Reducing the opportunities and incentives for corruption in the state's management of coal...

7/27/2019 Reducing the opportunities and incentives for corruption in the state's management of coal resources,

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ICAC REPORTOCTOBER 2013

REDUCING THEOPPORTUNITIES ANDINCENTIVES FOR CORRUPTIONIN THE STATES MANAGEMENTOF COAL RESOURCES


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REDUCING THEOPPORTUNITIES AND

INCENTIVES FORCORRUPTION IN THE

STATES MANAGEMENT OF

COAL RESOURCES

ICAC REPORTOCTOBER 2013


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ICAC

This publication is available on theCommissions website www.icac.nsw.gov.auand is available in other formats for thevision-impaired upon request. Please advise of formatneeded, for example large print or as an ASCII le.

ISBN 978 1 921688 49 2

October 2013 Copyright in this work is held by the IndependentCommission Against Corruption. Division 3 of the Copyright Act 1968 (Cwlth) recognises that limited further use of this material can occur forthe purposes of fair dealing, for example study, research or criticism, etc.However if you wish to make use of this material other than as permittedby the Copyright Act, please write to the Commission at GPO Box 500Sydney NSW 2001.

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Postal Address: GPO Box 500,Sydney, NSW, Australia 2001

T: 02 8281 59991800 463 909 (toll free for callers outside metropolitan Sydney)TTY: 02 8281 5773 (for hearing-impaired callers only)F: 02 9264 5364E: [email protected]

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ICAC

The Hon Don Harwin MLC The Hon Shelley Hancock MLAPresident SpeakerLegislative Council Legislative AssemblyParliament House Parliament HouseSydney NSW 2000 Sydney NSW 2000

Mr PresidentMadam Speaker

In accordance with s 74 of the Independent Commission Against Corruption Act 1988 I am pleased topresent the Commissions corruption prevention report arising from its investigations into the circumstancessurrounding the allocation of certain coal mining licences.

The Commissions recommendations to reduce the opportunities and incentives for corruption in themanagement of coal resources are contained in the report.

I draw your attention to the recommendation that the report be made public forthwith pursuant tos 78(2) of the Independent Commission Against Corruption Act 1988.

Yours sincerely

The Hon David Ipp AO QCCommissioner


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4 ICAC REPORT Reducing the opportunities and incentives for corruption in the states management of coal resources

Chapter 4: Recommendations relating to statedecisions a ecting the coal mining industry 29

Direction for the NSW coal mining industry 29

Transparent and fully-informed decision-making 31

The role of probity advisers 32

Chapter 5: Recommendations orremoving the systems fnancial incentives or

corrupt behaviour 34Auctions as the preferred allocation method 34

Direct allocations 37

Capacities of mining companies 38

Incentives to use ELs as intended 39

Assessment leases 40

Chapter 6: Recommendations concerning theconduct o members and ministers 41

Supporting the provision of frank and fearless advice 41

Codes of conduct 42

Pecuniary interest register 43

Parliamentary investigator 43

Lobbying 44

Chapter 1: Introduction and overview 5

Consultation 7

Structure of the report 7

The Commissions recommendations 8

Recommendation that this report be made public 9

Chapter 2: The policy and regulatoryenvironment or coal exploration and miningin NSW 10

Introduction to the NSW coal allocation system 10

Policy and regulatory environment in NSW 11

Coal mining strategy 13

The diminished capabilities of the MRB 14

Operational arrangements 15

Conclusion 23

Chapter 3: Doing business in NSW 24

Consequence waiting to happen rent seeking andcorruption 25

Community unease and opposition 27

Conclusion 28

Contents


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5ICAC REPORT Reducing the opportunities and incentives for corruption in the states management of coal resources

In July and August 2013, the NSW IndependentCommission Against Corruption (the Commission)furnished to the NSW Parliament its investigation reportson Operation Jasper, titled Investigation into the conduct

of Ian Macdonald, Edward Obeid Senior, Moses Obeid and others, and Operation Acacia, titled Investigation into the conduct of Ian Macdonald, John Maitland and others .

The investigation into Operation Jasper followed anallegation made by a private individual in February 2011

that con dential information regarding the tender processfor awarding the Mount Penny coal tenement had beenleaked to the Obeid family. As part of that investigation,the Commission examined the circumstances surrounding a decision made in 2008 by the Hon Ian MacdonaldMLC, then minister for primary industries and ministerfor mineral resources, to grant a coal exploration licence(EL) to Cascade Coal Pty Ltd (Cascade Coal), thecircumstances relating to the tendering process and theway in which the tender bids were assessed.

The Commission found that Mr Macdonalds corruptconduct was motivated by an agreement with theHon Edward Obeid MLC (Edward Obeid Sr) andMoses Obeid to nancially bene t the Obeid family.Mr Macdonald, Edward Obeid Sr and Moses Obeidwere found to have engaged in corrupt conduct byconspiring to defraud in the creation of the Mount Pennytenement. The Commission also discovered that severalco-investors, including Travers Duncan, John McGuigan,

John Atkinson, John Kinghorn and Richard Poole, hadengaged in corrupt conduct to obtain nancial advantageby deception.

The investigation into Operation Acacia followed a

referral made to the Commission on 23 November 2011by both Houses of Parliament, in which the Commissionwas asked, among other things, to investigate and reporton matters surrounding the application for, and allocation

to, Doyles Creek Mining Pty Ltd (DCM) of an EL.DCM sought the EL using the pretext of establishing atraining mine to bene t the coal mining industry.

The Commission found that Mr Macdonald engagedin corrupt conduct by acting contrary to his duty as aminister of the Crown in granting DCM consent to applyfor the EL in respect of Doyles Creek and by granting theEL to DCM; both of which were granted substantiallyfor the purpose of bene ting John Maitland, former

leader of the Construction, Forestry, Mining and EnergyUnions Mining and Energy Division, who was also ashareholder and chairman of DCM at the time the ELwas granted. Corrupt ndings were made against MrMaitland, Craig Ransley, Andrew Poole and MichaelChester for publishing, or agreeing to publish, false ormisleading statements to the NSW Department of Primary Industries (DPI).

In the referral from both Houses of Parliament, theCommission was directed to enquire, if deemednecessary, into any related matters with respect tolicences or leases under the Mining Act 1992 (theMining Act) and make recommendations for action.

The Commission has identi ed a number of corruptionrisks that exist throughout the states administrationsystem for the coal mining industry. The corruptbehaviour exposed in operations Jasper and Acaciadid not occur as the result of a small loophole thatwas cleverly exploited. Rather, the perverse incentivesand opportunities that are embedded in the existing coal allocation system have the capacity to distort thedecision-making process on what and when coal depositsshould be released, as well as the pathway that an

allocation process will follow.The legislative framework for the coal mining industry inNSW confers broad discretion on the minister and public

Chapter 1: Introduction and overview


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how often ELs should be renewed. In the absence of anoverarching strategy that sets out the preferred approach of government for developing the states coal mining industry,decisions for the release, allocation and extraction of coalare made in a strategic vacuum and are unable to be judgedagainst any standard. The con icting roles of governmentagencies and the time lapse between decisions made toaward ELs and decisions to give development approvalto establish a mine in an area create great risk anduncertainty for the industry over and above that related totypical business risks.

In 2008 and 2009, at the time of the corrupt conductidenti ed in operations Jasper and Acacia, the MineralResources Branch (MRB) 2 sat within what was then the

DPI (now the NSW Department of Trade and Investment,Regional Infrastructure and Services). The MRBs role is tofocus on decisions regarding the facilitation and regulationof the coal mining industry. Without any broader view onthe role of coal in the development of the state, the MRBhas largely limited its focus to the release of ELs and theplacement of conditions relating to exploration activity.Once allocated an EL, companies invest substantialamounts of money in rming up the case for mining.Only much later does a different arm of government, theDepartment of Planning and Infrastructure, step in toevaluate the mining proposal of a company against the

broader social, economic and environmental matters.

