The people and economy of Papua New Guinea are mired in the resource curse. Our extractive resources should provide a means, through the income flows they generate, to escape the development trap and move PNG towards an substantially improved quality of life. This is the hope for the substantial income flow from the PNG LNG Project – that it will be applied to investments that will secure PNG’s shared future prosperity.

Our country’s Constitution sets as the Four Directive Principle that our natural resources be used for “the collective benefit of us all, and be replenished for the benefit of future generations”.

Natural non-renewable resources are natural assets of PNG. When these assets are exploited – that is extracted, processed and sold – they are converted from a natural asset to a financial asset. This financial asset should be used for the collective benefit of all Papua New Guineas both the current generation and those yet to come.

The Norwegian Sovereign Wealth Fund has accumulated the proceeds of the sale of oil and the investment earnings and now the value of this Fund exceeds the GDP of Norway and made theoretical millionaires out of all Norwegians. Sadly, the PNG SWF for all the grand talk by the outgoing national government has yet to be established despite Peter O’Neill promising this as part of his coalition government’s policy platform in the Alotau Accord.

On the eve of the polling for the National General Elections, O’Neill and his PNC Party have decided to give to PNG LNG landowners and impacted sub-national governments 25% of Kumul Petroleum (PNG LNG) Limited, previously called Kroton No. 2 Limited. O’Neill values this equity at K 3.5 billion which is the discounted cash flow that the beneficiaries are expected to receive (see here). In nominal undiscounted terms and depending on oil prices, this is equivalent to up to K 15 billion over the 30-year life of the project. This is a significant transfer of wealth from Papua New Guineans outside the PNG LNG footprint to a small group of privileged people. I wrote about the sale of the equity in a previous post here.

There is a significant difference between the PNG LNG equity transfer and the transfers of shares from the state to landowners with Bougainville Copper Limited and Ok Tedi Mining Limited. With BCL the transfer to the people of Bougainville was the 17.2% equity shares that were gifted to the government by Rio Tinto in June 2016. It did not come from the 19.2% direct equity interest the government continues to own.

For Ok Tedi Mining Limited, the transfer of the 33% was done after Inmet, a Canadian mining company, had exited in 2011 and after O’Neill expropriated the shareholding of PNGSDP in 2013. Landowners of Western Province have held and continue to hold equity of 12.2% in Ok Tedi Mine through a MRDC subsidiary. O’Neill removed 63.4% from PNGSDP, who held it in trust for the people of Western Province, and then duped our people of Western Province with the transfer of 33% back to them whilst pocketing 30.4% for the State. Whilst the direct interest may have increased by 33% the people of Western Province should be asking about the additional 30.4% of economic interest they have lost.

With the PNG LNG equity we have a gross inequity in the distribution of wealth. Unlike BCL the equity interest is being transferred from the people of PNG and not from a foreign shareholding company. It is the taxpayers of PNG that have paid for the government’s equity position in PNG LNG and now they are denied any returns from 25% of that investment.

This inequity is compounded by the royalty regime applied to the oil and gas sector. Royalty payments are made to the minerals and petroleum resource owner for the right to extract the resource. The term royalty payment has its genesis in the history of England when their Kings were the ultimately owners of land and granted rights to the use of their land for a return of their “royalty” as a share in the profits. The government’s Papua New Guinea Extractive Industries Transparency Initiative Report 2013 points out that according to the “…Oil and Gas Act, subsoil assets belong to the State”.

Whilst a label of royalty may be applied to this benefit stream it is anything but. PNG does not have a true royalty system for the PNG LNG project as it is not the developers who exploit the gas resources that bears the burden of royalties but the taxpayers of PNG (see my previous post here).

Tax credits and tax deductions are what are termed “tax expenditures”. Tax expenditures have first call on budget revenue as these imply foregoing revenues that would have otherwise come to the government to be available for funding for priority areas for our people. There are a number of advantages of tax expenditures as there are a number of drawbacks.

For each Kina of royalty paid by the PNG LNG project co-joint venturer companies they can claim the full Kina back as a tax credit. For each Kina of development levy paid by the PNG LNG project co-joint venturer companies, they can claim 30 toea as a tax deduction. These are amounts that will be offset from their tax liability. Effectively, it is the tax payers of PNG that are meeting the costs of the royalty.

O’Neill has set a dangerous precedent and is prepared to abandon a fair distribution of wealth for political expediency. Instead of O’Neill and his party PNC extracting a greater share of the gas benefits from resource developers, they has chosen to take from the non-resource owning people of PNG to give to small fortunate group.

In the deal struck for the distribution of benefits from our gas project, PNG LNG landowners and hosting provincial governments have secured K 1.2 billion for infrastructure grants; K 460 million for infrastructure projects; and K 120 million for business seed capital grants. This is a total of K 1.78 billion paid for by the tax-payers of PNG, most before gas taxes and dividends were received.

In addition over the project life royalties totaling in the billions of Kina will be fully paid for by taxpayers of Papua New Guinea. Project development levy also totaling in the billions of Kina will be partially paid for by the taxpayers of PNG.

It is unjust that we forsake the founding values of our country embedding in our Constitution to transfer further wealth of nearly K 3.5 billion from most Papua New Guineans to a few that have been lucky to have natural resources created by God under their land or to have a pipeline or plant site situated on their land. This goes against the grain of our Melanesian culture and against the values enshrined in our Constitution. Why is that we allow our people to be caught in a zero sum game when the bigger issue is why we continue to allow our country’s wealth to be exploited by developers at our expense?

Is it not unreasonable to expect our elected government to govern for all Papua New Guineans?

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