Papua New Guinea Sustainable Development Program Limited has been under heavy political pressure to relinquish is majority ownership of PNG’s largest mine, Ok Tedi. In this speech, delivered at the company’s 2012 annual report meeting this week, PNGSDP Chairman Sir Mekere Morauta appears to concede the loss of Ok Tedi, arguing for a sale on fair terms, and ponders both the future of PNG’s largest mine and that of his own organisation.

PNGSDP Chairman, Sir Mekere Morauta

This meeting marks a turning point in the company’s history as a model mine owner, a model development agency and a model funds manager.

Now, through unplanned circumstances forced on the company, it is moving towards the final shape designed for it by my Government more than 10 years ago.

To put into context recent events concerning the company and the possible consequences, some history is necessary.

PNGSDP was created as a central part of the Ok Tedi Mine Continuation (Ninth Supplemental) Agreement Act 2001, which gives the force of law to the agreed outcomes of the negotiations between the State of Papua New Guinea and BHP Billiton to allow the Ok Tedi mine to continue operations and BHP Billiton to withdraw.

The consequences of that decision [by the PNG Government] will be very far-reaching for PNGSDP and for the people of Western Province.

The main elements of the Act are:

• To allow BHP Billiton to withdraw from Ok Tedi Mining Ltd
• To allow BHP Billiton to give its 52 percent share of the company for the benefit of the people of Western Province, and in exchange be indemnified against future law suits seeking compensation for environmental damage
• To create an independent trust company, PNG Sustainable Development Program Ltd to hold BHP Billiton’s shareholding in OTML in trust for the people of Western Province and Papua New Guinea. Under its charter, PNGSDP is required to spend one third of its annual dividend receipts from OTML in Western Province and Papua New Guinea, and invest two-thirds in the Long Term Fund for the people of Western Province to be spent after the closure of the mine
• To set up the Community Mine Continuation Agreements (CMCA), which provide for the Fly River people directly affected by mining to have the final say in whether the mine can continue operating and the appropriate levels of compensation for environmental damage
• To set up the Ok Tedi Development Foundation (OTDF) to manage community development benefits from Ok Tedi mine operations on behalf of the100,000 river residents living in 156 villages throughout Western Province. Trading as Ok Tedi Fly River Development Program since 2010, it delivers projects and programs to communities through a unique partnership between a mining company, the people and the government
• To develop arrangements for periodic review of Mine Life Extension, following consultation with the CMCA communities
• To develop a new environmental regime for the Ok Tedi mine
• To develop new mine closure plans

The creation of PNGSDP is at the heart of the Ninth Supplemental Agreement Act’s intention that OTML dividends be used wisely, transparently and accountably. In the 10 years since it began operations, PNGSDP has fulfilled this mandate.

PNGSDP, by level of expenditure, is the second-largest development agency in the country (after AusAID) and has delivered a wide range of projects to every corner of the country, to improve the quality of life of people, especially in remote and disadvantaged areas, and make a substantial contribution to economic and social development.

At this point in PNGSDP’s history, it is appropriate on behalf of the board to thank the company’s staff, and in particular my predecessor, Professor Ross Garnaut, for their efforts.

Professor Garnaut was inaugural chairman of PNGSDP and an inaugural director of the new OTML when it became majority Papua New Guinea-owned in 2002, and became Chairman in 2011.

So Professor Garnaut has played a pivotal foundation role in the growth of both PNGSDP and Ok Tedi Mining Ltd, and has overseen a very significant development contribution to the nation and to Western Province. I would like to publicly thank him for all he has done at PNGSDP and OTML, and indeed for Papua New Guinea, spanning over 47 years.

When Professor Garnaut stood down from PNGSDP and Ok Tedi Mining Ltd, he left both companies in an excellent position from which to meet the challenges of the future, especially those that may potentially result from the National Government’s decision to remove the company as a shareholder in Ok Tedi.

The consequences of that decision will be very far-reaching for PNGSDP and for the people of Western Province.

Constructive dialogue to put in place a fair and transparent exit of PNGSDP from OTML is necessary. Until final decisions on the future are made, PNGSDP remains in a period of uncertainty. It is in the interest of the State, PNGSDP and OTML to come to final decisions on the future shape of both companies soon.

In broad terms, PNGSDP is likely to become a pure development agency and funds manager with the sole mandate of providing sustainable development for the Western Province for at least 40 years. This is the ultimate role set for PNGSDP when my Government negotiated the Ninth Supplemental Agreement, which is the umbrella over every aspect of the management of OTML and PNGSDP.

If the Government’s desire is to be achieved, then a complex transaction must take place to untie the bonds between OTML, PNGSDP and the parties to the Ninth Supplemental Agreement – the State and BHP Billiton. PNGSDP’s aim is for that transaction to be fair and the process to be transparent.

PNGSDP is especially mindful of the fact that it holds its 63.4 percent share in OTML in trust on behalf of the people of Western Province. PNGSDP’s priority is to protect their interest first.

The Government’s decision to remove PNGSDP as majority owner of OTML would be the trigger forced on the company to start drawing down the $US1.4 billion in the Long Term Fund.

PNGSDP recognises that the National Government may be unable or unwilling to pay a full price for PNGSDP’s shareholding in OTML, which is estimated to be worth approximately $US1.1 billion.

Therefore alternative ways of continuing to put the dividends foregone by Western Province to constructive use will have to be considered. PNGSDP is keen to ensure that what is given up by the people of Western Province will be used in ways that they can see benefit the people of Papua New Guinea as a whole.

