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Resources Policy 34 (2009) 227–233

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Financial assurance and mine closure: Stakeholder expectations and effects

on operating decisions
Philip Peck a, Knud Sinding b,c,
International Institute of Industrial Environmental Economics, University of Lund, Sweden
Department of Environmental and Business Economics, University of Southern Denmark, Denmark
Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, UK

a r t i c l e in fo abstract

Article history: Financial assurance is increasingly seen as a means to ensure orderly, clean and lasting closure of mines.
Received 17 March 2009 Broadly interpreted, ‘‘closure’’ requires leaving viable ecosystems on mining lands that are compatible
Accepted 19 March 2009 with a healthy environment and with human activities, that have low hazard, and that encompass
measures to prevent ongoing pollution from the site in the long-term. Financial assurance encompasses
JEL classification: environmental surety instruments that protect the government and public in the event a mining
H23 company cannot meet its reclamation or rehabilitation obligations. As such, financial assurance is in
L72 essence the money available for closure of the mine in the case when the mine owner is not available to
M21 perform the work. A general trend towards greater environmental concern among social stakeholders
in mining further serves to focus attention on policies and practices that can actually ‘‘assure’’
financial assurance.
Q38 Financial assurance is also perceived as a means to address closure-related challenges that are
Q54 increasing in number as well as diversity. Notably, current trends involve a shift towards a greater focus
to the societal aspects of mine closure rather than just the ecological. The use of financial assurance,
Keywords: however, also raises some fundamental questions about how assurance mechanisms influence mining
Financial assurance operations and the relationship between mining operations and their surroundings. This paper
Mine closure examines both the internal effect of a variety of financial assurance approaches on mining
Stakeholder management operations—in particular the manner in which environmental and social concerns are addressed by
mining firms, and the almost inevitable tension between some form of financial provision for closure on
the one hand, and governmental expectations of tax revenue on the other. As a major argument for
supporting the conduct of mining is that state revenues from the extractive industries supply monies for
the building of human and infrastructural capital, this second area of tension also has strong social and
developmental overtones.
& 2009 Published by Elsevier Ltd.

Introduction sites. These implications have both financial and stakeholder

Financial assurance is an emerging tool used to ensure that Mining of metals, precious stones, coal and other commodities
mines, the areas that they have disturbed, and the facilities upon has the potential to disturb or affect large areas of land, either as
them are not abandoned and that measures to minimize or a direct consequence of operations or through the release of
eliminate adverse environmental and social impacts from mine pollution into the natural environment. While ownership of
sites are effective. In this paper we argue that to the extent that minerals – as non-renewable resources – is in most cases vested
financial assurance becomes standard practice, in the jurisdictions to the State, the rights to extract minerals are most commonly
where it is applied at least, has implications that go beyond awarded to operators or mining firms according to whatever rules
securing the orderly closure and rehabilitation of [former] mine the local or national mining code specifies. Among the conditions
that such awards may be subject to are requirements that
operators share their profit or income by paying some form of
mining tax(es) and requirements that operations are conducted in
 Corresponding author at: Department of Environmental and Business an environmentally safe manner. If provisions for dealing with
Economics, University of Southern Denmark, Niels Bohrs Vej 9, DK-6700 Esbjerg,
environmental (and social) externalities resulting from mining are
Denmark. not in place, then the natural environment and local communities
E-mail address: (K. Sinding). are often neglected during and after the conduct of mining.

0301-4207/$ - see front matter & 2009 Published by Elsevier Ltd.

