Tag Archives: Sovereign Wealth Fund

Papua New Guinea’s disappearing resource revenues

Foreign owned mining companies are raping PNG – in 2017 the government received just K400m from exports worth K25 billion.

 Glenn BanksMartyn Namorong | Devpolicy Blog | August 15, 2018

Government revenues from Papua New Guinea’s mining, oil and gas sector have essentially dried up. With the ongoing effects of the devastating earthquake in Hela province, the eruption of election-related violence in the Southern Highlands, a significant budget shortfall, and a foreign exchange crisis driving business confidence down, the resources of the government are severely stretched… and the massively expensive APEC meeting looms in November.

In this context, the drop in government revenue from the resource sector is staggering, and accounts in significant part for the growing fiscal stress. Figure 1 shows the extent of the issue: in 2006-2008, according to BPNG figures, the government collected more than K2 billion annually from the sector by way of taxes and dividends, on mineral exports that had just topped K10 billion for the first time. In 2017, the figure is just K400 million on exports of K25 billion – a revenue reduction of more than 80% in the same time that exports have increase by 150%! Government dividends and corporate taxes made up just 1.6% of the value of exports in 2017 (and that was a significant increase over 2015 and 2016). If we take the long-term average share of the value of exports that the government has received (at a little over ten percent), this points to a potential ‘hole’ of at least K8 billion over the past four years, an amount that would go a long way to covering the current fiscal deficit.

Figure 1

Source: BPNG. Resource revenues are defined as “MRSF receipts,” that is, the receipts that used to go into the Mineral Resource Stabilisation fund. Even though the MRSF no longer exists, BPNG still records resource revenues, which include corporate tax and dividend payments from resource companies.

There are some precedents for the rapid drop in government revenues from the sector, as Figure 1 show. In 1990 and 1991 – just as the ‘resources boom’ triggered by the Porgera gold mine and oil production at the Kutubu oilfield began – revenues collapsed, largely due to the closure of the Bougainville copper mine in 1989; and again, briefly in 2009 due to the onset of the global financial crisis in 2008. But neither of these has been as deep or as sustained as the current hole.

A full explanation of the precipitous decline in resource revenues is beyond the scope of this analysis. Clearly, a number of factors are involved, including a fall in commodity prices, major construction and expansion costs (which attract accelerated depreciation provisions) and generous tax deals. The revenue dry-up of the past four years also reveals that the State bears a disproportionate share of the risks associated with resource projects and investments. If we go back to the original intent of the post-Independence mineral policy, it was to translate mineral wealth into broad-based development across the whole country:

‘…known mineral resources should be developed for the revenue they can provide to the Government’ (PNG Department of Finance 1977: 2).

This clearly has not happened in the last four years. And certainly the Treasurer can’t be critiqued for commissioning yet another fiscal review: this seems appropriate, although whether it effectively addresses broader issues of a ‘fair share’ of mineral wealth remaining in PNG remains to be seen.

While there is much less money coming from the resources sector, there is at least better data than there used to be. The Extractive Industries Transparency Initiative (EITI) is a global initiative begun in 2002 to give transparency to what were regarded as often opaque flows of resource revenues from multinational companies in the extractives sector (especially oil) to the state in the countries in which they were operating. It is a voluntary initiative in which countries (and companies) can elect to become a ‘candidate’ country, and so long as they are able to be compliant with EITI standards, they can be admitted as a full member of EITI. The key requirement is to be able to report in a reliable way (through third party audits) on the revenues paid by companies, and reconcile these with payments received by the different arms of the state. The involvement of all parties – companies, governments and civil society – and public communication around the event and its products is also seen as central to both transparency and raising awareness of the nature of resource revenues and their destination.

PNG initiated its involvement in EITI in 2012. Four annual EITI reports have so far been produced (for the years 2013 to 2016). These reports provide an increasingly rigorous and transparent set of data on flows from the sector to the government, and identify additional revenue streams to the government than what BPNG use (and have used for the past 40 years). When all the additional revenue streams that EITI identify are included, the total share of the value of mineral exports rises to around 6.5% for 2017, up from the 1.6% based on the BPNG data. EITI is not without its problems and the most recent PNG country report identifies areas where it needs to be strengthened in PNG, and a focus on companies rather than operations can lead to the obfuscation of total flows and payments from each mine, oil and gasfield. In the PNG context, an examination of the sub-national flows and audit trails is also significant, and an initial study into this is underway.

