Under the Radar: Papua New Guinea gripped by nationwide civil disobedience

Under the Radar: Papua New Guinea gripped by nationwide civil disobedience
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The government of Peter O’Neill is besieged by a wave of civil disobedience, as calls for his resignation have destabilized the country. Investors could very well be in the crosshairs with protesters angered by corruption, high unemployment, and the poor track record of commodity firms.

Papua New Guinea is witnessing escalating civil disobedience and unrest as protesters demand the resignation of Prime Minister Peter O’Neill in the wake of a corruption scandal. O’Neill is implicated in signing off on $30 million in fraudulent legal fees, and while he claims innocence, has simultaneously used his powers to hamper corruption investigations. Furthermore, O’Neill has admitted that $2.5 billion has been lost from public trust funds, yet no government efforts have been implemented to track down the missing monies.

In recent years, Papua New Guinea has begun to develop its rich resource deposits, with GDP jumping from $3 billion in 2002, to $16.9 billion in 2014. Riding the commodity boom, the government channeled funds into urban areas, yet more than 75% of the population continues to live in rural areas. With the end of the commodity super-cycle, Papua New Guinea’s GDP growth has dropped from 8.9% in 2015 to just 3% for 2016. The country suffers from rampant corruption and government mismanagement, which has only become more apparent with declining commodity prices.

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Papua New Guinea’s exports are heavily reliant on commodities

Consequently, government revenue dropped by 20% in 2013, with rising inflation and a lack of sustainable growth resulting in a budget deficit of 4.6% of GDP for 2016. Moodys has already downgraded the country’s credit rating; with S&P reconfirming its negative forecast for 2016. The government is also suffering from bad timing, having launched its efforts to introduce a debut government bond in late June, in the midst of nationwide social unrest.

Civil disobedience sweeps Papua New Guinea

Protests against O’Neill began in the nation’s universities, with students boycotting the academic year, calling for the Prime Minister to resign in the face of the aforementioned corruption scandal. Protests spread across the country after police opened fire on thousands of students who were marching towards parliament, demanding O’Neill’s resignation. Public discontent only heightened after the Prime Minister defunded the country’s anti-corruption force, with divisions emerging within the police, as pro-government officers barricaded the fraud squad, preventing them from investigating O’Neill.

In response to the president’s actions, the Opposition has called for a no-confidence vote. While the Prime Minister enjoys a sizable majority in parliament, his support is being whittled away, as Bire Kimisopa and his three New Generation Party MPs crossed the floor to join the Opposition. Similarly, around a dozen government MPs have switched sides, as well as government minister Ben Micah and his People’s Progress Party – a member of the ruling coalition. Furthermore, three former Prime Ministers (with a fourth – Sir Paias Wingti expected to announce by the end of the week) have sided with protesters, arguing that O’Neill must step down. The Opposition said it is very confident that it will have the 56 MPs needed to topple the government.

To make matters worse for O’Neill – who on July 15th activated the National Defence Force to quell unrest – various professional groups have joined students and parliamentarians in calling for a change of government. For instance, dock workers are working extra slowly in protest, and the pilots of the state-owned Air Niugini have refused to fly, stranding thousands and cancelling flights across the country. Similarly, doctors and nurses have refused to perform any non-emergency medical care; a poignant indicator of the level of societal discontent.

Lastly, to cap off Papua New Guinea’s annus horribilis, the country has been facing an El Nino related drought since last August, when the worst frost in 40 years destroyed crops. Since then some 100,000 people have had to rely on food aid.

Foreign investors have a bumpy road behind – and in front – of them

Social unrest in Papua New Guinea poses a significant risk to investors in the oil and gas, as well as mining sector. Investors lured by Papua New Guinea’s frontier market allure must take into consideration the high likelihood of a change of government in the coming weeks, as O’Neill faces an imminent no-confidence vote. Furthermore, much of the impetus spurring national protests is fueled by inadequate investment in social development, unequal wealth distribution and a push for the government to take a stronger stance in negotiations with foreign investors.

Multinationals have had a brief – albeit chequered – legacy in Papua New Guinea. As one of the most underdeveloped countries in the world, Papua New Guinea has come to the attention of mining and oil companies, as more traditional markets mature. The fact that some 40% of the population lives a self-sustaining natural lifestyle, cut off from global capital, and that the country only became independent in 1975, has put Papua New Guinea in a weak bargaining position vis-a-vis international investors.

In 2009, Papua New Guinea was rocked by a wave of anti-Chinese riots, as protesters complained about the influx of Chinese small business owners, selling cheaper products and squeezing out locals. This combined with the fact that large international operations fail to hire locally, has led to resentment and anger, especially given that urban unemployment rates hover around 80%. This in turn saw deadly clashes at the $1.4 billion Ramu nickel refinery project, run by China’s state-owned Metallurgical Construction Corporation.

In 2011, Barrick Gold was implicated in the violent relocation of natives, as well as arson, and gang rapes by workers and guards, at its Porgera gold mine. Porgera is Papua New Guinea’s second largest mine, and one of the world’s top ten gold producers. Since then. Barrick Gold has been embroiled in a multi-million compensation lawsuit with over 130 victims, and in 2015 sold 50% of its stake in the mine to China’s Zijin, in order to cover mounting debts. Barrick is also entangled in local protests over concerns about corrupt local authorities siphoning off community mining royalties.

As if this was not enough, Porgera suspended operations in October due to the aforementioned drought, lacking sufficient water reserves for refining operations.

Alongside Barrick Gold, Rio Tinto is facing trouble, having transferred its 53.8% stake in the Panguna copper mine on Bougainville island, to an independent trustee for no consideration, on June 30th. Operations at the mine have had a troubled history due to secessionist violence.

With this in mind, Exxon’s recent $2.5 billion bid for InterOil Corp. faces some very real risks. Exxon has its eye on InterOil’s Elk-Antelope gas fields which contain some 10.2 trillion cubic meters. This acquisition is in line with Exxon’s strategy to target gas fields with sufficient reserves to supply the UK for three years. Due to low downstream costs, specifically regarding labour and land development, Exxon has positioned itself to dominate Papua New Guinea’s  nascent LNG sector: the country only began exporting natural gas in 2014. Moreover, Exxon already owns the country’s only LNG terminal; a $19 billion project.

Exxon et al. must tread carefully, lest they face the same pitfalls as the mining sector, and thus severely tarnish their reputations in Papua New Guinea. Tensions between locals and multinationals are always present even in the best of times, yet the people power movement sweeping the country is shaking up the corrupt business-as-usual system. It is very likely that O’Neill will lose the no-confidence vote, thus bringing in a new regime which will be beholden to the populace to improve living standards. This will have to be done by wrangling more favourable deals from investors.

The other option is that O’Neill clings on, which will only lead to greater unrest and violence. This too is hardly conducive to instilling business confidence.

Under the Radar uncovers political risk events around the world overlooked by mainstream media. By detecting hidden risks, we keep you ahead of the pack and ready for new opportunities.

Under the Radar is written by GRI analyst Jeremy Luedi.

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