228 P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233

Furthermore, in such instances, observable (accounting) profits serve to lift the discussion of financial assurance to higher levels –
would accrue to the operator, and taxes would be paid out of both at a governmental level (Clark and Clark 2005; UNEP et al.,
profits (unless they were royalties), even if there might not be any 2005; Strongman, 2005) – and in terms of the amounts of
profit at all in a social sense. financial assurance to be required (Miller, 2005).
In a number of jurisdictions, mines have long been subject to In this paper we seek to extend the debate surrounding
strict environmental regulation. However, even under such financial provision for closure with arguments that the use of
circumstances problems remain in ensuring that the process of financial assurance must be considered in the context of an
closing down a mining operation is completed in an ‘‘acceptable’’ ongoing competition for rents. Further, we argue that this
fashion. Indeed, what ‘‘acceptable closure’’ entails has many competition has important implication for how mining companies
definitions—but common themes generally found are that of the decide to operate and interact with their stakeholders. Section
reclamation and rehabilitation of the area impacted by mining is ‘‘mine closure issues and the growth in expectations’’ provides
achieved to a state that precludes further environmental damage, detail of the nature of stakeholder demands from miners and
is suitable of alternative use, is compatible with human activity highlights the ongoing escalation of expectations. It provides an
and capable of supporting viable ecosystems that are low hazard introduction to the expanding number of mine closure aspects
(ANZMEC MCA, 2000; Clark and Clark, 2005; Sassoon, 1996). that are under discussion in the mining and society field. The
A fundamental problem however, is that the process of closing a sections ‘‘financial assurance’’ and ‘‘challenges for the application
mine so that it meets these criteria can be costly and that a of financial assurance’’ provide a brief summary of financial
significant proportion of this cost generally occurs as a lump sum assurance models and introduce a number of inherent challenges
around the time when mining operations cease. Cost is a for financial assurance. A discussion of the economic effects of
particularly marked problem at the end of the productive life of financial assurance on the internal decisions at both the mine
a mine as cash flows are almost universally declining with (operational) and corporate levels is then provided in Section
reserves of diminishing quality and size. Numerous examples of ‘‘financial and operational effects of financial assurance on mining
mines that were not ‘‘closed’’ or ran out of money before firms/operations’’. Discussion of the implications for mining firms
completion of cleanup litter the planet—indeed: in terms of their relations with host governments, competitors
and other stakeholders is included in Section ‘‘stakeholder
today the developed nations, as well as the developing and relations: financial assurance and sharing of mineral rents’’ and
emerging economies, are faced with decades, if not centuries, conclusions are offered in Section ‘‘concluding remarks’’.
of mines and mining debris to clean up (Clark and Clark, 2005
p. 67).
Mine closure issues and the growth in expectations
As for many other activities that cause environmental damage,
mines generally do not have motivation to internalise the external Increasing expectations for environmental protection, desires
costs they generate unless they are provided with market for reduced human health risks, competition for land, and the
incentives or are strictly regulated. Environmental regulation increasing value of the natural environment as recreational space
aims to solve the problem, but the combination of high cost at the have led to markedly tighter regulatory requirements and more
end of a mine’s life and the possibility that it will be bankrupted restrictions upon mining practice in a number of countries.
towards the end of its planned life, makes traditional regulatory Concomitantly, mining firms have introduced management
solutions difficult. Similarly, liability-based solutions to the policies, practices and technologies that markedly reduce the
closure problem can be confronted by the possibility that the environmental harm caused by mining (Environment Australia,
individual mine may be judgement proof in the sense that 2002; Miller, 2005). When viewed in combination with growing
the individual mine may be insolvent when the costs associated desires to preserve land areas as a repository for valuable
with restoration of environmental damage are to be met. biological assets, for natural environmental services and for
An obvious solution to these liquidity problems is to require aesthetic appeal, these developments appear likely to continue
miners to set aside monies for the cleanup at closure at times to drive continued improvement in mining practice.
when there is sufficient capital available to be transferred (such as As a part of this trend, mine planning, mine closure practices
at the time of mine development when equity is raised) or while and the conduct of mine operations to facilitate environmentally
there are healthy cash flows from mining. and socially acceptable closure have also evolved significantly in
Making financial provision for closure is commonly known as recent years. While in the past communities often saw that the
financial assurance and it exists or can be formulated in many only choice available was whether a deposit should be mined or
variations (e.g. closure bonds, financial assurance and financial not, it has been clearly shown that the manner in which a mine is
surety). However, research on these instruments discussed in this planned can have major positive influences on the magnitude and
paper agrees that there is a need for some form of financial duration of impacts over the life of the development and following
instrument that can address the risk of insufficient provision of its closure (Environmental Protection Agency, 1995, p. 2). The
cleanup when mines close. While the choice of instrument can be mining sector is also a very important contributor to local and
debated at some length, the basic intent is to force the internalisa- national economies in a number of countries. This is particularly
tion of further environmental and social costs. This is a particularly relevant in developing countries where the extractive industries
relevant issue during the volatile years in the period 2006–2009. play a vital role in development and opportunities in the sector
Soaring commodity prices in the period 2006–2008 stimulated often constitute some of the first attractive investment opportu-
massive worldwide interest in new mines (and work to reopen old nities for private investors and international bodies such as the
ones)—this has been followed by a free-fall of commodity prices in International Finance Corporation (a branch of the World Bank
the closing months of 2008 and start of 2009. Almost without Group) (Liebenthal et al., 2005, p. 117). Similar generalisations can
doubt, many unplanned mine closures are now taking place as the be made for transition economies (Nazari, 1999). It is expected
global economy has entered its ‘‘financial crisis’’. that the extractive industries will continue to underpin the
Over the past decade there has been a constant and growing development and the economies of many countries in the future
interest in the wider legacy issues among a range of audiences (Liebenthal et al., 2005). At the same time however, extensive
(UNEP et al., 2005) and a growing body of praxis. These factors adverse environmental and social impacts arising from mining
P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233 229

