South Africa: Developments In Relation To The Financial Provisioning Regulations, 2015

Last Updated: 6 February 2017
Article by Kate Swart and Rob Scott

Developments in relation to the Financial Provisioning Regulations, 2015 published in terms of the National Environmental Management Act.

The Financial Provisioning Regulations which were published under the National Environmental Management Act ("NEMA") in November 2015 sent shock waves through the mining industry, as they drastically changed the approach to the calculation of the financial provision which companies are required to set aside for the rehabilitation of ground disturbed through mining activities, as well as the purpose for which financial vehicles could be used in making this financial provision. 

We have previously summarised the major changes brought about by these Regulations, which can be accessed here. All persons affected by the Regulations were initially due to have brought the financial provision made by them into line with the new Regulations before February 2017. 

Following the publication of the Regulations and their implementation over the past year, it became clear that some major changes may be required due to problems experienced in the implementation of the Regulations, the amount of work needed to bring all parties into line with the Regulations, and the consequential amendments which will need to be made to other legislation (such as the Income Tax Act).

Various discussions have taken place between industry and government, leading to the publication by the Department of Mineral Resources (DMR) in August 2016 of a clarification note. This was followed, on 9 September 2016, by a release by the Department of Environmental Affairs (DEA) of a call for comments on proposed amendments to the Regulations.

The proposed amendments to the Regulations reflected some of the major concerns in the industry:

  • One of the biggest concerns raised by the industry was the fact that the Regulations drastically minimised the type of rehabilitation for which trust funds could be utilised. Mining houses have built up enormous trust funds over the lives of their mines, with the intention of carrying out the substantial environmental rehabilitation required in order to close such mines. However, in terms of the Regulations, these trust funds can now only be used for post-closure rehabilitation and water treatment, and because the Income Tax Act has not been amended, substantial tax fines may be imposed should the funds be withdrawn from these trusts in order to place them into alternative vehicles which are not contemplated for the on-going and closure rehabilitation. This concern was addressed in the proposed amendments by proposing that existing trust funds would be excluded from the limitations on the use of this vehicle.
  • Another major concern in the industry is that the financial provision made by the mining rights holder cannot be decreased as the life of the mine nears its end, despite ongoing rehabilitation having taken place throughout the life of the mine. The proposed amendments attempt to rectify this apparent oversight.
  • The third major issue is the pro forma wording which is prescribed for financial guarantees and trust deeds. Various concerns were expressed in regard to both pro forma wordings, and the proposed amendments simply deleted the Appendixes in which they were contained (although the requirement that such pro forma wording be used was not proposed to have been removed from the body of the Regulations, which would have proved problematic).

However, when the amendment to the Regulations was published on 26 October 2016, none of the above amendments were adopted. The only change to the existing Regulations was an extension of the transitional period within which all mining rights holders are obligated to bring their financial provision into compliance with the Regulations, and an inclusion of parties who had applied for rights prior to the regulations into the transitional provision. The February 2017 date has now been pushed out to February 2019.

Due to the detailed and extensive amendments proposed previously by the DEA, the discrepancies within the Regulations and inconsistencies with other legislation (most importantly the Income Tax Act), and the widespread unhappiness in the industry, it seems likely that further amendments to the Regulations will be released shortly.

Developments In Relation To The Financial Provisioning Regulations, 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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