The Current Business Model and Tax Concessions are Cheating PNG of Revenues and Landowner Benefits
Post Courier | November 15, 2018
In the period leading up to and eventual start of the multi-billion kina PNG liquefied natural gas (LNG) project in 2014, there was much fanfare and grandstanding of the promise/premise that the project would single-handedly transform PNG.
In fact, the project has delivered some much-needed tangible developments in terms of major infrastructure, additional employment and spin-off business opportunities as well as foreign exchange revenue. However, there are still many unresolved issues that demand National Government’s most swift and appropriate remedial action.
On October 30 2018, it was reported (Post-Courier) complaints by Paguale Kekero resources landowners association from Southern Highlands Province over benefits from the PNG LNG project. The report referred to major clans with population of over 2000 people “left in the dark on LNG project benefits” – royalty and equity payments.
Their complaints followed a public statement on October 25 2018 by Mineral Resource Development Company (MRDC) Managing Director Augustine Mano of PNG LNG pipeline landowners receiving benefits. The concerns relate to Paguale Kekero resource owners not signing any agreement in the Umbrella Benefits Sharing Agreement under the Greenfield and future generations benefits.
The Paguale Kekero landowners concerns are among numerous other claims and counter-claims, be the genuine, not genuine or combination of both. So, the over-orchestrated myth of massive and immediate socio-economic transformation in the livelihood of resource owners, others in the project area and PNG as a whole is increasingly becoming a far-fetch tale.
PNG-wide, similar sentiments have been expressed over resource ownership, equity participation and the sharing of wealth generated from mineral, oil and gas reserves. As more resource owners become aware of their missed opportunities, there is mounting support from indigenous people for greater benefit from what is taken out of their land and sea.
They are rightly doing so because if anyone, these people and their ancestors have been living on and off that land or sea for over 40,000 years from one generation to next. Whilst PNG authorities continue to grapple with this contentious issue, plans are afoot for the ownership of resources to be transferred from the State as is the norm currently to the resource owners.
There has also been numerous calls for a comprehensive review of existing memorandum of agreements (MOAs) with project developers and provinces they are located. Some serious questions remain unanswered in the manner in which past governments proceeded to signing certain major project agreements. In fact, these are still burning issues that need government action by way of review of project agreements.
In that way, many landowner related issues and concerns, equity participation, wealth sharing and tax revenue can be addressed and resolved amicably.
The government must take heed of these concerns and start reviewing major project agreements. The underlying objective must be to cater for increased local equity participation by way of buying shares in these big resource development projects.
On May 14 2013, former Public Enterprises Minister Ben Micah while answering questions in Parliament alluded to the loss of millions of kina in tax revenue resulting from tax exemptions. Mr Micah’s comments may not have attracted much attention, but what he said then is still relevant day and needs follow-up action. There is nothing wrong for the government to admit fault, but take appropriate remedial actions to correct any wrongs of the past in PNG’s national interest and benefit.
A government decision for comprehensive review of agreements the State had entered into with developers in major projects would be well-received and welcomed nationwide. There are numerous concerns and un-answered questions that need clarification for and on behalf of the majority PNG citizens.
Today, questions are still asked why the Ramu Nickel project agreement was signed in China.
What input did relevant PNG State agencies, including Justice and Attorney General, Department of Finance, Commerce and Industry, Customs and Internal Revenue Commission and the Madang Provincial Government have in the Ramu Nickel project?
In December 2013, some agreements were reached and the review of the Ramu Nickel agreement was concluded and signed by relevant stakeholders. That is exactly why reviews in all project agreements are necessary and should be done within the time frame specified in such MOAs.
It must be mandatory and strictly adhered to by all parties. Failure by any of the parties to that MOA should be made to heavily compensate any breaches. There need to be a review of the current business model of the PNG LNG Project.
The review must reveal how exactly PNG entities and individual citizens are benefiting from all segments of the PNG LNG Project.
As it is, PNG is mostly benefiting from only one segment of the project while foreign investors take away much of the profits generated from the other segments.
This is because at the time of signing the project agreement the government then rejected outright the professional and technical advice in adopting the business plan. The LNG Project was and still is far important to the future economic health and well-being of PNG. It single-handedly underpins the future economic advancement of PNG.
This was fully recognised by then government and the technical team was task to deliver the project within the ambit of this objective. The technical team was convinced that the business model for the LNG Project had to be structured in the way, so that PNG and landowners were drivers of the projects, rather than mere bystanders, if the above objective was to be realised.
Under the business plan recommended by the technical team, The National Government, provincial governments, local level governments, landowners and other PNG citizens were to have fully participated through share equity in all segments of the project.
This means, under the aborted business model, various PNG entities and groups would have invested and benefit in all segments from upstream, pipeline, processing facilities, shipping and marketing. Unfortunately, this one-in-a-life time investment opportunities for PNG citizens was denied when the government opted to adopting a totally different business model. There were serious concerns and perception among various stakeholders that the originally well-intended ideals of this project was hijacked.
The Ministerial Committee on the LNG Project appointed by the National Executive Council totally ignored and ultimately rejected the business model recommended by the technical team.
Under the current model, the State, provincial governments and landowners are to participate ONLY at the UPSTREAM, by exercising their 22.5 per cent rights under the Oil and Gas legislation. Other than that they have no participation or interests in other segments of the project, namely pipeline, processing facility, marketing and shipping.
Under the current business model, the State and the landowners are complete bystanders, with no tangible control and ownership in the project. This business model defeats original Government policy ambition as well as political and economic aspirations of PNG.
If is it not too late and so there should be review into the business model of the PNG LNG Project to allow the National Government, provincial governments, local level governments, super funds, national owned businesses and individuals to buy shares in all segments of the project.
The current business model must be re-structured to enable maximum participation of government, landowners, and provincial governments, in all segment of the LNG Project.
Allow PNG and its citizens to retain the majority ownership of the complete PNG LNG project chain.
The government should also review the substantial tax exemptions given to the PNG LNG project. This government is in the best possible position to carry out a thorough review of all tax and fiscal exemptions granted to the developers of the PNG LNG project.
Among the concessions for review should include:
- 30 per cent Corporate Tax rate;
- Waiver of the 2 per cent Fiscal Stability premium;
- Foundation Volume pf 10.5tcf;
- State Carry;
- Excise and Import Duty Exceptions during construction phase;
- Special Tax Credits;
- Applicable Interest to State’s back-in Costs; and
- Oil to Gas Tax rate Conversion.
The concessions could well have resulted in losses of hundreds of millions of kina in State revenue. The government is morally obliged and duty bound to direct for full review of all major projects so that shares are floated for PNG owned entities and individuals buy into the projects. Then only can PNG citizens boasting of benefiting from resources found in their land and sea. Otherwise so-called landowners and PNG people are fighting among ourselves for bones and crumbs.