Mining in Papua New Guinea – where do the benefits go?

MARGARET CALLAN | Development Policy Blog

NRI Discussion Paper No 124, Peter Johnson, Lode Shedding: A Case Study of the Economic Benefits to the Landowners, the Provincial Government, and the State from the Porgera Gold Mine

THE NATIONAL RESEARCH INSTITUTE (NRI) in Papua New Guinea has published an interesting study of the economic benefits from the Porgera Gold Mine over its lifetime.

The Porgera gold mine in Enga Province has been producing gold for over 20 years. This research identifies the benefits distributed from Porgera’s operations from 1990 to 2009 at K6.4 billion.

Of this, K4.8 billion was distributed to groups and institutions in PNG in line with the mine’s Memorandum of Agreement and K1.6 billion was distributed to international stakeholders.

According to calculations in this report, the share of total PNG benefits accruing to various parties amount to: national government K1.7bn; landowners K1.2bn; ‘PNG nationals’ K1.1bn (mainly wages and contracts); Enga Province K424m; Enga Provincial Government K279m; and Porgera Development Authority K130m.

In 2009 alone, K56 million in royalties, compensation and dividends was injected into the Porgeran economy, equivalent to approximately K3,935 per person, a contribution substantially higher than PNG’s 2009 per capita income of K2,337 (US$850).

The study analyses Porgera’s benefit flows by type of benefit as well as beneficiary. Wages and taxes have each accounted for 31% of financial benefits from the mine, with business contracts close behind at 29%. By contrast, royalty and compensation payments, while large kina payments, accounted for only 4% and 3% respectively of total benefits paid.

However you cut it, it is clear that the Porgera mine has delivered massive resources to the national government, provincial authorities, development authorities and the people of Enga province. With what results?

Impact and accountability

Section 6 of the report entitled, Expenditure of Financial Benefits By Sector, is sobering reading. It concludes that the mine has put a lot of financial resources into the hands of landowners and in this respect their expectations of the mine are likely to have been achieved.

However, the examination of expenditure by the services arms of government (Porgera Development Authority, Porgera District Authority and local level government) concludes that it is not possible to determine how financial flows have been turned into infrastructure or health and education services.

The author finds a “complete lack of transparency and accountability in many of the institutions associated with the Porgera mine” (p88). Over a billion kina in cash and benefits have been spread through the Porgera region but it is almost impossible to know where the money has gone.

This finding was previously highlighted by Thomas Webster, Director of the National Research Institute. Webster noted that the operator of the mine paid different government institutions and landowner groups as it was required to do, but....

… it’s clearly government institutions which are not doing what they were expected to do on the ground …” and “… the mine pays particular individual or landowner groups, but these accounts are managed by – I don’t know how they do it, but it’s said one or two principal landowners, and then from quiet conversations, they said that these individuals are living in Port Moresby or in Australia

The report sets out to shed light on the perennial question of why PNG is resource rich yet its citizens are poor. It concludes that for the communities who are supposed to be the beneficiaries of the mining wealth, the legal and payments system is complex, opaque and one-sided, and there remains a lack of transparency at both national and sub-national levels of government.

The report also notes weaknesses in the national government: a failure to report the details of payments from and to mining project stakeholders, and the lack of a system that tracks how stakeholders under its control operate.

Recommendations

The report includes a number of recommendations to improve the transparency and accountability of responsible institutions. It identifies the implementation of the Extractive Industries Transparency Initiative as the first step.

But it argues that a more important step would be to increase transparency by creating an audit trail of payments from national and provincial governments to other institutions such as the Porgera Development Authority, the Porgera Landowners Association and local-level governments.

Such a second-tier transparency initiative would increase the accountability of these institutions. The report argues that current mining policy debates in PNG are being conducted in an information vacuum and risk missing the larger issue of whether monies meant to improve development outcomes in Porgera have been spent appropriately.

Comment

There are a few other perspectives I would add to the report. The first is that while accurate, clear and timely information is a critical first step in improving the accountability of all institutions receiving mining benefits, it is equally important to strengthen community-based engagement in planning and monitoring agreements associated with mining projects so that local citizens are better able to demand accountability from those in positions of responsibility.

Community engagement must pay particular attention to the interests of women. A recent study by the Porgera Environmental Advisory Komiti on the social impact of the mine on women found that while the mine has provided some facilities previously lacking such as roads, hospitals and schools, many women had been impoverished and disempowered by losing access to land and livelihoods.

