The mineral policy framework which prevailed in 1975 was one which took shape during the lifetime of the first and second Somare governments, from February 1972 to March 1980. Its basic features were established in discussion between a few key members of the first Somare government, supported by a team of expatriate advisers, who took the lead in renegotiating the terms of the Bougainville Copper Agreement and setting the initial conditions for development of the Ok Tedi project (Jackson 1982, 92). Its further refinement became the responsibility of the Minerals and Petroleum Policy Committee (MPPC) established in 1975, which was chaired jointly by the secretary of Finance and the director of the Office of Minerals and Energy, which made its recommendations to cabinet through their respective ministers,^[1] and which continued to function as the voice of the national government in negotiations with foreign investors.

The substance of this policy regime is documented in five of the laws enacted by the Independent State of Papua New Guinea: the Mineral Resources Stabilisation Fund Act (Chapter 194) and the Mining (Bougainville Copper Agreement) Act (Chapter 196), both of which date back to 1974; the Mining (Ok Tedi Agreement) Act of 1976 and the Mining (Ok Tedi Supplemental Agreement) Act of 1980, both of which were later subsumed under the Mining (Ok Tedi) Act (Chapter 363); and the Petroleum Act of 1977 (Chapter 198).^[2] Its basic principles were set out in two policy statements produced by the MPPC — a brief statement on Financial Policy Relating to Major Mining Project (1975) and a longer statement on Petroleum Policy and Legislation (1976). These are both summarized, discussed and endorsed in the report of the World Bank mission which visited Papua New Guinea in 1976 (World Bank 1978). Further endorsement can be found in academic literature published during or immediately after the period in question, some of which came from the pens of those expatriate advisers who played key roles in the policy process (Zorn 1973, 1977; Garnaut and Clunies-Ross 1974, 1975; Zorn and Bayne 1975; Garnaut 1981).

Box 6.1 Major landmarks in the development of Papua New Guinea’s mineral policy framework

The key question addressed in the construction of this mineral policy framework was a very simple one: how could the national government capture the maximum possible share of the nation’s mineral wealth in the form of mineral revenues without alienating foreign investors to an extent which would deter their future investment in the production of more mineral wealth and more mineral revenues? The importance of this question lay in a belief that the revenues derived from two very large and profitable mines, if properly applied to the task of national development, would enable the government and the country to escape their dependence on Australian aid and expertise before those mines had been exhausted. And the credibility of this vision partly depended on the fluctuating price of mineral commodities.

In 1973, the prices of gold and copper climbed to an unprecedented peak. As a result, Bougainville Copper Ltd (BCL) made an enormous windfall profit from the Panguna mine which had been opened in the previous year. Under the terms of the Bougainville Copper Agreement of 1967, the government got 20 per cent of the dividends paid by the company, because it held 20 per cent of the shares. But the government’s equity stake in the project had been acquired at the cost of granting the company an exemption from corporate income tax for the first three years of production. So the greater part of the windfall profit was destined for the pockets of foreign shareholders.^[3] This ‘flight of capital’ was an affront to the Eight-Point Plan which the Somare government had adopted as the charter for its National Development Strategy. This called for ‘a rapid increase … in the proportion of personal and property income that goes to Papua New Guineans’ and for ‘an increasing capacity for meeting government spending needs from locally raised revenue’.

The Eight-Point Plan also called for ‘government control and involvement in those sectors of the economy where control is necessary to achieve the desired kind of development’, but the government’s policy makers did not regard a mining enclave as a desirable form of development in its own right, expropriation was not a realistic option, and they could see no point in spending more money to purchase a bigger equity stake in BCL if the aim was to apply mineral revenues to the development of other sectors of the national economy. It was the fiscal component of the Bougainville Copper Agreement which therefore became the main point at issue in its renegotiation.

The economists on the government side were not content to wind back the various tax concessions granted in the original agreement. They went one step further, by suggesting that the rate of tax on company profits should be adjusted to reflect the total amount of such profits, so that the government, rather than the company’s foreign shareholders, would capture the lion’s share of any increase due to a surge in mineral commodity prices of the kind which had just occurred (Garnaut and Clunies-Ross 1975, 1983). Aside from the standard rate of corporate income tax, they proposed to levy an additional ‘resource rent tax’ on any amount of profit which exceeded a ‘reasonable rate of return’.^[4] CRA and the rest of the mining industry opposed this ‘additional profits tax’ on the grounds that windfall profits should be their own just reward for the huge risks involved in exploration and investment. But the government’s economists maintained that ‘resource rents’, like royalties, should return to the real owner of the mineral resources from which they were derived. And in this case, the real owner was the nation, as represented by the national government.

This at least was the assumption made in the legislation. But once the national government had settled its accounts with BCL, it still had an account to settle with the Bougainvilleans who were threatening to secede from the Independent State of Papua New Guinea and take away their renegotiated source of revenue. The first price paid for their allegiance to the nation was an agreement to return all mineral royalties to the province from which they originated, and the second price was the organic law which authorized the establishment of provincial governments (Conyers 1976). The House of Assembly had already sought to purchase the political support of the Panguna landowners in 1966, when it agreed to grant them 5 per cent of the royalties from the mine. Now the other 95 per cent would become the main source of revenue for the North Solomons provincial government, whose share in the ‘ownership’ of mineral resources received additional recognition through the grant of an effective power to veto any further mineral exploration in the province.