One surprising revelation from EITI is that the single largest revenue stream from the mining, oil and gas sector to the government for at least the last two years has been so-called “group taxes”: the taxes paid on the wages and salaries earned by employees in the sector (Figure 2). These were worth more than K500 million in both 2016 and 2017, and in 2016 represented 34% of the revenue streams from the sector to the government, as identified by EITI. This is significantly more than the K46-88 million in corporate income taxes, K200 million in dividends paid to the State, or the almost K200 million paid in royalties in 2017. These group taxes are likely to be a more stable revenue stream than taxes or dividends – the workforce is unlikely to expand and contract to the extent that it impacts on the taxes they pay (leaving aside construction phases), or at least not as much as global commodity prices and profitability. But – and here we come back to the issue of PNG securing a fair share of its mineral endowment – this is a tax on the labour used to extract the resource, not a means of necessarily securing a direct share of the value of the resource itself.

Figure 2

The second area where EITI has revealed some interesting questions is around the operation of the Infrastructure Tax Credits (ITC). ITC originated in the sector in 1992 when the Porgera Joint Venture negotiated with the state to use a portion of their taxable income to directly provide infrastructure for surrounding local and provincial governments in exchange for a tax credit on this spend. Over the years the value and the uses of the ITC have varied, including at times supporting various national projects, and has been the subject of debates in various reviews as to its value. In 2016, four companies reported expenditures of K135 million in tax credit projects to DNPM[i], a significant amount that could well have contributed significantly to local and provincial development aspirations… but we don’t really know given the relatively poor reporting of the outcomes of these expenditures. More significantly, though, it is difficult to reconcile the size of these expenditures with the actual taxes paid by the four companies, which come in at well under K100m in total. That tax credits have come to exceed tax payments should ring alarm bells, and would explain why the government has in fact put a temporary stop on them.

Going forward, we would suggest two additional areas of focus, based on the above analysis. This first is local procurement. What is clear from the EITI reports (and earlier work by Banks (1990) on BCL) is that extraction of minerals is an expensive process, and a significant amount of the value of the mineral resource is spent by the companies on the labour, machinery, fuel, food, and the multitude of other costs needed to extract and export the mineral resource. An analysis from the last year of the Bougainville Copper Ltd mine at Panguna revealed that an estimated two thirds of the value of the mine accumulated directly outside Papua New Guinea, and indirect or second round spending would increase this (Banks 1990: 108). Imported materials and services made up 23% of the total value of the gross revenue of the minerals exported, cost of sales (all spent offshore) another 13%, depreciation 8% and dividends to non-PNG shareholders 12%. Local content spend on materials and services sat at just 5.5%, less than a quarter of the equivalent imported costs, while in total local wages and salaries were around two-thirds of the expatriate salary costs, despite the much greater numbers of local employees.

A long-standing objective and challenge for the State has been to find ways to ensure a larger proportion of these capital and operating costs are spent on PNG-based labour and other inputs. Plans at most of the major operations have been successful in localising the workforce significantly, hence reducing imported labour (and costs) at operations over time, although foreign labour continues to be important during construction. In terms of the goods, services and materials used to construct and operate a mine though, there appears to be scope to increase the proportion that is spent and retained locally. In large part this is tied to corporate and state support for a stronger local small business sector that can effectively service these mines (and potentially service the growing extractives industry across the Pacific).

The second area to which attention needs to return is the Sovereign Wealth Fund (SWF). This Fund, which would serve the dual function of saving a component of the resource revenues and having a portion committed to developmental needs through the budget, is in place (in terms of the legislation for it) but has not yet been implemented by the government. This well-proven mechanism for translating immediate resource revenue into a long-term sustainable fund can play a critical role in reducing the volatility of flows to the government. Ironically it may be that the factor holding back the government from moving on its implementation is the dire need for all the resource revenues right now. But neither is it sensible to wait for revenues to return to high levels before initiating the SWF: it will almost be certain that political and bureaucratic processes would delay the first flow of revenue to such an extent that several years’ worth of revenues that could kick start the fund would be lost. In other words, in many ways this period of low revenue is an excellent time for the Fund to begin.

So, the answer to the question of where have all the resource revenues gone, is not a simple one. The EITI reports show that a range of factors at the different operations (accelerated depreciation, tax holidays, ITC and re-capitalisation in plant expansions etc), have impacted on the revenue flows to government. To this we can add global commodity price drops, a compromised fiscal regime and some less-than-transparent governance structures and processes. The fact remains though, that over the past four critical years in its development, Papua New Guinea has missed out on a ‘fair share’ of the value of its mineral resources that have been extracted.

