Monday, December 31, 2012

Equitable distribution of proceeds


AT the recent Sydney Mining and Petroleum Conference, Prime Minister Peter O’Neill promised a wide-ranging review into the current mining and petroleum fiscal regime.

At about the same time, he blacklisted a big-name industry personality in Dr Ross Garnaut for comments he made which the prime minister found to be offensive.

The prime minister has further called for a thorough review of the precepts that govern the PNG Sustainable Development Program and placed no less than the renewal of Ok Tedi’s mining licence on the line as a condition.

The prime minister’s bone with the programme, which has culminated in the move against its chairman Dr Garnaut and the decision to review the programme, is the continued control of its welfare by BHP, the Australian multinational which exited the Ok Tedi mine many years ago.
There is the presumption that Ok Tedi mine is fully nationally-owned but the prime minister quite rightly sees where the control comes from and that has raised his anger.

Whatever the merits of the individual case, the moves come against a background of a growing cacophony of voices demanding changes to the laws affecting ownership of mineral and hydrocarbon wealth in the country.
The industry had expected an emphatic “no” at the Sydney conference but, instead, got a very serious pledge to review the current regime. In so far as the industry is concerned, a review could go either way, depending on what the prevailing political environment is like.

That is scary, to say the least. And a scare equates, in the industry, to uncertainty and can put a dampener on what has been the biggest mineral and hydrocarbon exploration and investment period in the history of PNG.
Exploration and development activity in the resource industry is contributing K2.2 billion annually or one-third of the government tax revenue.

The position of the PNG Chamber of Mines and Petroleum is that complex regimes of landownership already pose significant challenges for resource development in PNG and a change in resource ownership would magnify these social problems many-fold.

A chamber position paper states: “Because there is no system of land title for customary land, an explorer would be left with the task of dealing with a resource owned by a community that is always open to challenge from within and without, and where agreements may always be in a state of flux.
“The end result would be a complete loss of security of tenure, making it all but impossible for the resource industry to operate.

“State ownership of minerals is vital to the development of PNG and allows resources to be developed for the benefit of all citizens as required by the Constitution. A change in resource ownership would result in a breakdown of this system; the risk profile would be unacceptable to potential developers.”

That makes sense, particularly under PNG’s current unchartered customary land tenure regime.
We do not think placing ownership back in the hands of individual landowners will work. Indeed, it might be a recipe for disaster.

But, what about the present regime where the state owns mineral and hydrocarbon wealth?
Has that been examined carefully?
Is it working for PNG?

To our mind, it does not. Why must the owners of something just go in for a mere one-fifth of the cake as is presently the case with oil and gas and one-third as in the case with minerals? Why not 80/20 or 60/40 or even 50/50?

Ok, the case might be made that PNG could not afford a larger equity share. That might have been the case once upon a time but, certainly, not today. So a larger equity share should enter the bargain during the review.

Since the wealth is owned by the state, why not have a certain percentage, say 10% or 20% free carry set in law and the balance of equity paid for at market prices. That certainly should enter the bargain.

Right now we have the ridiculous case where the state owns the minerals and oil or gas but, upon granting of a development licence, it seems to forfeit that right of ownership completely and acts like another equity partner begging for a right to participate.

All the debate today really has nothing to do with the philosophical aspects of ownership. It has everything to do with equitable distribution of the proceeds of development and that can be looked at under the present regime without wholesale changes that might not auger well for the country.
Bring on the review in the New Year because any procrastination will only create confusion and uncertainty.

OP/ED