While coal represents the largest export of the stateand ELs represent a transfer of assets worth tens orhundreds of millions of dollars from the state to privatehands, the arrangements for the release of the resourceand allocation of ELs are lacking many basic principles of good governance. There is, for example, an absence of a state plan or policy against which ministerial decisionscan be judged, little involvement of the NSW Treasury inasset disposal and limited transparency of decision-making.To outsiders, including mining companies, the process of

releasing exploration areas appears ad hoc. Importantly, thecurrent policy and regulatory environment creates a setof incentives that encourage manipulation of the systemfor substantial personal gain in the choice of areas to bereleased, the direct transfer of state assets to an individualmining company and the renewal of ELs to maintaincontrol over the deposit. This is not a policy and regulatoryenvironment that would be considered acceptable in anycomparable state operation.

The limitations of the states policy and regulatoryenvironment have had negative effects beyond the speci ccorruption exposed by the Commission and have restricted

2 The title of the branch, division or area of government with responsibilities for theadministration of ELs has changed over the years. For the purposes of this report, itwill be referred to as the Mineral Resources Branch.

of cials responsible for mineral resources to determinehow coal ELs are released, allocated and renewed. Thepurpose of the minister for mineral resources 1 granting anEL is to provide exclusive rights to a titleholder so thatthey may explore and con rm the quality, quantity andphysical location of the coal resource (so-called rming up activities). Once exploration is complete, a companywishing to establish a mine at the location must obtaina mining licence (ML) from the minister for mineralresources. Before a company can do so, however, it mustalso obtain development consent under the Environmental Planning and Assessment Act 1979 (the EP&A Act). Thisprovides a key role for the NSW Department of Planning and Infrastructure in assessing a companys application andin considering the wider environmental and social impactsof establishing a mine at that speci c location.

In preparing this report, the question facing theCommission was not simply how the states policy andregulatory framework could allow coal ELs of great valueto be corruptly provided to favoured recipients, but how itcould have been so easy to do so. It is inconceivable that inany other portfolio area of government such value could becorruptly transferred from the state to favoured individualswith such relative ease.

What, then, is so different about the allocation of rights to

state coal assets from the way that the rest of governmentdoes business? The corrupt conduct uncovered by theCommission in operations Jasper and Acacia cannot simplybe put down to a rogue minister for mineral resources.The state arrangements that relate to coal provided anopportunity not found in other parts of government forindividuals to engage in corrupt conduct.

While the corruption exposed in operations Jasper andAcacia related to exploration, these ELs were of high valuebecause they were in parts of the state that are consideredmature areas for coal. In such mature areas, it is widelyunderstood that coal deposits exist; although the exactquality and quantity still needs to be con rmed. ELs in amature area may be better viewed as pre-mining approval,rather than a right to undertake true exploration. The realvalue of having an EL in a mature area is that it representsa pathway to mining operations. If the information obtainedfrom exploration activities indicates a nancially-viablemining operation then, by convention, the holder of the ELwill apply for development approval to commence mining.

Given the above factors, an ongoing issue for the state hasbeen determining which areas should be released, how theELs should be allocated to individual mining companies and

1 The term minister for mineral resources is used throughout this report as adefault to denote the position title, both past and present, of the person withresponsibility for this portfolio. The current position title is minister for resourcesand energy.

CHAPTER 1: Introduction and overview


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the return the state has obtained for its assets during theboom period for coal prices. Perceptions of sovereign risk(in the broadest sense of unpredictable policy changes andshifting discretionary decisions) have been heightened and thereputation of the state as a desirable investment destinationhas been tarnished. The perception that the state is beholdento mining companies as a result of the additional nancialcontributions taken from them at the exploration stage hasgenerated community anger about coal mining.

ConsultationThe Commission consulted widely with mining professionals and undertook extensive analysis of thecurrent governance and operational arrangements.Government input was obtained through discussionswith relevant ministers and their of ces as well as pastand present directors general of the Department of Tradeand Investment, Regional Infrastructure and Services, theDepartment of Planning and Infrastructure and the NSW Department of Premier and Cabinet. Senior of cialsfrom the MRB and the Department of Planning andInfrastructure were also consulted. Generally, there waswidespread acknowledgement of the need for change tothe current policy and regulatory environment.

Input was also obtained from those with expertise

in the coal mining industry, including the AustralianGovernments Productivity Commission, the Bureau of Resources and Energy Economics, the NSW Treasury(speci cally specialists with knowledge of minerals andauction design), and the Australian Securities Exchange,as well as leading academics with expertise in resourceindustry incentive structures and auction design. Abrie ng for the Commission on auctions and marketdesign was commissioned by the NSW Treasury andproduced by the Centre for Market Design. 3 Industry inputwas also obtained from the NSW Minerals Council and theAustralian Coal Association. The Commission is grateful tothose who took the time to participate in interviews.

The Commissions research included the following:

desktop analyses of the policy and regulatoryenvironments in best practice jurisdictions (withregard to the way that ELs are allocated forcoal, oil and gas reserves), including Queensland,

Western Australia, the Commonwealth, Norwayand British Columbia

an audit of selected ELs undertaken by auditorsworking for the Commission

3 Centre for Market Design, August 2013, Competitive Allocation of Exploration and Mining Permits: An Issues Paper. This centre is a collaboration betweenthe University of Melbourne, the Commonwealth Treasury, and the VictorianDepartment of Treasury and Finance.

an examination of MRB policies, process design andstructural arrangements

a statistical analysis of the global relationshipbetween sovereign risk in mining and corruptionperceptions as measured by TransparencyInternational

consideration of the evidence presented in the publicinquiries.

Structure of the reportThis report examines the policy and regulatory environmentin NSW for the allocation of coal ELs in mature areas wherethe existence of coal deposits is well understood. It analyses

both the speci c issues that relate to the corruption exposedin operations Jasper and Acacia, and more broadly examinesthe vulnerability of the EL granting and renewal processesto corrupt behaviour in accordance with s 13(1)(f) of the

Independent Commission Against Corruption Act 1988 (theICAC Act). Section 13(1)(f) of the ICAC Acts states that aprincipal function of the Commission is:

to advise public authorities or public o cials of changesin practices or procedures compatible with the e ective exercise of their functions which the Commission thinks necessary to reduce the likelihood of the occurrence of corrupt conduct

The report, therefore, makes recommendations for changesto the system that are likely to reduce the incentives andopportunity for corruption while also having regard for theeffective functioning of coal EL allocation, EL renewal andmining approvals.

The report is presented in two parts. Part 1 (chapters 2 and3) examines the policy and regulatory environment at thetime of the corrupt conduct in 2008 and 2009. It discussesthe role of government and the MRB in facilitating andregulating the coal mining industry in NSW. This includes

a discussion of the impact that organisational change anddiminishing resources has had on the capacity of the MRBto effectively manage the coal allocation process. Part 1 thenexamines the aws in the state arrangements at the time of the corrupt conduct, and the consequences of widespreadperverse incentives and opportunities for corruption.

Part 2 of the report (chapters 4, 5 and 6) considers relevantchanges made to the state arrangements since the timeof the corrupt conduct and outlines the characteristics of a preferred future framework. The preferred frameworkis based on best practice identi ed in other jurisdictionsand, importantly, other parts of the NSW Government,and extensive consultation. Part 2 also presents theCommissions 26 recommendations for reform. Wherepossible, the approach has been to recommend changes that


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CHAPTER 1: Introduction and overview

reduce the incentives and opportunities for corruption byimproving the ef ciency and effectiveness of the system. An

ef cient and effective system, almost by de nition, would notcontain incentives and extensive opportunities to distort theprocess through improper lobbying, manipulation and corruptbehaviour. As much as possible, the Commission has avoidedrecommending onerous governance requirements to dealwith aws in the current arrangements.

Finally, Part 2 of the report will consider whether the currentrequirements concerning the behaviour of members of theNSW Parliament and ministers are adequate. Operations Jasper and Acacia highlighted shortcomings in theaccountability framework governing the conduct of members,

including the NSW Code of Conduct for Members and thecurrent pecuniary interest disclosure system. The reportexamines the ability of hidden interests of members to impacton executive government decision-making, along with therole of public of cials in providing frank and fearless advice asa safeguard against undue in uences .