[1] Although confusingly there are different figures recorded as tax credits claimed by the companies from IRC – where the total credit offset against tax from three of the four companies come to K54million.

References:

PNG Department of Finance (1977), Financial Policies Relating to Mining and Mining Tax Legislation: Statement of Intent. Waigani: October.

Banks, G. (1990), Minerals and Development in Papua New Guinea. Unpublished MSc Thesis, Department of Geography, University of Canterbury.

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Abel: SWF vital for PNG

More promises that we have heard time and time before…

Salome Vincent | Loop PNG | 29 November 2017

The government has placed considerable importance in establishing the Sovereign Wealth Fund.

Today, Deputy Prime Minister and National Treasurer, Charles Abel, addressed the Mining & Petroleum conference, saying the Fund is a critical part of PNG’s medium term strategy in building the country’s economic resilience and saving for future generations.

The National Treasurer addressed a packed conference room, of the government’s observations on the mining and petroleum sector.

The notion to set up a Sovereign Wealth Fund stems from four key characteristics that shape how the government should think in driving the sector.

  1. The extractive resources are nite;
  2. The exploitation of the extractive resources represent a Liquidation of natural capital that is a conversion
    to nancial assets;
  3. It is a volatile sector;
  4. It generates rents.

The Minister said that there is surplus income beyond normal pro ts, adding that the rst two characteristics invoke considerations of equity both intergenerational and intra-generational.

He added that these attributes suggest the need to establish institutions that ensure the country does not waste wealth from natural resources.

And so to establish the Sovereign Wealth Fund, a work program for 2018 will involve the drafting and passage of various secondary legislations, the appointment of an inaugural board and establishment.

The board will guide the detailed design of operational systems and processes.
The other key institution is to design a scal regime to save and invest in ows from extractive resources.

“During the 2017 Supplementary Budget Government recognized that our nominal scal anchor – that is the headline target that guides the formulation of the National Budget needed to be augmented.

“I introduced an amendment to the PNG Fiscal Responsibility Act so it not only targets an eventual debt to G-D- P ratio of 30% but also aims to achieve a non-resource primary balance that averages zero over the medium term.”

Meantime, the extractive industry remains important to the economy with a direct contribution of 20 per cent GDP.

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Sovereign Wealth Fund Is Our Security

Barney Orere | Post Courier | August 22, 2017

Concepts such as Dutch Disease are risks that threaten macroeconomic stability and consequently the long term development of the economy. This requires a forceful and comprehensive response from Government at all levels.

Given the fact that there is heavy dependence on the non-renewable sector; that is, petroleum and minerals, the current generation arguably has clear obligations to ensure that the benefits from their exploitation is available to generations that will come later.

Of importance will be the manner in which the State manages the increase in economic activity and resulting fiscal flows. The implementation of large scale projects such as the PNG LNG in a small economy such as PNG poses considerable challenge in terms of macroeconomic management also.

To minimize the potential negative impact of the considerable increase in financial flows and economic activity on the national economy, the Government policy was to ensure that a Sovereign Wealth Fund structure was implemented in the lead-up to increase in fiscal flows.

A Government submission says that whilst PNG LNG Project forms the backdrop of the implementation of Sovereign Wealth Fund (SWF) in PNG, it was to be expected that the SWF, upon establishment, was likely to be the recipient of financial flows from a range of projects or sources.

The submission which had its cover page removed was found in a warehouse quite by chance. Although some progress could have been made on the SWF, the lack of conversation has prompted the matter to be brought out into the open and there are insights which, hopefully, will get the conversation going.

The idea behind a Sovereign Wealth Fund (SWF) was to secure PNG’s future by putting away savings from major resource projects. Parliament passed the enabling law and five years later conversation on SWF needs to come out stronger.

Time has become of profound essence because earnings from PNG LNG will be flowing in a less than three years from now and without a SWF in place, where will we put the money?

The country is at a critical crossroad because without a management mechanism in place, the synergy effects of vast earnings in a small economy will be the cocktail for the dreaded Dutch disease.

What is more troubling than ever is the lucrative nature of SWF; the nation’s future security will need to be conducted at the most highest level of integrity and that means transparency and accountability. Hopefully this isn’t one of our greatest obstacles because we mess it up now and there’s nothing for future generations.

