PNG's resource tax challenges

PAPUA New Guinea has been blessed with abundant natural resources, but as a recent paper by the National Research Institute highlighted, the challenge has been following the money trail from the disbursement of resource rent. By Wantok

The challenge of getting ordinary people to benefit from resource rent isn't just one of optimising government receipts from resources but also improving transparency and economic rationale of spending those rents.

Now the PNG government has put out an issues paper highlighting the resource tax areas being targeted in the Mining and Petroleum Tax Review.

In the issues paper, the committee canvases four main types of changes aimed at reducing the number of fiscal instruments, rationalising the number of rules relating to them, reducing the need for state involvement in project negotiations, and using published template agreements.

What does this mean for industry? Reading through the contents of the issues paper Wantok has noted themes similar to recent rhetoric coming from the government.

Last December Prime Minister O'Neill told industry participants at the Mining and Petroleum sector that the government was looking at maximising social benefits from resource extraction.

The Tax Review committee also noted that, "Government revenue is critical to funding essential services and infrastructure for Papua New Guinea, to share the benefits of prosperity across families, communities and regions and to lay the foundations for future growth. Consequently, this Review is a high priority of the O'Neill-Dion Government and an important platform of the Government's economic and fiscal strategy."

A recent study by Margaret Callan found that between 2009 and 2011, the big four mining and petroleum operation in PNG (Lihir, Oil Search, Ok Tedi and Porgera) contributed on average K1.6 billion in taxes and statutory payments to the government.

An additional K1.6 billion was pumped into the local economy through procurement from local suppliers.

Landowner payments were on average K755 million.

While the Tax Review does not mention specific numbers, similar review being done to the Mining and Petroleum legislation shows potential increase in the state's participatory interest in resource projects.

It is difficult to say whether any of these changes should be a cause for alarm. The French energy giant TOTAL has shown keen interest in PNG's resource sector by recently announcing a deal with InterOil. However as was noted at last year's mining and Petroleum Seminar, PNG has a two speed resource sector with a booming petroleum sector and challenging times in the mining arena.

Wantok has spoken with industry insiders who are worried about the mining industry. Last year for instance PNG's gold miners had budgeted for a gold price of US$ 1400 in order to break even or make a profit. Recently the price of gold has been below that figure.

Many in the mining sector know how difficult it was to attract investment in the 1990s due to the lack of fiscal incentives. Changes to the fiscal arrangements were made in the early 2000s which enabled PNG to capitalise on the mining boom that followed.

The complex landowner issues, rugged terrain, lack of infrastructure and law and order issues make PNG a challenging place to do business. In a globally competitive environment where capital is mobile, the task of attracting investment can be challenging.

PNG has a number of green-field projects hosting world class copper gold deposits including the Wafi-Golpu, Frieda River and Yanderra projects. It is imperative that in considering the changes to fiscal arranges in the resources sector, the state does not undo the gains made previously. Right now the industry is looking for certainty in government policy as it adjusts to these difficult times. No doubt many will be anxiously flipping through the discussion paper put out by the Tax Review Committee.

Wantok sincerely hopes that whatever the outcomes of the tax review, it is a win-win for all stakeholders.

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