Despite the fuss made about the fiscal component of the new policy regime, the more lasting bone of contention would be the set of property relations expressed or implied in the distribution of mineral revenues between the two tiers of government and the ‘third estate’ of customary landowners. But the principles governing the ‘internal’ distribution of mineral wealth got no mention in the policy statement of 1975. That is because the policy makers were preoccupied, at that moment, by their failure to persuade Kennecott to develop the Ok Tedi mine on fiscal terms broadly similar to those which BCL had grudgingly accepted in 1974. It took another five years for the Papua New Guinea government (and perhaps also the Australian government) to persuade BHP to take Kennecott’s place. During that period, the prices of gold and copper fell to levels which cast considerable doubt on the role assigned to mineral revenues as a catalyst for state-led economic growth (Jackson 1982, 93). But then they hit another peak in 1980, just as the finishing touches were applied to the Supplementary Ok Tedi Agreement which, unlike the agreement of 1976, really was an agreement to develop the country’s second major mine. And 1980 was the first and only year in which BCL actually paid the additional profits tax. So the key articles of mineral faith in the National Development Strategy appeared to be quite solid after all.

The self-congratulation of the individuals who framed this charter should not lead us to exaggerate the extent of its departure from the principles which had informed the negotiation of the original Bougainville Copper Agreement by the Australian colonial administration. Take the question of state equity in mining ventures, for example. The financial policy statement of 1975 declared that the government ‘welcomes offers of minority shareholdings in major projects’. It was CRA which had originally made such an offer to the colonial administration, because this would have the highly desirable effect of giving the state a vested interest in the profitability of the mine without yielding effective control over its management (Denoon 2000, 92). At one point in the renegotiation of the agreement, the company offered to sell the government a controlling interest in BCL as a condition for its own acquiescence to the additional profits tax (Garnaut 1981; O’Faircheallaigh 1984). This was an offer which the government’s negotiators sensibly declined. But they did not go so far as to question the wisdom of purchasing 20 per cent of the shares in Ok Tedi Mining Ltd, despite their recognition of the risk entailed in this commitment of scarce financial resources, and despite the prospect of a contradiction in the government’s role as a shareholder and a regulator.

The tax concessions granted in the original Bougainville Copper Agreement owe something to the economic development strategy which the World Bank had recommended to the Australian colonial administration in 1963 (IBRD 1965). The central plank of this strategy was to foster a rapid growth in the export of primary commodities by attracting foreign investment to large-scale forestry and agriculture projects. But once the Panguna orebody had been discovered in 1964, a large-scale mining project was soon added to the shopping list. One way in which the administration sought to encourage CRA’s investment in the project was to limit the ratio of output-based taxes to profit-based taxes, regardless of the length of the tax holidays to be granted during the investment recovery period. So the royalty rate was set at 1.25 per cent of the value of mine production, which was very low by the standards of the time. When the tax holidays were renegotiated in 1974, there was no question of raising the proportion of output-based taxes in the total tax package. On the contrary, the new package was a more refined expression of the fiscal principle set down in the original agreement, which is one of the reasons why it found favour with both the World Bank and the Australian government.

What, then, were the implications of the national government’s decision to keep a tight lid on the level of mineral royalties, dispatch the whole lot back to their province of origin, and keep a firm central grip on the bulk of the profit-based taxes collected under the new fiscal regime? First, the national government’s dependence on forms of mineral revenue that were bound to vary with the fluctuating price of mineral commodities justified the institution of the Mineral Resources Stabilisation Fund, which was meant to stabilize the amounts which found their way into the government’s annual budget. Secondly, the national government had an even greater interest in limiting any further additions to the indirect or surplus costs incurred in the production of mineral wealth, which included the cost of managing or mitigating the negative impacts of development, as well as the payment of output-based taxes. Finally, in contrast and opposition to the national government, provincial governments and local landowners had little or no stake in the profitability of mineral development, and would therefore come to regard their output-based share of mineral revenues as a form of compensation for the social and environmental costs which the national government might reasonably want to exclude from the developer’s bottom line.

Environmental considerations were not entirely absent from the mineral policy regime established after 1972, but they were not pursued with the degree of diligence that was applied to tax matters. A brief statement of mineral policy in the Improvement Plan for 1973–1974 included a promise that ‘the Government will have power to require the use of the most modern and effective conservation measures’; the value of protecting the natural environment was enshrined in the preamble to the national constitution; and this constitutional imperative informed the passage of the Environmental Planning Act in 1978. But the Panguna mine and the Ok Tedi prospect were both exempted from this legislation because the relevant development agreements were signed before it came into force. The Supplementary Ok Tedi Agreement of 1980 did mark an advance on the Bougainville agreements in its requirement for construction of a tailings dam, but made no advance on the original Ok Tedi Agreement in demanding that serious money be spent on the conduct of environmental impact studies (Jackson 1982, 82ff).

