Resource Nationalism: Should PNG Copy Gillard’s Mining Tax?

Late Tuesday night the Australian Senate passed the Mining Resource Rental Tax, a tax on profits generated from the exploitation of non-renewable resources in Australia. It will be replacing Kevin Rudd’s fiercely opposed original proposal, the Resource Super Profit Tax.

The tax, levied on 30% of the “super profits” from corporations mining iron ore and coal in Australia, will kick-off on 1 July 2012. A mining company will only have to pay the tax when its annual profits reach $75 million, a measure designed so as not to burden small domestic miners involved in the iron ore and coal industry.

Julia Gillard has stated that revenue from the tax, estimated at AU$11 billion (K25 billion) over the first three years, will help fund company tax cuts, assist small business (estimated at about 800,000), improve regional capital works, and increase compulsory superannuation contributions. It will also help produce a healthy surplus for her government.

The Sydney Morning Herald yesterday published an article demonstrating that Australia wasn’t the only country keen on introducing a “super profits” tax. They identified the following global clampdown from rich and poor countries alike, all which possess a significant resource base:

South Africa: The world’s biggest mineral producer is debating a 50 per cent windfall tax on ”super profits” and a 50 per cent capital gains tax on the sale of mining tenements.

Ghana: Africa’s second biggest gold producer plans to raise mining taxes from 25 per cent to 35 per cent, with a windfall tax on ”super profits”. Existing 5 per cent royalties on output remain in place.

Guinea: The new frontier in iron ore and bauxite demands a 15 per cent stake in all mining projects, with an option to lift it to 35 per cent.

Namibia: All new mining and exploration to be state-owned.

Zimbabwe: Locals will own 51 per cent of all foreign miners.

Nigeria: Wants all offshore oil contracts renegotiated.

Mongolia: Wants a bigger stake in its Oyu Tolgoi project.

Further more, add to that list India, Peru, China, the Democratic Republic of Congo, Chile, Kazakhstan and Zambia, all which either have new mining taxes on the drawing board or have already introduced them in the past three years.

So where does this leave Papua New Guinea?

Behre Dolbear, a Dever-based mining business consultant group, yesterday released its 2012 annual ranking of countries in terms of political risks for mining investment. Australia (not so sure now), Canada, Chile, Brazil and Mexico topped the list as the five best nations in which to invest mining projects.

Russia, Bolivia, the Democratic Republic of Congo, Kazakhstan and PNG were the five lowest-scoring nations ranked as the worst in terms of political risk for mining projects.

Countries were ranked based on seven criteria: 1) the country’s economic system; 2) the country’s political system; 3) the degree of social issues affecting mining in the country; 4) delays in receiving permits due to bureaucratic and other issues; 5) the degree of corruption prevalent in the country; 6) the stability of the country’s currency; and 7) the competitiveness of the country’s tax policy.

The main reason why PNG ranked so low, based on an average result over these seven criteria, is primarily due to the fact that PNG ranked as the world’s most challenging place to operate a mine in terms of Behre Dolbear’s criteria #3: the degree of social issues affecting mining in the country.

We all know what these means in the PNG context – landowners and landowner driven issues.

But, if one looks closely at the Behre Dolbear report, you will see that PNG does well in other criteria too. Particularly noteworthy is PNG’s equal ranking with Australia and Peru, and actually ranked ahead of the United States, on criteria #7: the competitiveness of the country’s tax policy.

So although PNG is a challenging country to invest in due mainly to social issues for mining companies, from a tax and regulatory perspective, PNG is a very attractive option for miners around the world. And indeed, PNG has been very generous in approving significant 10 year tax holidays for a number of mining projects in the country – including the Chinese operated US$ 1.4 billion Ramu Nickle/Cobalt project.

Gillard has focused her mining tax on Australia’s largest mineral exports, iron ore and coal. In PNG, copper and gold remain the major targets for most of the nearly 100 companies that have active exploration licences in the country, with projects ranging in size from grassroots prospecting to the late-stage evaluation of bulk-tonnage porphyry, and epithermal-hosted resources.

With a booming mineral export-driven economy, increasing pressure on poorly maintained national infrastructure, and a growing young population, is it time for PNG to introduce a copper and gold “super profits” tax in the mold of Gillard’s mining tax?

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~ by Tavurvur on March 21, 2012.

7 Responses to “Resource Nationalism: Should PNG Copy Gillard’s Mining Tax?”

  1. Another great article!

    I think this is a serious issue which the PNG Government needs to revisit. Granting 10 year tax holidays are useful – but due to the demand of minerals, and PNG’s improving mining climate, should the government continue to dish out such lucrative terms?

    At the end of the day, the minerals will still be here. Let the world chew theirs up and then they’ll come flocking to PNG under any framework.

  2. Well, there’s is just one problem here.
    PNG gives nothing back to the miner in terms of infrastructure.
    In Australia there is massive support by way of infrastructure for signifcant mining operations.
    PNG offers nothing in returm, not even governance.
    And right now it wants to cut the Miners investment in half by vesting 49% of the profits in mining to just a few land owners.
    Before PNG taxes the industry into oblivion it might be a good idea to sort the whole mish mash of current proposals into some coherant order first.

  3. Thanks Wesely for your comment – I agree, if PNG were to introduce such a “super profits” tax as we’ve seen the ALP introduce to Australia this week, then a review of the current tax framework must be undertaken.

    The figure usually bandied around as being the figure for the “oblivion” of mining companies is a amalgamated tax/royalties threshold of 50%.

    Any total tax/royalty package by the PNG government needs to be below that figure. Vesting 49% of mining profits into a selected number of landowners is ridiculous.

    However, I do think there is a role for such a “super profits” tax on gold and copper in PNG.

    PNG’s infrastructure can not be compared to that of Australia’s – we’re two completely different kettles of fish. It would be naive of us to expect PNG to help support mining companies by way of infrastructure – why else do we offer 10yr tax holidays?

    When was the last time a 10yr tax holiday was given to a miner in Australia?

    K25 billion over three years is a huge windfall. A similar appropriate figure for PNG, if administered properly, would of huge significance to the future of the country.

  4. I’m not so sure about this Tavurvur – we all know our mining sector is an integral part of our economy. If we are to impose a “super profits” tax on copper and gold – our two biggest commodity exports, then we would have to revisit the idea of landowner royalties.

    Gillard advocated her MRRT on the basis that the accumulated wealth would be spread amongst all Australians. This won’t happen in PNG, it’ll just go to the landowners!

  5. Tax Credit schemes worked, but our Government Failed to maintain them. More Autonmy, and more power to the people. Let the Provinces have more say. At the moment everythiing is Waigani this Waigani that.

  6. A system like the Federal States in Australia? That could work in PNG but would that put off mining companies? Mining companies are already tentative about dealing with Waigani – how will they feel about dealing with a provincial government? Good point though.

  7. […] recently wrote a post about how PNG is the world’s most challenging place to operate a mine in terms of social issues affecting mining in the […]

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