Cost Reflective Pricing Options Environmental Regulation of the Mining Act 1978

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1 Submission October 2014 Cost Reflective Pricing Options Environmental Regulation of the Mining Act 1978 Department of Mines and Petroleum Contact Kane Moyle Manager Environment and Land Access The Chamber of Minerals and Energy of Western Australia Level 10, 2 Mill Street, Perth, Western Australia Locked Bag N984, Perth WA 6844 p f e chamber@cmewa.com w cmewa.com

2 Contents About CME... 3 Recommendations... 3 Context... 4 Cost-Recovery... 4 Business Case... 5 Fee Structure Options... 6 Regulatory Impact Assessment... 7 Conclusion... 7 Page 2 of 7

3 About CME The Chamber of Minerals and Energy of Western Australia (CME) is the peak resources sector representative body in Western Australia funded by its member companies, which generate 95 per cent of the value of all mineral and energy production and employ 80 per cent of the resources sector workforce in the state. The Western Australian resources sector is diverse and complex, covering exploration, processing, downstream value adding and refining of over 50 different types of mineral and energy resources. In , the value of Western Australia s mineral and petroleum production was $121.6 billion, accounting for 91 per cent of the state s total merchandise exports. Furthermore, the value of royalties received by the Western Australian government from the resources sector increased by 33 per cent from the financial year to reach a record $6.98 billion in Recommendations o CME does not support the introduction of cost-recovery for the implementation of the RER program. Revenue to implement and administer the reform program on an ongoing basis should continue to be funded from existing government appropriations. o CME recommends DMP develop a robust business case canvassing objectives, goals, options, cost/benefits, resourcing, budgets, governance, monitoring and reporting arrangements, in consultation with industry, to inform discussion on the need for a costrecovery proposal. o CME consider both compliance fee models will result in cross-subsidisation between mining companies and potentially constitute a levy or tax and therefore not suitable as a cost-recovery model. o CME recommends the referral of the full package of RER amendments to the Government s Regulatory Gatekeeping Unit for a Regulatory Impact Assessment. Page 3 of 7

4 Context CME has been a key contributor to the Department of Mines and Petroleum s (DMP) Reforming Environmental Regulations (RER) program. As outlined in the Discussion Paper, the scope of the RER reforms is to establish a risk and outcome-based regulatory framework which integrate the principles of best practice regulation. In-principle, CME supports moves to introduce an environmental risk and outcomes-based approach for mining activities in Western Australia. During the early development of the RER initiative, DMP undertook preliminary consultation on funding options. Industry-based fees or cost-recovery was at this time first canvassed with CME and in response industry opposed this proposal. Subsequently, DMP s Cost Reflective Pricing Options Environmental Regulation of the Mining Act 1978 (Discussion Paper) was released in September 2014 and revisits the merits of cost-recovery funding models to deliver on the RER reform. Cost-Recovery The Discussion Paper proposes options to recover costs amounting to $4.8 million annually associated with the DMP s RER program. It is not clear from the information provided why the RER program is required to be funded through cost-recovery as opposed to consolidated revenue. CME does not support the imposition of cost-recovery for environmental regulation purposes generally and does not support the models outlined in the Discussion Paper. This opposition is based on the premise the proposed cost-recovery models simply shifts existing government appropriations onto industry and the absence of a robust business case to justify the expenditure. The strength of argument has not been met to demonstrate to the resources sector how the imposition of a cost-recovery model would enhance and improve existing government regulatory processes. While the model proposed is a partial cost-recovery approach, there is significant concern there will be a further diminishing of Government resourcing overtime without any consequential improvements in service delivery to the sector. Cost-recovery models to finance government regulation have become increasingly more frequent in recent years. Both State and Federal governments have introduced or are considering introducing cost recovered fees in environment, Aboriginal heritage and safety regulation. Prior to establishing a cost-recovery model, CME considers it is critical for the Government to demonstrate the costs are reasonable, justified and achieve an efficient process. In this instance the Discussion Paper does not present a sound business case for the introduction of cost-recovery to implement the RER program. Further detail provided by DMP to CME on the cost-recovery business case also fails to address the resources sector s expectations. While CME is supportive of the RER program to establish a risk and outcome-based regulatory framework, the model should be funded from existing government appropriations. Market research completed by CME has highlighted community support for strong and independent environmental regulations. Community support for regulatory agencies and their subsequent decisions may be diminished if cost-recovery is introduced. Environment regulation is an important function of government and cost-recovery models have the potential to create the perception industry is purchasing environmental approval from the regulator. Page 4 of 7

