United Press International - August 28, 2002
Stephen Sheldon, UPI Business Correspondent

Just to the north of Australia, this spectacular land, with its 600 tiny islands, has a wealth of natural resources like copper, gold, gas, oil, timber and plenty of scenery to tempt the visitor, from rugged mountains to swaying palms and fringing coral reefs.

But asset-rich Papua New Guinea is on the brink of economic collapse.

"It's not a particularly pretty picture, and the trends are all getting worse," Roger Donnelly, chief economist at the Australian Export Finance and Insurance Corporation, which undertakes country risk profiles, told United Press International. "The only debate is whether the country's fortunes are plummeting or just sagging."

Steve Feld, professor of Anthropology at Columbia University, who has 25 years' experience in the highlands of PNG, paints a similarly pessimistic picture. He traces the problems from the time of independence from Australia in 1975, and says the country did not have the skills or infrastructure required for self-rule.

"When a country becomes independent, it is standard practice for the outside world to focus on development," he told UPI.

"But for PNG, the road to development has been paved with pain, from human rights abuses, to environmental devastation, prostitution, and bribery. The people have got sicker, less autonomous, less well off and marginalized."

As they say, the fish rots from the head, and so it is in PNG. This is where many of the problems begin.

PNG is a democracy, but one where elections are beset by bribery and corruption, and where unconstitutional, extra-parliamentary and sometimes violent challenges to the government's authority are not uncommon. "People go into politics because it's perceived as a direct route to making lots of money, like getting a key to the safe," says Feld.

An election in early August saw Michael Somare become the new prime minister. He took office under a cloud of alleged ballot rigging and political violence.

In this unstable political climate, corporations find it hard to do business. At times, political and military intervention have severely hampered a number of companies. And that's on top of the problems encountered in a country with over 700 language groups, where mountains and a lack of roads make it hard to travel around.

"Many people see PNG as a quarry," says Feld. "It has copper, nickel, lead and oil, all the stuff the developed world wants. But getting it out is a bit more difficult."

Several projects have been dragged into either tribal feuds as at Porgera mine, landowner/miner disputes as at Mount Kare, or secessionist disputes as at Bougainville, where the mine had to be completely written off.

Companies also face the risk of the government appropriating income and market value from a project through arbitrary and retrospective change to taxes and regulations. This has been most prevalent during fiscal crises, when governments have needed to raise extra income.

Alan Roberts, the chief executive officer of the Lihir Gold Mine which operates the world's 17th largest gold mine on remote Lihir Island on the northeast tip of PNG, told UPI that operating in PNG is "tough, but it can be done." Would he start another venture in PNG knowing the difficulties? "Yes," says Roberts, "but it would have to be a high-return project."

In this high-risk environment, many projects are winding down, and exploration spending is at an all-time low as private capital shies away from investment. PNG's oilfields are estimated to cease production in a decade, and annual gold production will drop from 73 to 17 tons by 2012, according to the PNG Chamber of Mines and Petroleum.

"There's not a lot coming over the horizon," says Donnelly.

The main potential developments are a gas pipeline to northern Australia, in which Chevron of the United States is in partnership with Australian and local companies, and the Ramu nickel mine. But those are far from certainties.

This lack of investment is feeding the country's economic crisis -- the government forecasting a 3.3 percent shrinkage in real gross domestic product this year. While subsistence farming accounts for the bulk of economic activity, commodity exports from the mining and petroleum sectors provide 25 percent of government revenue and 65 percent of export revenue. So the impact of shrinking resource output will be catastrophic.

According to country's central bank, foreign exchange reserves will be gone by the middle of 2003. A recent EFIC report says the government's recurrent cash flow and foreign exchange difficulties could gradually make PNG "ungovernable and insolvent."

Of course, PNG is no virgin when it comes to financial crises. It was bailed out in 1995 by the International Monetary Fund/World Bank and again in 2000, in an effort to head off what it saw as the potential for human tragedy on a massive scale.

Little wonder Somare has talked of the need for emergency action. That has been interpreted as a need for more help from Australia, its main benefactor, which provides development and technical aid, and one-off loans.

The government is also resorting to selling off the silverware. Real estate in Sydney has been sold, and publicly owned assets like Air Niugini, Telikom and PNG Banking Corp are slated to be next.

The environment is also taking a caning from mining and logging projects, which is playing havoc with local subsistence economies. There are few environmental safeguards, and almost no land rehabilitation once a project closes down.

"The environmental constraints applied in developed nations are not applied in PNG," says Feld.

A notable example has been the Ok Tedi copper mine which allowed tailings to enter the Fly River, wreaking devastation on the waterway and surrounding land.

A class action by the local villagers, who can no longer fish or grow food, forced resource giant BHP Billiton to withdraw from the project in February this year, writing-off its entire investment to that date.

Socially, PNG is no paradise either. Apart from crime, which is rife in the bigger towns like the capital Port Moresby, there is an HIV/AIDS epidemic that is starting to rival Africa's. A report by AusAid calls it a 'slow motion disaster', and says one out of every 10 adults will disappear because of AIDS.

"AIDS will have financial ramifications down the track in the same order of magnitude as the rundown in the resource sector," says Donnelly.

Feld links the rise of AIDS to development projects, particularly logging and mining. "HIV has gone hand in hand with development. With every venture has come huge amounts of prostitution. It's a major problem. There are no retroviral drugs. The locals associate the disease with some sort of sorcery. The government is not confronting it, there is zero education about it, so people don't understand how you get it, and how to prevent getting it."

Turning this ship around won't be easy.

On a micro level, a glimmer of a better future is provided by Lihir. Roberts says the company went in with a package which includes a fixed amount of revenue to the local government and landowners, spending on health and education, and a trust fund for future generations. He says that since the mine began operating in 1996, malaria levels and infant mortality rates have dropped sharply.

Australian Prime Minister John Howard has said that PNG needs to fix its economy and its society, and shouldn't continue to rely on Australian aid.

It's a theme taken up by both Donnelly and Feld. "PNG needs more than dollars," says Donnelly, who feels that while the situation is very difficult, it is not impossible. "There's no magic bullet, but the government needs to enforce more corporate governance, more disciplined macro management. It needs to get law and order under control, and it needs cleaner government."

Feld says Australia needs to increase its role in education, stressing the need for an 'educated elite' to run things properly. He sees a need for people to develop a deeper understanding of how the international economy, trade and development work. And how to negotiate with large foreign companies.

But he also says curing the ills of PNG is not just about economics. "It's hard to see a way out," says Feld. "But I think as a starting point the people need to begin asking themselves what they want for PNG, where they want the country to go, and take it from there."

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