Chinese interests in Pacific nations: mining ventures in PNG

Author: Graeme Smith, UTS and ANU

With China’s hunger for resources, its mining ventures into the Pacific continue to expand. With the discovery of vast tracts of copper deposits in New Britain, there are likely to be new investments in PNG undertaken by Chinese state-owned enterprises, quite possibly in partnership with Australian mineral exploration companies.

To date, China’s flagship project in the Pacific islands has been the Ramu nickel and cobalt mine, a US$1.4 billion investment in PNG’s Madang province managed by the China Metallurgical Corporation (MCC), in partnership with Brisbane-based Highlands Pacific.

The project has found itself stalled in the courts since March 2010, and it awaits final approval to proceed with plans to dispose of tailings in Astrolabe Bay. In 2009, the Basamuk refinery site saw a riot between PNG and Chinese workers, triggered by lax safety procedures and communication barriers. Controversies over the migration status of Chinese workers, health, safety and labor issues have been ongoing, spawning a strident and popular blog that now covers all mines in PNG.

Australian and international companies have acquired a reputation for damaging the environment and local communities. This was seen most spectacularly in Bougainville and Ok Tedi, and more recently in revelations of human rights abuses at Barrick’s Porgera mine; but nothing of comparable scale has transpired in Madang.

China’s involvement in Ramu may mean its development will differ from other mines. But there is danger in treating ‘Chinese’ enterprises as monolithic propositions and neglecting the variations found in different communities in the Pacific, as well as denying the significant role of local agency in interactions with powerful international actors. Much of what has unfolded in Madang is specific to both the structure and corporate culture of MCC, factors peculiar to the local communities at the Kurumbukare mine site and the Basamuk refinery site, and the weakness of provincial and local government in Madang.

The background of MCC and its Engineering and Non-Ferrous Institute (ENFI) contractors in infrastructure has been a strength and weakness. It has allowed much of the hardware (including a 134-kilometre pipeline to carry the ore slurry) to be built ahead of schedule, but emphasis on meeting construction deadlines has led to disputes with local communities that have been left unresolved long after the responsible ENFI contractors have returned to China.

As with all mining projects in PNG, Ramu has found itself caught up in complex local landowner disputes, most of which arise whenever a mining company shows up, regardless of its nationality. The levels of expectation that have built up around this project (the exploration lease was issued five decades ago), the haste of construction, and the PNG state’s lack of institutional capacity to resolve disputes regarding who is entitled to receive landowner benefits have exacerbated these disputes.

One notable characteristic of the Ramu project is the propensity of both the Chinese and PNG governments to view it as a ‘state-to-state’ matter, leaving provincial and local governments and landowners sidelined. At first, this approach appeared to be to the benefit of MCC, delivering a 10-year tax holiday, a zero rating on value added tax during the construction phase, and a framework agreement which passed much of the sovereign risk to PNG.

Ramu Nickel’s preference for dealing with the PNG central government arose partly from MCC’s identity as the offspring of the Ministry of Metallurgy, and partly from the lamentable state of political leadership in Madang, which during the negotiation phase entailed a succession of flawed governors who went straight from the provincial government to the lockup. The 2008 PNG National Economic Fiscal Committee Report found Madang to be in the bottom three of PNG’s 18 provinces in terms of service delivery.

But having to rely on PNG’s Somare government has ultimately disadvantaged MCC, the PNG central government having failed to deliver on many projects in the Memorandum of Agreement, and shifting the blame for changes to the Environment Act to MCC — even though government agents primarily drove these changes.

Still, MCC management’s reluctance to engage with local government, civil society and landowner groups led to the court action that has delayed construction for a year; mistakes which future Chinese investors may learn from. While MCC is often described as a ‘giant’, future Chinese investors may bring more in the way of state largesse; in September 2009, the chairman of MCC, Shen Heting, memorably described the level of state support for MCC’s overseas ventures as ‘one hair of nine buffaloes.’

Other elements of Chinese exceptionalism that future projects will face are extensive use of Chinese labour, low wages paid to local staff, and communication problems between the two workforces. A tendency to keep wage costs tight extends to Chinese employees, who only receive 20 per cent loading, and two months of holidays per year — far less than comparable mining companies.

This is an extension of how these companies operate domestically, rather than a strategy devised for PNG. In China, wages share of GDP is below 40 per cent, having dropped more than ten percent between 2000 and 2007 (ILO figures put the wage share at 63.7 percent in the US and 56.7 percent in Australia). Pacific nations will face pressure from Chinese companies to make their labor regimes more flexible, as Julia Gillard discovered when Shen Heting called on her to scrap the English language test for migrants to Australia.

To make the best of future investments, Chinese or otherwise, PNG actors could heed the advice of John Momis — PNG’s former ambassador to China and now President of the Autonomous Region of Bougainville — and push for joint ventures. This will allow for real input from local partners and provide funding for the local state to deliver services, rather than expecting mining companies to become the state.

Dr Graeme Smith is a Postdoctoral Research Fellow at the China Research Centre, University of Technology Sydney, and a Visiting Fellow at the State, Society & Governance in Melanesia Centre at the College of Asia and the Pacific, Australian National University.