activities must also be recognised (US Department of Interior, often young(er) single men, and a range of related flow-on effects
1998; Balkau, 2005a,b; Clark and Clark, 2005; UNEP et al., 2005). such as prostitution, alcohol and drug abuse, increased instances
Moreover, the very real potential for similar problems to arise of communicable diseases, domestic and community violence,
from new mineral developments remains. In many countries, squatter settlements, and so forth (Clark and Clark, 2005;
particularly developing countries (Clark and Clark, 2005) and Strongman, 2005; Low and Gleeson, 1998; Gibson et al., 1998).
former centralised economies – also referred to as transition In some areas such pressures can also contribute to civil unrest
economies (Nazari, 1999) – the mining sector has often been and even civil war (Liebenthal et al., 2005, p. 1).
characterised by inappropriate planning and operational/post- Both the narrow ‘‘environment-focused’’ debate about closure
operational practices and inadequate regulatory frameworks and the broader ‘‘social issues’’ or ‘‘sustainable development’’
(Clark and Clark, 2005; Sassoon, 1996; Van Zyl 2000; Van Zyl debate – also related to closure issues – are characterised by the
et al., 2002). In many jurisdictions this has resulted in – and need for a distinction between closure-specific duties resting with
continues to contribute to – significant adverse environmental, the mining firm and broader social welfare considerations or
health and safety, social and economic impacts and related duties that are traditionally held to fall within the sphere of
liabilities (Nazari, 1999; ICPDR/Zinke Environment Consulting, government activity. Sometimes governments are well function-
2000; Peck and Sinding, 2003; Burnod-Requia, 2004). ing and well positioned to solve broader welfare issues, providing
The contribution that mining can deliver to emerging or measures against squatting, and control (unwanted) urban
transitional economies (in particular) is also compromised for development around mine sites, etc. In a very significant number
other reasons. In addition to dealing with environmental, health of other instances however, governments do not function well
and safety (EH&S) challenges associated with current and new (Liebenthal et al., 2005; Strongman, 2005; Östensson, 2005; Clark
mining activities, the European Bank for Reconstruction and and Clark, 2005). As a result they may not support, control or
Development (Nazari, 1999) reports that emerging and transi- provide such measures adequately. In the light of stakeholder
tional economies also have to deal with the significant adverse expectations that broader welfare issues are catered for by
impacts of past mining activities and their legacies. Nazari someone, this situation can lead to conditions that tend to blur
indicates that inadequate mine closure activities and rehabilita- the line between closure-specific tasks that are the responsibility
tion works have continued to result in significant adverse EH&S of mining firms, and the broader governmental responsibilities.
impacts—and moreover that such failure was normally a result of As the expectations of what duties mining firms should take on
financial constraints (Nazari, 1999). Such failure was normally as a increases, a crucial decision has to be made by the firms. Only two
result of financial constraints. Similarly, there are countless options are really available: leave the field for less sensitive
examples of the same problems in developing nations that host competitors willing to ignore expectations, or engage in making
mining activities (UNEP et al., 2005). clear what is expected of the firm (Husted and de Jesus Salazar,
The financial, environmental and social liabilities associated 2006). Mining firms that choose to stay clearly have to negotiate
with such sites also pose a barrier to development in the some level of service provision in this regard.
jurisdictions where they are located (Strongman, 2005; Östens-
son, 2005; Clark and Clark, 2005). In contrast to countries that
have already implemented ‘good international mining practices’, Financial assurance
most developing countries and transition economies have yet to
develop corporate governance, regulatory frameworks, or finan- The notion of the need for financial assurance is derived from
cial and insurance markets that are sufficiently sophisticated to the frequently noted examples where mine operators have
adequately address mine closure rules or funding (UNEP et al., abandoned a site without adequately addressing environmental
2005; Clark and Clark, 2005). The lack of such governance frames problems arising from their mining activity. Some firms, generally
can lead to delays in developing projects and investments in the large and internationally recognised ones, have a long tradition of
sector, potentially inequitable distribution of benefits, externali- addressing these issues as part of their operations. Other miners
zation of closure costs, and costly and time consuming tailor- have a less proud record in this respect (Peck and Sinding, 2003).
made solutions developed on a case-by-case basis. Moreover, such Similarly, some are more aware than others of the increasing and
situations can even serve to disadvantage (potentially) more expanding nature of stakeholder expectations in this regard.
responsible investors who seek financing or political risk The concept of financial assurance, while most extensively
insurance through international financial institutions (Nazari, used in countries with well-developed regulatory systems, is also
1999). Indeed, international financial institutions as well as held to be vital in addressing environmental problems in
national legislation increasingly require consideration of closure- countries that have not developed a regulatory infrastructure
related issues (Liebenthal et al., 2005; Clark and Clark, 2005). (UNEP et al., 2005; Clark and Clark, 2005; Strongman, 2005).
The development of corporate governance, regulatory frame- While there appears to be broad-based agreement that financial
works, financial and insurance markets to address the funding of assurance should be an integral part of any moves forward for the
mine closure may be further complicated by involvement of mining sector, these concepts are often referred to without real
‘‘junior investors’’. Unlike many major mining companies, these critique as a panacea for many problematic issues. Similarly, due
often have only limited resources to back up the mining reference is not given to the advantages and disadvantages
company’s obligations, and arguably lower sensitivity to other associated with different types of financial assurance (Poulin
drivers for responsible behaviour such as reputation risk. Such and Jacques, 2007). Financial assurance instruments are variously
actors may be more prevalent in developing countries and in defined, but can generally be referred to as:
transition economies than in more developed mining nations
(Stec et al., 2001). yguarantees issued by a bonding company, an insurance
In addition to the environmental concerns, current debates company, a bank, or another financial institution (the issuer is
about mine closure have come to include a number of important called the ‘surety’) which agrees to hold itself liable for the acts
social issues. When mines of any size are developed a number of or failures of a third party (Miller, 1998)
potentially problematical social issues can arise. These encompass
relations with local stakeholders (including local indigenous At the present time, the most common use of financial
communities), migration of labour to the vicinity of the mine— assurance instruments is when they are applied to guarantee
230 P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233