The Commissions recommendationsThe Commissions view is that the policy and regulatoryenvironment in NSW for the release and allocation of coal ELs is conducive to corruption. For example, the

MRBs decision-making, which is characterised by weakprocesses, is not framed within governments wider strategicgoals. Furthermore, decisions are not transparent, thereare incentives for exploration and mining companies toseek resources through direct allocations and there is animplicit pressure generated to approve mining activity whensigni cant additional nancial contributions have beenmade at the exploration stage. Finally, there is only a weakmechanism to prevent licence holders from continuallyrenewing ELs.

The Commission notes that decision-making practices aroundthe release of ELs differ from the prevailing practices in otherparts of government. For example, the disposal of state assetsor decisions regarding whole-of-government considerations,such as the unsolicited proposals model, are quite differentin nature from the arrangements for the management of thedisposal of coal. The Commissions recommendations are inmany ways the application of well-established approachesutilised in other parts of the NSW Government.

The 26 recommendations fall within ve key areas of reform.

First, the state should develop a clear policy statement thatconveys how coal mining ts within the broader policyobjectives of the state. From that policy statement, a set of factors can be developed that must be considered prior to adecision being made. These would both guide public of cialsand provide a standard against which decisions can beevaluated in a transparent way.

Secondly, the MRBs decision-making committee, knownas the Coal Allocation Committee (CAC), should be

replaced with a steering group comprising members witha broader skill set to fully consider the range of issues thatlink decisions to release and allocate resources to stateobjectives and priorities and the nal approval to mine.Given the relatively unique nature of each EL application,expert judgment provided by the steering group ispreferable to rigid prescription. The steering group wouldcomprise senior of cials from the Resources and EnergyDivision of the Department of Trade and Investment,Regional Infrastructure and Services, the Department of Planning and Infrastructure and the NSW Treasury. TheDepartment of Planning and Infrastructure should host

and convene the group and co-opt members, as necessary.

The steering group would be assisted by an assessmentpanel comprising practitioners with relevant expertisefrom the Department of Planning and Infrastructure, theNSW Treasury and the Resources and Energy Division.The assessment panel would support the formulation of recommendations on areas to be released for explorationand the method by which areas would be allocated forexploration. The recommendations made by the steering group, based on the workings of the assessment panel,would be made to the newly-established Cabinet Standing

Committee on Resources and Land Use for nal approval.Thirdly, the auctions method should be the preferredapproach to the allocation of the states coal resources. TheNSW Treasury should oversee the design of the auctionprocess. In those cases where direct allocation is necessary,it should be the subject of oversight by the assessment panel.

Fourthly, the current renewal processes for ELs should bereplaced by an exponentially escalating lease rent to allowcommercial decisions to be made in an environment of certainty and to remove the incentive to repeatedly renewELs without progressing to mining.

Finally, the Commission makes a series of recommendations to improve the systems that ensurethe accountability and scrutiny of members of the NSW Parliament and ministers, including the recommendationthat consideration be made for the establishment of aparliamentary investigator position.

The recommendations made in this report are madepursuant to s 13(3)(b) of the ICAC Act and, as requiredby s 111E of the ICAC Act, will be furnished to therelevant public authorities and the ministers responsiblefor those authorities.

As required by s 111E(2) of the ICAC Act, the relevantpublic authorities must inform the Commission in writing within three months (or such longer period as the


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Commission may agree to in writing) after receiving therecommendations whether they propose to implement

any plan of action in response to the recommendationsaffecting them and, if so, the plan of action.

In the event a plan of action is prepared, the relevantpublic authorities are required to provide a written reportto the Commission of their progress in implementing theplan 12 months after informing the Commission of theplan. If the plan has not been fully implemented by then, afurther written report must be provided 12 months afterthe rst report.

The Commission will publish the responses to itsrecommendations, any plans of action and progressreports on their implementation on its website,www.icac.nsw.gov.au, for public viewing.

Recommendation that this report bemade publicPursuant to s 78(2) of the ICAC Act, the Commissionrecommends that this report be made public forthwith.This recommendation allows either Presiding Of cer of aHouse of Parliament to make the report public, whether ornot Parliament is in session.


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This chapter will provide a brief overview of the signi canceof coal mining to the state of NSW and outline the policyand regulatory environment as it operated at the time of thecorrupt conduct identi ed in operations Jasper and Acacia.Chapter 3 will then examine the incentives and opportunitiesfor corrupt conduct created by this policy and regulatoryenvironment.

Introduction to the NSW coalallocation systemAustralia is the second largest exporter of coal in the worldand coal mining is the largest export industry in NSW,generating employment and raising signi cant exportincome. The NSW coal mining industry has experienceda period of substantial growth since 200405, due to thegrowing demand from Asian export markets.

In 200910, the value of coal mining production in NSW totalled $13.2 billion, or 80% of the total value of theNSW mining sector. It directly employed 19,000 peopleand supplied 92% of the states electricity. The value of

coal exports has more than tripled in the past decade.In 200910, it accounted for 25% of all export income,making it NSWs single largest export in revenue terms.Coal mining royalties are also a major source of revenuefor the state, generating $354 million in 200405, whichincreased to $915 million in 200910. 4

The major coal deposits in NSW range from bituminouscoking and thermal coals to sub-bituminous thermal coals.Lower quality coal is used in the local power generationindustry, whereas higher quality coal is exported or usedin heavy industry. The quality of the coal deposit is akey consideration when mining companies are making investment decisions but it is not the only consideration.

4 Statistics obtained from the Resources and Energy Divisions website athttp://www.resources.nsw.gov.au, viewed mid-2013.

The mineral resources of NSW belong to the state ratherthan the owners of the land that contain these resources. Itis the responsibility of the NSW Government to facilitateexploration and extraction of those mineral resources forthe bene t of the people of NSW in accordance with apolicy and regulatory framework set by the state.

The allocation of rights for the exploration and mining of coal is largely regulated by the Mining Act. An EL providesexclusive rights to a titleholder so that they may exploreand rm up the quality, quantity and physical location of a particular mineral resource. To obtain an EL for coal, acompany must gain the consent of the minister for mineralresources. An EL can be granted by this minister as a directallocation of the EL to a particular company or the EL canbe allocated through a competitive process.

Certain fees are payable on receipt of an EL and, oncegranted, an EL is subject to conditions. For example, it is ageneral condition that a titleholder must undertake certaintypes of exploration within the boundaries of the EL. Atthe end of a xed term, a company can relinquish the EL orrequest a renewal.

Generally, before the minister for mineral resources makesa decision about whether or not to grant an EL, he or she isprovided with advice from their department. Principally, theday-to-day functions of the MRB are the identi cation andallocation of mineral resources to mining companies and theregulation of mining companies in terms of the environmentand mine safety. The MRB had in place various operationalarrangements to make recommendations about allocationof ELs to the minister for mineral resources (thesearrangements will be discussed later in the chapter).

The granting of an EL does not guarantee the eventual

opening of a mine. The real value of having an EL is thatit represents a pathway that is likely to lead to mining operations. Once an EL is granted, a company conductsexploration activity with a focus on identifying the speci c

Chapter 2: The policy and regulatory environment for coal exploration andmining in NSW


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area within the EL boundaries where mining is most likelyto be pro table. A project is more likely to be nanciallyviable if it is in what is considered to be a mature area forcoal. There are many regions in NSW where the location,quantity and to a lesser degree the quality of coal iswell established. Understandably, these mature areasattract greater industry interest, as coal exploration inthese areas is considered low risk and regarded by industryinvestors as more of an activity in rming up of a businesscase for mining operations rather than true exploration in a

frontier area. Many small exploration companies will obtainan EL with a view to carrying out exploration activitiesand, if a nancially-viable resource is identi ed, might sellthat EL to a larger mining company or form a partnershipand seek to set up a mine at that location.

Once exploration is complete, a company wishing toestablish a mine must obtain an ML from the minister formineral resources. An ML gives the holder the exclusiveright to mine for minerals over a speci c area of land. To begranted an ML, applicants must demonstrate that there isan economically-viable mineral deposit within the area of the proposed lease. They must also show that they havethe nancial and technical resources to carry out mining ina responsible manner.

