Canberra, 8 July 1969
Confidential
Territory of Papua and New Guinea Bougainville copper project
Purpose
The purpose of this submission is to inform Ministers on the progress of this project and to seek Cabinet approval for the temporary and conditional use of Asian workers during the construction phase.
Background
2. In 1967 (Decision No. 258 of 18th April)1 Cabinet endorsed arrangements for an agreement between the P.N.G. Administration and a subsidiary of Conzinc Riotinto of Australia Ltd. (Bougainville Copper Pty. Ltd.) for copper mining development on Bougainville Island in New Guinea.
3. The agreement was ratified by the Mining (Bougainville Copper Agreement) Ordinance 1967 of the Territory House of Assembly. The Agreement provides that 20% of the operating company’s equity capital may be taken up by the Administration or an approved authority on behalf of or by the people of the Territory. There will be a three year tax holiday and certain other concessions to the Company during the early period of production, but when full company tax becomes payable, the rate will be 50% of taxable income (as against the present Territory company tax rate of 22½%).
4. At the time of the negotiations, the Company envisaged that some 10 million tons of ore would be processed annually and production would be of the order of 200,000 tons of copper concentrate per year. Later feasibility studies have favoured a much larger scale of operations and at full production it is now planned to process some 30M tons of ore per year, with an expected annual yield in the region of 470,000 tons of copper concentrate.
Status of project
5. The Company says it has taken an ‘in-house’ decision to go ahead and to spend $35M in 1969 on a port, access roads, town sites and other facilities. A public announcement of a final decision to go ahead will be made later this year after completion of a detailed evaluation study and confirmation of credit arrangements. The capital structure has not yet been determined but it seems likely to be $100M equity and $200M credit. The Company has been granted a mining lease and discussions are in progress on the grant of the auxiliary leases.
Government option to equity shareholding
6. The Company does not intend to offer the Administration the 20% equity until it has made a public announcement on the future of the project. The Administration will then have six months to take up the offer. lf the offer is accepted, the Administration will be required to subscribe $20M ($10M in each of the years 1969/70 and 1970/71).
7. A matter for consideration is whether the Government should seek to take up the equity now or await the Company’s formal offer.
8. Participation now would give the Government a say (if it wanted it) in important decisions to be taken by C.R.A. 1t could have a favourable political impact in the Territory and promote confidence in the Territory on the part of private investors. The Bank of America has told the Company it will arrange the credit sought provided the Government takes up the equity. A decision now would clarify the Government’s attitude and firm up the whole project.
9. On the other hand, the Company is not seeking an immediate decision by the Commonwealth. The final feasibility study will be ready within two months and although C.R.A. and the finance houses seem to be backing the project in advance of securing the final feasibility study, only that study will provide a really satisfactory basis for assessing the prospects of profitable operation of the project. We would also be wanting to avoid formal association with the Company on issues sensitive in the Territory at this stage, for example in acquisitions of land for Company purposes. Furthermore, the Government is already being fully consulted by the Company.
10. On balance, I consider that a decision on Government equity participation should be deferred until a formal offer has been made (probably in August of this year).
Effects on the Territory economy
11. Development of the copper deposits should speed up dramatically the Territory’s progress towards economic self-reliance,2 substantially increase revenue available to the Administration and provide substantial employment and training opportunities—
• By 1982, it could result in a net annual contribution of some $50M in the Territory balance of payments of goods and services.
• At full tax paying stage annual revenue to Administration from the project could be of the order of $50M. (Estimated Administration revenue for 1968/69 $54M). Over the first 10 years of operation, total revenue of the order of $200–$300M (depending on copper prices) could be received.
• The project could add around 60% to the current ‘gross Territory product’.
• Employment for some 2,500 indigenes in early production period, rising to perhaps 4,000 after 10 years. During construction, peak indigenous employment of around 3,000.
• Establishment of a regional town centre of some 10,000 people (size of Rabaul) with a range of industries and services.
Proposed use of Asian workers
12. The project will generate heavy demands for labour. On a broad estimate the peak workforce required by the Company during the 36 to 42 month construction period will be of the order of 4,000 (Attachment 1).3 This will consist of some 1,700 positions for which indigenes will be available while the remainder will require special skills which are scarce or not available in the Territory. Unrestricted competition by C.R.A. on the limited Territory labour market would result in severe disruption and unmanageable wage pressures (Attachment 11).4 Businessmen in the Territory have already complained of labour ‘poaching’ and a major assault on the Territory’s labour market by C.R.A. and the contactors associated with the construction work would be a matter for serious concern.
13. The schedule for construction involves the completion of works of the order of $250M by mid-1972. The critical timing together with the special nature of much of the construction makes it impracticable for any significant part of the skilled construction workforce to be provided by a crash training programme.
14. C.R.A. recognises the shortage of skilled workers in the Territory and is willing to be guided by the Administration’s assessment of the number of employees both native and expatriate which it can safely seek to recruit from within the Territory. However, previous experience, for example in connection with major defence contracts, shows that it is difficult in practice to control the demands of contractors on the Territory labour market and the inflationary impact of heavy expenditures in the small Territory economy. Importation of Asian labour would help to overcome the problem.
15. Because of the buoyant Australian economy, the Company considers there will be difficulties in recruiting labour in Australia and then only at the cost of substantial wage increments which would have an undesirable effect on wage levels in the Territory and (to a much lesser extent) in Australia. The Administration supports the Company’s assessment in relation to wage levels in the Territory.
