All that glitters is not gold

THE public, including landowners, are far more aware of issues and impacts of resources projects, says Institute of National Affairs director Paul Barker.
He said they were scrutinising companies, State and to some extent their own landowner leaders more closely.
Some projects may be unsuitable or the costs too high.
Barker said there were major resource projects in PNG with sound potential and adequate potential returns for the State, investors and landowners, so long as environmental risks and hazards could be minimised.
He said landowner benefits should not simply come in form of cash, and should certainly be received and managed in a transparent manner.
“It should also come in the form of employment, not just in the mine or construction phase, which are short-lived, but also through investment in other sustainable economic activities, notably agriculture and other sustainable resource use, and in human resource development,” Barker said.
“As a country, you want to attract sound, reliable domestic and international investors, including in the resource sector.
“They require suitable and stable investment conditions, with Government honouring their commitments.
“No investors, or financiers or insurers, will commit their funds or other capital if they don’t think they can make a profit, or gain an adequate return on capital, or if they consider the risks too high.
“Clearly, the Government only sets some of the investment conditions.”
He said many resource projects were determined by international factors, such as commodity prices.
“Some are determined by the natural conditions, from the minerals in the ground, to the soil and terrain, to the geography determining distance and accessibility and factors like earthquakes or other natural events,” Barker said.
“Many are determined or influenced by Government, including quality of education and skills of the workforce, quality of roads and other transport infrastructure, power and communications, state of law-and-order, and the regulatory environment.
“These all influence the costs of doing business and the risks, and hence, the viability.
“If the costs and risks are too high, and the returns inadequate or non-existent, then the overseas investors will go elsewhere.
“Domestic investors will put their time and money into another activity, or possibly also take it elsewhere.
“For many economic activities, such as a manufacturing, PNG is a relatively high-cost place to do business because transport, marketing, power, communications and other infrastructure are poor.
“State providers are under-capitalised and generally inefficient and competition limited, education and training limited, law-and-order problematic, raising the costs of security, and corruption adding to the risks and costs.
“On the other hand, PNG has some rich natural resources and environment, that should make it a natural place for agriculture, tourism, energy generation, as well other sustainable resource use in forestry and fisheries, if costs are kept down and quality kept high to provide a premium product.
“The extractive industries are high-capital enclave industries, and therefore, somewhat less dependent than agriculture, tourism or manufacturing, on the public goods provided by the State.
“However, they are dependent upon the overall level of governance and law-and-order.
“They’re dependent upon the investment conditions set out in the Mining and Petroleum and Gas legislation, relevant tax and fiscal legislation, and contracts reached with State, and consistency and reliability of these agreed conditions.”
Barker said the resource sector was clearly competitive around the world, and oil and gas and mining investors were mobile, within reason.They could choose, he said, subject to their shareholders and financiers, where to take their capital to explore or develop prospects and projects.
Barker said if companies invested heavily in exploration and had positive finds on their tenements, clearly they had a greater commitment and would be more reluctant to walk away and go elsewhere.
However, he said if the costs of development and the taxes and royalties were too high in relation to forecast price, and the returns therefore too low, non-existent or risky, then the investor (and financiers) would not commit to that project, possibly selling out, or the prospect would just be put on hold or never proceed.
Barker said from the State’s perspective, the mineral resource (hard minerals or hydrocarbons) belonged to the State.
“Extracting them had inevitable environmental impacts and risks, although that varied according to the nature of the mining or oil and gas extraction, whether open cast or underground, surface extraction like nickel, or drilling for oil and gas, using tailings dams or riverine or deep/shallow sea waste disposal, or deep sea mining, for example.
“There are also various associated social impacts, some potentially positive, others negative.”
Barker said being highly capital-intensive, except for alluvial mining, the extractive industries largely provided limited direct employment, except during the construction phase for gas development, in particular.
Barker said this varied, with gas and high-tech mines, like the planned deep Wafi-Golpu copper/gold mine (or deep sea mining) being largely mechanised and providing few jobs, directly, whereas more traditional mines required more employment operating plant and equipment.
He said the extractive industries were also only short-lived, as by nature, they were non-renewable resources.
“The benefit to the country from mining and oil and gas exploration and development is by nature largely from the revenue that it provides the State (including provincial authorities) to be able to perform their functions of delivering public goods (law and order, defence, reliable infrastructure, education and health services), to enable the citizens to enjoy reasonable health and livelihoods, including as a result of suitable conditions for a broader-based economy, and jobs, to be generated,” Barker said.
“If the mines and oil/gas operations cannot provide an adequate and timely revenue to the State, and also timely income and opportunities as well as compensation for damage/losses to the landowners and mine affected communities or the social and environmental costs and risks are considered too great, then those mines should clearly not proceed, or at least proceed later at such a time that prices are higher, or technology has improved and impacts or risks reduced.
“So, between the State, investors and customary landowners and project affected communities, it’s partly about the overall potential benefits from the project, and how they might be shared, as well as the overall impacts and whether they, or their risks, are minimised and deemed acceptable.
“If the benefits are inadequate for the investor and the State and landowners to currently gain an acceptable return, in relation to the cost, it should not proceed.
“There’s no point in a project where there’s only enough return for the business investor, and nothing for the State or landowners, or if the State has to wait over a decade to see any return.”
Barker said the State and landowners had to keep their demands within reasonable or realistic limits.
He said there were norms around the world, and while some resource projects were markedly more potentially-profitable than others, with much lower costs of project development and extraction, it was unreasonable to impose undue risk on the State or the investor. Investment conditions, Barker said, should largely be present in general sector tax and related laws and regulations, but where specific project negotiations occurred, this needed to be done in an atmosphere of trust and transparency, with all parties well informed and with adequate access to professional support, so that one side did not take undue advantage of the other’s inadequacy.
This, he said, was open contracting, so that the process and outcome was made fully available to the public that the State represented, and the landowners, whom landowner leaders represented.
This should be mandatory.
“It’s welcome to see that Total Oil has made a global commitment in early 2018 to contract transparency,” Barker said.
“The Extractive Industry Transparency Initiative (EITI) process has helped raise awareness, standards and trust between different parties, private sector, State and civil society, but including between the different Government agencies, which tended to be in the dark on what each other were doing, and therefore uncoordinated in negotiations and oversight.
“The earlier generation of resource projects, despite major problems in both Bougainville and Ok Tedi, did generate revenue.”
“The later generation projects in the 1990s and beyond offered greater tax concessions, to be in keeping with perceived international norms, but also where new resources were being developed in what were considered green field industries or sites.
“In some cases, the Government for some reason seemed to go overboard, granting excessive concessions, and leaving PNG in the situation where since 2016, there has been almost no tax revenue from the resources sector, and foreign exchange has been negligible, despite several major resource projects currently operational.
“The next generation of projects, or project expansions, are certainly no longer green field sites.”