Canberra, 10 April 1967
Confidential
Territory of Papua/New Guinea—agreement on mining of copper on Bougainville Island
The Minister for Territories has placed a submission before Cabinet seeking policy directions regarding the major provisions of a proposed agreement between the Papua and New Guinea Administration and a subsidiary of Conzinc Riotinto of Australia for a large-scale copper mining operation on Bougainville lsland.1
2. The project is said to be among the largest ever mounted by a private company in an under-developed country and the copper deposits concerned are the only known large mineral deposits of the Territory of Papua and New Guinea.
3. Discussions have taken place between this Department and the Department of Territories on foreign policy issues raised by the Submission. The attached note summarises these discussions and may be of useful background to you.
Attachment
EXTERNAL AFFAIRS NOTE ON THE DRAFT AGREEMENT ON MINING OF COPPER ON BOUGAINVILLE ISLAND
Discussions with the Department of Territories have turned on two main foreign policy aspects.
(a) The agreement runs for 84 years and it is most unlikely that during its lifetime the Territory will not attain self-government and perhaps independence. If experience of the working of the agreement shows that from the point of view of the people of New Guinea it has not been a fair agreement, the dissatisfaction created could impose strains on relations between a self-governing New Guinea and Australia. The Government of an independent New Guinea would no doubt seek to re-negotiate an unsatisfactory agreement, or, failing that, to abrogate it. Friction between an independent New Guinea and the company would have repercussions on relations between New Guinea and Australia. The financial stakes for New Guinea are likely to be very large.
(b) The Trusteeship Council and other United Nations bodies concerned with colonial questions will concern themselves with such an important agreement. It will come officially to the Trusteeship Council’s notice in the annual report of the Australian Government to the Council since the agreement with the company is to be embodied in legislation for approval by the House of Assembly. We need to be able to demonstrate that the agreement protects to the maximum extent possible the long and short term interests of the people of the Territory.
2. With respect to (a) above, it is obviously desirable, if practicable, that before concluding any agreement with the company, a realistic appraisal should be made of the potential benefits that the company is likely to gain under the projected agreement. Since the company is being treated as a special case, that is to say it is being given concessions that do not at present apply to other companies, it is important that the company should not reap an excessive return as a direct result of those special concessions. The extent to which the agreement is judged satisfactory in the Territory is going to depend in the long-run on the extent to which the revenues of the Territory benefit as compared with the return to the company. In short, an appraisal of the fairness of the terms of the agreement depends very much on an appraisal of the profitability of the scheme.
This question was taken up with the Department of Territories which replied as follows:
‘At this stage of the Bougainville project it has been difficult to make assessments about future costs, prices and profitability. A great deal will depend upon the results of further exploration, involved costing techniques and movements in copper prices. Nevertheless, it has been necessary to move reasonably quickly towards a formal agreement on mining of the deposits because of the unusually high exploration costs. C.R.A. Explorations Pty. Ltd. have been spending at the rate of $200,000 per month and have spent over $4m. so far. The company’s Chairman, Sir Maurice Mawby, has expressed his concern to the Minister for Territories at its rising expenditures without assurances about future rights and conditions of mining the deposits. It is now over a year since negotiations for an agreement began.
Whilst the lack of more accurate information on which to base future estimates of profits and revenue is a handicap (to both sides) in the negotiations it is felt that the proposed agreement adequately protects the Territory’s future interests. It is not easy to make comparisons between agreements made by different countries because the balance of advantage in each one takes in a number of factors pertinent to the needs and conditions of the host country. This said, however, it is our belief that, in the circumstances of Papua and New Guinea, the proposed agreement on Bougainville copper gives the Territory a better deal than would the terms of other agreements on which we have information.’
4. During discussions between representatives of this Department and of the Department of Territories, it emerged that the company could expect to repay the money it intends to borrow for the project (two-thirds of the sum to be invested) in eight to nine years, or in a shorter period if the price of copper remains at the present high level.
5. With respect to (b), that is to say, the likely reaction to the agreement in United Nations bodies, a comparison will probably be made of the terms of the agreement and similar agreements with other developing countries and within Australia itself
6. The agreement is to run for 84 years, but it is not subject to effective re-negotiation until after 42 years. It may be argued in the United Nations that conclusion of such an important agreement should either wait upon the attainment of self-government by the Territory, or, failing that, should specifically provide for re-negotiation if and when New Guinea becomes independent.