environmental performance at the time of (and after) cessation of case of a bankruptcy these become part of the assets of the
mining activities through the funding of mine site reclamation company and will not be available to pay for closure.
or rehabilitation.1 As such, financial assurance is also the amount Among currently applied financial assurance instruments,
of money available to a government entity for closure of the mine bonding is the most widely used. It involves the payment into
in cases such as bankruptcy, when the mine owner is not available escrow of an amount determined by regulators to be sufficient to
to perform the work, during operations or at any time thereafter. ensure an acceptable level of remediation; it is an established
The financial assurance can be provided by a variety of financial manner to provide protection against unfunded liabilities as in the
instruments or cash deposited in a bank. However, it is important event of bankruptcy. An alternative suggestion is for the creation
to recognise that the governmental policy and local financial of a captive insurance company for the mining sector (Poulin and
markets may determine the type of instrument available for a Jacques, 2007). All such tools, however, face challenges and have
specific location (Miller, 1998, 2005; Van Zyl, 2000; van Zyl et al., advantages and limitations; a number of these are briefly outlined
2002). in the next section.
Financial assurance instruments are also increasingly accepted
by industry as perhaps the most effective manner in which to
ensure that protection of the environment can be achieved and Challenges for the application of financial assurance
that public expectations can be met in the mining sphere.2
According to van Zyl (2000) another important concept to be A fundamental problem with the imposition of financial
considered and/or recognised is that of financial accruals by assurance requirements (or higher levels of assurance than are
mining companies for closure. It is common to base accruals on a now applied) is that environmental protection, as well as social
unit production basis (such as $ per ounce of gold produced). The expenditures directly related to a mining project, must come out
total amount of the accrual is estimated from the environmental of the same pool of gross revenue. Given homogenous commod-
closure cost plus other liabilities specific to a mine such as land ities and with prices determined in competitive markets, gross
holdings and personnel costs associated with the end of opera- revenues depend on the quality of orebodies (in terms of grade,
tions. Financial auditors can perform annual reviews to determine tonnage and location). Mines will usually extract those volumes of
the adequacy of these closure funds. ore that generate a profit. However, internalising environmental
A number of additional features also characterize financial and social costs raises capital and operating costs and raises the
assurance and closure cost accruals (van Zyl et al., 2002; Miller, cut-off grade (the lowest grade of ore that will be mined) as well
1998). Conceptually, financial assurance is in place during the life as the average grade of ore actually mined. With a higher cut-off
of the mine and will only be released (in part or in total) after the grade, the volume of ore mined over the life of the mine will be
regulatory agencies have established that rehabilitation has been lower (assuming no further reserves are discovered and with
completed to their satisfaction. However, the financial surety does constant prices and costs). Profits and the tax base will be lower as
not necessarily constitute a fixed amount throughout the life of a result.3 Mining firms may dislike internalisation if their profits
the mine. Rather, it may vary pursuant to the conduct of mining fall.4
and rehabilitation (e.g. as one pit is filled by transfer mining) as Discussion of environmental and social externalities also
environmental issues develop at a mine, as regulatory changes touches upon a second challenge. The sharing of profits between
occur and as community expectations change. Closure cost companies and governments also involves a number of other
accrual should take place over the life of the mine on the basis ‘‘local’’ or ‘‘social’’ stakeholders.5 These look to both mining firms
