Why choose equity over corporate tax?

WHILE the Porgera mine deal is now the hot subject, many of our readers are losing track because the Government’s sudden change of direction in the heat of the moment and putting up contradicting statements that are troubling our minds that are already affected by the effects of the coronavirus pandemic. It does not help when the so-called framework agreement is shrouded in complete secrecy as if it is written on the Shroud of Turin.
How will the public know the details of the terms and participate meaningfully in the ongoing discussions for accountability and transparency? From what is circulating in the media, including leaked Government documents, thanks to the Mining Minister Johnson Tuke, we can make our own assumptions. Barrick Niugini Ltd (BNL) has signed a binding framework agreement with the Government to reopen the Porgera gold mine. The operations of the mine have been suspended since last April after the Government refused to extend its special mining lease. BNL is a 50-50 joint venture of Barrick Gold and China’s Zijin Mining Group. According to the latest agreement, a joint venture between the Government and BNL, respectively holding 51 per cent and 49 per cent stakes, will own and operate the Porgera mine. The agreement also allows Papua New Guinea stakeholders and BNL to jointly share the economic benefits generated from the mine. BNL will fund the capital required to resume operations at the mine. After 10 years, PNG will have the right to increase its stake in the mine to 100 per cent by purchasing the remaining interest from BNL at fair market value. The deal also provides the landowners with increased equity. And the joint venture plans to start full mine re-commencement work once definitive agreements are signed by the two parties. Now, with the above one points as your backdrop, let us reason together the issue at hand – the outcome of the Porgera deal. Prior to the mine closure, Porgera was a joint venture between Barrick Gold (47.5 per cent), Zijin Mining (47.5 per cent), the Enga government (2.5 per cent) and the Porgera landowners (2.5 per cent). Here, the Government had no stake or an equity in the gold mine.
The Government only earned from what came out of its tax component. Many emerging economies in the world progress through corporate tax rather than having direct equity and participation. But in the new agreement, the Government, through the State company Kumul Minerals Ltd, is expected to take up 36 per cent of the 51 per cent equity given to PNG. In order to own the 36 per cent equity, the cash-stripped Government has to go again and borrow at a time the world is going through a financial crunch and lending rates are not so favourable. However, Prime Minister James Marape insists on borrowing to finance the Government’s equity, as stated in one of his recent outing. Borrowing will add to the already 10 plus billion kina loan accumulation in just two years after Marape got into office. This further adds pressure to the already-strained economy. But that is only the tip of the iceberg. The big problem remains: Why having 36 per cent stake in the mine when we can still do better with the corporate tax we collect from BNL? Acquiring 36 per cent equity means giving away significant portion of the corporate tax earning. Besides, we don’t have the money to finance an investment with an uncertain future. In 10 years, the investment would probably be worthless. We might have to contend with the prolonged legacy issues such as environment damages after the mine closure. Greater equity and participation for the landowners and the Enga government is a fair call – if they can be able to finance their respective stakes – but you cannot commit the country to unnecessary strains when we can simply live within our means.

David Lepi