As negotiations between Papua New Guinea’s State Negotiating Team and the developers of the P’nyang gas project draw to a head this week, the Institute of National Affairs’ Paul Barker reflects on the challenge of reaching an agreement that ensures the country’s gas resources deliver tangible benefits.

The Institute of National Affairs’ Paul Barker

There’s no question that PNG needs a diverse economy, that can generate broad-based livelihoods across the country, to people with different skills and assets.

This economy also needs to be able to provide Government revenue, to support the State to provide a range of essential public functions, on behalf of its citizens, including provision of basic infrastructure and services, such as police and justice, education and health. These public goods and services in general are currently in a dreadful state and require major reinvestment and upgrade.

At the moment, a large portion of that revenue provision falls upon household incomes, and yet this only comes from a small portion of the formal workforce.

PNG is unusual in having a major positive current account surplus, some major enclave industries, but a very low revenue-to-GDP rate, and very limited foreign exchange availability, restraining various business activities.

Many of the world’s most successful economies do not have so-called extractive industries. Extractives can be damaging environmentally and socially; they can also be economically disruptive, triggering what is widely called the resource curse or ‘Dutch Disease,’ where they undermine the viability of other major economic activities and jobs, notably through distorting the exchange rate.

‘Ironically, tax on employees’ earning has proven to be the major revenue source from the extractive sector’

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If a country chooses to proceed with this option, both nationally and for each project, there needs to be high standards set, detailed assessments and determination of costs and benefits, and only if the benefits are substantial and the costs, or potential damage, limited and manageable, and clear and transparent plans agreed, with broad public consensus, should such projects proceed. Where the costs are too high, or damage excessive, then the project should clearly not proceed, or at least be deferred until better technology or oversight is available to minimise the impact and risks.

The benefit from the extractive industries on PNG and its economy is from export earnings and government revenue. This is the main driving force for the government for approving extractive projects. Revenue from the extractives has, however, been disappointing over recent years, particularly in relation to the government’s unrealistic expectations, which include certain long-established mining projects and the new LNG development, with revenue constrained partly from lower commodity prices and various other factors.

Taxes

Corporate tax from mining and petroleum reached 40 per cent of budget revenue in 2007 but, despite various major new resource projects coming on stream since then, fell to a mere one per cent for 2016 and 2017. It recovered to about 5.5 per cent in 2018 and this year, following improvements in prices, recovery of production from the 2018 earthquake, and capital expenditure costs and depreciation concessions maturing, if not yet concluding.

Resource sector dividends have also been picking up, albeit having entailed a major initial cost outlay for the State, and albeit major concerns over the accountability of the respective SOEs administering the State’s (and landowners’) investments in these resource projects.

‘The attractions of the proposed Papua LNG and P’nyang projects are that they build on the back of the existing PNG LNG project.’

Ironically, tax on employees’ earning has proven to be the major revenue source from the extractive sector, which in reality entails contributions from the employees themselves, rather than the companies, but nevertheless would not be gained without the existence of the project itself.

LNG and high-tech mining operations (such as the proposed Wafi-Golpu mine) employ very few staff beyond the construction phase, so clearly the main revenue transfers from these industries to the State must largely come from corporate tax, and other revenue-sharing arrangements.

The attractions of the proposed Papua LNG and P’nyang projects are that they build on the back of the existing PNG LNG project. They could consolidate PNG’s gas industry and have the potential to sweep up output from some of the remote or isolated smaller gas fields in the southern region, notably in Western Province and offshore.

‘Open contracting, transparent and accessible agreements, and open data ensure agreements are made in the public interest’

The construction phase for plant and pipelines can be extended over a longer period (eight years or more) by sequencing development, providing a much longer economic stimulus and local employment, training  and contract opportunities. The extended construction phase this time will provide a more sustained and valuable stimulus to the PNG economy than the more distortive impact of PNG LNG.

Negotiating positions

The State should have moved away from the unhelpful and burdensome commitment to borrowing and taking up equity in projects, where it already owns the resource, and focusing instead upon the tax revenue, combined with appropriate (but not commercially unrealistic) resource benefit sharing arrangements, commencing from the start of production, so that there’s less dependence upon declared profits, less risk for the State and greater revenue reliability.

The new agreements should also be fundamentally pinned to the prevailing law, as the basis for negotiation, albeit that the law could have merited from some prior revision.

‘The clock is ticking and clearly contractors and overseas customers cannot be retained, but will find work or supplies from other sources.’

The government should restrain its negotiating team, and ensure that, as far as possible negotiations are concluded through open processes, to which the government and developers are committed under EITI provisions.

Open contracting, transparent and accessible agreements, and open data ensure agreements are made in the public interest, that unprofessional or unethical demands are restrained, and that greater trust is achieved between all parties – including, or especially the general public, on who’s behalf the State is meant to be negotiating.

The extended LNG construction phase would provide a major economic stimulus (and the biggest immediate benefit from the next phase of LNG development), which would certainly be welcomed by most of the PNG economy, and should not be as disruptive as the experience for PNG LNG, where skills shortages and various local contract prices and rentals were driven up severely for a few years.

The clock is ticking and clearly contractors and overseas customers cannot be retained, but will find work or supplies from other sources. It would be valuable to conclude the current round of contract agreements within the immediate accepted timelines, and for both parties to be in a conciliatory but also realistic mind frame.

Paul Barker is Executive Director of the Institute of National Affairs, the Port Moresby-based think-tank.