Understanding the amendments to the regulatory framework

Although mineral extraction provides a large portion of the country’s economic output and exports, much of Papua New Guinea’s vast mineral wealth remains underexplored due, in part, to the mining sector’s challenging regulatory regime. Grey areas include, but are not limited to, land rights issues, royalties, length of contract, environmental and social obligations, contract sanctity by the government, and perhaps most importantly, a lack of clarity regarding ongoing revisions to the country’s overarching mining law.

New Mining Act

The sector operates under an overlapping regulatory framework including the 1992 Mining Act, the 1977 Mining (Safety) Act and the PNG Mineral Policy. The country has been looking to overhaul its complex legislation as part of creating a broad, overarching structure that will both update existing policies as well as lay the groundwork for previously neglected areas. First initiated in 2009, the legislative review appears to be nearing the finish line after the mining minister, Byron Chan, told local press in December 2013 that Parliament had been briefed on proposed changes to the Mining Act the month prior and had expressed “overwhelming support”.

After finalising and reviewing the proposed changes with a number of consultants in 2013, the Department of Mineral Policy and Geohazards Management (DMPGM) is currently planning to receive final approval by stakeholders and submit the revised Mining Act to the government at some point in 2014, with full implementation expected by 2015.

Specifics

According to Chan, the review is focused on amending eight core areas. These include mineral ownership; greater national participation; increased and better distribution of mine-derived benefits; infrastructure developments; relocation and resettlement planning; mine closure and rehabilitation; sustainability of communities impacted by mining projects; and improved monitoring and regulation by the state.

These changes are expected to be sweeping, touching upon nearly every aspect of the existing law, as well as helping to formulate policy for previously unacknowledged developments.

Beginning with the preconditions necessary to apply for an exploration licence, prospective mining companies operating under this new revised code will first have to fulfil a number of obligations, specifically formulate a community engagement plan and grievance mechanism, secure an environmental permit and satisfy other criteria, according to the DMPGM. The requirements will increase regarding the application of a mining lease as well, and will include a conceptual mine closure plan, mine waste management plan, landholder relocation plan, local business engagement plan, and social mapping and landholder identification.

Amendments

Once an exploration licence is granted, its validity will cover a five-year period (up from two years under current legislation). The maximum size of exploration licence areas will be halved from 2500 sq km to 1250 sq km, while also limiting the maximum amount of exploration licences held by a single entity to 10. Licence applications received by the Mineral Resource Authority are mandated to be turned around within three months and can be submitted online.

Mining leases, which are used during the production phase, are set to be extended from 20 to 40 years, with a possible 20-year renewal in order to cater to largescale, long-term projects. Special mining leases will be phased out entirely. Other administrative changes include mining retention licences as well as reporting protocols and transfer pricing to curb tax avoidance.

The state will also have the right to assume up to 50% participation in any mining project, with 5% each designated for provincial governments and landholders distributed from the state’s share. This is up from the 30% maximum stake that currently applies. Under the new framework this 30% share – which is purchased by the government paying an equivalent rate of capital expenditure for the project – may be supplemented by a new provision granting the government the authority to purchase another 20% equity stake at full commercial value in any resource project (for a total of 50%). Royalties will remain set at a rate of 2% freight on board. Downstream processing requirements, mandating that 70% of minerals extracted must be smeltered and refined in the country, could prove to be a challenge, however, to the new mining act. The main hurdle to this requirement, apart from the huge capital costs required by mining companies to build and operate smelters, is the lack of adequate power capacity necessary to run these energy-intensive operations.

Extensive Change

Increased social and environmental safeguards are also anticipated, which would likely lead to greater obligations by miners in areas such as a mine closure fund for local communities, involuntary resettlement policy, sustainable mining development policy, mining safety, community awareness and consultation programmes, and other modifications to the requirements of environmental and socio-economic impact statements. New regulations governing the management of previously unexploited resources such as seafloor mining, geothermal resources, coal seams and coal-bed methane are also expected.

In addition to the review and development of mining policies and legislation, the government has initiated a number of key changes in the sector including the introduction of the Kumul Trust, the establishment of a sovereign wealth fund and, controversially, nationalisation of Ok Tedi Mining Limited (OTML).

Highly dependent on the revenues from OTML, Parliament passed legislation in September 2013 that signed over the 63% share of the company held under the PNG Sustainable Development Programme ( PNGSDP) project. Further, the government is also seeking control of the $1.4bn, long-term investment fund, which was under the helm of a board of public and private appointees in Singapore.

Altering Perceptions

Although the end results of the policy formulation will not likely be finalised until 2015, an updated and stable framework for the country’s evolving mining sector is hoped to alleviate some of the perceived risk currently associated with PNG. The unresolved changes to the country’s mining regulatory framework combined with other stand-alone incidents such as the takeover of OTML, restructuring of government mineral asset holding companies and issues with the Solwara 1 project continue to have a detrimental effect on the perceived risk of operating mineral extraction projects in the county.

Under the current regulatory framework, PNG continues to receive low marks. According to the Fraser Institute’s “2013 Annual Survey of Mining Companies”, the policy perception index measuring governments on the attractiveness of their respective mining policies ranked PNG 84th out of 112 countries, with an overall score of 24.7 out of a possible total of 100.

Policy factors examined include uncertainty concerning the administration of current regulations, environmental regulations, regulatory duplication, the legal system and taxation regime, protected areas and disputed land claims. Infrastructure, socio-economic and community development conditions, trade barriers, political stability, labour regulations, quality of the geological data base, security, and labour and skills availability were also examined.

A number of factors have influenced the country’s low score. A recent decision by Parliament to nationalise the PNGSDP, for example, has had a negative impact on international perceptions on the country as a safe destination for investment. The country’s Current Practices Mineral Index (with a maximum score of 1) has declined in each of the past three years the survey has been issued, falling from 0.67 in 2010/11 to 0.60 in 2011/12, and to 0.29 in 2012/13. The Investment Attractiveness Index, which measures the effects of government policy and attitudes towards exploration investment, scored PNG higher at 56.2 out of 100, or in 50th position, above Indonesia and Malaysia. Assuming no change in the existing regulations and land use restriction 23% of respondents indicated that the current system encouraged investment, compared with 40% who said that it was a mild deterrent, and 9% opting for a strong deterrent, while 26% said that it was not a deterrent to investment. In terms of the legal system, the majority of respondents held negative views on whether or not PNG’s system was fair, transparent, non-corrupt, timely and efficiently administered. Opinions were equally split – with 35% each – on whether this was a mild or strong deterrent to investment.

A recent move by the Mineral Resource Authority should help address some of these concerns. A new tenement management system was implemented in July 2014 in partnership with land management software developer, Spatial Dimension. The new system will enable real time management of tenements and provide updated cadastral data, while online applications will commence as soon as regulatory support is in place. This will help ensure that PNG continues to move towards meeting the standards of the Extractive Industries Transparency Initiative, which were recently adopted by the PNG government. It is expected that these initiatives will help boost PNG’s rankings going forward.