of an agreed and continually updated mine plan. As such, accruals and government to obtain a share of mineral rents. Mining firms
are not necessarily a linear function but rather will also vary over are sometimes caught up in conflicts between the other
the mine life. In the US and some other countries, the financial stakeholders and governments. A notable case is the civil unrest
assurance fund is not available to a mining operation for closure on the Island of Bougainville in Papua New Guinea (PNG) in which
work at the end of the mine life, but rather may be released a conflict between islanders and the central government of PNG
shortly after the work has been done. The mining company must over the distribution of resource income and environmental
be a going concern in order to perform, or contract some entity to damage led to unrest, sabotage and the closure of the rich
perform, the required closure activities. As a variation, a number Panguna copper, gold and silver mine. Panguna was one of the
of mining companies have established sinking funds to pay for the worlds largest open-pit mines during its period of operations
closure of a mine. Money from a sinking fund will be available in during the 1970s and 1980s and dominated the overall PNG
cash to pay for closure in contrast to an accrual that is an economy. The mine closed in 1989 as a result of sabotage by
accounting allowance and as such is not liquid. However, while
sinking funds may be attractive because they are liquid, in the 3
Shorter mine life provides a shorter period of time to capture the benefits of
mining, but also a shorter period in which damage can occur. While some will hold
that a smaller volume of mining contributes to a lower overall environmental
impact, we believe that the ‘‘additional’’ environmental impact of longer mine
Note also that financial assurance arrangements often specifically target the operation is likely to be marginal in nature as the overall ‘‘environmental and
‘‘ongoing’’ rehabilitation and restoration of disturbed lands during the operational social footprint’’ is rarely likely to be directly proportional to the volume of ore
life of the mine. mined.
2 4
In some circles, these views have evolved markedly. Miller (2005) acknowl- It is important not to view this as a value judgment. Some firms operate
edged that in a previous study (Miller, 1998) he had reported that a group of under the terms typical of the industry—others may choose to leave the industry
leading mining organisations showed a marked preference for ‘‘soft’’ assurances or the country if they feel that they have been regulated too restrictively.
such as: financial strength; self-funding of the obligation while retaining control of This is a complex topic that is not dealt with in detail here. The reader is
the funds; a financial test which determines the grade of the company; a corporate referred to the literature of ‘‘distributive justice’’ for deeper insights. Lamont
guarantee based on that grade; self-funding through financial reserves; parent (2003) for example, holds that the principles of distributive justice are normative
company guarantees and pledge of assets. By contrast, in a follow-up survey principles designed to allocate goods in limited supply relative to demand. The
conducted in 2004 by the same author, the majority of industry respondents principles vary in numerous dimensions. They vary in what goods are subject to
recognized that ‘‘harder’’ methods such as letters of credit, bank guarantees, distribution (income, wealth, opportunities, etc.); on the nature of the subjects of
deposit of securities, and cash trust funds, may best serve the industry, as they are the distribution (natural persons, groups of persons, reference classes, etc.); and on
required to satisfy public expectations. As to which instruments best serve the what basis the goods should be distributed (equality, according to individual
interests of the government, the 1998 report noted that they would be those that characteristics, according to free market transactions, etc.)—Lamont also provides
best serve the mutual interests of the government and the company. a concise overview of the topic.
P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233 231

