Canberra, 29 March 1967
Confidential
Territory of Papua and New Guinea: proposed agreement on Mining Copper on Bougainville Island
The attached submission1 seeks specific policy directions regarding some aspects of the proposed agreement between the Papua and New Guinea Administration and a subsidiary of C.R.A. Limited for a very large scale copper mining operation on Bougainville Island in New Guinea involving an investment of the same order of magnitude as for the Hamersley and Mt. Newman iron ore projects—at present a capital investment of the order of $135m. is envisaged.
Benefits for the Territory
2. The venture would raise the level of Territory economic activity particularly in the private enterprise area to an entirely new level. On Bougainville it would provide roads, power and a new port for general use; and employment and training facilities for substantial numbers of indigenes (800 to begin with). For the Territory as a whole it would add about $10m. per annum to revenue when fully tax paying and would produce export earnings of about $50m. per annum gross. There would be opportunity for a Territory holding of 20% of the equity capital at par (i.e. 20% of say $45m).
Proposed tax concessions to the Company
3. In the light of the prospective benefits, tax concessions are envisaged to facilitate the borrowing of the large loan capital (say $90m.) against the uncertain political future of the Territory. These are a three year tax holiday and broadened capital deductions for tax purposes (paras. 19/23). The Treasury view is that the proposed tax holiday and additional capital tax deductions are too liberal and would lead to renewed pressures for comparable concessions in Australia (para. 20). The Department of Territories considers the concessions are justified in the Papua and New Guinea context which has no or negligible relationship with the Australian investment scene (paras. 21/23). C.R.A. have repeatedly emphasised in negotiations that these concessions are essential to the financing of the project and without them they would have to reconsider their position.
4. A 50:50 sharing of ‘adjusted taxable income’ is proposed along with some commitments by the Administration limiting the maximum future tax liability of the company (paras.12/18 and 24).
Territory participation
5. C.R.A. regard Territory equity participation as essential to their borrowing programme; the Territory Administration regards such participation as essential for acceptance of the proposed agreement by the Territory House of Assembly. It is proposed that when the agreement is before the House the Administration be authorised to foreshadow (subject to the company’s decision to go ahead and subject to the Government being satisfied that the venture is sound and offers reasonable prospects of profitable operation) that the Government will ensure that the 20% option is taken up on behalf of or by the people of the Territory (paras. 26/31 ).
General
6. In my view the success of this project would provide a tremendous impetus to the economic development of the Territory whereas a decision by C.R.A. not to proceed would in all probability severely deter other potential investors.
7. It is proposed that some requests by C.R.A. be rejected—a request for an assurance of availability of foreign exchange (para. 35); a government guarantee against expropriation (para. 38); and some points affecting the definition of the future tax ceiling (paras. 17/18 and 25).
Balance of agreement
8. A summary of the balancing factors in the proposed agreement is given in paragraph 40.
Conclusion
9. The recommendations set out in paragraph 41 therefore represent the rejection of some of C.R.A.’s requests and acceptance of the following propositions—
(a) that the project is of such importance that the proposed agreement (and associated special mineral leases) should be ratified by ordinance by the Territory House of Assembly, and its terms in relation to duration and royalty payments should give assurance of stability;
(b) that the project is of such importance to the Territory that to assist the raising, in the light of the Territory’s uncertain political future, of the necessary funds C.R.A.’s requests for tax concessions should be met in substantial part;
(c) that as part of the total taxation arrangements there should be a 50/50 sharing under which the company when fully tax paying will pay half of its ‘adjusted taxable income’ as tax—the present income tax rate is one fifth; the company to be assured however against an increase beyond 50 per cent in its tax liability at least during the first 25 years of operation;
(d) that to facilitate the acceptance of the proposed agreement in the Territory and to provide some political insurance for the company’s capital raisings, the Government, subject to the soundness of the project, should commit itself to substantial Territory equity participation;
e. that appropriate commitments be undertaken by the company directed towards maximum processing and towards the employment and training of indigenes.
[NAA: A5842, 187]
1 Submission no. 36, Barnes to Cabinet, 29 March 1967. See NAA: A4940, C4491.