PNG 2016 Mining Conference: The good and the why?

The annual PNG Chamber of Mines and Petroleum annual conference was held in Sydney from 5 to 7 December. Given the economic times, the turnout was impressive with some 1,100 delegates, although still below the 1,400 delegates that attended in 2014.

Rays of Hope

As noted in Prime Minister O’Neill’s speech, there have been some tough times in the industry over the last two years but there are rays of hope.

These rays of hope that can only help create optimism for the role the resource sector can and should play in the development of PNG’s economy.

For me, these rays were not the really big projects that are sitting in the potential pipeline (and there is an impressive number). Rather, they included the stories from the company operating the Simberi gold mine who stood in front of the conference two years ago with a share price of 7 cents and a total company worth of $35m.  Now, those figures are $3 per share and some $1.5 billion in net worth.  Done through good work with local communities and getting back to basics.

There was a similar story of the Porgera mine which has been moved from “close down” mode to one of high profitability and strong prospects. Project financing options also looked strong – much stronger than those facing the PNG government.

Another ray of hope was the constant messaging of the importance of working with local communities – an essential component of the social license to operate in the country.

The afternoon panel sessions, one on the environment and one examining issues of sustainability for communities once the mine closed were excellent, also highlighting the depth of technical expertise and wisdom available from local experts.

At the end of the conference, I was left with three main questions.

First, why is there no similar agriculture conference?

Agriculture is much more important for the welfare of the people of PNG than mining (some 85% of PNG’s population still depend on subsistence agriculture – mining and petroleum on average accounts for less than 20% of PNG’s GDP).  Australia has great expertise on agriculture and the very wide set of service industries that support agriculture.  Substantial development of the agriculture sector, because of its strong links to most of PNG’s population, would avoid the resource curse. I think I know the answer – the difference between millions of relatively poor beneficiaries who do not have the excess cash to form something similar to the PNG Chamber of Mines and Petroleum.

Second, why are resource companies so powerful?

The “resource curse” is the widely observed phenomena that many developing countries rich in resources have worse development outcomes than those without resources (the possible exception are oil producers in the Middle East – but PNG has a radically different history and topography to allow a repeat of that success). I’ve commented earlier on how a focus on resources can distort development choices and outcomes (see here).  This is usually through an exchange rate that is too high to encourage broader development of other sectors such as agriculture.  However, an element that showed through at this conference, was the creation of powerful interests and institutions that affect political choices.  There is no doubt that some largely foreign private sector firms have enormous political influence in PNG. This is being played out in the pre-election context of likely roll-backs of recently announced tax measures. There is enormous pressure to stop some of these changes recommended by the Sir Nagora Tax Review. And just as the Australian resource industry succeeded in killing off sensible tax reforms suggested by the Henry Tax Review, the PNG resource sector looks as if it may have similar success. The PNG Treasurer has announced a Supplementary Budget for January 2017 to adjust the proposed legislation, and the Prime Minister announced at the conference that there will be no changes to the Mining Act until after the 2017 election. Deferring changes until after the 2017 election might be the best option to keep options open.

The scariest moment in the conference for me was the raw ambition of the new Kumul entities to take essentially government funded bodies deep into areas which are best managed by the private sector. The head of Kumul Petroleum was explicit on the desire to build a major pipeline across parts of the country. An ambitious and risky project without the rigorous pre-feasibility studies that private sector shareholders expect before a major investment decision is undertaken. And the source of financing – the dividend stream from the PNG government’s share in the PNG LNG project. These dividends are estimated to be worth K500m to the 2017 budget. The budget papers indicate this figure will now drop to zero from 2018 onwards. These are funds being taken away from the budget and no longer available to fund health and education and vital infrastructure activities. Indeed, this diversion of funds more than fully explains the drop in revenues from 2017 to 2018 – falls that have been used to justify government expenditure cuts.

Finally, why does the Treasurer continue to use the wrong figures and poor examples?

The Treasurer stated in his speech, when talking about the strength of the PNG economy, that it will grow from K47.3 billion in 2015 to K57 billion in 2017. These are the old Treasury GDP figures which are inconsistent with the National Statistical Office numbers and other numbers used in the 2017 Budget (see here for the conflicting estimates of GDP in the latest budget).  Indeed, if these figures used by the Treasury were correct, they would mean PNG debt to GDP ratio would be 37.7%, well above the maximum 30% level allowed under the Fiscal Responsibility Act. Even more minor mistakes in Australia have cost Treasurer’s their jobs (such as John Kerin and his giving the wrong definition of GNI to journalists).  Such silly and easily avoidable errors just undermine international confidence – and this is not good for the chances of PNG raising the necessary international financing on good terms. There was a similar error when using the agriculture sector’s increased growth estimates between the 2016 Budget and the 2017 Budget as being a sign of the resilience of the PNG economy.  On this occasion, the Treasury indicated a complete lack of understanding of the difference between real growth values (the basis for the 2011 agriculture growth numbers) and the 2017 nominal growth figures. These are very basic mistakes. Ironically, there were good examples that the Treasurer could have used of economic resilience – including some of the rays of hope mentioned above.

Timely, accurate, frank and fearless advice