Table 1 Similarly, difficulties in estimating the cost of future reclama-

Advantages and disadvantages of financial assurance through bonding. tion work are a financial issue specific to each project. For bonds
based on expected future cost, Poulin and Jacques (2007) indicate
Advantages Disadvantages
that the only approach likely to ensure adequate bond amounts –
 Protection against unfounded  Depends on monitoring, including detailed cost estimates – must have the same quality and
reclamation needs. the resources allocated and the reliability as other financial decisions related to mines. This may
 Relies on individual performance expertise available, both to not be just a technical problem. Exploration and engineering
objectives, rather than broadly governments negotiating bond size
applied standards. and terms, and to bond issuers.
specialists have a long tradition of estimating the costs of various
 Bond payments into escrow  Bond size and thus minimum project items spanning the entire discovery–exploitation–closure
accounts have great symbolic and reclamation is a floor, not an cycle (O’Hara, 1980; Mular and Poulin, 1998). What may be lacking
hence political value. optimum. is a well-established tradition for including environmental costs,
 Posting a bond is a form of  Bonds are not immune to political
especially in the earlier phases of the mine development decision
commitment by mine company pressure.
managers.  Difficulties in measuring future process. While cost estimation based on compliance with
reclamation costs and setting bond traditional command and control regulation may be well
amounts. established, the emergence of bonding and other types of financial
 Insufficient bond amounts due to assurance adds to existing needs for precise cost estimation and is
unforeseen changes.
 Bonds create liquidity constraints.
a capacity that must be built. Accurate cost estimations of this
kind must be performed in a field of practice that may be
unfamiliar to cost estimators. They also have to estimate costs
Adapted from Poulin and Jacques (2007). occurring far in the future at the end of a mine’s life.
Existing methods for estimating costs are likely to be deeply
ingrained in the patterns of conduct for responsible engineers.
Bougainvillian secessionists. The mine is still closed, but interest Methods and thinking about cost estimation are taught at school,
in reopening it remains (Mining Journal, 2009). repeated amongst colleagues and end up being taken for granted.6
Earlier we indicated that money could be set aside at the time Furthermore, cost estimation in mining is intimately connected to
of equity-raising, or when a mine has healthy cash flows (if the project evaluation based on present value calculations. Financial
latter eventuate). In any event, the size of realized cash flows is assurance, presents a challenge to this type of analysis. On the one
only indirectly linked to the need for financial resources for hand, the costs of closure occur far into the future. Even at
closing a mine and restoring a site. This raises another challenge. moderate discount rates, these future expenses may seem small in
Crudely stated, the degree of environmental impact is propor- terms of present value. On the other hand, stricter forms of
tional to the volume of ore extracted or the area of land financial assurance require up-front deposition of the expected
affected—both related to the size of operations or length of time future cost, creating a large front-end payment.
of operations, but not necessarily to profits. Adding to difficulties The consequence of these raised costs is both a direct liquidity
with the ‘‘accumulation approach’’, a significant proportion of the effect and a dynamic adjustment effect that works through
eventual footprint of a mining operation often occurs during mine downward adjustment of ore volumes and upward adjustment
construction and preparation for operations. In this case, a of cut-off and average ore grade. The difference however, is that
significant impact can exist prior to the commencement of cash financial assurance adds to the environmental and social costs
flow. One might argue that to provide adequate assurance the that such firms have already internalised. To the extent that
amount of money set-aside should be determined according to expectations of what firms must do to mitigate social impacts as
the initial footprint and linked to marginal increases or decreases well as environmental ones at the end of mining are increasing,
in mine footprint over its life. both standard regulation and financial assurance serve to shift the
As indicated in Section ‘‘financial assurance’’, bonding is boundary between ore, which is profitable to mine, and miner-
already a widely adopted approach. In many mining countries alised rock. In other words, regulation and financial assurance
the application of bonding (i.e. the up-front or gradual set-aside or raise the cut-off grade.
guaranteeing of expected cleanup cost) might be perceived as a
panacea that will solve all major problems related to mine closure.
As examples, most Canadian provinces make bonding a require- Stakeholder relations: financial assurance and sharing of mineral
ment in their mining codes (Poulin and Jacques, 2007) as have rents
most Australian States (Clark and Clark, 2005). Notwithstanding
its popularity as a policy instrument, there remain serious Some mines generate far more revenue and profits than others.
concerns about the efficacy of bonding (Shogren et al., 1993; They may have a higher content of valuable minerals, the minerals
Boyd, 2002; Poulin and Jacques, 2007). Poulin and Jacques (2007) may be simpler to extract, the mine may be located near a
contrast the advantages and disadvantages of the bonding processing facility or a market, or the operation may enjoy some
instrument and Table 1 summarises their main observations. combination of these features. The profits generated by successful
mining operations are key areas of focus for government taxation
policy. There has been considerable progress in establishing
Financial and operational effects of financial assurance on effective tax regimes (Otto et al., 2006) based on profits, but
mining firms/operations specific and ad valorem royalties are also widely used.
Using financial assurance instruments to ensure regulatory
The liquidity problem noted by Poulin and Jacques (2007) in compliance and reduce external costs has dynamic impacts. Their
Table 1 arises because the ability to provide the bond depends on use affects the size of ore bodies, the fraction of ore that will be
the total assets of the firm having to post it. Bonds can be large if
potential damage is large, even though the risk of damage may be 6
The notion of taking organizational practices ‘‘for granted’’ is the subject of a
small. In some bonding situations, there is a real possibility that large, varied and widely accepted literature in organizational sociology, with
even socially attractive projects may not proceed (Shogren et al., particular emphasis on this being placed with work following the thinking of
1993). Meyer and Rowan (1977) and DiMaggio and Powell (1983).
232 P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233

