Under review: A new regulatory framework will clarify legislation

Recognising that mineral extraction has long remained the mainstay of Papua New Guinea’s export-driven economy, the country’s regulatory framework for the mining sector reflects the importance of creating a relatively friendly business environment for investors in the industry. The primary laws governing the sector are the Mining and Safety Acts of 1992, although an updated legal framework may be put in place in 2012.

BY THE NUMBERS: To boost investor interest in PNG, the government has maintained relatively low royalty rates for its resources, with divided withholding tax set at 10% for mining (lower than the standard rate of 17% for non-mining businesses) as well as a 30% corporate tax rate and 2% royalty rate for special mining leases and mining leases only. Deductions from these taxes are also available in the form of the Infrastructure Tax Credit Scheme, which credits companies’ expenditures on eligible works, such as road and bridge construction or utility improvements, of either the total amount of eligible expenditure or 0.75% of the taxpayer’s total assessed income, whichever is less.

Unlike other resources located in PNG, the mining act states that all minerals existing in, on, or below the surface belong to the state. This differs from other resources in the country in that landowners are generally granted ownership of all resources associated with their territory under customary laws that apply to approximately 97% of all land. As a consequence, all land within the country, including the seabed beneath PNG’s territorial waters, may potentially be mined.

While the government maintains the sole right to govern the country’s mineral wealth, landowners are not completely without recompense for mining activity on their land. In accordance with the mining act, local residents receive compensation generally via a small partnership percentage of the project.

ENFORCEMENT: A number of government agencies oversee the enforcement of these laws, including the Mineral Resources Agency (MRA), which is in charge of enacting legislation, and the Department of Mineral Policy and Geohazards Management (DMPGM), which is responsible for drafting sectoral policy. Created in 2007, the MRA’s primary duties are to promote PNG as a destination for exploration and mine development, and facilitate these activities through dissemination of geological and exploratory data; license all mining and exploration activity; monitor projects and provide support to operating firms, landowners and communities; and encourage sustainable growth.

Other government entities overseeing specific aspects of the mining industry include the Department of Environment and Conservation, responsible for implementing PNG’s Code of Practice for Mining regarding domestic environmental responsibilities, as well as the Water Resources Act, which relates to the use of water resources within mining and exploration tenements.

BY THE BOOK: As stipulated in the mining act, there are five types of mining tenements issued upon recommendation of the Mining Advisory Council (MAC): exploratory licence (EL), mining lease (ML), special mining lease (SML), alluvial mining licence (AML), mining easement (ME) and leases for mining purposes (LMP).

ELs are the most widely used licences in PNG and have a validity of two years, but are easily renewable for an indefinite number of two-year cycles providing approval is granted. However, if a company is granted a permit and is deemed not to have met the objectives as outlined in its contractual work plan submitted every two years the permit will more than likely be revoked.

Permits are also easily transferable, with many mines changing hands in recent years and still operating on the original permit and subsequent renewals. The maximum land area available for an EL is 2557.7 sq km ( limited to 750 sub-blocks each measuring 3.41 sq km).

SMLs are used for larger and longer ranging projects (25-40 years), and are contingent upon the firm, generally already an EL holder, obtaining a mining development contract with the government. For this contract to be approved, a forum must be conducted by the government in which the firm, landowners, and federal and provincial government representatives must all come to a consensus on the terms of the licence.

An ML is issued for small- to medium-scale operations not larger than 60 sq km and is valid for an initial 20-year period with the possibility of an extension that may not exceed a further 10 years. Also used for smallscale mining operations (less than five ha), an AML is valid for five years but is reserved for native Papua New Guineans conducting non-mechanised operations on their own land. These leases are valid for joint ventures provided the project is majority-owned by locals.

Lastly, provisional MEs and LMPs are issued for the development and construction of mining support infrastructure, including roads and port sites.

OBTAINING A TENEMENT: To be granted any mining tenement, a mining company must first complete a set of surveys of the potential site and then submit the relevant data and work plan to the MRA. In addition, applicant companies are vetted by the MAC to ensure they meet a number of prerequisite conditions such as adequate finance capacity, previous experience in similar mining operations and other criteria through the submission of a schedule of fees, rents, security and exploration expenditures. Acting as a facilitator, the MAC also deploys mining wardens to engage the landowners of the site in question to determine the intentions and requirements of the local community that will be affected by the project. Following the conclusion of the first two steps, the MAC will then act as a facilitator between the company and the landowners to secure the necessary approvals. If all previous steps are then fulfilled to the satisfaction of the MAC, it will recommend a permit for the company, which must then submit its two-year work programme for the site.

OVERHAUL: More recently, the DMPGM has been reviewing the cumulative body of regulations governing the sector in an attempt to reform it into a single fluid policy. As of early 2012 the finishing touches were being applied to the framework of what is to become the new Mining and Offshore Mining and Safety Act before being sent for approval by the government and becoming law. There are a number of important changes present in the document, which may go a long way to alleviating concerns and other uncertainties present in the existing legislation. According the DMPGM, the principle issues being addressed include government participation, royalty recovery, mine closure procedures, offshore drilling regulations, environmental standards, and health and safety standards.

One of the key recommendations of the new policy is to clarify sole ownership of all minerals to the state. But while ownership is now transferred to the government, the policy also outlines clear benefits and compensation for the local population of mine operations as well as clarification of the distribution channels through which the funds are to flow. One caveat addressing the distribution of compensatory funds requires all mining outfits to publish the specific amount of compensation awarded to each recipient on a quarterly basis. It is hoped this will clarify a point of grievance by landowners, who feel they have not received their fair share of compensation from the government in the past.

The degree to which the government is entitled to participate in mining projects operating in PNG is also under review. While the current mining act grants the government the right to exercise up to a 30% stake in any foreign-owned or operated mineral extraction project, the DMPGM is mulling increasing this ratio up to a possible majority government share. Under the current framework, once acquired these stakes are then held by state development arm Petromin.

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The Report: Papua New Guinea 2012

Mining chapter from The Report: Papua New Guinea 2012

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