On February 22, 2012, Parliament passed the Organic Law on the Sovereign Wealth Fund; a high profile initiative that has the potential to be a significant contributor to the welfare of the people, stability and growth of the Independent State of Papua New Guinea for generations to come.

The statutory objectives of Sovereign Wealth Fund are:-

  • TO support macroeconomic stabilization,
  • TO support the development objectives of the Government, including long-term economic and social development, and,
  • TO support asset management in relation to assets accrued from natural resource revenue.

The SWF was to consist of:-

(a) A Stabilisation Fund, to manage the impact of fluctuation of mineral and petroleum revenues on the economy and on the national budget, and,

(b) A Development Fund, to provide definite and ongoing funding for economic and social development in accordance with the development plans of the Government.

The author/s of the submission noted that the organic Law on Sovereign Wealth Fund creates the following stakeholders to be involved in running the SWF:-

  • SWF Board to oversee the SWF (Section 16 of the Organic Law on SWF)
  • Minister responsible for Treasury matters to determine the investment mandate for the SWF board and receive and consider reports from the board (section 6),
  • SWF Appointment Committee to appoint members of the SWF board (section 22)
  • Independent Probity Auditor to consider probity issues associated with the operation of the SWF (section 39), and ,
  • Secretariat to assist with the operational aspects of the SWF (section 31).

Certain matters regarding the composition, functions and governance of each of these stakeholders are set out in the Organic Law. However, details of how these stakeholders will manage the SWF and interact with each other have not been fully provided for in the Organic Law.

Section 42 of the Organic law provides for regulations to be passed in future which are necessary to give effect to the Organic Law on SWF.

The submission recommended that in advance of the start of revenues being ready for deposit, the National Executive Council should take action to implement the Organic Law on SWF with the view to ensuring that it was fully operational prior to operations starting at the PNG LNG Project. To this end a working committee was suggested to take charge of implementing the Organic Law.

PNG has already made dozens of LNG shipments.

When the Post-Courier raised the dangers of Dutch disease in a feature, Treasury Secretary, Dairy Vele made a statement a day or two later, that tax revenue from the PNG LNG Project would not be seen until 2020 (or thereabouts). He took the trouble of explaining how complicated the project was and made no mention of proceeds from any shares that might be held in the project; only the tax component.

PNG borrowed about K14 billion to get the PNG LNG Project off the ground.

When Prime Minister Peter O’Neill took office after the 2012 General Election, he spoke of starting the Sovereign Wealth Fund but the conversation gradually faded as he got embroiled in the tussle over the Independent Commission Against Corruption and other legal squabbles that confronted him.

The aim of the Organic Law on SWF was the establishment of the appropriate structures for the management of PNG’s increased resource wealth.

We see now from the submission that we’re dealing with a very lucrative organization. But it is the decisions that will be made that will protect the future of PNG.

With the earnings from the PNG LNG coming up, as indicated by the Treasury, work on SWF must begin because there are still some outstanding bits and pieces to attend to. Time is of essence because this is the entry point for Dutch Disease to set in. We will have so much money to throw around we will wreak havoc in our small economy; that is the danger.

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Opposition questions PM on benefits from LNG shipments

Delays in royalty payments are frustrating landowners

Delays in royalty payments are frustrating landowners

Post Courier | March 05, 2017

PRIME Minister Peter O’Neill has come under fire again from the Opposition on the benefits from LNG’s more than 200 shipments.

Mr O’Neill said bigger benefits were looming for the country in the next LNG projects at Port Moresby’s inaugural petroleum and energy summit.

Opposition Leader Don Polye said the Department of Treasury projected that annual proceeds from the first LNG would be up to K4 billion.

“Our alternative government’s question is who will benefit the most? We know these benefits looming in the petroleum and energy sector.

“This is not the first time we will see them coming in from such an international project.

“Our resource owners have missed out on benefits which are rightfully theirs in the first LNG project,” he said.

Mr Polye said the government had betrayed the people.

“Talking about projects after projects will not solve the real problems. There is nothing from the LNG project reflected in national budgets.

“Budget books show nothing. With such disarray in the management of the resources, pushing for another LNG project is unheard of,” he warned.

Sovereign wealth fund, he said, was established outside of the international best practice Santiago principle.

Mr Polye added that the Extractive Industry Transparency Initiative was not fully established within the standard frameworks as well.

“We cannot justify discussing another second or third LNG project. We are afraid their proceeds will also go down the same trend.