Before a company can obtain an ML, it must obtaindevelopment consent under the EP&A Act. Thisprovides a key role for the Department of Planning andInfrastructure, which is responsible for assessing projectswhose size, complexity, importance or potential impactsindicate that they are of state rather than local or regional

signi cance.

While an area may be considered a viable location fora coal mine, it may also have competing land uses,a local community in close proximity or signi cantenvironmental value. The Department of Planning andInfrastructure considers these types of impacts as part

of a merit assessment at the mining development stage.Despite mining being a controversial topic and taking place in populated areas with possible alternate land uses,ELs were awarded at the time of the corrupt conductidenti ed in operations Jasper and Acacia with inconsistentconsideration of the impact that mining could have withregard to economic, environmental and social perspectives(the so-called triple bottom line).

Policy and regulatory environmentin NSWThe policy and regulatory environment has a profoundimpact on the decision-making of companies, theirbehaviour as they interact with government and,consequently, on the long-term development of the coalmining industry and its contribution to economic growthin the state. Where the environment is opaque, uncertainand discretionary, incentives may be created to lobby andpersuade decision-makers to achieve favourable outcomes;the greater the value of the coal resource to be transferredfrom government to a private entity, the greater the

incentive. Similarly, the greater the private investment putat risk by uncertain policy and regulatory decisions, thegreater the incentive to improperly lobby and manipulategovernment decision-making and policy.

A poor perception of the policy and regulatory environmenthas negative consequences on investment. The FraserInstitute, a widely referenced independent research andeducational organisation based in Canada, conducts the

Annual Survey of Mining Companies.This survey analysesthe perceptions of senior managers with regard to thespeci c public policy factors they believe encourage or

discourage mining investment (see gure 1).The Fraser Institute has identi ed the type of governmentpolicies that encourage investment and classi ed theseas best practice. These best practice policies include a


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world class regulatory environment, highly competitivetaxation, no political risk or uncertainty and a fully stable

mining regime.5

Jurisdictions that rank amongst the mostattractive investment destinations do not simply give acarte blanche to mining; rather, they all have policy andregulatory environments that reduce uncertainty for theindustry.

5 Fraser Institute, February 2013, Annual Survey of Mining Companies 201213,p. 15, viewed mid-2013, http://www.fraserinstitute.org.

When considered against the key items identi ed by theFraser Institute, the policy and regulatory environment

in NSW at the time of the corrupt conduct identi edin operations Jasper and Acacia fell well short of ideal.It was characterised by uncertainty, inconsistenciesand regulatory overlap, encouraged opaque and highlydiscretionary decisions, and lacked oversight.

CHAPTER 2: The policy and regulatory environment for coal exploration and mining in NSW

Figure 1: Fraser Institute Annual Survey of Mining Companies 201213

Since 1997, the Fraser Institute has conducted an annual survey o mining and exploration companiesaround the world. The survey now includes 96 jurisdictions rom all continents (except Antarctica).Respondents to the 201213 survey were asked to indicate how each o the 17 policy actors below

infuence company decisions to invest in various jurisdictions.1. uncertainty concerning the administration, interpretation or enorcement o existing regulations

2. uncertainty concerning environmental regulations (stability o regulations, consistency andtimeliness o regulatory process, and regulations not based on science)

3. regulatory duplication and inconsistencies ( ederal/provincial, ederal/state, inter-departmentaloverlap and so orth)

4. legal system (legal processes that are air, transparent, non-corrupt, timely, e cientlyadministered and so orth)

5. taxation regime (includes personal, corporate, payroll, capital and other taxes, and complexity o tax compliance)

6. uncertainty concerning disputed land claims

7. uncertainty concerning which areas will be protected as wilderness, parks or archaeological sitesand so orth

8. in rastructure (access to roads, power availability and so orth)

9. socio-economic agreements/community development conditions (local purchasing or processingrequirements, or supplying social in rastructure such as schools or hospitals and so orth)

10. trade barriers (tari and non-tari barriers, restrictions on pro t repatriation, currencyrestrictions and so orth)

11. political stability

12. labour regulations/employment agreements and labour militancy/work disruptions

13. quality o the geological database (quality and scale o maps, ease o access to in ormation and soorth)

14. level o security (physical security due to the threat o attack by terrorists, criminals, guerrillagroups and so orth)

15. availability o labour/skills

16. level o corruption (or honesty)

17. growing (or lessening) uncertainty.


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Coal mining strategy

In NSW, valuable coal resources are often located in areaswith competing land uses, signi cant local populationsand environmental value. Despite this, at the time of theboom, there was no explicit statement laid out in legislation,regulation, plans or guidelines of the NSW Governmentsgoals, priorities and desired outcomes for coal. There was noguidance or standards on how the con icting demands wereto be resolved within the context of larger state-developmentgoals and no decision-making group existed in governmentwith expertise across all relevant areas. There was noconsideration of a state plan for coal until 2010; even then,a plan never eventuated. High-level decisions, such as

whether, where and when the states coal resources shouldbe explored, developed and extracted, were never consideredat a whole-of-government level prior to the release of ELs. Without an overarching strategy, such decisions weredevolved to the department or made at the discretion of theminister for mineral resources.

At the time of the corrupt conduct identi ed in operations Jasper and Acacia, the Mining Act provided the minister formineral resources with wide discretion to grant ELs. Thesearrangements and provisions under the Mining Act remainunchanged. The Mining Act does provide that an application

or tender can be refused on the grounds that the applicant ortenderer has contravened the Mining Act or provided falseor misleading information in connection with the applicationor with respect to the tender. Otherwise, it does not specifyany criteria or factors that the minister must consider whenmaking a decision and the minister is not required to makethe reason for his or her decision public or transparent.

The MRBs 2008 Guidelines for Allocation of Future Coal Exploration Areas (the Coal Allocation Guidelines) set outthe circumstances in which ELs would be directly allocatedand, conversely, when competitive processes would beadopted. According to the Coal Allocation Guidelines, thecriteria for obtaining an EL were framed by the estimatedtonnage of the resource and the geographic location. Whilethe normal practice of the department at the time of thecorrupt conduct was to advise the minister on the basis of the criteria in the Coal Allocation Guidelines, these guidelinesdid not impose any formal constraint on the ministersdiscretion under s 13 of the Mining Act.

The level of discretion afforded the minister for mineralresources in NSW is relatively unfettered in comparison tothe discretion afforded to ministers in other state portfoliosand in other jurisdictions. Over the years, in the absenceof criteria or a strategic plan, the minister for mineralresources and the MRB were afforded great exibility indecision-making. The exercise of this discretion withoutoversight resulted in inconsistent outcomes in the release

and allocation of ELs that perplexed both the coalmining industry and the community. The decisions made

by Mr Macdonald, as identi ed in operations Jasper andAcacia, did not immediately stand out as unusual to anexternal observer.

In 2010, a strategic planning initiative was undertakenacross various government departments but, due toa change of government in 2011, was not put intopractice. At the time that the strategic planning initiativewas undertaken, the then Labor government formeda ministerial sub-committee to consider the merits of a single strategy for the coal and emergent coal seamgas industries in NSW. The treasurer and ministers for

the portfolios of planning, primary industries, health,and climate change and the environment worked incollaboration to develop a strategy that would ef cientlyand effectively regulate the industry.

In February 2011, the committee produced a scoping papertitled the NSW Coal and Gas Strategy . Its purpose was toprovide an overview of the NSW coal and gas industry,its place within the state and regional economies and,given the increasing global demand for energy, its potentialgrowth prospects over a 25-year period. Due to the changeof government in 2011, the strategy was not implemented.Nevertheless, this strategic initiative had a solid underlying rationale. Without some form of overarching strategy,high-level decisions about how the states coal resourcesshould be developed remained at the discretion of theminister for mineral resources and the MRB. Guidancefor of cials was inadequate and there were few standardsagainst which decisions could be judged.

The absence of clear state objectives is not are ection on the MRB. The MRB has never hadresponsibility for strategic thinking with regard to howcoal exploration and development should t within abroader state-development program. Indeed, it has been

recognised that such a task is beyond the capability of theMRB and requires input from a number of governmentagencies (as seen in the attempt at a strategy in 2010).

