Conversion of Capital assets to Liabilities called "Free Carried Interest" in Mineral and Petroleum Development in PNG
Commentary by Johnathan Paraia
Papua New Guinea is indeed the land of the unexpected; where things that do not happen elsewhere in the world, happen here ordinarily, to the amazement of visitors from around the world.
One such example, is the conversion of mineral and petroleum assets discovered by mining and petroleum companies in Papua New Guinea, to liabilities, called “free carried interests” for project landowners and the government of Papua New Guinea. Free carried interest, is a liability to a project partner such as a landowner group or the government, when their share of a project’s development cost is paid for or carried by the other project partners.
The carried interest then becomes a loan or in other words, a liability which is repayable over time from the project’s profits, due to the landowners or the government, whoever is being carried. In such an arrangement, the free carried partners would usually end up with a very small interest in the project, because of their inability to raise significant monetary capital to pay for their share of equity or interest in the project.
The questions which then correctly lingers in the minds of the ordinary citizens of this country are; what has become of the capital in the value of the physical asset of the mineral or petroleum being extracted? Why has the value of the capital asset contribution by the owners of the minerals or petroleum to the project become zero, resulting in the owners of the asset, suddenly becoming liable to the other project partners? At what point did the owners transfer the ownership of the wealth transfer from the landowners and the government to the mining or Petroleum Company? Or did they transfer their ownership of the wealth to the mining or Petroleum Company at all? The answers to all these questions is simply no, the owners did not at any time transfer their wealth to the developer. It was simply wrestled off them. The owners were naïve, stupid, incompetent, weak, inexperienced, uneducated or whatever; which allowed the other partners ending up with the ownership of the asset. The owners then had to buy back some of it through the so called “free carry” concept.
The Resource Owners Federation believes that, time has now come for this deceptive conduct and lies to come to an end. A truthful regime must now be adopted, where the landowners and the government, as owners of the assets, must retain the majority interest in all of the country’s natural resource projects. The mining or petroleum companies which invest in the exploration and discovery of a particular mineral or petroleum asset, should only receive an interest that is proportionate to its total investment in the exploration and discovery of the mineral or petroleum asset. Funds for the development of a project can then be borrowed from banks or raised elsewhere, by each of the project partners.
Papua New Guinea is indeed the land of the unexpected; where things that do not happen elsewhere in the world, happen here ordinarily, to the amazement of visitors from around the world.
The carried interest then becomes a loan or in other words, a liability which is repayable over time from the project’s profits, due to the landowners or the government, whoever is being carried. In such an arrangement, the free carried partners would usually end up with a very small interest in the project, because of their inability to raise significant monetary capital to pay for their share of equity or interest in the project.
The questions which then correctly lingers in the minds of the ordinary citizens of this country are; what has become of the capital in the value of the physical asset of the mineral or petroleum being extracted? Why has the value of the capital asset contribution by the owners of the minerals or petroleum to the project become zero, resulting in the owners of the asset, suddenly becoming liable to the other project partners? At what point did the owners transfer the ownership of the wealth transfer from the landowners and the government to the mining or Petroleum Company? Or did they transfer their ownership of the wealth to the mining or Petroleum Company at all? The answers to all these questions is simply no, the owners did not at any time transfer their wealth to the developer. It was simply wrestled off them. The owners were naïve, stupid, incompetent, weak, inexperienced, uneducated or whatever; which allowed the other partners ending up with the ownership of the asset. The owners then had to buy back some of it through the so called “free carry” concept.
The Resource Owners Federation believes that, time has now come for this deceptive conduct and lies to come to an end. A truthful regime must now be adopted, where the landowners and the government, as owners of the assets, must retain the majority interest in all of the country’s natural resource projects. The mining or petroleum companies which invest in the exploration and discovery of a particular mineral or petroleum asset, should only receive an interest that is proportionate to its total investment in the exploration and discovery of the mineral or petroleum asset. Funds for the development of a project can then be borrowed from banks or raised elsewhere, by each of the project partners.
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