In Porgera’s predominantly patriarchal society, the benefits from the mine overwhelmingly favour men as employees or landowners.

Another issue highlighted by this report is the relatively small shares of royalty and compensation payments in total benefits to landowning communities. So it is perplexing that during community consultations on new mining projects, these shares tend to be given a great deal of attention and the potential benefits from employment and contracting opportunities relatively less.

Finally, I note that AusAID hosted a Consultative Forum with Business (21 August 2012) at which the government’s sustainable economic development strategy was launched.

That strategy includes the Mining for Development Initiative which itself includes support for the Extractive Industries Transparency Initiative.

It will be interesting to see how the Mining for Development initiative plays out in PNG and whether it extends beyond EITI to working with mining companies, communities and governments to help improve the development results from mining projects such as Porgera.

While this is an important report, it isn’t easy reading. That is due partly to the complexity of the subject matter: nothing about the regime of benefit-sharing for mining projects in PNG is straightforward.

So it is very difficult for new researchers to be confident in understanding this complexity and equally challenging to write about it in an accessible way.

I recommend readers with limited time tap into the Executive Summary and Overview, read Section 2 on Negotiated Responsibilities, then skip to Section 8 General Observations and Section 9 Conclusions.

Margaret Callan is a Visiting Fellow with the Development Policy Centre at the Crawford School, ANU, researching the contribution of the private sector to development in Papua New Guinea

Comments

[Lorena Adams]

Mining might mean earning and finding money that can provide the people. But this will not last long. There are many places that are affected drastically because of mining. The money that we earn today cannot suffice the life in the generations to come.

[Arthur Williams / Cardiff & Lavongai]

Porgera was said by the ex-spurts to have once been a very low cost mine upto 2004 when it cost about K580 per ounce of gold. Note the past tense.

But amazingly even though cost of production seems to have risen to K1545 per ounce the miner is now somehow producing at a slightly lower 43 %.

Isn't it wonderful how the 'bean counters' manage to still cream off that very similar level of good tax deductable expenses in a time of exceptional high gold prices.

Calculating from the published figures from various sources the total revenue 1990 -2012 is approximately K26,945,733,030 at the August 2012 total gold production of 17.6 million ounces.

Now that's K27 trillion..

Compare that to the whopping huge gigantic amount that NRI tells us PNG got of K4.8 Billion and you can see it is really no big deal. It means PNG got about 4.3% out of the project so far.

I personally wouldn't want to run a tucker shop getting only a miserly 4.3%! Yet PNG has sold its stock of gold in its Porgera underground store for just that silly amount. Hang your heads in shame you past PMs, Ministers, recent and even some current MPs.

The number boyos in the back offices of miners and loggers so adept at manufacturing these eye widening figures to baffle the poor Landowners and their 3rd World Governments.

That's why so many very profitable mines seem to be in some of the world’s most backward or isolated communities in nations with poor governance and/or corrupt officials.

I have said it before the only way to develop your mineral, forestry, fishing resources is for the companies wishing to develop them to set up a new limited company for each project and the Land Owners, possibly with governments too, being given a worthwhile minimum percentage of the shares in that company from Day One with some directorships.

That way it would be in the LOs interest to support the development from inception to fruition.

It would take time and money to fully complete a land ownership database before the project began but it would surely ensure the LOs and the nation got a far better return from the exploitation of their bountiful resources.

Find it - dig it – flog it and move on – Misima here we go again.

[Chalapi Pomat]

Indeed nothing in PNG is as straightforward. The financial and commercial working of the mine and compensation and the flow on benefits of the mine are complex matters that I do not understand well enough to comment on.

But the long term impact of the mine in terms of environment is what I understand the most and I am passionate about.

I've worked in many mines within and without Austalia, involved in many of the design and installation of mine tailings disposal systems and to see what is occuring in the mines at PNG, where submarines talings disposal system seems to be the preferred way, is indeed very sad.

Because it is an "easy & cheap" way of getting rid of mine waste and therefore maximising the shareholders returns. That is what is all about. Greed.

Just pump the waste into the ocean or rivers - out of site out of mind. If the pipe breaks and leaks who cares. Benefits? What benefits? And who benefit long term?