Tackling resources sector blues: The heavy price we pay

This is part 2 of a three-parts series on Papua New Guinea’s resource sector under threat, FRANK SENGE KOLMA writes about the heavy price we pay.

If “unfair benefits to the nation” is the measure Prime Minister James Marape chooses to review existing resource concessions then all current agreements should be up for review.
The evidence is there for all to see.
So much mineral, hydrocarbon, forestry and marine resources have been taken from PNG across four and a half decades with the singular effect that there exists no evidence of the harvest in the country’s vital socio-economic indicators.
A nation so obviously rich is so startlingly poor, it beggars description.
Marape is probably alluding to a wider range but we limit our discussion here to the concessions in the mineral and hydrocarbon resources sector.
Other sectors like forestry, fisheries and agriculture, manufacturing, hospitality, and finance and banking sectors are covered by the same broad principles discussed here.
Achieving an equitable balance between the interests of investors, host states and special lease area communities (landowners) appears part and partial of all contentions raised by governments and local interest groups of resource rich countries.
Outright or creeping expropriation has been attempted or achieved in places but the negative impacts outweigh all other considerations and such approach is shunned by both investors and host countries.
Others have claimed international best practice to review and set aside important concession contracts such as in the Democratic Republic of Congo with great success (2007-9).
The main issue claimed for any review is a host country or host community’s fair share of resources development.
A key issue in effective mineral resource management in the 21st Century is ensuring a host country’s equitable share of its mineral resources.
Recently, this has taken the form of government-led retrospective contract reviews (as in the 2007–9 review by Congo), or a state’s demands for a greater share of resource rents (for example, through windfall profit taxes or renegotiated royalty rates, as attempted in Zambia in 2008).
More recently in South Africa, this has led to calls for outright nationalisation, indigenisation, or state control of strategic minerals.
All of PNG’s resources agreements do not have national content provisions to determine how and where national entities can participate to get a fair share of the development of the country’s non-renewable resources.
Many developers have gone out of their way to develop quite effective local business development concepts along the way but the fault, if it is indeed a fault, is the State’s not having a position on it both as a policy or law.
A national content bill and policy are only just undergoing drafting by the Department of Commerce and Industry.
National content, ownership, equity participation, onshore processing and other issues are contentious with investors but it were better to know what the thinking is right from the start on these issues rather than have them inserted partway in moves that might affect project viability.
All concessions do not have local processing or refining of resources harvested to add value to our raw materials and develop the country’s fledgling manufacturing sector.
It is a rather absurd position to be in when the country is a net exporter of natural oil and gas and a net importer of the same products in their refined forms.
Other absurdities exist in this industry that are way too obvious to ignore.
How is it that the State, which by law owns all the mineral and hydrocarbon resources in the country concedes 100 per cent of the resource at some point during the process of negotiating and granting a resource development licence to the resource developer and ends up with a requirement, at law, to obtain certain percentages on commercial terms in the resource project?
This participation is also limited by the same law that grants the State 100 per cent ownership to only 22.5 per cent for hydrocarbon projects and 30 per cent in mining.
Whether or not the special 51 per cent ownership acquired in principle by the State in the Porgera gold mine requires a change in the Mining Act to raise the 30 per cent bar or make this a special one-off transaction is for the legal eagles to advise.
The point is made though on the absurd nature of this arrangement.
Another absurdity are the company tax holidays enjoyed by these major multi-billion Kina projects.
If anything, taxation is the only area where the State has guaranteed returns on any project at all.
Tax holidays ought to be given to operations which are at best marginal and which require the extra tax incentive to make investment decisions.
To give holidays on the basis that they are first time industries such as with PNG LNG is absurd because LNG projects by their nature do not start in one place and by that first example, cause others to sprout all over the country.
They are rare events driven by huge outlays of exploration money and where they happen it is almost always limited to one or two.
For the same reason, a LNG plant is not a marginal project that requires a tax holiday to attain success or profitability.
Markets are secured, the end product is forward sold and therefore project viability and profitability are guaranteed before the first rivet is driven to begin construction.
Only an act of war or an act of God that affects global markets do affect markets adversely but those are conditions that form part of all project considerations everywhere and no situation that warrants special tax holidays.
The State negotiators owe the people a lot in explanation for the tax holidays enjoyed by these projects at present.
Employment and emoluments discrepancies or discriminations, training and promotions short comings and fly-in, fly-out provisions and practices add their own not insufficient weight in support of moves for reviews of resource development agreements.
Most especially, the prevailing laws governing the resources sector might not have been drawn up with the best interests of the country at heart in the first instance.
The most frequently visited proviso at Section 6 of the Mining Act that declares all minerals at a certain depth below the surface as belong to the State and for those on top of the soil to belong to the landowners groups, controversial.
All open cut mines such as at Panguna and at Ok Tedi do tend to expose minerals to the surface so reading the law literally and liberally such minerals might as well be said to belong to the people.
The stockpiled ore at Porgera might fall under a similar reading of the law.
Only strict rules of a development licence which grants a developer almost total rights to the resources and the special lease area protects such liberal reading of the law.
But it is there and can provide leeway for legal mischief.
The State has not been a good custodian of the country’s resources.
Right from the start, it has preferred to take up equity participation as an equal partner with developers, rather than remain a regulator and tax collector.
This role has placed it in serious conflict of interest positions where it has had to arbitrate between its regulatory responsibilities as the State and its fiduciary concerns as an investor.
Many times, we have seen it decide in favour of its investment role, ruling in favour of the developers.
Once it walks down that path, other obligations along the way have to be thwarted or waived.
Taxation holidays are granted in order that a project gets to pay off its debt earlier and pay dividends, including to the State.
Tax deferred in that exercise might equal or surpass dividends to the State for its holdings in the long run.
Tax is immediate, while dividends must be paid after its debts to secure its shareholding are paid off.
Equity participation from which dividends accrue at the appropriate time is a gamble heavily dependent on global market movements, commodity prices and global geo-politics – all of which are outside PNG’s direct influence.
Tax, on the other hand, must be paid regardless of market movements.
There is greater security there as tax law making, enforcement and tax collection means and manpower are at the State’s beckon and call.
The State has repeatedly reneged on its obligations to its own citizens under resources development agreements.
The Bougainville Copper Ltd agreement was not reviewed when it fell due twice – in 1981 and again in 1987 – leading to the Bougainville uprising.
State obligations under the Umbrella Benefits Sharing Agreement and the License-Based Benefits Sharing Agreement are still being argued now already more than a decade into the agreements.
PNG’s share of 22.4 per cent equity will come in full in about 2023, when the project debt accumulated from a consortium of banks around the world are paid off in full.
We fiddle and wait while our resources burn up all around us.
New projects do not add to our wealth, it seems, only to our debt.
It would appear that our problem derives from inadequate time spent on passing laws.
Laws do not come into force until a resource is about to enter development stage.
And when that happens it is a fair assumption that often the concerns of getting a project off the ground – that is the economic gains or benefits of a project from our equity participation – are overriding and tend to hold sway over other matters.
It is quite silly that the rush often denies the object aimed at – that of better and lasting economic gains for the country.
There is no telling what part other short term, political and individual gains considerations play in this scenario but they are surely there.
But perhaps the most obvious and biggest question remains: Ownership.
Does the State really own the sources?
If it does, is it a good custodian of the people’s resources?
Is it mobilising the resources responsibly and on behalf of the people?
What about the project site provincial governments and land owning groups – do they have a say in these considerations?
Ought they not?
Serious questions that require serious answers as we ponder and plot a way forward.

Frank Senge Kolma is a journalists, commentator and newspaper editor.