7. The Department ofTerritories has made the following comments on this point:
‘Other agreements entered into by developing countries which have been examined include agreements by Jamaica, Surinam and Sierra Leone for mining bauxite. The Surinam agreement is for 75 years and provides for a maximum rate of income tax of 35% for 30 years and of 40% thereafter together with limitations on increases of other forms of taxation. The Jamaica agreement provides for a maximum rate of income tax of 45%. The Sierra Leone agreement provides for a maximum rate of income tax of 50% and also gives a 5 year tax holiday. Each of these agreements provides that the general rate of taxation will be paid. By comparison under the agreement on Bougainville copper the ceiling of 50% would become the actual rate of taxation paid by the company within 4 years of first becoming liable for income tax irrespective of the generally applicable rates of taxation in the Territory.’
8. The principal tax concessions granted to the company are a three year tax holiday and broadened provisions for capital deductions for tax purposes. Similar concessions are not given in Australia for mining but the Department ofTerritories has argued that the situation in the Territory is different from the situation in Australia and that in the long term the risks facing a particular private company in investing in Australia and in the Territory are not comparable. The Treasury does not support the tax holiday and broadened provisions for capital deductions because of precedents that would be created for Australia. This view does not take account of the fact that a ‘package’ is involved and that the company is also making concessions, for example in agreeing to a 50-50 division of taxable profits with the Territory.
9. Paragraph 26 of the Submission states that ‘in the present political state of the Territory, it is regarded as indispensable that a project of this size should provide for a significant level of local participation in the company’s equity capital’, and the view is expressed that without some such provision, it is improbable that an agreement could pass through the House of Assembly. Accordingly, the agreement will provide an option of 20% of the company’s equity capital at par for Territory participation. United Nations attention is also likely to be directed to this point and it is, therefore, fortunate that the agreement makes provision for equity participation by the Territory. (As well, the capital gains to be made by the Territory could offset loss to revenue of concessions made in early stages of project.)
10. International attention is also likely to be given to those provisions of the agreement dealing with processing of ore in the Territory. Paragraph 33 of the Submission points out that the company has strongly resisted a firm commitment to construct a smelter and in the circumstances the Minister for Territories is recommending that if, after eight years, the Administration disagrees with a decision by the company not to erect a smelter, the matter will go to arbitration. These provisions may well be regarded as being insufficiently restrictive on the company.
11. The agreement is to contain provisions for the training and employment of the indigenous people. In the Cabinet Submission, however, this is treated as a minor provision of the agreement. As presently contemplated, the agreement would provide: ‘The Company shall, so far as is reasonably and economically practicable, use and train in new skills labour available within the Territory.’ We consider that when the agreement is scrutinised in the United Nations, considerable attention will be given to this point, and it will be one of continuing concern. We therefore believe that the Administration should insist on the company’s making a positive and early effort to train sufficient indigenes to make this as much as possible a Papuan operated enterprise at staff as well as other levels. Clearly this could not be done overnight but the agreement should be seen to put pressure on the company to bring about such a situation as early as possible.2
[NAA: A 1838, 846/1 part 1]
1 Document 100.
2 On 11 April, DEA rang Territories ‘to advise that there had been some change in their attitude on the Bougainville submission following the discussions [the two departments] had last Friday .. they had arrived at no definite conclusions but this didn’t mean that they had a negative attitude towards the project … the proposed package deal with C.R.A. was probably reasonable but that they found it hard to assess. The package presented raised some practical problems and External Affairs considered it vital for presentational purposes overseas that something much more positive than at present contemplated on the training and employment of indigenes be included in the agreement. There should be an obligation on the company to employ local people and not just a best endeavours sort of provision which the company could by-pass if the use of local labour interfered with its commercial interests … on reflection and in the light of our discussions last week External Affairs do not really agree with Treasury about the tax holiday and accelerated depreciation—they thought our point was valid but the cost of these concessions would be borne by Australia rather than by a future self–governing New Guinea and that in view of this any criticism in the U.N. or elsewhere could be fairly readily answered … External Affairs were drawing their Minister’s attention to the long term dangers of a detailed agreement but not in a way which was likely to cause any reaction in Cabinet. Summing up [DEA] thought the attitude they were expressing to their Minister was more favourable than unfavourable to our submission’ (note for file by Ahrens, 12 April 1967, A452, 1967/1333).