Monday, June 20, 2011

Preserving wealth in Papua New Guinea


"Those who cannot learn from history are doomed to repeat it." - George Santayana 1863 - 1952.

Preserving Personal Wealth

Many have observed that ‘It takes one generation to build up a gigantic fortune and the next one (or two, or three) disperses it again with some combination of bad decisions and lavish living.’
The guiding principle is: ‘Don’t touch the Principal’. Yet even the invested ‘principal’ or capital can disappear as demonstrated in the recent Global Financial Crisis.
‘Bricks and Mortar’ was another successful stand of yesteryear however look at what happened to the US property market where houses and properties are now being repossessed and selling for a fraction of their original value as borrowing agencies try to recoup their losses?

Preserving National Wealth

PNG’s Liquefied Natural Gas (LNG) Project is about to come on line:
‘The LNG project is the largest investment scheme in PNG’s history. Production is expected to start within four years and has the potential to double the country’s income.
In Port Moresby, the government faces the challenge of ensuring this new-found prosperity is handled responsibly and transparently. Ministers have announced plans to set up special accounts known as sovereign wealth funds to save some of the revenue for future generations.’ (1)
The proposal to set up a ‘sovereign wealth fund’ for PNG has a familiar ring to it.
The Republic of Nauru was declared in 1968. The Island’s economy was solely based on the extraction and export of phosphate rock, a left over from when the island was uninhabited and a roosting/nesting place for Pacific birds. The birds shed their guano over thousands of years and that eventually compacted on top of the coral rock to become phosphate, a prized component of fertilizer.
In the 1960’s and 70’s, the island’s population of less than 10,000 enjoyed the highest per capita income in the South Pacific from phosphate royalties.
The following excerpts are from Wikipedia:
‘The Nauruan economy peaked in the early 1980s. Nauru's economy depends almost entirely on the phosphate deposits that originate from the droppings of sea birds. There are few other resources, and most necessities are imported. Small-scale mining is still conducted by the RONPhos, formerly known as the Nauru Phosphate Corporation. The government places a percentage of RONPhos's earnings into the Nauru Phosphate Royalties Trust. The Trust manages long-term investments, intended to support the citizens once the phosphate reserves have been exhausted.
The Trust's fixed and current assets, many of which were in Melbourne, were reduced considerably, and many never fully recovered. Some of the failed investments included financing 1993's Leonardo the Musical, which was a financial failure, the purchase of the vacant Carlton and United Breweries site on Swanston Street in 1994 which was sold undeveloped in 1998, and a loan to the Fitzroy Football Club which went into liquidation in 1996.
The Mercure Hotel in Sydney and Nauru House in Melbourne were sold in 2004 to finance debts and Air Nauru's only Boeing 737, which was repossessed in December 2005. Normal air service resumed after the aircraft was replaced with a Boeing 737-300 airliner in June 2006.
The value of the Trust is estimated to have shrunk from A$1.3 billion in 1991 to $138 million in 2002. In 2005, the corporation sold its property asset in Melbourne, the vacant Savoy Tavern site, for $7.5 million. Nauru currently lacks money to perform many of the basic functions of government; for example, the National Bank of Nauru is insolvent. The CIA World Factbook estimated GDP per capita at $5,000 in 2005. The Asian Development Bank 2007 economic report on Nauru estimated GDP per capita at $2,400 to $2,715’

So what happened to Nauru’s wealth? Why has the average income of this nation’s citizens now diminished from a comfortable living to that of virtual poverty? Again, Wikipedia gives an answer:
‘When the phosphate reserves were exhausted, and the environment had been seriously harmed by mining, the trust that had been established to manage the island's wealth diminished in value. To earn income, Nauru briefly became a tax haven and illegal money laundering centre. From 2001 to 2008, it accepted aid from the Australian government in exchange for housing a Nauru detention centre that held and processed those who had tried to enter Australia irregularly.
The island has one airport, Nauru International Airport. From December 2005 to September 2006, Nauru became partially isolated from the outside world when Air Nauru, the airline which serviced the island, ceased operations and left the island accessible only by ship. The airline was subsequently able to restart operations under the name Our Airline with monetary aid from the Republic of China.

Nauru was one of three great phosphate rock islands in the Pacific Ocean (the others were Banaba (Ocean Island) in Kiribati and Makatea in French Polynesia). However, the phosphate reserves on Nauru are depleted for all practical purposes. Phosphate mining in the central plateau has left a barren terrain of jagged limestone pinnacles up to 15 metres (49 ft) high. A century of mining has stripped and devastated about 80% of the land area. Mining has also affected the surrounding Exclusive Economic Zone, with 40% of marine life estimated to have been killed by silt and phosphate runoff.

Following decades of mismanagement, corruption, and spiralling loans to General Electric, estimated to amount to approximately A$227 million, the Nauru Phosphate Royalties Trust (NPRT) was forced to sell off its international assets to pay loans.

