Submitted By:  Jan Kees van Donge, retired ex Professor of Political Science at UPNG

The concern with corruption in PNG is in the first place forensic: concerned with what goes wrong. It may, however, also be useful to give some attention to issues of policy in order to avoid, as much as possible, such situations arising again in the future. This is especially pertinent with respect to policies governing natural resources, as these are so important for the PNG economy and governance issues are so blatant. Such a policy debate needs to begin with information on the actual present situation. This article argues firstly that such information is not currently available. A debate on procedures for an Extractive Industries Transparency Initiative (EITI) is therefore simply irrelevant.[i] There are a number of reasons to ask scholarly as well as politically crucial questions that need to be answered before a sensible debate on natural resources policy can begin. These are set out below. Secondly, there is need of a debate on the ways in which PNG can extract income  from such projects dealing with the amount of leverage allowed and equity participation. This article does not pretend to provide definitive solutions, but it wants to create sensitivity to the issues involved.

First, government data are not explicit on income from natural resources projects. The income flows from mines and oil/gas for the government have to be guessed. These income flows are governed by confidential Resource Development Agreements between the state and companies. Furthermore, there is not one prescribed format for such agreements; rather, agreements are contract-specific and may contain any kind of concession with respect to taxation, royalties, equity participation and so forth.[ii] Political action is needed to change the law so that these agreements become public.

Second, specific questions need to be asked about depreciation and tax concessions. For example: when Asian Development Bank economist Aaron Batten presented the seminal report, Papua New Guinea: Critical Development Constraints, he mentioned specifically the taxation concessions for Ramu nickel and the LNG project. The Internal Revenue Commission (IRC) defended these concessions, as companies need the time to extract, produce, export and sell their products before they can generate a continuous income that is taxable. However, no definite and precise information was given by the IRC to answer the questions about the ten-year tax holiday for Ramu Nickel and the delay in significant income flow from LNG/PNG until after 2020.[iii]

Third, the degree of leverage in mining enterprises needs to be critically examined. The more loans need to be repaid, the higher the cost structure; and this influences profits directly. There is a vigorous debate on the UBS loan used by the government to buy equity in Oil Search. Similarly, there is debate about the IPIC loan from Abu Dhabi to finance the government equity in LNG/PNG.[iv] There has not, however, been a debate about the leverage of LNG/PNG. The cost of the project was budgeted at US$ 15 billion and loans were raised for a total of US$ 14 billion. These loans were sourced firstly from export credit agencies (US$ 8.3 billion), secondly from Commercial Banks (US$ 1.95 billion) and thirdly from Exxon Mobil, the company executing the project (US$ 3.95 billion).[v] The project was thus heavily geared. Exxon Mobil used this gearing also to reduce risks. It brought in about the same in loans as in share capital (US $3.3 billion),[vi] the former being of course less risky than equity. Creditors have also preference over shareholders if income streams disappoint or in the event of bankruptcy.      

Fourth, the UBS loan ignored many procedures, yet an insider like Paul Barker commented when the loan was set up: “At least this loan deal is significantly more transparent that the original PNG LNG deal, which was struck behind closed doors, leaving out even the Department of Treasury. Treasury has been involved this time, to some degree, as has the central bank and other government institutions. And there was a tender arrangement, which involved UBS, Barclays and others participating in that process.”[vii] In the course of time however, crucial aspects of the UBS loan appeared that are not clear; for example, there is reference to a bridging loan and a collared loan.[viii] A bridging loan is by its nature a short-term loan to fund a temporary logjam in financing. A semi-official comment on the bridging loan states: “The Bridge Loan is to finance the State’s DIRECT shareholding of 12 million (12, 377,994) Oil Search shares, which is under the PNG Government’s own name.”[ix] This gives no indication of any short-term problem to be solved, as it can equally refer to the whole loan operation. It seems more likely that this loan was meant to finance the servicing of the collared loan until income from LNG/PNG was sufficient to service this much bigger loan. Was the bridging loan expected then to be repaid out of the early income from LNG/PNG? However, both the collared loan and the bridging loan have been refinanced.[x] The bridging loan is thus probably less temporary than expected. The information gap on the way the UBS loan is expected to be serviced and on the difficulties met in financing the share operations has thus widened.  