PNGSDP has no choice but to act to protect its set role and independence and to preserve and insulate the Long Term Fund for the people of Western Province. The most important factor in the success of PNGSDP over 10 years is its strong governance structure – a trust-style notfor-profit company that is insulated from any outside corrosive influence.

That is why PNGSDP has $US1.4 billion in the Long Term Fund for sustainable development of Western Province for the next 40 years.

PNGSDP’s unique structure has allowed it to oversee very successful mining operations at Ok Tedi, to deliver sustainable development to every part of the country, but particularly Western Province, and to save and protect a very substantial portion of the dividends from the Ok Tedi mine for the benefit of current and future generations.

The Government’s decision to remove PNGSDP as majority owner of OTML would be the trigger forced on the company to start drawing down the $US1.4 billion in the Long Term Fund. That money would be spent solely in the Western Province.

OTML has submitted a Mine Life Extension application to the State. It is subject to approval by the State as mining regulator and separately by the two OTML shareholders – PNGSDP (63.4 percent) and the State of Papua New Guinea (36.6 percent). Mine Life Extension cannot proceed without the approval both of the State and the Western Province communities affected by the mine (the Community Mine Continuation Agreement Communities).

The CMCA communities have already given their unanimous approval for Mine Life Extension to be granted. Based on the feasibility study, Mine Life Extension is expected to provide $US4.3 billion in social and economic benefits to PNG.

Mine Life Extension increases the value of OTML (both State and PNGSDP shareholding) by $US660 million from $US1812 million to $US2472 million.

Ok Tedi mine has been managed well with PNGSDP, on behalf of the people of Western Province, as the major shareholder.

2012 was another good year.

Ok Tedi’s exports of copper and gold accounted for 27.3 percent of Papua New Guinea’s total exports and 9.5 percent of gross domestic product. OTML generated $US913.3 million in profits and paid $US444.8 million in taxes to government. It paid $US350 million in dividends to PNG shareholders.

PNGSDP regards the environmental impacts of the mine as OTML’s greatest challenge and actively pursues improvements in the mine’s environmental performance through OTML.

Removal of PNGSDP as a shareholder in OTML will result in no further dividends being paid to PNGSDP – all dividends from OTML will then go to the National Government. The Development Fund will cease operating and no more money will be spent on projects and programs in any area of the country apart from Western Province

Since 2002, OTML has spent more than K3.3 billion on environmental management. This includes the Bige dredging and rehabilitation program, Bige pyrite storage pits, tailings sulphur removal plant, trans-shipping monitoring, die-back and recovery monitoring, ecology monitoring, industrial waste monitoring and community health assessments. The cost of the sulphur removal and storage program alone, commenced in 2005, reached $US840 million by 2011. The Mine Life Extension proposal provides for waste rock to be stored in a stable waste dump near the mine.

With the dredging and sulphur removal in place and the stable waste dump incorporated in the Mine Life Extension proposal, PNGSDP regards a tailings storage facility as the single most important additional remediation measure.

PNGSDP has encouraged an OTML feasibility study on possible sites for tailings storage.

This study will be completed in 2013, and PNGSDP is hopeful of a good outcome.

PNGSDP’s governance structure, systems and capacities will be reviewed again as the future becomes clearer. There will be consequential changes to the boards of both PNGSDP and OTML.

Ladies and gentlemen, it can be demonstrated that since 2002, under PNGSDP majority ownership, there has been no incremental environmental damage.

Removal of PNGSDP as a shareholder in OTML will result in no further dividends being paid to PNGSDP – all dividends from OTML will then go to the National Government. The Development Fund will cease operating and no more money will be spent on projects and programs in any area of the country apart from Western Province, although PNGSDP intends to complete those projects to which funds have been committed.

PNGSDP will necessarily review its own financial plans over the next few years. It is likely that spending will increase in that time and then gradually reduce thereafter until the Long Term Fund is depleted.

PNGSDP’s governance structure, systems and capacities will be reviewed again as the future becomes clearer. There will be consequential changes to the boards of both PNGSDP and OTML.

The duty of the PNGSDP Board will be to maintain strong governance mechanisms, with exemplary accountability and transparency. The Program Rules will remain essentially the same, but will need to accommodate the fact that although PNGSDP will remain a model development agency and a model funds manager, it will no longer be a model mine owner.

By the end of 2012, PNGSDP had received a net $US1.8 billion in dividends from OTML after payment of $US200 million in Dividend Withholding Tax. The Long Term Fund stands at $US1.4 billion. K1.18 billion has been committed to 662 projects and programs since PNGSDP began operating in 2002.

PNGSDP represents for the first time, anywhere in the world, a successful way to save the bulk of the dividend proceeds from a resources project for the benefit of future generations of resource owners. No other resources project in Papua New Guinea, or overseas, has delivered or will deliver an equivalent level of benefits.

The authors of the independent Papua New Guinea Sustainable Development Program Review of 2011, Professors Stephen Howes and Eric Kwa noted: ‘PNGSDP is a unique organisation. We are not aware of any parallel to it anywhere else in the world.’

I urge the Government and resource owners to look at PNGSDP as a model, as a way of benefitting landowners now, and in the future.

I look forward to a constructive partnership with the Governor and the Provincial Government as PNGSDP embarks upon its second decade of sustainable development for the nation and for Western Province in particular.

Partnership with Government, bilateral and multilateral partners, NGOs and business and commerce has been a cornerstone of the company’s success.

In coming years, as PNGSDP focusses entirely on Western Province, the relationship with the national and provincial governments will be critical.

PNGSDP would like to see a partnership between itself, the National Government and the Fly River [Western Province] Provincial Government to achieve as much sustainable development impact as possible over the next 40 years.

Reproduced by kind permission of Papua New Guinea Sustainable Development Program Limited.