Undue economic uncertainty and investor threat at a time when Government needs to provide investor assurance and encouragement
Executive director of the Institute of National Affairs PAUL BARKER shares his thoughts this week on the recently passed resource bills – the Mining Amendment Bill 2020 and Oil and Gas (Amendment) Bill 2020.)
PAPUA New Guinea’s economy is currently in dire straits, and the Government’s own public finances face a severe predicament.
The economy, which had already experienced very low growth, investment and employment generation over the past five years, has suffered a severe hit in 2020 from a combination of:
- major external forces affecting global markets, including commodity prices, notably driven by the impact of the Covid-19, and the global response; and,
- ongoing surpluses of supply of certain major traded commodities such as oil and gas, but also from some untimely actions of the Government.
The Government announced a set of generally constructive measures in March to help safeguard the economy, businesses and households in the face of the economic hit from coronavirus.
With revenue severely undermined in 2020, and years of budget deficit already accumulating, the Government’s flexibility to sustain and stimulate the economy has been severely restrained, and its public financing measures require an increase in public debt to unprecedented levels, and the availability of such domestic and concessional international finance.
While diversification of PNG’s economy is critical, requiring both domestic and foreign direct investment (FDI) and innovation, but also some ‘take-back’ and further value adding, particularly of lower-tech resource extraction activities, the economy, investor confidence and public finances have also really needed (and been expecting) the stimulus of a few major resource projects.
That was not to be in 2019, with differences between the developers and the incoming government over the planned new LNG resource projects – P’nyang and Papua.
With the current global energy surplus and severe fall in LNG prices and prospects this year (prices are currently at a 25 year low), potential market access has likely been closed, with interest by investors and financiers in these major projects severely diminished and potential investment long deferred.
The Government’s objective to obtain a better share of the proceeds from resource extraction for the State and traditional landowners is sound and overdue.
Enhancing the State’s right to determine how, whether and when major resource projects proceed is entirely reasonable, both as the resource owner and regulator representing the interests of the people of PNG, including the need to secure an improved and more sustainable revenue flow from resource utilisation, but also better safeguarding the natural environment and the welfare of project affected communities.
In 2007, mining and petroleum taxes accounted for 40 per cent of Government revenue. But by 2016-17, they had plummeted to just over 1 per cent, in the face of partly of low commodity prices, production disruption to some projects and with two major projects being in early production phases.
Yet, while oil and gas prices had fallen substantially, some major resources, notably gold, had held up relatively well, resurging in 2020 to around US$1,700 an ounce (K5,777/ ounce).
Even with mining/oil taxes combined with dividend payments to the State, in 2011 these fell from 23 per cent of revenue, down to 3.8 per cent in 2016 (recovering to around 13 per cent in 2019).
These figures severely understate the importance of the oil/gas and mining sector to PNG’s economy and to revenue, as employee tax substantially raises the total revenue flow from the sector, as well as providing a valuable contribution to formal sector employment and wider economic activity.
In addition, the economic activity delivered through contractors, in transport, catering and other fields adds substantially to the impact and revenue flow, especially during the major, if brief, construction phase for large projects, notably in LNG.
Indeed, the tax on personal emoluments makes up the largest single portion of the revenue provided by the sector to the State.
Nevertheless, the Government and people of PNG could certainly have expected a better and more consistent benefit flow from its combined resource sector projects over this period, considering the number and scale of resource projects prevailing in this supposedly “resource-rich” country, and with, for example, several of its gold mines ranking in the top ten globally.
With each successive decade the new resource agreements became somewhat more concessional than hitherto, partly to attract investment in a globally more competitive market, but also partly in view of weak negotiating capacity on the part of the State and readiness to make concessions (such as undue tax holidays).
The State, landowners and resource-affected communities, could certainly require enhanced and timelier benefit sharing from the next generation of resource projects and also, following, project reviews, from existing projects as well, together with earlier and fuller remission of export earnings back into the domestic market.
