How can we trust the National Government?

By Emmanuel Narokobi*

In Mekere Morauta’s Contract in 2000 with Highlands Pacific, the National Governenment reserved the right to take up to 30% equity in the Ramu Nickel project once operational. However in 2006, Sir Michael Somare in his wisdom amended the agreement this time with the Chinese Metallurgical Group Corporation (MCC), to never take up that option so that we could stay with the whopping 6.3% equity.

In addition, Mekere’s contract had a two tier tax scheme to give an incentive for a developer. In 2000 the nickel price was suppressed – at about $7000 per tonne – the contract provided for a corporate tax rate of about 15% for the first 5% profit and then for all profit, after that tax would be at the normal rate of 30%.

Somare’s beautiful contract work removed that tax clause and replaced it with a 10 year tax holiday to kick in whenever MCC feels the need to be generous.  On 2000 prices we could estimate that this masterstroke “amendment” cost PNG K162 Million but now that the nickel price is about US$23,000 per tonne, the mind boggles at how much was really given away.

Further more, there is a nice transfer pricing clause in the new contract, which was not even in Mekere’s – the new clause states that the parties recognise that MCC will sell nickel to related companies in the Chinese domestic market.  Full stop.  It doesn’t say “at international market price”.  So if you are a buyer in new York who is willing to pay $23,000 per tonne and one of MCC’s brother or sister companies in China want to pay $7000 a tonne – MCC can just sell to the one in China and the parent company gets $23,000 worth of benefits per tonne for only $7000. Which all means that MCC would never have to declare a profit or tax for that matter, ever and for our measly 6.3% we will undoubtedly never get a declared dividend.

With all our new projects coming online in the next 10 years, have we or will we learn anything from the Ok Tedi experience? Why do you think Ramu Nico is having such a hard time with the landowners. Why do you think we lost Bougainville Copper Limited (BCL)?

* Abridged from The Pato that Laid the Golden Eggs

5 Comments

Filed under Corruption, Financial returns, Mine construction, Papua New Guinea

5 responses to “How can we trust the National Government?

  1. Ian G. Mileng

    The truth about these revelations is that they can ignite a nationwide riot, a second Bouganville revolution or even have M.Ps assinated. Please M.Ps who are responsible, do not treat the landowners as fools without dignity and with contempt. It only takes another Francis Ona to cement the peoples’ resolve and by that time, a war would have broken out.

  2. Scandal of epic proportions! Political & bureaucratic scandal calculated to rob PNG in daylight. The mining advisors to the Gov’t have sold the country to foreigners for free. How can my garden be harvested by someone else while I am forced to sit down and watch it happen in broad daylight??

    Madang people & PNG are only to feed on the bones while the meat is taken by MCC.

    Absolutely disgusting, we are sick of illiterate politicians and half-baked advisors!

    I hope this mine never gets off the ground under the current arrangements

  3. dexter bland

    A couple of points:

    For the government to have taken equity it would also have to contributed its share of the finance, about K1.2 billion. They would then find themselves in the same unfortunate position as the developer, unable to start production and making a loss every day. There is a reason investors expect profits, they take risks, and have to wear the consequences in situations like this. In PNG the risks are considered to be especially high, so investors will need to see potential for a higher return. Its questionable whether the government should be gambling public money on risky ventures. There are better ways to extract a larger share of mining revenues – e.g. through taxation.

    On the tax holidays I agree there is no good reason for letting them off and they shouldn’t be making this a standard practice. Though in this case Ramu struggled to get finance, and it was arranged at a different time. It may have been that or no development, of course that is sometimes a valid option.

    Ramu won’t be producing nickel metal, but a nickel cobalt concentrate, which will be refined in China. That means some of the value will be added in China, but the price paid for the concentrate will be done on standard commercial terms – there won’t be any special discounts.

    The benefits from the mine are more far reaching than just direct tax revenues. The mine creates jobs, the government collects income tax from this, it creates business opportunities for locals, infrastructure is constructed, more jobs, all of this economic activity generates revenue for the government, and the benefits are widely dispersed.

    • Fed up

      “but the price paid for the concentrate will be done on standard commercial terms – there won’t be any special discounts.” – dexter bland.

      what makes you so sure about this statement. all indications are that transfer pricing will be applied and PNG will get nothing out of this shit of mine.

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