In the absence of such a focus, the MRBs strategy wasto conduct very broad regional resource assessmentsthrough a departmental drilling program to identifythe resources in that particular area. Thereafter, anyfurther drilling by the department was carried out onlywhen industry indicated an interest in an area and whenbudgets were available. In these instances, the primaryfocus for the MRB was on obtaining geo-scienti c datawithout any formal consideration of whether these areaswould ever be considered suitable for mining.

The MRB released ELs with a view that explorationis concerned with verifying the quality and quantity


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of the resource and that exploration activity has minimalenvironmental impact. For the coal mining industry and the

community, both saw the granting of an EL as a rst steptowards mining approval being granted, particularly in amature area. For a mining company, the granting of an ELsignaled the start of signi cant investment and calculationsof future earnings, all of which could be put into jeopardyif a social, environmental and economic assessment at thelater stage of development approval restricted its plannedaccess to the coal deposit.

As much of the known coal reserves in NSW are locatedin populated areas that have signi cant alternative uses,at some point, judgments have to be made that weigh up

these multiple issues. Senior management within the MRBhas acknowledged that there is little point in allocating anexploration area if the area is unlikely to gain developmentconsent. Yet, despite the role that the Departmentof Planning and Infrastructure played in giving thatdevelopment consent and, in the absence of an integratedgovernment approach to coal mining, neither the MRB norDepartment of Planning and Infrastructure established amechanism to determine whether an area would be likelyto gain development approval prior to releasing an area foran EL. Instead, these matters were considered informallyby the MRBs internal committees.

These issues remain a problem today at the stage whencompanies move to seek development approval. Generally,ELs start off covering large areas and, then, through aprocess of elimination, are reduced in scale, so that businessplans are developed only for viable areas. As explorationactivity is completed, an application for developmentapproval is prepared. This prompts a lengthy processof negotiation between the mining company and theDepartment of Planning and Infrastructure.

While outright refusal by the Depar tment of Planning and Infrastructure of development approval for a mine

is rare, this process of negotiation generally results indevelopment approval being granted for a smaller areaand a tonnage that is potentially much lower than thatassumed in the mining companys business case. It is atthis later stage that competing economic usages andenvironmental or social concerns are considered; thatis, following the millions of dollars invested in developing the business case based on the EL that was issued. Thegovernment then begins the assessment of the suitabilityof the area for mining. The viability of the project is atrisk and, along with it, the investment to date and theanticipated future earnings. This risk is exacerbated by

the length of time it takes to get development approval inNSW. If there is a market downturn during the period of negotiation and the assumptions on which the companysbusiness case was built change signi cantly, the company

may decide it is more prudent not to invest further in theproject.

Without a strategic focus at the government level at thetime of the corrupt conduct identi ed in operations Jasperand Acacia, the MRB had no guidance for the decisionsmade around whether, where and when the states coalresources should be explored and developed. Equally, therewas no standard against which any decisions made by theMRB could be judged by an external observer. Without anintegrated approach to the development of the coal mining industry, each area of government focused solely on its partof the process with little consideration given to the impact of the MRB releasing ELs for broad areas that the Department

of Planning and Infrastructure would later restrict.The consequences of this approach were far reaching,particularly during the years when coal prices were booming and in the lead up to the corrupt conduct exposed by theCommission. First, it created uncertainty in the industry andput investment at risk as a result of inconsistent governmentactions. As presented in chapter 3 of this report, such aframework created incentives for industry players to lobbygovernment to protect their investments.

Secondly, it created great unease and opposition within thecommunity when ELs were issued for areas of land that had

competing land uses, local populations and environmentalvalue. Finally, such an approach led to claims that the MRB,as both regulator and facilitator of the industry, was biasedtowards the interests of mining companies; an accusationfuelled by the opaque decision-making processes.

The diminished capabilities of theMRBThe rise in coal prices from 2004 onwards led to an increasein exploration and mining activity in NSW and a subsequentincrease in workload for the public of cials charged withadministering the states MLs. At the same time, however,the MRB was undergoing signi cant change.

In late 2004, the MRB transferred from Sydney to Maitlandin the Hunter Valley, where it was co-located with theindustry it regulated. Part of the Industry CoordinationUnit, a small subsection of the MRB, remained in Sydney.As is common with any decentralisation, many employeesdid not transfer to Maitland, leading to a loss of corporateknowledge, a number of vacancies and a de cit of skilledstaff. These losses were aggravated further by employmentopportunities with mining companies that had arisen during

the boom period (encouraging further staff resignations) anda government-wide recruitment freeze that prevented thelling of many job vacancies. Since then, chronic problemswith staff retention and recruitment have plagued the



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MRB. It has been acknowledged, generally, that workloadpressures and staff shortages had left the remaining staff

doing the best they could with a focus on keeping theirheads above water.

During this time, the stand-alone Department of MineralResources was also abolished and transferred to theDPI. The DPI, in turn, had been newly formed following the merger of NSW Agriculture, NSW Fisheries, StateForests of NSW as well as the Department of MineralResources. This was just the rst of a number of publicsector restructures that, between 2004 and 2011, saw theMRB subsumed into larger and larger departments; rst, itwas merged to form the DPI, which was then amalgamated

into the Department of Industry and Investment in 2009,and nally into the Department of Trade and Investment,Regional Infrastructure and Services in 2011.

One rationale for cluster departments is to break downagency silos and encourage creative solutions to issues thatcut across previously separate departments. In reality, eacharea has to compete for resources and the focus of thedirector general. Despite coal mining representing 25% of state exports and its controversial nature as an industry, itwas not always given priority at a cluster level. During theOperation Jasper segment of the public inquiry, Dr RichardSheldrake told the Commission that when he becamedirector general of the DPI in 2008:

the Department of Primary Industries at that stage comprised 3,500 sta . Mineral Resources were approximately 250. So, and nancially in a similar proportion it represented about ve to seven percent of the Department of Primary Industries. So I had a range of other priorities and pressures.

While the MRB retained substantial technical skills afterit was subsumed into the DPI, the policy, economic andlegal expertise within the MRB was centralised, to a largeextent, within the cluster, leaving a de cit of skills in thoseareas within the MRB itself. An economics unit existedwithin the DPI but no formal nancial or economic analysiswas undertaken when it came to decisions about whereand when the states coal resources should be explored.No formal mechanisms were in place within the cluster toensure the MRB accessed this expertise.

The cluster was just that a cluster of individual branches rather than an integrated organisation. It required theMRB to recognise the need for economic, policy or legalinput, and request it. In reality, the MRB did not obtaininput from these specialist areas, as the perception was

that the public servants in those areas did not have enoughexpertise in minerals to provide the necessary support. As aresult, recommendations to release and allocate ELs wereformulated solely by the under-resourced MRB without the

bene t of the expertise available in the broader department.

These problems that resulted from the establishmentof clusters were not unique to the DPI or, later,the Department of Trade and Investment, RegionalInfrastructure and Services. In 2012, the NSW Commission of Audit recognised that many clusters donot have the corporate systems, governance arrangementsnor legal authority to operate in a coordinated way. 6

In its 201112 annual report, the Department of Tradeand Investment, Regional Infrastructure and Servicesacknowledges that multiple restructures and mergers since2004 have led to the department operating with a range of different corporate systems. Given that these more basicintegrations have not been successful, it is not surprising that isolated units still exist within the cluster arrangementsand that synergies with other areas within the departmenthave not necessarily been achieved.

At the time, as the MRB lost staff, status and capabilities,there were greater opportunities for the minister topressure or override the branch on behalf of speci c miners.As the MRB became isolated, Mr Macdonald and his of cegenerally communicated directly with the MRB rather thanthrough the director general of the cluster. The opportunityfor Mr Macdonald to unduly interfere in the work of the

MRB was, therefore, established.