“I must boldly tell the nation that Prime Minister Peter O’Neill has mismanaged the country’s proceeds from the first LNG project.

The country is in the red. I would like to advice the forum to address these issues,” Mr Polye said.

He warns Total, ExxonMobil and other players that whilst bidding to increase their profitability to serve the interest of shareholders, they have a moral and legal obligation to PNG as well.

“We would like to see responsibility on the part of the developers to create a sustainable economy for PNG.

“When we are in government, we will not only bid for maximum benefits for our resource owners, we will fix SWF and EITI, minimise law and order, restore rule of law and alleviate corruption to make PNG become an attractive investment destination,” Mr Polye said.

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Papua New Guinea’s oil and gas boom – blessing or curse?

lng-australia

Resource extraction projects in Papua New Guinea have a decidedly mixed history. Will things be different this time around?

  • A deadly conflict is currently raging in Hela Province, home to the country’s largest gas project – the conflict does not directly relate to the gas plant there, but some fear the facility could be targeted.
  • After a bidding war between multinationals, plans are moving forward to begin exploration of additional offshore gas fields.
  • Despite its wealth of natural resources, Papua New Guinea remains one of the poorest countries in the world. Analysts say it is a classic example of the “resource curse” – a country where rich resources are associated with low levels of democracy and overall economic development.

David Hutt | Mongabay | 22 December 2016

Papua New Guinea announced last week that it is deploying its military to quell violence in Hela Province, home to the country’s largest oil and gas project.  Tribal conflict in the area has turned deadly this month, raising concerns about human rights and public safety as well as the potential impact on the operations of the PNG LNG (liquefied natural gas) project, operated by ExxonMobil.

The company is not directly implicated in the conflict. However, Prime Minister Peter O’Neill told Australia’s ABC news service the government would ask ExxonMobil and Australia’s Oil Search, a partner in the PNG LNG project, to provide logistical support to boost the security operation. The plant has also been a recent target of anger in the highlands. In August, local landowners blockaded roads leading to a natural gas facility in Central Province, demanding delayed royalty payments. This month, with tension mounting in the area, landowners reportedly threatened violence against the plant if a promised equity deal falls through.

Papua New Guinea is a country in transition. Perhaps best known for lost tribes and uncharted land, today PNG is hurtling into the 21st century – a shift that is clearly causing more than a few growing pains. While its past remains an integral part of its present, many of the country’s leaders are hopeful its abundant natural resources will provide the funds necessary for PNG to become a modern and prosperous state. The conflict currently raging in the highlands demonstrates the pitfalls of this process.

Customary landowner Auwagi Sekapiya of the Ubei Clan, Kosuo tribe. Photographed here in 2003 in front of a bulldozer, he was angry that a logging road destroyed his sago swamp. Photo courtesy of Sandy Scheltema/Greenpeace.

Customary landowner Auwagi Sekapiya of the Ubei Clan, Kosuo tribe. Photographed here in 2003 in front of a bulldozer, he was angry that a logging road destroyed his sago swamp. Photo courtesy of Sandy Scheltema/Greenpeace.

For decades, the mining of gold, copper and other minerals has been the mainstay of PNG’s extractive economy. More recently, oil and gas have become some of country’s most important exports.

In September, both the American oil giant Exxon Mobil and  Oil Search bought 40 percent shares in two separate offshore explorations permits in the Gulf of Papua. Peter Botten, managing director of Oil Search, said the maritime area, almost 150 kilometers (93 miles) off the capital Port Moresby, has “significant gas potential.” The purchase followed a bidding war between Exxon Mobil and Oil Search for shares in InterOil, a Singapore-Papua New Guinea company that offers investors a way into the Elk-Antelope gas field, believed to be one of the largest untapped gas deposits in Asia. The bidding war, which included France’s Total part-funding Oil Search’s bid, was credited by analysts as a sign of companies’ faith in improving international oil and gas prices and Papua New Guinea’s importance for the industry.

The potential profits from oil and gas extraction are enormous, but extracting it poses risks to the environment. “Like other forms of resource [extraction] in Papua New Guinea, oil and gas extraction is promoted as a model of development,” said Natalie Lowrey, Communications Coordinator for the Deep  Sea Mining Campaign. “But, as has been seen with large scale mining, logging and palm oil, there is the ongoing concern that it provides very little financial benefit for ordinary people as well as environmental destruction.”