16. The Company is therefore proposing to let the major construction tenders on the international market and considers that the most satisfactory tenders will be received from Asian countries, especially Japan, involving the use of specialised Asian labour (see Attachment 1).
17. Under the existing immigration procedures of the Territory, the importation of non-European labour is restricted to limited numbers of key workers who cannot be obtained from normal immigration sources. The policy would not extend to admission of the numbers and categories of skills required in the C.R.A. project.
18. The Company has proposed a massive training programme involving the expenditure of some $2M by 1972 (Attachment III).5 The Company has indicated that the objective of the training programme is to achieve maximum indigenisation of the project workforce as quickly as possible and discussions on the final form of the programme are still proceeding with the Company.
19. It is suggested that workers indentured from Asian countries are more amenable to control and discipline and would be less likely to cause serious social problems on Bougainville than large numbers of Australian or other European construction workers. This view is supported by the Administrator’s Executive Council.
20. Use of international tendering would mean reduced capital expenditures by the Company and result in substantial increases in Administration revenue from the project by way of dividends and tax receipts. At favourable copper prices, the figures at present available suggest that the additional revenue could be of the order of $7M by 1982.
21. Because of the uncertainties at this stage regarding the successful tenderers for construction work and the timing of operations on individual contracts, the Company is not in a position to provide firm details of the numbers of Asian workers that may be required. The Company is therefore seeking a general approval for the admission of Asian tradesmen and professional workers (the majority will probably be Japanese) up to a maximum at any one time of 1,600 and over a period of about 36 months. The length of stay of each worker would depend on the individual contracts but would probably average less than 12 months.
22. It is not unlikely that the relaxation of the policy of admission of Asian workers in this case would lead to requests from other employers. Each case would have to be looked at on its merits but I do not intend that there be other relaxations of existing immigration policies unless compelling reasons exist. Because of the vast size of the Bougainville copper project, its likely effects on the Territory economy and the large training programme proposed, the C.R.A. proposal seems to me to clearly stand separate, and to be distinguishable, from other construction projects in the Territory which might seek to use Asian workers.
23. Under these circumstances, I consider the Company proposals should be approved as being unavoidable in the best interests of the Territory, despite the fact that the approval will result in some contracts going to foreign-based companies which may otherwise have been won by Australian companies. I have already approved the entry of 17 Japanese for a period of four months for the erection of prefabricated housing at the mining town on Bougainville. This decision was taken after consultation with interested Ministers and without prejudice to the decision by Cabinet on the present submission.
24. The Papua and New Guinea Administrator’s Executive Council has already been consulted in general terms on this proposal and has reacted favourably. Consideration by A.E.C. of the detailed proposals will be arranged after the views of Cabinet are available.
Recommendation
25. It is recommended—
(1) that Ministers note that C.R.A. has taken an ‘in-house’ decision to go ahead with the Bougainville Copper project and that in pursuance of its obligations under the Bougainville Copper Agreement the Company is expected to offer 20% of the project’s equity to the Administration later this year. Acceptance of this offer is likely to involve cash subscriptions of $10M in each of the years 1969/70 and 1970/71.
(2) that Ministers approve the short term admission of Asian workers (of the order of 1,600 at any one time) during the construction period from 1969 to 1972, subject to the following conditions:
(a) the Ministerial Member for Labour is satisfied that:
(i) suitable indigenous labour is not available;
(ii) the Company training programme is designed to achieve maximum indigenisation of the project’s operational workforce as soon as possible and to make the best practicable contribution towards the training of native employees for the project’s construction workforce.
(b) satisfactory supervision and accommodation arrangements.
(c) satisfactory arrangements regarding bonds and other guarantees of repatriation (including repatriation of individuals before expiration of the agreed period if required by the Administration).
(d) compliance with normal immigration requirements (health and character).
(e) concurrence of the Administrator’s Executive Council.6
[NAA: A586, 654]
1 Document 106.
2 See Document 267.
3 Not printed.
4 Not printed.
5 Not printed.
6 On 19 August, Cabinet noted paragraph 25(1), including that acceptance of the cash subscriptions ‘depends on the Government being satisfied, from its assessment of C.R.A.’s feasibility study when this is fully to hand, that the venture is sound and offers reasonable prospects of profitable operation’ (decision no. 1209, NAA: A5868, 654). The recommendations embodied in paragraph 25(2) had been the subject of disagreement during inter-departmental consultations prior to submission. Under pressure from industry groups (see note for file by J.B. Gregory (OIC, Mining Projects, DOET), July 1969 (exact date unknown), NAA: A452, 1967/1104), the Department ofTrade and Industry had indicated it would advise McEwen to oppose the recommendation, on the basis that ‘it would disadvantage Australian manufacturers and prevent them from securing contracts which they would otherwise win’ and that ‘it would set a precedent which would be unfavourable to Australia’s short and long term export interests in the Territory’ (see record of conversation between DOET officials, D.F. Fisher (Assistant Secretary, Services Branch, Department of Trade and Industry) and N.C.K. Evers (Assistant Secretary, Policy Secretariat, Department of Trade and Industry), 7 July 1969, ibid.). Cabinet did not rule on paragraph 25(2), deciding that ‘this matter should be referred back to it after clarification is reached in relation to discussions now proceeding concerning the Arawa plantation and native lands in Bougainville’ (decision no. 1209, NAA: A5868, 654).