This is a reply to a letter circulated in emails to the editor in one of the papers in PNG but I thought it gives some insight into understanding the difference between the mining equity participation by landowners and PNG government.
The reality of mineral resource development or any other major capital project requires a lot of money for initial start-up. Apparently we (landowners and other Papua New Guineans) donít have the money or donít have the capacity to generate enough money to pay for their development costs. On the other end, we have the resources but they are only resources worth zero cents until it is extracted from its natural state, processed to extract the valuables that are saleable at the market place, and actually a cent generated from this sale!
The revenue generated from this sale of the valuables must first pay for the initial expense of the capital spent (plus interest of course) and must also pay for the operating costs of extracting this valuable. It must also pay for other expenses such as taxes, and royalties before what is left can be paid to the shareholders. The question one needs to ask is how much of these money that is left over (net profit) after all the deductions can we as landowners should be claiming??
Since we donít have the money at first (or for those who have probably are not confident to spend on high risk resources projects!), we allow foreigners to invest in developing these projects in the hope that they spend a lot of capital and make some profit at the end and return as dividends to their shareholders. The cost of making business in PNG is somewhat more expensive than a similar opportunity elsewhere, due to security risk, sovereign risks and other unforseen (remote) costs.
However, for the landowners to participate in resource development in PNG, there are various avenues available allowed by legislation as well as by right (ownership to mother-land!). The legislation allows for us (PNG government and landowners) to take equity up to 36% of the project (in mineral projects to be specific, 22.5% in Oil & Gas). The 36% can be shared between the government and the landowners based on how they negotiate (for example, the recent agreement on the LNG project where landowners got more than normal).
A lot of people fail to understand is that the 36% equity is NOT FREE (excluding 2% to 5% royalties managed by MRDC for the landowners). The 36% has to be paid for, that is, landowners and PNG government must raise the money elsewhere (because we donít have it as spare money sitting in the bank). The equity literally and simply means that we have to get the 36% of the total project capital cost and contribute to the project developer so they can use it with their contribution (64%) and develop the project.
Now, when we have the news of our share of the equity we jump up and down jubilantly but then one has to sit down and scratch their head to find the money to pay for this equity. The fact is we donít have the money to throw it into the project as our equity contribution so we go to faraway places (like Somare has to go to some Arab state to fund the government's share of the equity in the LNG project) and look for yet again to other investors who can lend us the money so we can pay for this equity. Hahahah....this lenders are not our distance cousins...they want their capital back with some interest at their setting (i.e., interest rate and what pay-back period Ė they want their money quickly or slowly but (more the former), off course before the end of the project life). We are basically seen as beggars so we loose any bargaining power Ė famous Sir Jís quote to PNG when the World Bank shoved down our throat some crazy land reforms, ďBeggars canít be choosers!Ē
Okay, for sure, there are off course a lot of people with money out there who would like to help us to purchase the equity. Now we get the equity funded and the project goes ahead. As an example of a project, say a mine has 20 years mine life. The money we (landowner or government) borrowed to pay for the equity will take the first 15 years to pay back with interest. This literally means that the landowners/gov will not get any money into their pocket for the 15 years of the 20 year mine life. Period! A good example is the Ok Tedi mine which didn't pay any divident to shareholders for the first 10 years of it's mine life. The money generated will go straight to paying back the equity. It must also be understood that for a mine, the early years of the life, it is often focussed to get the cream (high grade) of the minerals out as quickly as possible to payback capital quickly so that if anything else happens (e.g. premature mine closure, e.g. Bougainville!), at least the shareholder capital is not lost.
Therefore, the first 15 yrs is gone with no money in the pocket for landowners and government, now the last 5 years is the only time when one will realise the dividends of the equity, but you must know that for a mine, these last 5 years are only scratching through low grade material and overall return is not so flash as the formative years.
At the end, you basically become a loser in your own land with less money, destructed environment, and invaded culture! Now, Iíd like to revert back to a question posed, how much equity can a landowner get or how much share of the profit can one get? The simple solution is for one (landowner or government) to get a share of the profit at the end of a financial year in a project than to go through the tedious process to acquire equity. Simple logic says a 10% free equity is a million times better than 36% equity at a cost!
The landowners and/or government should negotiate with developers to get a balanced but free equity (i.e., at no cost so you benefit from profit from the start to the end of the project). Some may suggest a 50-50 split (equity or profit?) but this has to be justified in terms of economics so you donít kill the project before it gets off the ground.
I hope this info gives some insight to think about!