removed, and ultimately which ore bodies are developed into the tax base and tax revenues. It is conceivable that governments
mining operations. An increase in capital cost (due to the up-front may be either indifferent about regulating externalities or
bond payment) or an increase operational cost (brought on by the enforcing regulations (or both) in order to prevent erosion of the
bond mechanism) or both, will change the optimal operational tax base. This is not only a question of regulatory form, even if
strategy of the mine (the ‘‘mine plan’’) to accommodate a lower financial assurance may cut into the tax base a little more
amount of ore (due to higher cut-off grade). These impacts can be efficiently than traditional regulation, especially if non-govern-
measured in terms of average grade of ore (which will be higher) mental stakeholders force an operator to accept financial
and the total tonnage of ore mined (which will be lower). assurance8 and effectively bypass the regulatory mechanisms in
At constant demand individual mines are exhausted more rapidly the host country.
and have to be replaced earlier, potentially resulting in a greater The key feature of this second dimension is that the allowance
number of mines. of external cost imposition upon the neighbours, local stake-
Accountability for post-mining rehabilitation or cleanup has holders, and even global stakeholders, without efforts to inter-
two components. One is related to the temporal dimension, in the nalise effectively involves wealth transfers from these
sense that prevention of the need for cleaning up at mine sites stakeholders (or victims of externalities) to the government. The
(e.g. through life-cycle oriented design for closure and return of victims lose quality of life and have their productive assets
mining leases to the state) is likely to be much more efficient (farmland, rivers, forests, wildlife, biodiversity, etc.) damaged. The
when integrated into the operational life of the mine. This government and operators share a larger ‘‘pie’’ than would have
compares to a situation where cleanup requires renewed access, been available if external costs had been internalised. Moreover,
new personnel who do not ‘‘know’’ the site, new facilities and related to the relatively common location of mining activities
equipment. The difference between concurrent rehabilitation adjacent to underprivileged or indigenous communities, this may
undertaken by the operator and government sponsored post- reflect serious negative aspects when viewed in the light of
closure remediation work has a further dimension since in reality environmental or distributive justice concerns (Gaventa, 1980;
the latter option will only be pursued after prolonged efforts to Klubock, 1998; Low and Gleeson, 1998; Scheyvens and Lagisa,
make polluters liable for the cost. This brings additional expenses 1998; Evans et al., 2002; Amundson, 2005). As such, welfare
because mobilisation of resources and clean up after the cessation transfers to government (or de-facto taxes) may be inequitably
of mining activities probably costs significantly more per unit of imposed on those social actors with the least capacity to bear such
land than if the mining company had carried out the work during costs. Furthermore, the environmental and distributive justice
the mine life and at the time of cessation of activity (but prior to literature clearly establishes that poor governance, when linked to
the demobilisation of personnel, skills and equipment). The environmental and social degradation, disproportionately places
eventual costs of rehabilitation and the cumulative environmental the burden of pollution or social fragmentation on the poorest
and social damage mount as damage to the natural environment sections of society, or both.
from the unremediated site continues.7
The second dimension of this problem may be termed the
‘‘incidence question’’. In a simplified form, a mine produces net Concluding remarks
profit or rent, which represents the tax base available for the
jurisdiction owning the mineral resource. Ideally, rent is the sum The risk of inadequate mine closure and the frequency of long-