River in the rainforest near Mt. Bosavi. New Guinea’s rainforests are the third-largest in the world. Photo courtesy of Markus Mauthe/Greenpeace.

River in the rainforest near Mt. Bosavi. New Guinea’s rainforests are the third-largest in the world. Photo courtesy of Markus Mauthe/Greenpeace.

According to conservation biologist Richard Steiner, the risks could be “very high,” particularly for offshore extraction. “Oil is a very toxic substance, and if or when it is spilled, it can cause long-term, even permanent ecological harm, as with the 1989 Exxon Valdez spill in Alaska,” he told Mongabay.  A number of spills have already occurred in waters of Papua New Guinea. In August 1993, Oil Search, a major player in oil and gas in PNG, caused a spill, although it initially denied such an event took place; it was only the work of local media that forced the company to admit to the spill three months later. Then, in 2012, Oil Search once again announced that a spill had taken place, though described it to the press as only a “minor incident” of a “small number of oil droplets.”

Even if nothing goes wrong, developing PNG’s petroleum industry will inevitably have a huge environmental impact. “Exploration and extraction of oil and gas will bring mass amounts of infrastructure, like pipelines and shipping, potentially resulting in land clearing,” Lowrey says. Take, for example, ExxonMobil’s PNG LNG Project, which began production in 2014.  The project sources gas from seven fields across the country, most onshore. Gas is transferred by a 407-kilometer-long (253 miles) subsea pipeline and a 292 kilometer (181 mile) onshore pipeline to two production facilities, where the gas is liquefied before being loaded onto ocean-going tankers that are then shipped across the region. As part of this project, the following had to be built: nine new wells in one onshore field; a new airstrip for the delivery of heavy duty machinery; more than 700 kilometers (435 miles) of pipeline; and the expansion of the docks for transport. And this was only a fraction of the infrastructure needed for the project.

Others are more concerned about the potential social impacts of such projects. “There is comparatively minimal environmental impacts, mainly due to the innovative construction of underground pipelines by Chevron in the early 1990s. Compared to mining, the footprint is small,” Emma Gilberthorpe, a Senior Lecturer at the University of East Anglia’s School of International Development, told Mongabay. “However, the social impacts are enormous, mainly initiated by the influence of cash royalties and conflicts over ownership.”

Women crossing a river on the way to Mt. Bosavi in Southern Highlands Province. Photo courtesy of Markus Mauthe/Greenpeace.

Women crossing a river on the way to Mt. Bosavi in Southern Highlands Province. Photo courtesy of Markus Mauthe/Greenpeace.

In a 2007, essay titled Fasu Solidarity: A Case Study of Kin Networks, Land Tenure, and Oil Extraction in Kutubu, Papua New Guinea Gilberthorpe explored the impacts of the country’s first commercial oil field development, located in the southern highlands. The use of cash royalties and “the imposition of centralized judicial constructs of corporate landholding groups” radically altered the traditional, social interactions between kin groups and communities. “Males are becoming isolated from pre-oil exchange networks, and females are becoming isolated within villages,” she wrote. More recently, the protests in Central Province show the potential for social unrest when expectations about cash royalties go unmet.

The extraction the country’s abundant resources, especially oil and gas, was supposed to transform the country and its economy. But it hasn’t, writes Charles Yala, Director of the National Research Institute, a local think tank: “The petro-oil-gas dollars [are] disappearing into thin air, leaving behind an impoverished nation,” he wrote in Business Advantage PNG. Despite the wealth the industry has created, Yala says the economic situation remains dire: getting to and from the country remains difficult and costly; accommodation can be more expensive than in most Southeast Asian capitals; internet access is poor; electricity supply is scant; and the government does not do enough to allow smaller businesses to prosper.

Even people in government admit that oil and gas revenue won’t solve all of the country’s problems. In June 2015, Finance Minister James Marape announced that the importance of Liquefied natural gas (LNG) to the economy was a “myth.” He added: “We are clouding our vision thinking that LNG is a waterfall of money. It is how we maximize use of all the resources in this country that will unlock our development potential.”

A tree kangaroo, one of the many incredibly rare species living in PNG’s lowland forests. Pictured here at the Melbourne zoo. Photo courtesy of Tom Jefferson/Greenpeace.

A tree kangaroo, one of the many incredibly rare species living in PNG’s lowland forests. Pictured here at the Melbourne zoo. Photo courtesy of Tom Jefferson/Greenpeace.