So, PNG expected improved benefit-sharing and the government required improved social and environmental standards, and by and large the more responsible international investors, were prepared to concede to these demands, so long as the demands were realistic.
Naturally, the operators and investors would negotiate firmly, particularly as the market conditions and their own capacity to secure capital would be heavily constrained, but there is recognition of the need to make adjustments.
Countries such as Norway, for example, secure a high portion of project benefits, largely because they provide strong investment security and stability.
Indeed, their local benefits are markedly better than those that Australia gains from its resource projects.
PNG, unfortunately, is in a much weaker position to attract investment and negotiate the best conditions because of its investor uncertainty and insecurity, and sometimes by making unrealistic demands.
Generally, it’s considered wiser for the State to use its ownership of the resource and regulatory powers, to secure a strong and consistent revenue flow, and to minimise risk, by avoiding major equity commitments.
But, if the government does choose the major equity option over other fiscal measures, then it must recognise that it make concessions over taxes and other revenue.
It cannot expect to take major, or even majority stakes in the project and raise tax rates, and expect major international investors or capital to be readily available.
Owing to the combination of weak market demand and low energy prices and an unrealistically rigid Government position on resource project ownership and control, as reflected in the new Mining and Petroleum and Gas Acts, and project negotiating positions in 2019/20, it seems that all planned new resource projects are likely to remain on hold for the foreseeable future and that even the major existing gold project at Porgera, which was required to close down in April following the expiry of its operating license, will continue out of operation.
This imposes a major and unexpected further blow to PNG’s export earnings and government revenue, at a time when the economy has already been hit with the impacts of Covid-19, and is already saddled with high and growing debt, and debt-servicing costs.
This week has tragically seen the termination of the bulk of the 3,800 workforce from Porgera, with some staff and contractors already laid off, pushing thousands out of formal sector employment at a time when there’s little opportunity for most of them to secure a replacement job, badly jeopardising their families’ welfare, as well as removing revenue to the State from wages tax, and royalties and other benefits to landowners and some local services and other institutions.
So, while seeking a better deal from the resources sector for PNG with more timely benefits for the State, provinces and landowners, is a sound objective, and is achievable, it needs to be realistic.
The whole world is crying out for investment capital, both from domestic and external sources.
With the Covid-19, it has become a whole lot harder, with global capital withdrawing to safer havens, notably developed economies, and safer investments and markets.
PNG has been able to secure very concessional funding from the International Monetary Fund and World Bank, under special Covid-19 support arrangements. But, with the shortfall of revenue, major demands on government expenditure to sustain budget commitments, salaries, and support the economy, business and employment during the severe downturn, the State has been pushed into a tight situation.
It has been able to borrow from the domestic market using Covid-19 bonds, and it can and has undertaken some quantitative easing (effectively printing money), which it can do, as other governments do, discreetly.
But there are firm limits to borrowing, unless early and sustained revenue is assured and wise policies pursued to restore and build up the economy, manage fiscal operations and debt levels.
The Government will be hard-pressed to boost revenue with the economy and business activity substantially restrained by the Covid-19 for the foreseeable future.
Now is the time to apply favourable business and investment policies and measures to encourage and sustain business, jobs and enable an early recovery.
That requires both domestic and foreign director investment (FDI).
Attracting FDI is doubly tough right now, but it remains needed particularly for the major projects requiring substantial capital, notably in the resource sector.
However, major new resource projects are likely to remain on-hold, or even be shelved, while global market conditions show little sign of improving and while unrealistic investment conditions are imposed for the resource sector investors.
Getting PNG back to business and generating new investment and employment opportunities, stimulating revenue, securing public and private finance and managing debt all require competitive and stable investment conditions.
Resource and other investment policies and conditions need to be reviewed periodically, but where the rules are changed substantially or incessantly, it imposes undue uncertainty, disrupts and frightens away investment, favours speculation and currency runs and does the country and its workforce, but also the Government and the wider public, no favours. PNG seems to be in that situation right now.