Last week’s legislation to nationalise the PNG Sustainable Development Program (PNGSDP) and Ok Tedi Mining Limited carries severe risks and negative implications for development in PNG, writes Stephen Howes, Director of the Development Policy Centre at the Australian National University.

Last Wednesday 18 September, legislation was introduced into and unanimously passed by the PNG Parliament to give the PNG Government ownership of the country’s largest company, Ok Tedi Mining Limited, and control over the country’s second largest development partner, the PNG Sustainable Development Program.

Legislation

ANU’s Stephen Howes

The legislation, available here and here, has three main objectives:

• to remove SDP from its current position as majority owner of Ok Tedi
• to remove BHP’s immunity from environmental liability
• to give the state the power to “restructure” PNG SDP.

Ok Tedi

The legislation gives the Prime Minister the discretion to decide whether compensation is to be paid, to whom, and the amount. The legislation imposes no obligation on him to pay compensation, and provides no guidance on the amount. It would certainly seem unlikely that the consequence of this legislation would be compensation at fair or market value.

Although the Prime Minister has denied it, the takeover of the PNGSDP is clearly an act of expropriation.

The PM has argued that it is not, because Ok Tedi already belongs to the people of PNG or Western Province. But this could be said about any resource project: clearly the resource belongs to the people of PNG, but not the assets used to dig up the resource.

Applying the Prime Minister’s argument would imply that all multinationals running resource projects in PNG should have their assets seized by Government. Like it or not, 63% of Ok Tedi shares belong to SDP, and SDP is a Singapore-registered company.

BHP environmental liability

The 2001 Ok Tedi Ninth Supplemental Agreement, which the new legislation amends, prevented the Government from taking legal action against BHP, but not individuals, and a suit was brought against BHP in 2007.

Various out-of-court agreements were reached and compensation amounts paid with different landowner groups prior to BHP’s exit.

The new legislation claims to authorise any such groups to sue BHP once more. Even if such agreements can be simply legislated away, since BHP is not present in PNG, it is not clear how any case could succeed against it there.

The clause giving the state the right to restructure SDP is also an attempt at nationalisation.

In addition, the various agreements reached long ago between BHP and different claimants will continue to protect BHP from offshore  court action.

Finally, as part of the original SDP establishment, there was an agreement that, should there be a case for environmental damages against BHP, SDP would pay the damages (see the end of SDP’s first annual report) from its Ok Tedi dividend receipts. The legislation purports to remove this obligation from SDP, making BHP directly liable. However, PNG’s jurisdiction over agreements entered into by foreign entities would seem to be lacking.

Sustainable Development Program

The clause giving the state the right to restructure SDP is also an attempt at nationalisation.

At the moment, there is only one Government representative on the PNG Board, a Treasury nominee.

The new legislation purports to give the Government the unconstrained right to appoint SDP directors and direct SDP operations.

This edict cannot be enforced, since SDP is a Singapore-registered company and so beyond the jurisdiction of PNG law.

However, any Government decision requiring restructuring could lead to SDP being unable to operate in PNG, since it could have the implication that, without restructuring, it would only be able to operate in breach of PNG law.

In this case its US$1.4 billion (K3.58 billion) trust fund would simply accumulate offshore.

Risks and implications

These developments carry with them several severe risks and negative implications for development in PNG.

First, there are the risks at OK Tedi, both environmental and financial. The one mine the PNG Government has had majority ownership of (the Tolukuma gold mine) is widely regarded as a failure. More generally, the Government’s record in managing its own enterprises (power, airlines, telecom, etc) is very weak, as recent ADB analysis has found.

Will Ok Tedi be the exception to this rule? PM O’Neill has promised independent management, but the ADB report found that political involvement in the selection of SOE directors has been common (p. 13).

Second, there are the risks to the Government’s reputation, and to PM O’Neill’s as a business-friendly prime minister. The Investment Protection Act specifically prohibits expropriation of foreign assets, but this action shows that legislation offers little protection.

Third, there are risks to the credibility of the PNG Government. But what PNG has just shown is that it is willing to renege on contracts and change its mind on long-term endeavours within the space of a decade.

Even if a Sovereign Wealth Fund (SWF) is established in PNG, and progress has recently stalled, it is unclear, based on the SDP experience, how long it would last.

Fourth, there are the risks to the use of Ok Tedi dividends. It is implausible that the Government will make better use of Ok Tedi dividends than SDP.

Fifth, there is the risk to SDP funds and projects. If SDP ceases operations, its various subsidiaries (in areas such as sustainable forestry and microfinance) will be forced out of business. And having its long-term funds accumulate in Singapore, unavailable for use in PNG, is hardly in PNG’s interest.

Likely outcomes

There is no doubt that Prime Minister O’Neill has had a daring victory. The issue is a controversial one in PNG, but the fact that no-one in parliament was prepared to vote against the bill speaks volumes.

But the Government’s victory might well be a temporary one. One obstacle is the Western Province landowners who have recently voiced their opposition to the deal. Without community consent to a mine-life extension, Ok Tedi can’t continue beyond about 2015.

There will also be court challenges, which SDP has promised. And if SDP’s long-term funds end up being stuck in Singapore that may give the company leverage in relation which in turn might lead to a re-opening of negotiations.

International and Australian reaction

So far the issue has attracted little attention outside PNG, though it was featured in an ABC Four Corners program on Monday, 23 September. The nationalisation may also embarrass the PNG Treasurer, Don Polye, who has just been given the rotating position of Board of the IMF and World Bank Chair of Governors.

How will the Australian Government respond? So far it has been missing in action on this issue. At the time of the ban on (former chair of PNGSDP) Ross Garnaut, then Foreign Minister Bob Carr declared the issue to be simply ‘a consular’ one.

He could not have been more wrong. Australia is providing PNG with half a billion dollars of aid every year. It should not be too much to expect that this aid would be accompanied by a frank dialogue around core policy issues.

However, Australia now needs PNG to implement its asylum-seeker policy. I hope that the Coalition will be more forthright, but I fear that the overriding aim will be to maintain a good relationship.

Disclaimer: These are my personal views. With Dr Eric Kwa, I completed an independent evaluation of PNG SDP in 2010-11, which can be found here. I have worked twice for Professor Ross Garnaut, the former SDP Chair, in 1999 (on Australia and the Northeast Asian Ascendancy) and in 2008 (on the Garnaut Climate Change Review).

Professor Stephen Howes is Director of the Development Policy Centre at the Crawford School of Public Policy, Australian National University. This is a shortened version of this Devpolicy blog post.