The original Ok Tedi Agreement contained a number of clauses which declared that the people of Kiunga and Telefomin sub-provinces (later to be known as districts) should receive preferential treatment in the project’s training, employment and business development programs (ibid., 163). This also represented an advance on the Bougainville agreements, because it implied the recognition of a project impact area which was smaller than a province, but larger than the area of land leased from customary landowners for the purpose of mineral development. The significance of this innovation was explored at some length in the socio-economic impact study commissioned by the Department of Minerals and Energy (Jackson et al. 1980). That study was also the first of its kind in Papua New Guinea, and it served to underscore the exemption of the Ok Tedi project from the provisions of the Environmental Planning Act because it was the government, and not the mining company, which paid for it.

The policy of discriminating in favour of the people who lived in the so-called ‘area of preference’ was initially justified by reference to the remoteness and backwardness of this area in comparison with other parts of the country. But it also implied the recognition of a series of graduated zones of entitlement to the benefits of mineral development which could be taken as another form of compensation for the social and environmental costs of that development. And, like the ‘real’ compensation payments due to local landowners, this kind of positive discrimination would seem to internalize some of those costs by adding to the indirect costs of mining itself. However, this should not lead us to suppose that the national government was more generous in its dispensation to provincial and local stakeholders in the Ok Tedi project than it had been in the case of Bougainville. On the contrary, the general feeling in Port Moresby was that the Bougainvillean stakeholders had commanded a premium which should not be allowed to function as a precedent for the distribution of mineral wealth from other projects. So there was no equivalent of the ‘Panguna Regional Payment’ in the compensation package allocated to the Ok Tedi landowners, Ok Tedi Mining Ltd. (OTML); OTML was not required to pay the 50c per tonne of output which BCL had been obliged to contribute to the ‘Non-Renewable Resources Fund’ administered by the North Solomons provincial government, and the Fly River Provincial government was not granted an effective power to veto any further mineral exploration in Western Province.

The various charters of the independent state laid great emphasis on the values of ‘participation’ — the participation of Papua New Guineans in a national economy which was still dominated by foreign companies and expatriate persons, and the participation of those sections of the national population who would nowadays be described as ‘stakeholders’ in any specific economic venture. In this respect, they were seen to make a clean and decisive break with the economic policies of the colonial administration, including those which had been designed to satisfy the World Bank. But the national constitution also spoke of the need for an ‘equitable distribution of incomes’ between different parts of the country, and called for the country’s natural resources to be wisely used ‘for the collective benefit of us all’ and to be ‘replenished for the benefit of future generations’. This is what we would nowadays call a charter for ‘sustainable development’.

The architects of the country’s ‘new’ mineral policy regime thought that state ownership of mineral resources and central government control of mineral revenues were both essential to the cause of sustainable development. If mineral wealth was now to be derived from one of the most remote and backward parts of the country, then the local benefits of mineral development would marginally reduce the spatial inequality of income distribution. But the area around Ok Tedi was only one of many ‘less developed areas’, and a small number of scattered mining enclaves would still tend to widen the gap between rich regions and poor regions unless the national government could use a significant portion of mineral revenues to achieve the opposite effect. Since non-renewable resources could not exactly be ‘replenished’ for the benefit of future generations, the wealth derived from their extraction should ideally be invested in another form of development in which a lot more Papua New Guineans would participate for a period which would not simply come to an end with the closure of a mine whose location was an accident of geology. But the local beneficiaries of such an accident could not be expected to make this kind of investment, especially if they had no experience of any other form of development aside from their mineral windfall. So their participation should ideally be limited to a share of mineral wealth which would be just enough to sustain the belief that they had gained more than they had lost from the development of a local resource which was ‘really’ a national resource (Filer 1997a).

What was this other form of development whose promotion would enable a mineral-dependent state to avoid the perpetuation of a mineral-dependent economy? By most accounts, it was a form of integrated rural development constructed on a solid agricultural foundation. But the government’s capacity to realize this vision was undermined by another feature of its own economic policy. This was the so-called ‘hard kina’ strategy, which had the effect of aggravating that common affliction of mineral-dependent economies which has since come to be known as the ‘Dutch disease’ (Garnaut and Baxter 1984; Goodman et al. 1985; Duncan et al. 1998; Sugden 2002). The appreciation in the value of the national currency was thought to be a good thing because it lowered the price of the imported goods which were consumed in large quantities by urban wage-earners. But it was not such a good thing for the national producers of agricultural commodities whose prices were artificially inflated (Jarrett and Anderson 1989; Baxter 2001). Since public expenditure and public sector employment accounted for such a large proportion of formal economic activity, it could be argued that the national government’s mineral revenues were simply being ‘invested’ in a widening economic and social division between the urban and bureaucratic elites and the vast majority of rural villagers. If the national government came to be seen as a parasite stuck to the back of the mining industry, then the legitimacy of its claims on the nation’s mineral wealth would naturally be called into question.