left when all costs, private as well as social, have been paid. This is term negative environmental and social legacies being imposed
the sum available for sharing between stakeholders. In practical on mine stakeholders or most notably upon neighbours can be
terms, however, the tax base is unlikely to coincide with this reduced by legislative measures directly targeting the closure
definition of rent. Mining activity produces external costs that are phase of mines. Financial assurance is one tool that can contribute
imposed upon neighbours, other adjacent stakeholders, and on to this. However, in line with other research on financial assurance
future generations. Applying financial assurance instruments to – in particular literature addressing bonding – such economic
ensure that social costs are borne by individual mining projects incentives are unlikely to be sufficient.
changes an established (or customary) division of benefits to The problem given particular emphasis here is that there is a
stakeholders. The extra costs (environmental and social expendi- distinct possibility for a trade-off between the tax base and hence
tures plus opportunity cost of the monies deposited for assurance) government revenues on the one hand, and good environmental
must now be met from the revenue stream from a mine with and social performance on the other. When mining companies
higher capital and operating costs. The overall net value of each wish to operate in a sustainable manner – or where this term is
mine becomes smaller as external cost are forced onto the found to be poorly defined – in an environmentally and socially
operators balance sheet, leaving less to be divided between responsible manner, this may be costly and serve to reduce the tax
operator, government and other stakeholders. There is usually no
way of passing on any cost increase to consumers.
So far we have assumed a responsible government that is This is a real possibility. The Equator Principles is an initiative led by the
concerned with the welfare of its citizens. However, this International Finance Corporation and the World Bank. These seek to ensure that
projects financed by signatories are developed in a socially responsible manner
assumption may not always hold. Governments may be more and reflect sound environmental management practices. As part of adopting the
interested in revenue than in total welfare. In such cases, their principles, financiers undertake to carefully review proposals and to refuse loans to
focus is not upon minimizing external costs but upon maximizing projects where the borrower will not, or are unable to comply with the required
environmental and social policies and processes. A large group of leading banks
already support the initiative (some 66 banking institutions as of March, 2009).
Further, the signatory international banks undertake not to finance any project
The difference between the two is difficult to generalise. Empirical studies over US$ 50 million unless it meets World Bank and International Finance
will always have to estimate the cost of the option NOT pursued. Cost arising from Corporation environmental policies, standards and guidelines, which include a
remediation of abandoned sites can be calculated but would then have to be requirement for closure funding (Miller, 2005, p. 6 & 17). Indeed, the principles
compared to estimates of how remediation would have been carried out had it include a requirement for fully funding a mine’s closure plan by appropriate
occurred concurrently. The opposite difficulty is found where concurrent instruments so that the cost of closure can be covered at any stage in the mine life,
remediation has taken place. Apart from separating remediation costs from other including premature and unforeseen cessation of activities. For further detail, see
costs, the difficulty would be to estimate the externalities that would have (accessed
occurred in the absence of concurrent remediation. March 4, 2009).
P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233 233

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