Operational arrangements

Process of allocationThe process for obtaining any mineral EL, as describedin Part 3 the Mining Act, is uncomplicated. A companyapplying to the department for an EL must submit anapplication accompanied by information as speci ed in s 13of the Mining Act. Thereafter, using a checklist, the TitlesUnit within the MRB considers the information provided.Input is obtained from the various subsections withinthe MRB and consultation may occur at the discretionof the Titles Unit staff member with other governmententities, such as the NSW National Parks and WildlifeService, Fisheries Division of the DPI or water and energyauthorities. The application is then considered at a meeting of the Exploration Titles Committee whose members allwork within the MRB (see gure 2). Generally, where anapplication is recommended for approval, conditions willrestrict what activities the titleholder can undertake.

Conditions on an EL divide physical exploration into threecategories, with two of these requiring further approvals

from the MRB to assess possible and potential impacts on

6 NSW Commission of Audit, January 2012, Interim Report: Public Sector Management, p. 28, viewed mid-2013, http://www.treasury.nsw.gov.au.


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the environment. These environmental considerations arenot explicit in the Mining Act, but come from statutoryresponsibilities placed on the MRB under Part 5 of theEP&A Act. It is noteworthy that the environmentalconsideration under Part 5 of the EP&A Act relates onlyto the potential impact of exploration activity and not thebroader environmental impact of possible mining activityat that location. Once the assessment under Part 5 of the EP&A Act is complete and the conditions of the ELare nalised, a recommendation is made that the ministerissue the EL. Delegations in place within the department

at the time of the corrupt conduct allowed of cers of theMRB to execute an EL on behalf of the minister. When MrMacdonald was minister for mineral resources, it was veryunusual for him to directly execute an EL.

This process for obtaining an EL currently applies to allother mineral resources in NSW and works on a rst-comerst-served basis (known as a gold rush approach toallocation). Mature areas, however, have always attractedgreater industry interest, as coal exploration in these areasis considered low risk and regarded by industry investorsas more of an activity in rming up of a business case formining operations rather than true exploration in a frontierarea. The MRB recognised the interest generated inmature areas and sought that coal on lands within the statecovered by the Sydney Gunnedah basin and Oakland basinbe declared a Mineral Allocation Area. In August 1992, thethen governor of NSW made this declaration.

The goal of declaring a Mineral Allocation Area was tocontrol the allocation of ELs in a better way than therst-come rst-served gold rush model. Control was not,however, obtained through well-crafted regulations andtransparent decisions. Rather, ministerial discretion wasenshrined as the sole control of allocation. The process, as

established, required that, before an EL application couldbe lodged and before it could follow the process outlinedabove, the minister for mineral resources was required torst give written consent for that application to be lodged.

It effectively created a situation in which a private companyhad an incentive to lobby the minister for a transfer of valuable assets from the state to the company.

In response to the boom and an increase in explorationapplications, a practice arose whereby companies begansubmitting applications for ELs in areas just outside thedeclared Mineral Allocation Area and getting those ELs ona rst-come rst-served basis. Senior management at theMRB responded to this by recommending that the wholestate of NSW be declared a Mineral Allocation Area forcoal in order to ensure the orderly development of coalresources. In December 2006, this declaration was madepursuant to s 366 of the Mining Act.

By Mr Macdonald providing his consent to a companyto apply for an EL, it now became the critical point atwhich he could exert in uence and decide whether an ELwould be allocated directly, be the subject of a competitiveprocess or be released through a limited expression of interest (EOI). This consent has been described as theprimary policy decision. If that decision was made infavour of a direct allocation, the applicant submitted theirEL application following the standard process outlined

above. Given the minister had already indicated his supportfor the project, MRB staff generally viewed the standardEL approval process as a purely administrative one.

Brad Mullard, Executive Director of the MRB, was askedabout this practice during the Operation Acacia segment of the public inquiry:

[Counsel Assisting]: What hurdles remained for a personinterested in an Exploration Licence

once it had been granted the Ministers consent to apply?

[Mr Mullard]: They were largely administrative, e ectively all they had to do was actually lodge the appropriate fees, security deposits and demonstrate


Exploration Titles Committee

chair is the director, Mineral Operations,MRB

representative from EnvironmentalSustainability Unit, MRB

representative from Geological Survey(reports to executive director, MRB)

representative from Titles Unit, MRB

Coal Allocation Committee

chair is the executive director, MineralResources, MRB

director, Titles Unit, MRB director, Development Coordination,

MRB director, Coal Advice, MRB

Figure 2: Committees within the MRB


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an EL should be directly allocated or be the subject of an EOI. The CAC met, generally, from three to four

times a year, although sometimes as few as two meetingsoccurred. Meetings were arranged when the secretariatwas of the view that a suf cient number of applicationshad been registered to warrant holding a meeting. Theperson in this role was based in the Industry CoordinationUnit in Maitland, while most of the unit was based in theSydney of ce.

Like the Exploration Titles Committee, all members of theCAC came from within the MRB (see gure 2). There wasno external oversight of the committee and no mechanismfor appealing the recommendations it made to the minister.

None of the deliberations or recommendations of the CACwere made publicly available. There was effectively notransparency at all. While the nal decision of the ministerwas known to the applicant, there was no public recordof whether or not the ministers decision differed fromthat recommended by the CAC. This lack of transparencyis unlike comparable government activities that canconfer great bene t on an individual, such as the issuing of planning approvals. The Department of Planning andInfrastructure has well-de ned frameworks for decisionsand clear processes by which its recommendations anddecisions are made transparent. Assessment reports andrecommendations to the minister are made available on thedepartments website before the minister makes a decision.The ministers response is also made public.

The CAC did not have terms of reference but usedthe 2008 Coal Allocation Guidelines to guide itsdecision-making. According to the guidelines, the criteriafor obtaining an EL were framed by size and geographiclocation and fell into the following four categories:

1. Major stand alone areas these areas containedsuf cient coal to develop a large new mine and wouldbe allocated by tender or EOI.

2. Substantial additions to existing mines (20 milliontonnes open cut or 50 million tonnes undergroundsaleable coal reserves) these areas were locatedadjacent to existing mines and could be mined froma continuation of the existing operations. Such areasmay also have had the potential to be major standalone areas. Unless the area was required to ensurethe ongoing short to medium-term future of the mine,competitive tendering or EOI would be used.

3. Minor additions to existing mines (20 million tonnesopen cut or 50 million tonnes of undergroundsaleable coal reserves) these areas were small areasadjacent to existing mines and could be mined by acontinuation to the existing mine. These areas werenot large enough to develop major stand alone mines.

that they had access to appropriatetechnical and nancial, nancial

ability. It was, it was largely an administrative process it was not, if provided ---

[The Commissioner]: Its not discretionary?

[Mr Mullard]: No, it wasnt. And provided they metthe requirements as de ned in the Actthey would be granted the title.

When an EL application was considered by theExploration Titles Committee, it was generally dealt withquickly, as the application already had the support of the

minister and there was no instance where an EL was notgranted after the minister had given his consent. In effect,it was a fait accompli.

There was also no opportunity for the community to haveinput prior to the granting of an EL. At the time the eventswere unfolding in operations Jasper and Acacia, there wasa non-statutory requirement on individuals who lodged anEL application to place a public notice in a newspaper. Thisrequirement, however, came after the minister had givenhis consent to a company to apply for an EL. Similarly,conditions that were placed on some ELs required the

titleholder to establish and run a community consultativecommittee but these committees were established onlyafter an EL was granted.

No information was publicly available about how theminister reached their decision. Without criteria in theMining Act that set out what the minister must considerbefore making this decision, the minister had broaddiscretion to directly allocate ELs.

The role of the Coal Allocation Committee

When companies wrote to Mr Macdonald or the MRB

to request that they be given consent to apply for a directallocation of an EL for coal (see gure 3), those requestswere recorded on an Excel spreadsheet known as theRegister of Interests. The register listed the name of therelevant company and the area of land over that it hadrequested an EL. There was no standard information thata company had to provide with its submission; as such,applications varied in length and detail from two-pageletters to detailed proposals. Companies that requesteda direct allocation were given no indication of how long they would be likely to wait, with time frames varying signi cantly. The Commission was advised that some parts

of the coal mining industry were not aware of the Registerof Interests.

