Papua New Guinea's planned gold monopoly will weigh economy down
Wed April 24 2024
Gold has long been one of Papua New Guinea's top exports but its vital contribution to the country's economy is now at risk.
Prime Minister James Marape is pushing for parliamentary votes next month on two bills that would create a National Gold Corp. and give it monopoly control over the refining and marketing of the country's supplies of the precious metal.
The bills would take exporting and marketing out of the hands of multinational mining companies like Canada's Barrick Gold, South Africa's Harmony Gold Mining and Newmont Corp. of the U.S. But it is quite doubtful whether the results will benefit either the people of Papua New Guinea or the economy.
Mining has already suffered under Marape, who came to power in 2019. In 2022, Papua New Guinea produced around 50 metric tons of gold, the country's lowest yearly yield since 2010 and far below the peak output of 73.9 metric tons reached the year Marape came into office. No official figures have been released about last year's output, but it is not believed to have improved much.
The prime minister's draft bills would empower a new national mint that would, in effect, be a subsidiary of a mysterious Singapore-registered shelf company called Refinery Holdings, which is at least partly owned by Australian investors. Previous governments rejected doing business with Refinery Holdings in 2010 and 2014, as it was judged the company did not meet national interest criteria.
The new mint will have sole authority to set prices on how much to charge local gold producers to refine their raw output. While Refinery Holdings is to set up a refinery in Papua New Guinea, the mint will also be entitled to outsource refining to overseas operators, allowing it to arbitrage cost differences but also potentially undercutting the government's ostensible goal of bringing the activity onshore.
The bills would also authorize the new company to form a gold police force with unrestricted access to firearms and power to search, arrest and detain anyone suspected of breaching the new laws, without requirement of a warrant, to "ensure the safety" of the chain of custody of local gold production.
Currently, Papua New Guinea's gold is processed overseas, with miners working with various mints at their own discretion to refine gold for the global market. The state extracts a range of levies and royalties from all locally mined gold that is shipped out. This is all above board, and the system operates with high levels of security and scrutiny.
Of course, Papua New Guinea is within its rights to nationalize gold refining and marketing. It is standard practice that the state holds control of sensitive economic levers to preserve its operational capacity and independence, as well as to ensure its viability. But it is not standard practice to hand over such control to an inexperienced, foreign-owned partner.
The government could have looked to the 66 gold refiners accredited with the London Bullion Market Association as potential partners. Nearby Australia is home to at least two experienced refiners accredited by the association and likely well placed to set up a new refinery without the demand of monopoly rights that Refinery Holdings has made. But no tender or public consultation preceded the government's agreement with Refinery Holdings, which apparently was signed in 2021.
The PNG Chamber of Resources and Energy has indicated the project proponents have suggested the new arrangement will bring in 1.08 billion kina ($277 million) in taxes over the coming 15 years. But the group says a more realistic figure would be 241 million kina.
All business interests in Papua New Guinea, as well as those with a stake in the geopolitical game of chess currently underway in the Pacific, should be wary of developments like this.
Major miners like Newmont will be forced to conform to the new arrangement, even though it will undermine their interests. The laws will broadly tarnish Papua New Guinea's standing with foreign investors. More foreign direct investment exited the country in 2021 than came in and while inflows have resumed, companies remain wary.
The 2021 drop followed the government's abrupt move the previous year to block Barrick from renewing its lease on the Porgera Gold Mine, the country's second largest.
After Barrick filed a dispute claim with international arbitrators, officials agreed to open talks, which eventually led to a new lease as well as the government getting a much larger stake in the mine. Porgera finally resumed operation last December, potentially setting the stage this year for a recovery in national gold output.
Yet in reforming the country's gold sector, the National Gold bills will tarnish the good brand and reputation the country has achieved in this area, while unlocking opportunities for graft.
Transparency International already ranks the country worst in the Pacific region for corruption. According to the group, 96% of Papua New Guineans think government corruption is a big problem.
The Refinery Holdings deal, as is becoming the new normal, will edge out Papua New Guineans themselves and widen domestic tensions. The country is bristling with firearms and law and order is a perennial concern as violent crime is all too common.
Riots in Port Moresby in January highlighted festering dissatisfaction with Papua New Guinea's elite and the current system whereby a few win and the majority lose.
It is hard to understand what the Marape government is intending with the gold bills, in terms of the national interest and the broader economy. No proper business case has been presented. The people of Papua New Guinea are entitled to a better deal.
Source: https://asia.nikkei.com/