State of Minas Gerais regulates environmental collateral requirement for dams included in the State Dam Safety Policy

The State of Minas Gerais has regulated the collateral for the environmental licensing proceeding of dams, by means of State Decree No. 48,747/2023 (“Decree”). This collateral is provided for in the State Dam Safety Policy (“PESB”), established by State Law No. 23,291/2019, whose regulation was pending, until recently, in order to be implemented. The rule will apply to new environmental licensing proceedings and, as for those proceedings that already have a Preliminary License (“LP”),  Installation License (“LI”) or Operation License (“LO”), the deadline is March 29, 2024, and documents for submission will vary on a case-by-case basis.

Under the terms of the PESB, the proposal for an environmental collateral constitutes a requirement for obtaining the LP, while obtaining the LO depends on proof that the collateral has been implemented.

Upon the publication of the Decree, the rule imposed by PESB has become applicable, so that the submission of the environmental collateral proposal will be required at the LP or LI stage and proof of its implementation at the LO stage.

For projects that already have an LP, LI or LO, on the date of the Decree, the environmental collateral proposal must be submitted by March 29, 2024. If the dam either has an LO, is currently deactivated, or in the process of de-characterization, the collateral implementation schedule also must be submitted within this period, and the maximum deadline for the schedule, in these cases, is December 30, 2026. In addition, 50% of the actions proposed in the schedule must be implemented by 2024 and 25% in each of the following years.

For dams that have been deactivated and whose de-characterization process has begun, with a proven reduction in the area of the reservoir, a proposal for an environmental collateral must be submitted to the Minas Gerais State Environmental Foundation (“FEAM”), thus incorporating the area of the reservoir that was formed after the filling of the reservoir up to the current crest of the dam.

The collateral must be updated every five years, counting from the issuance of the LO or from the end date of the collateral implementation schedule. During the update, it is possible to change the amount or type of collateral, subject to approval by the competent body or entity of the State Environmental System (“Sisema”).

As for the types of collateral, the entrepreneur is allowed to choose more than one, such as: cash deposit, Bank Deposit Certificate (“CDB”), bank guarantee, surety-guarantee, according to the requirements established in the Decree. What is more, those collaterals whose payment is conditional on a potential court decision are not allowed.

The calculation of the amount of the environmental collateral must be defined based on the application of the formula provided for in the Decree, considering the following parameters:

1. the area of the dam reservoir, including the area occupied by tailings or waste and water, in square meters;
2. the classification and purpose of the dam, under the terms of Decree No. 48,140/2021; and
3. the estimated cost of dam de-characterization projects by area.

It is worth highlighting that the collateral is individualized for each dam. Therefore, even if the entrepreneur has more than one dam structure, they must prepare a proposal for each structure.

If the submitted environmental collateral is not approved, the licensing process will be filed and the entrepreneur will be responsible for resuming it, regardless of other applicable civil, administrative and criminal legal measures. In addition, if the entrepreneur fails to comply with the obligations established in the Decree and the PESB, the environmental license will be suspended immediately, in addition to the possibility of other sanctions and measures being applied.

The environmental collateral must be maintained throughout the life of the dam, from its installation to the cumulative and total completion of (i) the de-characterization of the dam, duly certified by FEAM; and (ii) the socio-environmental recovery of the area impacted by the dam, duly certified by the competent Sisema body or entity. The socio-environmental recovery measures will be laid down by means of regulations.

In cases on which FEAM certifies that the dam has been abandoned or an accident has occurred, the environmental collateral will be executed, at which point notification for payment will be sent to the insurance company, financial institution, or State Treasury, depending on the nature of the type of collateral offered.

Even if the environmental collateral is executed, the entrepreneur remains bound to repair the social and environmental damage caused by the installation, operation or de-characterization of the dam, as well as by accidents or disasters involving its malfunction or collapse.

At the federal level, the National Mining Agency (“ANM”) is considering the possibility of requiring financial guarantees for mine closure decommissioning. This topic has already been addressed by Demarest in its November/2023 Client Alert (see link below).

Demarest’s Mining and Environmental teams are monitoring this topic and are available to provide further information and clarification on the subject.

In order to access State Decree No. 48,747/2023, click here.

In order to access State Law No. 23,291/2019, click here.

In order to access State Decree No. 48,140/2021, click here.

In order to access State Decree No. 47,383/2018, click here.

In order to access our Client Alert about ANM’s Project on Financial Guarantees, click here.