The CAC was established to review these applicationsand make recommendations to the minister as to whether


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Figure 3: Process for granting an EL in a Mineral Allocation Area via a direct allocation


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Neither the Coal Allocation Guidelines nor the CAC hadany statutory backing and, so, did not limit the discretion

of the minister. Indeed, in Operation Jasper, the decisionto release a limited EOI was made at the request of the minister without input from the CAC. Similarly, inOperation Acacia, the application to establish a training mine was considered by MRB staff separate to the CACprocess and directly allocated by the minister despiteadvice to the contrary from the MRB. With little formalguidance, no transparency and a history of seeminglyinconsistent decision-making, it was much easier for MrMacdonald to make the decisions examined in operations

Jasper and Acacia.

The EOI process

The second consequence of declaring a Mineral AllocationArea was that it gave the government the power toaward ELs via a statutory tender under the Mining Act.A company that was refused consent to apply for a directallocation would remain on the Register of Interests. Whenmultiple applications for one area of land were received,consideration was then given to releasing a call for EOIs(see gure 4). Similarly, when the minister requested thatareas of land be released for ELs, the register was consultedto see which areas had signi cant industry interest. Before

the MRB would recommend that the minister release anEOI, the branch would, generally, undertake additionaldrilling to obtain further geological data. It was argued bythe MRB that more detailed geological data would generategreater industry interest.

Tendering provides a vehicle to consider multipleapplications for a particular area and to assess whichcompanys work program best satis es the criteria speci edby the MRB. Instead of using the statutory tenderprovisions available under the Mining Act, however, theMRB used an EOI process with the express purpose of retaining exibility in the way it managed the process.

Sections 14 and 15 of the Mining Act set out a tenderprocess to allocate coal ELs along with a description of the information to be provided to the MRB by a tenderer,including:

Particulars of the nancial resources and relevanttechnical advice available to the tenderer

Particulars of the program of work proposed to be carried out by the tenderer in the proposed exploration area

Particulars of the estimated amount of money that thetenderer proposes to expend on prospecting

Any other information that is speci ed in the tenderinvitation.

These areas could be directly allocated for a numberof reasons, including if it would extend the life of the

existing mine or the area would not be amenable to thedevelopment of a separate small mine.

4. Small areas unrelated to existing mines these areaswere small but may have had the potential to bedeveloped as stand alone mines if located close toinfrastructure or markets. Allocation would be bypriority of application or by some limited form of EOI.

The CAC was provided with advice from geologists inCoal Advice (a subsection of the MRB) as to the merit of the application, including information on the boundaries, thelevel of geological knowledge of the area and the estimated

tonnage. Some companies were also asked to make apresentation to the CAC on their proposed work program,although this varied from application to application andwas not consistent. Once the CAC had all informationit considered relevant, the application was then assessedagainst the Coal Allocation Guidelines and the CAC cameto a conclusion as to whether to recommend that theminister give his consent to apply or not.

While the Coal Allocation Guidelines required CACmembers to give consideration to the size of the coaldeposit, in reality broader considerations (such as

environmental and social factors) were brought to bear onapplications in an informal way and without input from theDepartment of Planning and Infrastructure.

In an audit of a sample of ELs granted by direct allocationduring the period that Mr Macdonald was minister, theCommission found evidence of inconsistency in approach.In the cases examined by the Commission, there appearedto be a tendency to directly allocate an EL based on anunsupported estimation of the potential resource. In onecase, a direct allocation was given to a company of anadjoining resource because it was considered a minoraddition to an existing mine under the Coal AllocationGuidelines. No estimate of the potential resource wasprovided by the company and there was no evidence ordocumentation to support how the MRB determined thatthe company met the criteria for a minor addition. Thearea also adjoined other mining projects but there was noevidence as to why the MRB considered that the directallocation to one company over another represented themost rational and equitable approach, as required by theCoal Allocation Guidelines.

In another case, an estimated resource of 8 million tonneswas directly allocated to a company and the resource was

later found to contain upwards of 89 million tonnes. In thatsame case, the EL covered part of a dam and was in closeproximity to a town, but there was no evidence on le thatthe potential environmental or social factors were considered.


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Figure 4: Process for granting an EL in a Mineral Allocation Area via an EOI


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panel did not interrogate the nancial information providedto it or do any independent checks to verify the claims of

nancial backing. At the conclusion of its deliberations, arecommendation was put forward to the minister and thepreferred company was granted the ministers approval tosubmit a formal application for an EL.

In the parlance of auction theory, the MRBs method of allocation was a beauty contest. This approach has fallenout of favour in much of the Western world as the solemethodology for allocation of resources. Experience hasshown that it can be dif cult to specify the criteria and, as aresult, makes evaluating proposals challenging. In addition,they can be politically and legally controversial. They createthe perception of favouritism and corruption. In mining,the Productivity Commission refers to this approachto allocation as work program bidding, whereby theallocation decision is based on how well each companyswork program meets policy and regulatory objectives. TheProductivity Commission notes that such work programbids can be complex to assess.

Not only are the criteria and evaluations discretionary,the system is open to manipulation by mining companies.In NSW, the use of this approach during the boom periodallowed companies to offer the promise of future publicbene ts, such as infrastructure or the development of

innovative technology, as part of their application. Inreality, the provision of these public bene ts is linked to theprobability of obtaining an ML, and many companies madethese offers knowing that it may be possible to rescindsuch promises given the right combination of time lapse,changing political climate and pressure on government.

In the years prior to the boom period, when an EOIprocess for an EL was undertaken, a cap was placed on anadditional nancial contribution payable by the successfulcompany. In 2005, the then director general of the DPIrecognised that, with the increase in coal prices, the value

of an EL had increased and that the state could receivean increased additional nancial contribution. An addedbene t was that, at that time, the DPI was experiencing abudget shortfall and an agreement was made at a politicallevel that revenue generated by the additional nancialcontribution could offset this de cit. With the agreement of the then minister for mineral resources, Kerry Hickey, thecap on additional nancial contributions was removed.

By doing so, a mining company that wished to participatein the EOI was, in effect, asked to consider the valueof the coal deposit and then make an offer that it

thought appropriate to gain access to the coal resource.The company then submitted that additional nancialcontribution offer along with its work program andresponse to each of the EOI criteria.

These statutory tender provisions were not used bythe MRB, as there was a view that they did not provide

suf cient exibility for the branch and minister in allocationdecisions. It is unclear which elements of the statutorytender processes were considered overly restrictive.Regardless, a decision was made, in the absence of formallegal advice from the departments legal section, not touse the formal tender process but instead opt for an EOIprocess. Like the placement of ministerial discretion as thecornerstone of allocation, the EOI process was adoptedto maximise the discretion afforded to the department andminister in the competitive allocation process.

The EOI process was managed by the MRBs IndustryCoordination Unit. Outside of managing the EOI process,the unit worked with companies in advance of theirsubmitting an application for development approval to theDepartment of Planning and Infrastructure. The unit wasestablished to help those companies cut through red tape. Italso carried out various functions, including the preparationof agship publications on the mining industry in NSW and managing the community consultation process. Theunit also maintained the Register of Interests and providedsecretariat support to the CAC. When a decision wasmade to hold an EOI, the unit prepared the selectioncriteria and worked with the Coal Advice subsectionto prepare a data package of geological information toaccompany the EOI.

Additional nancial contributions

For many years up until 2005, competitive EOI processeswere used to enable the MRB to review each companyswork program and assess the relevant capabilities andproposals. These proposals were accompanied by xedfees and a capped additional nancial contribution, payableby the successful company. In brief, an EOI package wasdeveloped by the Industry Coordination Unit, including aset of evaluation criteria and a data package based on the

departments drilling data. An evaluation panel was alsoestablished that included an independent panel memberfrom the Department of Premier and Cabinet and a probityadviser. Upon receiving the ministers approval, the EOIwas released to the market for a xed time period. Thosecompanies that had previously requested the minister formineral resources approval to apply for an EL in that areawere advised of the EOI. The EOI was also marketedmore broadly.