Fifth, it is surprising that there is a vigorous debate on the loans to acquire equity but that the very idea of government equity in natural resource projects is hardly debated. The existing debate on equity participation needs to shift in focus. Such equity participation is presented in the first place as beneficial to government: it allows the government not only to share in profits, but also to participate in decision making on the development of natural resources.[xi] However, government equity is in the first place beneficial to the companies. They have to mobilize less share capital in the start-up phases of projects: the stage that is aptly called the stage of burning cash. This can make the PNG government’s controversial arrangement with IPIC to pay up its share of LNG/PNG equity understandable. LNG/PNG had a construction cost overrun of US$ 4bn, and there must have been a dire need for cash.[xii] Mekere Morauta has stressed in the case of both the IPIC loan and the UBS loan the dangers of spending cash on equity before there is an income stream.[xiii] The expectation of dividend income from equity may also be exaggerated. The degree of profit is to a large extent an accounting construction depending upon the treatment of costs. It has already been mentioned how a loan from the company building the project constitutes costs. The resulting income is not liable for corporation tax as would be the case with profit. Companies can award themselves management contracts also. The management fee will also be classified as costs and depress profits to be distributed to the shareholders. If a government wants to have a say in the boardroom, it needs considerable technical and accounting skills. It is doubtful whether the PNG government has those at its disposal. Dividends from equity are only one way to benefit from the income stream of a company. There are other more dependable ways to benefit: production sharing, taxation on output.

Sixth, the issues surrounding equity participation in natural resources projects need to be clarified by a political economy approach. Important politicians have voiced strong reservations about equity participation. Mekere Morauta has been a consistently sceptical voice about government shareholding in general. In 2002, his government sold the Orogen shares, which consisted of a mishmash of participations in natural resources projects, for a single participation in Oil Search. The Somare government instituted a commission to study the question under Mel Togolo. This commission made two seemingly contradictory recommendations. First, it advocated the strengthening of such participation in one big holding company. Secondly, it advised against government taking equity.  “Due to uncertainties in how to treat state equity, the committee recommends that state should not opt to take equity in resource projects. The government should only continue to collect revenue from taxation and royalty payments.”[xiv] Scepticism about taking equity did not take root however.  The Somare government took on the equity participation in LNG/PNG. The O’Neill government may struggle to finance equity participation, but it is keen to acquire it. Togolo became the PNG face of Nautilus and has in that capacity been insistent on demanding that government pay up its share in the equity of that company. In the end, the share was reduced and it was financed without security by the Bank South Pacific.[xv] Mel Togolo is now also a director of Oil Search. The links between government and particular economic interests are crucial to understanding the way these large financial interests are embedded in networks. These need to be understood to grasp policy formation. Mekere Morauta commented recently: “The National Parliament is in danger of becoming a rubber stamp for the decisions taken by the Prime Minister, surrounded by a small group of unelected advisers, high-priced foreign consultants and vested interests.”[xvi] Arthur Somare, for example, has mentioned that Peter Botten, the Oil Search CEO, introduced him to the United Arab Emirates and Dubai, leading to the IPIC loan.[xvii] The venture capitalist Lars Mortensen portrays himself as “a valued member of the negotiating team for the Independent State of PNG during the negotiations between the State and ExxonMobil in respect of the Project Agreement for the US$19 billion PNG LNG Project.” He is a CEO in Pertusio CapitalPartners together with the present Secretary of Finance Diari Vele and Nathan Chang.[xviii]  

Lastly, there is often despondency in popular circles in PNG about outsiders robbing PNG of their resources. It may then be an uplifting consideration that PNG benefited considerably especially from Ok Tedi and to a lesser extent from Kutuba in the period 2002 to 2012. It may be worth considering the arrangements guiding these resource flows. Furthermore, instead of paralysing thoughts, attention may be shifted to how a relatively weak partner such as the PNG government may deal with the powerful forces of international mining companies and finance.