Thursday, 7 November 2013

ICAC recommends fundamental changes to exploration licence approval process

On 30 October 2013, the Independent Commission Against Corruption (ICAC) provided its report to Parliament titled ‘Reducing the opportunities and incentives for corruption in the State’s management of coal resources’.  The Commission’s report makes 26 recommendations to prevent and minimise the reoccurrence of corruption as identified in recent ICAC investigations into the granting of exploration licences (ELs) in NSW.

Key recommendations

The key recommendations made by ICAC include:
  • the development of a set of predetermined factors to provide guidance in the release, allocation and development of NSW coal resources
  • the establishment of a steering group chaired by the NSW Department of Planning and Infrastructure and made up of senior public servants from the Resources and Energy Division of the Department of Trade and Investment, Regional Infrastructure and Services, the Department of Planning and Infrastructure and the NSW Treasury to develop a protocol for the release and allocation of ELs
  • the establishment of an assessment panel comprised of experts from the departments identified above to provide further technical information and analysis to the steering committee and to provide a triple bottom line assessment of the environment, social and economic factors of allocating an EL in a particular area
  • the assessment panel should conduct technical analysis of preferred companies to determine if each company has the technical expertise to undertake the exploration activities and analysis of their financial position for their capacity to fund exploration work
  • the  Government’s decisions on the release of mature areas for ELs and the auction of those ELs should be linked to the likelihood of approval to mine
  • the auction method should be the preferred approach to allocating the State’s coal resources and this auction process should be overseen by the New South Wales Treasury.  Where direct allocation is appropriate, it should be the subject of oversight by an assessment panel comprised of practitioners with relevant expertise from the key departments
  • the current renewal of ELs should be replaced by exponentially escalating lease rent, allowing commercial decisions to be made in an environment of certainty, removing the incentives to renew ELs repeatedly without progressing to mining, and
  • the development of a transitional regime for moving all existing ELs to this rent based arrangement.

Implications for current tenement holders

The following significant implications arise as a result of these recommendations:
  • the renewal of ELs in the future may be subject to exponentially increasing rent arrangement whereby the tenement holder is required to increase payments to the NSW Government each time the EL is renewed
  • the existing practice of sitting on tenements for extended periods of time without meaningful steps being taken to develop the resource is unlikely to be possible under the proposed regime
  • an auction process may be applied to grant the majority of ELs which means that the company with the highest cash bid or highest exploration work program will be awarded the EL
  • if preliminary exploration in a particular area does not fall within the strategic assessment areas recommended by the NSW Department of Planning and Infrastructure, there is potential that future ELs will not be granted over the area, and
  • there will be a more stringent analysis of the technical and financial capabilities of a preferred company to carry out and fund the exploration activities before an EL is granted.

Direct allocation

Importantly, ICAC recognises that in some situations direct allocations will continue to be necessary but there should be greater oversight of the direct allocation system.  Specifically, the ICAC recommends the assessment panel adopts a ‘triple bottom line’ approach when advising on direct allocations.  Potential arguments identified in the ICAC report for direct allocation applications include when the applicant mining company:
  • is seeking an EL in close proximity to its existing operations
  • is the only mining company interested in the resource, or
  • can better serve the wider interests of the government by the innovative work programs they are proposing.

On this basis, mining companies may still be able to obtain ELs through direct allocation but any new regime for granting ELs is likely to place significant constraints on this allocation process.

Next stage

The recommendations will be provided to the relevant public authorities for consideration, with a response required within three months prior to any plan of action being implemented. 

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