At the close of the EOI period, sealed proposals wereopened in a public place and then the EOI evaluation panelconvened to consider how each companys proposal metthe evaluation criteria. The Commission heard evidencethat the applications were largely assessed on face value.For example, while one criterion required examinationof the nancial capacity of the applicant companies, the


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the market, giving an important advantage to the selectedcompanies.

The use and limitations of a probity adviser 7

While the decision-making processes were nottransparent, the MRB did recognise the need to haveindependent members on the evaluation panel. The MRBwas aware that there was a risk in the administration of ELs. As a result, a public of cial from the Department of Premier and Cabinet sat on the EOI evaluation panel anda probity adviser was also engaged. Kevin Fennell was anindependent probity adviser who had assisted with variousprojects undertaken by the MRB over the 16 years priorto 2008.

Engaging a probity adviser does not guarantee probityin the process. A probity adviser is generally engaged toverify that the processes being followed are consistentwith government regulations, policies, guidelines and bestpractice principles. In Operation Jasper, the ministersof ce requested that the EOI process be reopened togive additional small- to medium-sized companies anopportunity to apply.

Mr Fennells initial draft advice on the question of reopening the EOI suggested that the then Departmentof Commerce (now the Department of Finance andServices), as experts in procurement and contracting, couldbe called on to provide input. Later, that suggestion wasremoved and Mr Fennell agreed that the process could bereopened. In explaining his rationale to the Commission,Mr Fennell stated that, I had to have empathy with theMinister because it seemed to me that, the main reasonwhy he wanted to do this was to, to try and grab in morefunds, and that, if a Minister of the Crown wants todo something hes going to do it anyway and it probablywouldnt have mattered what I said.

It is not the role of a probity adviser to fail to fully consider

a matter because of the desires of a minister; even if thatrequest appears on face value to have validity. Probityadvisers will often face situations where they need to decidebetween what they know to be best practice and whatthey know to be the desire of the agency. It is always opento an agency or minister to give greater weight to nancial,technical or political considerations over that of the advicegiven by the probity adviser; however, a probity advisershould not allow these other considerations to compromisetheir independence or the quality of their advice.

7 The terms probity adviser and probity auditor are often used interchangeablywithin the profession and there is no legal or professional standard in relation to thecorrect or agreed use of the terms. In practice, it is often the case that the personengaged to perform probity activities for a government project will perform bothadvice and audit functions. While Mr Fennell was engaged as a probity auditor,the primary function of his role was one of advice. The Commission uses the termprobity adviser in this report, while acknowledging that many probity advisersprovide some audit functions.

The uncapped additional nancial contribution approachwas adopted in EOI allocation processes for the Caroona

and Watermark coal exploration areas. In each case, anopen competitive process was used, with the EOI processadvertised broadly in national newspapers and online. Allcompanies operating a mine within NSW were advised of each EOI. The EOIs were also promoted internationally.This had the effect of stimulating broad market interest.

Coal Mines Australia Limited (a wholly owned subsidiaryof BHP Billiton Ltd) offered an additional nancialcontribution of $91 million, plus further staged payments of $50 million and $65 million for the Caroona coal explorationarea (estimated to contain approximately 1 billion tonnesof coal). This was a signi cant injection to state revenueand was followed up by the release of the Watermarkcoal exploration area (estimated to contain approximately1 billion tonnes of coal) in October 2007. China ShenhuaEnergy Company Limited was the successful company,with an additional nancial contribution offered of $276million, plus an extra $200 million at the granting of an ML.

Clearly, the experience of Caroona and Watermark showthe importance of marketing an EOI broadly and theresulting nancial bene t to the state. In these cases, byhaving open and competitive processes, the state receivedthe full value for the EL. Simply lifting the cap on additional

nancial contributions, however, is not the same asredesigning the system to be auction-based; rather, whenthe cap was lifted, an auction component was simply addedonto the existing process of discretionary assessment.The EOI evaluation panel now no longer focused onlyon how an applicant met each evaluation criteria andwhich applicant had the better work program. It nowalso considered the technical criteria in tandem with theadditional nancial contribution bid from each company.This mixed model may have raised more revenue but asubjective work program assessment remained.

There are various technical models available for theauctioning of public resources, each with careful designconsiderations. They do not appear to have been exploredwhen the cap was lifted on the additional nancialcontribution. By not consulting with the NSW Treasury,which has the relevant expertise and experience, theopportunity was lost to redesign the auction system byusing one of these technical models. Had the model beenredesigned and overseen by the NSW Treasury, as would beexpected for transactions of this size, it would have lessenedthe opportunity for the minister for mineral resources toin uence how an EOI process would take place.

In Operation Jasper, without the NSW Treasury involvedand with high levels of discretion built into the process, MrMacdonald was able to instruct MRB of cials to limit theEOI to invited companies only. This signi cantly narrowed



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were actively trying to progress with their explorationprogram but these assurances were generally taken on

face value rather than requiring those companies toproduce any evidence.

The renewal process allowed for some companies tomeet with the MRB to explain why they needed arenewal, while others were not invited to do so. In onecase examined by the Commissions auditors, multiplecompanies (as well as the Coal Advice subsection)opposed another companys EL renewal. After the MRBmet with the company seeking the renewal, however, therenewal was granted. It is unclear from the le why thisdecision was made.

There is a real risk of mining companies seeking to hoardresources, which could potentially be accessed by othercompanies, by repeatedly renewing an EL withoutintending to progress to a mining project. Despite thisrisk, there was no formal use it or lose it policy inplace. Evidence was heard by the Commission during the Operation Jasper segment of the public inquiry thatthe idea of developing such a policy had been raised bythe minister for mineral resources but never progressed.The process remained discretionary and opaque, andinconsistently administered.

ConclusionThe processes within the MRB and the interactionsbetween the minister for mineral resources and theMRB at the time of the corrupt conduct identi ed inoperations Jasper and Acacia were largely hidden fromscrutiny. A process that lacks transparency can increasethe opportunities for manipulation of release andallocation decisions. This lack of transparency, coupledwith a large amount of discretion and a lack of guidanceat a state level, led to inconsistencies in the decisionsmade about EL allocations. The result was a framework

that was opaque and created uncertainty for bothindustry and the community.

The policy and regulatory environment failed to provideindustry certainty, ensure quality public policy, capturethe value of the assets and reduce opportunities forcorruption through transparent decision-making. Rather,such a complex and opaque policy and regulatoryenvironment created an incentive structure thatencouraged companies to engage in lobbying andnegotiation in order to do business in NSW.

While the intention of the MRB was to involve independentexpertise and ensure probity in the process, having this

involvement solely at the EOI evaluation stage meant theprobity adviser had a necessarily narrow viewpoint on theprocess. The probity adviser had no oversight of the processat the point where the initial recommendation was madeabout whether a particular area of land was suitable forrelease or whether a limited EOI approach was appropriate. When a probity adviser cannot oversee the entire process,their value is questionable and a public sector agency mayachieve a better outcome by ensuring its own systems,policies and procedures are designed with built-in probityand corruption controls.

Process of renewalFor the tenure of an EL, the resource is linked to a speci cmining company. By convention, the EL gives that mining company a right to apply for an ML. The purpose isrelatively clear. Some degree of security is provided to amining company, which may well have spent many millionsof dollars rming up the viability of the areas, that it willbe able to go on to apply for an ML. The limited tenureprovides an incentive to move ahead with the program of exploration or risk loss of, or partial forfeit of, the lease.

The MRB also had responsibility for the EL renewals

process but did not have a database that automaticallynoti ed MRB staff when ELs were due for renewal. Asa result, it was not uncommon for renewal requests tobe made immediately before the EL was due to lapse.Once the application was lodged, however, the companywas allowed to continue work until the renewal had beenprocessed. Often, the processing of these requests washeld in abeyance due to heavy workloads at the MRB.

At the point of renewal, a company was required to forfeit25% of the EL area to encourage the company to focus onidentifying the speci c area within the EL boundary wheremining was most likely to be pro table.

As part of the renewals process, the Coal Advicesubsection undertook an assessment of the companyswork program, and whether it had met its conditionsand proceeded as planned. A recommendation was thenmade to the Exploration Titles Committee (made upof representatives from th

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Reducing the opportunities and incentives for corruption in the state's management of coal...

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