5 Furthermore, the resources sector is already a significant contributor to the WA Government s revenue base through mining royalties, contributing $6.98 billion in CME considers consolidate revenue, into which existing mining royalty payments are made, presents the most appropriate source of revenue to ensure independent environmental assessments are undertaken. CME does not support the introduction of cost-recovery for the implementation of the RER program. Revenue to implement and administer the reform program on an ongoing basis should continue to be funded from existing government appropriations. Business Case It is important the regulation imposed by government, meets the needs of the community and industry, and achieves the Government s objectives. Regardless of the funding source, as occurs in the private sector, a robust business case needs to be developed to justify the costs associated with any changes to service delivery. The business case should not just be seen by DMP as the vehicle for gaining approval for the cost-recovery proposal, but rather the means to clearly articulate the: o clear and concise objectives and goals of the proposal, which are specific, measurable, achievable, relevant and time constrained; o options considered in terms of the scope, solution, delivery, implementation and funding of the underpinning policies and program; o consequences of not proceeding with the proposal; o resultant benefits and costs over the short, medium and long term compared against the existing arrangements; o resources required for its implementation and associated timelines; o capital and revenue requirement for the proposal over the expected life span of the service, together with an assessment of how this will impact upon the balance sheet, income and expenditure account of DMP; o arrangements for governance and monitoring during implementation and for post implementation evaluation, as well as contingency plans for risk management of the proposal. In this absence of such discipline in developing a well-articulated business case which links the recovery of costs and the Government s objectives for regulation, the model implemented may create incentives which can result in unnecessarily high cost recovery charges. This may be due to factors such as: o gold plating : where unnecessary high standards are adopted in the provision of goods and services with government agencies imposing their own preferred levels of service, rather than the levels sufficient to meet the industries needs or achieve government objectives; o cost padding : where costs are inflated above efficient levels, motivated by the knowledge costs can be recovered; o regulatory creep or over-regulation: where additional or unnecessary regulation is imposed without adequate scrutiny. Regulatory creep or over-regulation can impose significant additional costs that are recovered from affected parties. Page 5 of 7

6 CME acknowledges the proposal is only a partial cost-recovery of $4.8m of the total $19.1m DMP estimates it spends on its environmental regulatory functions. Nevertheless, the introduction of partial cost-recovery does risk creating inefficiencies in regulation. Without adequate oversight by industry to ensure costs being charged are commensurate to the service delivered, the outcome can be unnecessarily high charges for industry. Prior to any decision regarding cost-recovery arrangements, the business case must include appropriate governance arrangements involving industry to ensure DMP is accountable for the costs they are seeking to recover. This maintains an emphasis on the efficiency of the cost-recovery arrangements. The Discussion Paper is absent of any details surrounding the governance of the cost-recovery model. CME recommends DMP develop a robust business case canvassing objectives, goals, options, cost/benefits, resourcing, budgets, governance, monitoring and reporting arrangements, in consultation with industry, to inform discussion on the need for a cost-recovery proposal. CME does not consider the business case developed by DMP is sufficient in this regard. Fee Structure Options Section 3 of the Discussion Paper outlines options which have been modelled as costrecovery options. The fee structures have been separated between Programmes of Work (Exploration) and Mining Proposals/Mine Closure Plans. The following options were modelled: 1. Application fee and a separate annual compliance fee on a per unit (application) basis; 2. Application fee and a separate annual compliance fee based on area of disturbance (hectares); a. Without a minimum fee b. With a minimum fee Based on the two models presented in the Discussion Paper, CME has concerns they do not meet key objectives 1 to be considered legitimate cost-recovery options. While the charging of an application fee commensurate to the costs of the goods and services provided is a legitimate form of cost-recovery, the charging of cost-recovery to fund DMP s compliance functions does present a number of important questions. Given the annual cost of DMP s compliance is not evenly distributed across all Mining Act tenure, attempts to cost-recover this function could easily be considered a levy or tax if the model does not address important cross subsidisation issues. Cost-recovery can simply be described as the recovery of some or all of the costs of a particular activity. General taxation, on the other hand, is a compulsory exaction of money by a public authority for public purposes, enforceable by law, and which is not a payment for services rendered. 2 The key principle which distinguishes cost-recovery from general taxation is any charges (levy or tax) under a cost-recovery model must demonstrate a direct link or earmarking between the revenue and the funding of a specific activity. Without demonstrating a direct link between charge and activity, such a charge can be considered to be general taxation. 1 Australian Government Cost Recovery Guidelines July Australian Government Cost Recovery Guidelines July 2005 Page 6 of 7

7 DMP currently undertakes a risk-based approach for mining compliance monitoring and inspections. Under a risk-based approach, a high-risk site would require a higher level of compliance monitoring than a low-risk site. This approach does create issues on how the cost-recovery for compliance monitoring can be administered equitably across industry. The charging of an annual compliance fee on a per-unit (application) basis or an area of disturbance (hectares) does then place such a charge in the category of general taxation. This creates a situation where a low-risk site is not receiving a fee for service in terms of costs recovered and cross-subsidising the compliance of other high-risk sites. CME consider both compliance fee models will result in cross-subsidisation between mining companies and potentially constitute a levy or tax and therefore not suitable as a cost-recovery model. Regulatory Impact Assessment To enable industry to make a full assessment of the merits of the reform and the associated costs being passed on to the resources sector it is imperative a full package of the amendments is presented. As part of this process, and in addition to the development and provision of the robust business case, the Government s Regulatory Gatekeeping Unit should also provide a thorough assessment of the package through a Regulatory Impact Assessment. CME recommends the referral of the full package of RER amendments to the Government s Regulatory Gatekeeping Unit for a Regulatory Impact Assessment. Conclusion CME welcomes the opportunity to comment on the Discussion Paper and looks forward to ongoing engagement throughout the RER program. Increasing cost of doing business is becoming a significant challenge for many resource companies as they grapple with global market dynamics, increasing input costs and policy and other regulatory settings that are volatile, complex and at times costly. CME considers the introduction of additional fees and charges in the form of cost-recovery risk compounding this situation and has the potential to negatively impact on the community perception of the independence of the regulatory. If you have any further queries regarding the above matters, please contact Kane Moyle, Manager Environment and Land Access, on (08) or k.moyle@cmewa.com. Authorised by Position Date Signed Reg Howard-Smith Chief Executive 21/10/2014 Document reference K:\Environment\Projects & Issues\Approvals\DMP Reforming Environmental Regulations\Cost Recovery\ ENV-DMP Cost-recovery sub-v1.0.docx Page 7 of 7