In October, an analysis by Development Policy Center, a  think tank ran out of the Australian National University, estimated that while PNG’s mineral exports in the first quarter of 2015 were worth $1.6 billion,  government revenue for this sector amounted to just $8 million, or roughly 0.5 percent of the total value. Some of this, the article noted, was likely due to a lag in between exports being made and taxes on them being paid, as well as changes in how the state receives its share of the sector’s profits.  Nevertheless, it concluded that “what the numbers illustrate most clearly are the effects of price volatility in the sector, and the subsequent, highly uneven returns to the government.” This volatility make it “extremely difficult for governments to manage these flows effectively, and makes strategic development planning difficult,” the report noted.

“In this regard, and others, Papua New Guinea certainly exhibits many of the classic markers of the ‘curse’,” the paper noted – referring to the theory that countries possessing an abundance of natural resources tend to have less democracy, less economic growth and worse overall development than countries without such resources. While not universal, the paradox of the “resource curse” has been found in countries across the world, particularly those without a history of good governance.

In an effort to sustainably manage the money derived from oil and gas, the prospect of creating a sovereign wealth fund has been on the table since 2011. It finally came into law in July 2015, was scheduled to come into operation this year – reports now point to a 2017 launch date. Many oil-rich countries have developed such ways of re-investing oil and gas profits for long-term profit, with Norway leading the way with a fund worth almost $890 billion, making every Norwegian a millionaire, in theory. (Norway has also helped other countries develop their own funds, including Papua New Guinea’s neighbor, Timor-Leste.)

Papua New Guinea’s fund will be split into three sections, according to an interview with the High Commissioner of Papua New Guinea to Australia, Charles Lepani. The Future Generation Fund is intended to put aside money for the decades to come; the Infrastructure Fund to revitalize what is needed today; and the Budget Stabilization Fund to support the country’s growing budget.

A mountain hut in the highlands of Papua New Guinea. Photo courtesy of Markus Mauthe/Greenpeace.

A mountain hut in the highlands of Papua New Guinea. Photo courtesy of Markus Mauthe/Greenpeace.

Again, there is a concern that its sovereign wealth fund might itself become another curse. In Timor-Leste, analysts have spoken of the government’s overuse of the fund to boost the state budget, which could lead to it being empty within a decade. Experts have warned that politicians in Papua New Guinea must provide accountability and expertise when managing the fund, so money for future generations is not wasted. The biggest task for future governments will be tackle corruption in the face of a slosh of new petrodollars. Transparency International’s latest index on corruption perception, in 2015, put Papua New Guinea 139th out of 168 countries. Without effectively tackling this endemic practice, the money available for necessary social projects and infrastructure development could slip away from the state’s coffers.

Another concern is that politicians look to the oil and gas industry, as the sovereign wealth fund, as a silver-bullet, and fails to plan for a future of less dependency on natural resources. When asked if the oil and gas sector could sustain the economy of Papua New Guinea, Gilberthorpe responded that it couldn’t on its own. “And not sustainably. Without a diversified economy Papua New Guinea is putting itself in the firing line of the resource curse,” she said. “The country needs to develop beyond natural resource extraction to more sustainable forms of economic development if it is to have a sustained economic growth.”

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PNG people poorer despite big mines: NRI

PNG people are poorer but is that despite the big mines – or because of the big mines?

Perhaps a Sovereign Wealth Fund is NOT the answer.

What we need is a new model of development – one that actual respects and follows our National Goals and Development Principles rather than completely ignoring them as we do now… 

Aerial view of the LNG processing site

Freddy Mou | PNG Loop

Revenues from past extraction of PNG’s natural resources have failed to impact the lives of the average citizen, the country’s think thank and leading researcher in the Pacific, National Research Institute has revealed.

Director Dr Thomas Webster when launching the Sovereign Wealth Fund Report today in Port Moresby says the average citizen has become poorer as a result of poor management and accountability in the previous SWF projects.

“This experience is instructive for the present debate and the emphasis must be on ensuring that the LNG income stream and revenues from other similar projects transforms positively the lives of the average citizen, both now and into the future.

“The magnitude of the projected revenue from the current PNG LNG project is such that its impact on the macroeconomic stability is critical. Prudent strate-gies aimed at stabilising the plausible macroeconomic consequences from the current and future projects must be packaged into the SWF structure.

He said protecting the purpose and intent of the SWF through the approved management structure is critical.

It has been speculated that the final structure of the SWF Bill is scheduled to be tabled in the coming (October) Parliament session.

