Bad advisers come and go but governments cop the blame

VISITORS to PNG often ponder how a country with such immense resource potential, natural beauty and low population density can be mired in so much poverty. By Brian Gomez

It is a question many Papua New Guineans themselves ask from time to time. Clearly, there are no simple answers.

A multiplicity of issues are involved from the somewhat parlous state of the economy at independence 30 years ago and the increasing difficulties of successive governments to match limited financial and technical resources with ever-growing demands.

In this introductory column, I would like to explore some issues in line with their pertinence to potential foreign investors, especially those interested in the resources sector.

As in many developing countries, politics has played a crucial role in the volatile nature of economic growth, together with other social considerations such as difficulties in accessing land mainly held under customary law (approximately 93%).

An early curse, if one might call it that, came in the shape of a super tax that was imposed on the once-herculean Bougainville Copper Mine in 1974 shortly after the mine commenced operations.

Even though it was the country’s only commercial mine in those days, American and Australian academic advisers – enamoured with the concept of a resource rent tax – drew up a super tax to ensure that a fair share of “excessive” profits were captured by the government.

It was a noble idea built on dreams rather than reality. Bougainville Copper paid this tax in 1974 and lost the benefit of accumulated depreciation allowances after copper prices reached unexpected highs and the company announced a $US158 million ($A217 million) profit. The super tax, we understand, was paid just once again in the 1980s.

For many potential investors the super tax would have generated second thoughts. Why take high risks when there can be little or no high rewards? Would the ground rules be changed after a company had been successful?

At the urgings of another foreign bureaucrat in the government’s employ in the 1980s, the PNG Government imposed a moratorium on new gold exploration at a time when gold prices were soaring to their highest levels ever.

Talk about missing the exploration boat. That was the time explorers rediscovered Australia for its gold and the Kalgoorlie region was virtually brought out of mothballs.

The super tax as applied to Bougainville Copper may actually not have had a dramatic impact on exploration because most miners believed threshold for the marginal tax rate of 70% was actually very high.

But the government of Sir Mekere Morauta, which lost office in the 2002 national election, proved beyond doubt that secondary taxes frighten off investors when it lowered the secondary tax threshold, virtually sounding the death knell for sharply declining exploration spending.

The current Somare Government turned the situation around in 2003 by abolishing secondary taxes and introducing incentives that make PNG competitive with most other countries at a time when mineral commodities are enjoying a boom. The response of foreign investors has been dramatic.

Although this discussion might sound like the basis of another case of politicians stuffing things up for everyone else, it could also be look upon as a learning process that many newly-emerging countries have to go through.

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