Extractive industry drives economy
The latest PNG Extractive Industries Transparency Initiative report published by PNGEITI secretariat has been
described as the “most comprehensive” compared to previous reports. The report, released on July 30, is for the 2019 financial year. The National Secretariat has been producing reports from 2013. Below is a summary of the 2019 report.
THE Extractive Industries Transparency Initiative (EITI) is the global standard for promoting transparency and accountability in counties rich in oil, gas and mineral resources.
The PNGEITI is a Government initiative established in 2013 to promote accountability and transparency of revenue received from the country’s mining, oil and gas sector and how it spends these funds.
The PNG EITI Multi-Stakeholder Group (MSG) is an oversight body that governs and guides EITI implementation in Papua New Guinea.
It comprises representatives from government, civil society organisations and the extractive industry companies.
One of the MSG’s main activities is the production of annual EITI reports as required by the EITI Global Standard.
This tripartite stakeholder group has worked collaboratively, culminating in the publication of six PNG EITI annual reports covering fiscal years 2013 to 2018.
This continued collaboration has led to the production of the financial year 2019 PNG EITI Report, the seventh consecutive report to be published since PNG became a member of this global body in 2013.
The EITI reporting process continues to facilitate critical policy and legislative reforms and improvements in current institutional capacities and business practices in key government departments and agencies for improved governance of the extractive sector.
PNGEITI secretariat
Head of PNGEITI National Secretariat Lucas Alkan said the report, covering the financial year 2019 builds on the progress of preceding reports and provide a clearer picture of contributions to the PNG economy
by the mining and petroleum sectors.
“The 7th PNGEITI Report is more comprehensive than the previous reports in that we have reflected data gaps and recommendations in those preceding reports to advance transparency and accountability in the mining and petroleum sectors,” Alkan said.“The technical and complex nature of the extractive industry warrant an overarching reporting platform for the purpose of better understanding the resource sector to help formulate the right policies and legislations to derive best value. “The reports process serves that purposes.” “Despite the onset of the coronavirus (Covid-19) pandemic in late 2019 and disruptions to activities in 2020, the MSG is satisfied that the 2019 EITI Report has significantly improved in addressing information and data gaps identified in previous reports, including the corrective measures recommended from PNG’s first validation assessment against the 2016 report.
Other contributions
There are other contributions of the extractive industry in PNG for the year 2019.
PNG’s economy is characterised by two large economic sectors: agriculture, forestry and fishing – which engages most of the labour force (the majority informally) – and the extractives sector (oil and gas extraction; mining and quarrying), which accounts for the majority of export earnings.
The PNG LNG project has been the primary driver of GDP growth in recent years.
Higher production volumes in the extractive industries in 2019, including significant growth in silver and nickel, contributed significantly to nominal GDP growth in 2019.
The extractive industries contribute 88 per cent of PNG’s exports.
Total employment in the extractive industries improved in 2019.
According to the BPNG’s June employment statistics, total employment average grew by 2 per cent, driven largely by growth in the mining sector.
In 2019, the extractive industry, contributed K109 million and K335 million of mandatory and voluntary social expenditures, respectively.
These social expenditures are in a form of cash and in-kind which local communities have directly benefited.
Of the Government revenues recorded in the National Budget (composing corporate income tax, dividends, import taxes), the extractive industry contribution amounted to K1.1 billion.
Other revenues received by State-owned enterprises and government agencies such as salaries and wages taxes, foreign contractor withholding taxes, DPE and MRA fees, environmental charges and equity distribution amounted to K3.7 billion.
Contributions to PNG Economy
The extractive industries have both positive and negative social impacts in PNG.
The positive impacts of the extractive industries are the provision of employment and revenue to local communities, as well as funding for infrastructure such as roads, hospitals, schools and power generation.
The extractive industries can also be a source of tension between different societal groups and negatively impact the environment through land degradation, water quality and increased carbon greenhouse gas emissions if not properly managed. Papua New Guinea’s major export commodities 
are gold and LNG, together comprising, over 80 per cent of total oil and gas and mineral export value (70 per cent of total export value including non-mineral).
Gold prices have trended upwards since December 2018, reaching a six-year high of US$1,500 (about K5,259) per ounce in early September 2019.
This increase was driven by increased demand for gold as a safe haven asset, due to the escalation of trade tensions between US and China, volatility in financial markets, escalating US-Iran tensions and easing monetary policy in the US and elsewhere.
Gold purchases by central banks have also provided some support to the gold price.
Over the year to October 2019, gold prices have averaged around US$1,376 ( about K4,714) per ounce, 8.4 per cent higher than 2018 levels.
As markets continued to respond to ongoing trade tensions and geopolitical problems, gold demand remained robust over the remainder of 2019 supporting an average if US$1,380 (about K4,728) per ounce for the year.
How do the extractive industries contribute to State revenue?
In 2019, the largest sources of revenue from the extractive industries included equity distributions, corporate income tax, salaries and wages taxes, dividends and royalties.
Most of this revenue goes into consolidated government revenue, with the rest primarily distributed to SOEs.
PNG’s budget is prepared by the Department of Treasury through a public consultative process.
In recent years, there has been an effort to make the process more strategic and rules-based so that it is directed towards achieving sound fiscal policy.
Some revenue from the extractive industries is earmarked for specific purposes, such as the Public Investment Programme, a vehicle through which the PNG Government implements development policies aimed at improving the livelihood and wellbeing of PNG citizens in all provinces.
The PNG Sovereign Wealth Fund was established in 2015 to ensure that some of the wealth generated by the extractive industries is saved for the benefit of future generations.
However, at the time of writing, the Government has yet to appoint an inaugural board, and the 2019 National Budget projects zero balances for the funds through to 2023.
Revenue flows to the government from the extractives industry can be volatile, as the financial performance of the individual operations are affected by a variety of factors that include fluctuating commodity prices, natural disasters, and impacts of severe weather events such as drought and flood.
While not analysed in this report, state revenue is significantly enhanced by the multiplier effect that each operation generates from hiring by subcontractors, increased business start-ups and expansions, increased demand for housing and services, etc.