Govt should negotiate better deal for projects

OUR constitution was anchored in the principles of democracy which perhaps endeavours to safeguard public welfare and interest, however, the recent amendments to our laws including the Mining Act have placed public welfare and interest at stake.
I think the amendment to the Mining Act which endeavours to increase the State’s interest in the mining projects to 51 per cent is very obnoxious and will hurt public welfare and interest because a lot of public money will be tied up to the projects.
Mining projects often exist within a protracted time period and require huge investment outlays.
Increasing the State’s interest in such projects and borrowing loans to finance the interest will leak huge amounts of public funds to loan sharks and in the long run, public interest and welfare will be badly affected.
The Government should learn from the mistakes in the International Petroleum Investment Company deal and the Union Bank of Switzerland loan saga, which has tied a significant percentage of the country’s public finance to the Union Bank of Switzerland in the long run.
Such borrowing have in no way safeguarded public interest and welfare because finance have become the problem in the provision of public goods and services and that the loan periods have extensive life that even surpass average project life.
I recall the Opposition claiming late last year that the economy was on life support.
I understand the logic behind the amendment to increase the State’s interest in mining projects, however, I hope it doesn’t borrow significantly.
Currently, our public finance is very thin and weak to finance massive borrowings.
We have been heavily dependent on aid from our bilateral partners to fund critical infrastructure projects and provide budget support to wade off the unprecedented impacts of the pandemic on our economy.
The State-owned entities such as Kumul Mineral Holdings Limited and Kumul Consolidated Holdings Limited have no sufficient reserve that can guarantee the Government to undertake massive investments in the mining projects as the overall performance have been poor and balance sheets have been in brackets for years.
Let alone, any cap in public borrowing and interest repayment in the Fiscal Responsibility Act.
Perhaps investments in the mining projects will generate dividend but it will often fluctuate and take time.
Dividends will be chewed up by the interest repayments on the loan so this is a crucial financial decision the State will have to make before projects kick-off.
Most often, loan interest rates are high and this is true in the current capital market and comparing that to the dwindling mineral prices in the global market and limited project life, the State might realise a lower or negative return-on-investment and accumulate losses in its investment portfolios.
The loan period and interest repayment rate will determine whether the Government will make a gain or loss.
Considering that the amendment gives the State the obligation to borrow significant funds, the limited project life coupled with usually prolonged interest repayment periods at colossal rates might weaken public finance which will badly hurt public welfare and interest.
At this backdrop, it is recommended that the Government negotiate better percentage stake in mining projects, especially a percentage stake that is affordable, sustainable and profitable.
I think the 51 per cent stake in Porgera is definitely not affordable and sustainable given a thin and weak public finance and a weak balance sheet of Kumul Mineral Holdings Limited.
If the Government decides to borrow, this will weaken the country’s public finance by further increasing the debt-to-gross-domestic-product ratio to unsustainable levels.
This will cripple public finance regardless of the return on investment because of the time lag before the interest repayment is terminated.
Moreover, risks are inevitable in all mining projects so the public will shoulder any risks attached to Porgera and this include operations sabotage due to tribal fights and election-related violence in the precincts of the mine; dwindling gold and copper prices; court injunctions preventing mine operations; and, possible pandemic outbreak and restrictions.

Mike Haro,
Lake Kutubu