Dr Webster said missing from the design of a SWF has been a transparent and wide-ranging debate on its aims and a structure most likely to deliver the intended benefits.

“We are well aware that the PNG LNG has started exporting and proceeds from these sales accruing to PNG need to be deposited responsibly.

“We therefore continue the series of NRI discussions with the view to ensuring that the SWF is properly structured, established and managed,” he said.

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Filed under Financial returns, Human rights, Papua New Guinea

Cobalt in Cooks awaits exploitation

Could supply 10% of global supply

Dionisia Tabureguci | Islands Business

This year could be a defining year for seabed minerals in Cook Islands.

There are plans by its government to move a step closer to exploration of its massive cobalt resource, following the completion of consultation work with the International Monetary Fund (IMF) on how to maximise this potential national wealth.

In an interview with ISLANDS BUSINESS last year, Cook Islands’ Minister for Finance Mark Brown revealed his government’s intention to ensure that critical groundwork is laid before any advancement in this area, given that undersea mineral exploitation is still a new frontier globally.

“Our legislations have been in place for a number of years now and they came into force in March (last year), so we’ve been setting in place a legal framework for the exploitation of our minerals resources,” Brown told ISLANDS BUSINESS.

“We are also in the process with the IMF of working out a taxation and royalties legislation to determine how we will maximise the returns on those resources. And we also had a study done on the establishment of a sovereign wealth fund so that revenues collected from this particular resource will go into a dedicated sovereign wealth fund,” Brown added.

Cook Islands is said to be sitting on a significant field of manganese nodules, which are known to host mineralisation in the seafloor. According to a study done there in the 1990s, its manganese nodules are so rich in cobalt that they’re enough to supply global demand for the next 500 years.

Known data at the time estimated that even if a small portion of Cook Islands’ manganese nodules is mined, it would be enough to supply 10 percent of the world’s annual cobalt consumption.

Although interest in exploration work there has been expressed and carried out by a number of parties in the past, among them a U.S engineering firm, they have not translated to any progress in actual mining as economic viability was always questioned.

Globally, technological advances in undersea mining equipment have been slow while in the country, specific legislations to regulate the relatively unknown industry were also slow to take form.

Recently however, interest in seabed mining especially in the Pacific was rekindled following substantial interest and progress by Canadian-listed mining company Nautilus Inc. to launch the world’s first commercial seabed mine in Papua New Guinea waters.

It’s an interest that has continually been the subject of much criticism because of fears it will severely damage the ocean’s ecosystems but this hasn’t stopped Pacific Islands countries with seabed mineral prospects—Cook Islands among them—to revisit their opportunities in that area.

They are being assisted by the Applied Geoscience and Technology division of SPC (SOPAC), especially in the drafting of relevant national laws.

In PNG, the arrival of Nautilus became the catalyst to the drafting of national policies and legislation on seabed mining but Cook Islands had decided it will not allow exploration or mining until all relevant legal and policy work are in place.

Its Seabed Minerals Act was passed in 2009, establishing the Cook Islands Minerals Authority and a regulatory framework for seabed mining in the country.

It has also gone a step further to explore the concept of having a sovereign wealth fund for seabed minerals proceeds, a model used by many countries to manage national wealth from their mineral resources, oil predominantly.

“It’s been estimated that the value of our minerals below the sea is in the billions of dollars, which will make us one of the wealthiest countries in the world if we can get down there and exploit the value of these minerals,” said Brown.

“So by the end of (last) year, we would have completed our work on the exploratory licences regime and we will be putting out expressions of interests to companies or countries that wish to take out exploratory licences to determine whether full exploitation is actually feasible,” he added.

In its initial analysis on Cook Islands’ proposed sovereign wealth fund for its undersea minerals resources, the IMF said the Pacific region had produced cases of both successes and failures, which underscored the importance of having well structured and well managed funds.

“Kiribati, Timor-Leste, Papua New Guinea and Nauru have SWFs established for non-renewable resources. Tonga and Tuvalu have funds established from revenue windfalls and Tuvalu, Marshall Islands, Micronesia and Palau from donor contributions. An IMF study on sovereign wealth funds in the Pacific islands provides insights into the successes and failures of these funds. The failures of the funds in Kiribati and PNG provide some lessons on how important the design of the investment strategy can be. The Timor-Leste Petroleum Fund provides a model for effective design,” the IMF said.

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Filed under Cook Islands, Exploration, Financial returns