When the new Australian Labor government decided to close the Nauru detention centre in 2008, the country’s Foreign Affairs Minister Dr. Kieren Keke, stated that it would result in 100 Nauruans losing their jobs, and would affect 10% of the island's population directly or indirectly: "We have got a huge number of families that are suddenly going to be without any income. We are looking at ways we can try and provide some welfare assistance but our capacity to do that is very limited. Literally we have got a major unemployment crisis in front of us."’

Sustainable Resources

‘A sustainable resource is a resource that is used up at the same speed that it is renewed. Wood can be a sustainable resource if the trees are harvested at the same rate as new trees mature. Wind is a sustainable resource as the wind is not "used" up. Solar and hydroelectric power can be considered sustainable. Oil, natural gas, minerals taken from the earth do not regenerate and are non-sustainable. Fish stocks can be renewed and can be used in a sustainable fashion but are presently being used at a greater rate than they are being renewed and are considered non-sustainable.’ (2)

Sustainable National Resources

The ancient Chinese monopoly on silk trade seemed to be a good example of a sustainable national resource until silk worm grubs were smuggled out of China.
The same situation happened with Brazilian rubber. Brazil enjoyed a huge world trade in rubber with centres like Manaus 1,000 miles up the Amazon, becoming a thriving metropolis. Then seeds of the rubber plant were smuggled out of Brazil and the country lost its rubber monopoly. Malaysia then became a major world producer.
Most extractive industries are logically, finite in nature and therefore not sustainable. Nauru is a classic example. Let’s examine two exceptions:
The timber industry can be a potentially sustainable resource but this industry must be managed assiduously.
Prior to PNG Independence in 1975, Commonwealth New Guinea Timbers (CNGT) located in Bulolo had a principle that for every Klinki pine tree felled, 10 new seedlings would be planted.
The guiding principle adopted was that with successive logging and replanting, the naturally occurring forests of native Klinki pine would be self sustaining and could be harvested every 30 years on a cyclical basis.

‘Forests cover more than 70 % (32 to 36 million hectares) of the total area of Papua & New Guinea Territory, and of that area at least 8-12 million hectares have considerable industrial potential. The approximate total of the already investigated resources is 2.6 million hectares carrying some 6,100 million superficial meters of merchantable timber, which represents approximately 25 % of the known merchantable forests of Papua and New Guinea (Anon. 1967). Production in 1965-1966 was more than 41 million superficial meters as compared with 5.5 million superficial meters in 1950-1951.

The Department of Forests has undertaken a reforestation program of harvested productive forests and of rehabilitating low value forests and grasslands since 1948. Major plantations are being established at Brown River, Bulolo, Kerevat and Wau.

The main species planted are as follows: Hoop pine {Araucaria cunninghamii Ait.), Klinki pine {Araucaria hunsteinii K. Schum.), Teak {Tectona grandis Lin.), Kamarere {Eucalyptus deglupta Blume), and Pinus spp. Except for Teak and Pinus, these species are indigenous to the Territory. The areas planted as of May 1967 are given in Table 1. (below)’

Table 1. Plantation areas in the Territory of Papua and New Guinea as of May 1967.

Species Locality Hectares                   planted
Hoop pine Bulolo/Wau                        4,058
Klinki pine Bulolo/Wau                       1,120
Teak Brown River                                  726
Teak Kerevat                                          630
Kamarere Kerevat                                 311
Pinus spp. Highlands                               92
Miscellaneous All centres                       112
Total net hectares                                7,091

* DEPARTMENT OF FORESTS, BULOLO, T. P. N. G. 1968 - See (3) below

Around Independence however, it was reported that a Japanese company had contracted to extract all CNGT forests and transform this valuable commodity into disposable wooden chopsticks. No comparable reafforestation program was reportedly to be undertaken.
Since Independence in 1975, the natural forests in PNG have been progressively felled and extracted by foreign timber companies. The income for PNG from this timber is negligible when compared to the value added timber products that are eventually marketed by those who process the timber. Very little of the income from timber actually accrues to the PNG nation due to reported corruption and claims of political malpractice. There also seems to be no attempt to develop a locally owned and operated timber processing industry to manufacture furniture to meet local and overseas demand.
On a visit to Weipa, North Queensland in 1982, the author listened to the company liaison officer explained that the local Bauxite ore body, the ore of the metal aluminium, was created by the gradual leaching of other minerals from the subsoil and that this was a continual process.

‘Almost all metallic aluminium is produced from the ore bauxite (AlOx(OH)3-2x). Bauxite occurs as a weathering product of low iron and silica bedrock in tropical climatic conditions.’ (4)

It just takes millions of years to produce an ore body of the size available in Weipa.


Are most natural resources like bank accounts? i.e. ‘The more you withdraw, the less there is?’ Well not necessarily.
There are some potentially long lasting national assets such as unique and beautiful scenery that promotes tourism. Cultural events and rare wildlife also can be useful as long lasting wealth generators again from tourism.
All these examples must be managed, carefully looked after and preserved however.
If it were easy, why everyone would be doing it wouldn’t they?

(1)   Mining Boom promises huge riches’ by Phil Mercer – Voice of America 2011

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