The Papua New Guinea liquefied natural gas (LNG) investment agreement with ExxonMobil has certainly raised PNG’s profile among global investors. However, while interest has broadened, investors remain cautious of potential policy inconsistencies. Indeed, several government moves over the past year have elicited concern – even if the authorities, backed by ratings agencies, view these as “one-offs”. A number of recent reforms – from amending the Takeover Code to drafting a list of restricted industries – presage more restrictive investment rules, even if the scope of their application remained unclear at the time of writing. As the state moves to boost its stake in new mining and resource projects, its contingent liabilities are set to increase just as it strives to sustain investor confidence. While the country’s second LNG project testifies to continuing interest in PNG’s vast resource base, sustaining confidence with transparent and consistent policies will be key to broadening investment in both resources and non-mining sectors.

Room For Improvement

Beyond hard infrastructure challenges, PNG has also lagged behind other countries in streamlining its regulations, according to the World Bank’s 2014 “Doing Business” report.

With an overall ranking of 113, down five places on 2013, the country placed higher than Indonesia (120) and Myanmar (182), but below Vietnam (99) and the Philippines (108). The country fell nine places to 92nd in the category of ease of starting a business, six places to 165th in dealing with construction permits, five places to 116th in the ease of paying taxes and four places to 86th in getting credit. It also dropped one place to 128th in resolving insolvencies, registering property and protecting investors, respectively.

At the same time, PNG ranked 28th among 42 Asia-Pacific countries, according to the Heritage Foundation’s (HF) 2014 Index of Economic Freedom. PNG has seen its ranking in seven of 10 economic freedoms decline, namely in property rights, corruption and business freedom. In particular, the overall tax burden at 25.8% of GDP, with a top income tax rate of 42% and corporate tax of 30%, remains comparatively high, according to the HF.

OK Tedi Takeover

The government’s swiftest move came in September 2013 when it took full control of the Ok Tedi mine, an ageing gold and copper mine facility in Western Province (see Mining chapter). Although the mine caused widespread environmental damage in the 1980s and 1990s, it continued to operate after BHP Billiton transferred its 63.4% stake to a charitable trust, PNG Sustainable Development Programme (SDP), in 2002 in return for legal immunity from environmental liabilities. The trust accumulated assets of $1.4bn in its long-term fund managed independently from Singapore and launched social investments nation-wide, funded through dividends from the mine.

Legislation passed by Parliament in 2013 allowed the government to raise its stake, held jointly by the national and Western Province governments, from 36.6% to 100%. While some, including the World Bank, have viewed the move as a nationalisation, others argue that the share transfer is a more technical issue.

“Ultimately the change in Ok Tedi’s shareholding amounts to a change of trustees rather than a nationalisation, since the assets continue to be managed on behalf of the people of Western Province,” John Leahy, partner at Leahy Lewin Nutley Sullivan, told OBG. Calling the 2002 agreement “unfair”, the bill also rescinded immunity for environmental damages involving BHP and, potentially, the government, to prosecution.

Meanwhile, PNG SDP has stopped funding its social programmes and transferred its remaining assets, including power utility Western Power, to Western Province in February 2014 (see Mining chapter).

In its Article-4 consultations published in December 2013, the IMF encouraged “the authorities to reaffirm their commitment to respecting property rights and contracts by adequately compensating the PNGSDP for its stake in the mine”. While the Bretton Woods agencies raised such concern however, rating agencies such as rating agency Standard & Poor’s view the move as an isolated case.

Nautilus Arbitration

The government’s dealings with a Toronto-listed seabed-mining firm, Nautilus Minerals, reflect both the state’s growing contingent liabilities linked to resources projects, but also the need for international arbitration clauses.

The dispute stemmed from a March 2011 investment agreement covering the Solwara 1 copper-and gold-mining project in the Bismark Sea (see Mining analysis). The government gained a 30% stake of both the project and of the intellectual property (IP) of the pioneering seabed-mining technology – co-owned by Nautilus and its dredging partners – in exchange for financing its share of developments.

The stake in the technology’s IP gives the government promising prospects of revenue from similar Nautilus projects in several other Pacific Island nations going forward. Yet a 10-day international arbitration by a former Australian High Court Chief Justice ruled in October 2013 that the state had breached the 2011 contract by failing to cover costs, ordering it to pay $118m in compensation. The government missed the payment deadline and contracted legal counsel to assess its options under the ruling, according to Prime Minister Peter O’Neill in October. “These unfolding policy changes are likely to be followed closely by national and international investors aiming to make long-term commitments,” Tim Bulman, country economist for PNG at the World Bank, wrote in December 2013. “Sustainable investment and development is only possible where the integrity of property rights and contractual obligations is not subject to doubt,” he added.

National Interest

State intervention has not only been limited to the mining sector. In August 2013 the government amended the 1998 Takeover Code to introduce a “national interest” test for all equity transactions, empowering the Securities Commission (SC), division of the Department of Trade, Commerce and Industry’s Investment Promotion Authority, to block deals. “The revision to the Takeover Code, which is not being applied retroactively, is aimed to ensure equal participation of indigenous businesses in agriculture especially,” James Joshua, a surveillance officer at the SC, told OBG. The test applies to any firm incorporated in PNG – domestic or foreign – with assets of more than PGK5m ($2.03m), 100 staff, 25 shareholders and listed on a stock exchange. The revision came as Malaysian palm oil producer Kulim attempted to boost its 50% stake in London-listed New Britain Palm Oil by acquiring part of its London Sock Exchange free-float.

The definition of national interest remains unclear however, according to legal firm Linklaters LLP, and though the SC has historically been under-funded, its annual budget was quadrupled to PGK2m ($813,000) in 2014. “There is nothing intrinsically bad about introducing a national interest test as long as it is applied rationally and not capriciously, which is not likely in the PNG context,” John Leahy, partner at legal firm Leahy Lewin Nutley Sullivan, told OBG. “It is likely the DCI will bring out implementing regulations to better define the national interest.”

The minister for trade, commerce and industry, Richard Maru, has led the reform process and announced 50% foreign direct investment (FDI) caps in agriculture and media, telling local media in September 2013 that, “It is time the country has to serve the interests of its people and not allow too much control of our resources by foreigners.” The review of the restricted activities list is planned for 2014.

While PNG is not alone in enforcing new restrictions on FDI and renegotiating mining deals, the timing of such moves has caused concern among existing investors. Amidst new curbs on key non-mining sectors, conclusion of the Total-InterOil deal in December 2013 was welcome proof of continued investor confidence. Just as the government seeks to streamline investment procedures, it should clarify the rules by which investors both local and foreign should abide.