Transcript
John Morrell (00:00): Welcome to the Democracy That Delivers podcast. This is John Morrell, the Asia Pacific Director at CIPE. And today’s episode is part of a special podcast series: Business and Politics in Today’s Pacific Islands. Today, we’re having a conversation with an old friend of mine, Paul Barker from Papua New Guinea. And we’re talking about Chinese spending and lending in the Pacific. What does it mean?
Paul is the executive director of the Institute of National Affairs, or INA, the leading independent public policy think tank in PNG and a very influential thought leader in the broader Pacific. INA’s primary role, in its words, is to carry out research and disseminate results as widely as possible to the community, to government, and to academia. INA provides independent, robust, and constructive policy analysis. And INA has been a CIPE partner for several years.
So Paul, to set the stage for some questions about the PRC in the Pacific, I want to ask you about the current political dynamic in Papua New Guinea, which is after all by far the largest Pacific Island country. Prime Minister Marape survived yet another no confidence vote earlier this year. So to get things started, Paul, how should the outside world view PNG politics today?
Paul Barker (01:24): PNG politics is quite complicated for an outsider. It just celebrated last week the 50th anniversary of independence from Australia as the former colonial power. It’s a nation with 850 languages, and the bringing together of an independent state was really a case of bringing a lot of communities together to create a single entity. And that is always a challenge.
The political party system—we have a Westminster system of government, a parliamentary system, a single unicameral parliament. And in that, there are multiple political parties and they don’t really have any ideological basis. Some of them did in the early days, but by and large there’s no left wing or right wing. There’s a lot of opportunism in there, a certain amount of regionalism that’s persistent. And so the challenge of trying to form and retain a government is extremely hard, and it involves a lot of mechanisms to try and bolster numbers, to induce players.
And that does sometimes encourage—provide opportunities, if you like—for malpractice of some sort to try and stick a government together and hold it together. That sometimes gives opportunities for outside players to interfere in the process, to help induce, and that is a hazard. And we’ve seen that coming from influential players like logging industries that sometimes have money that is a little bit more loose. But it also sometimes gives opportunities for other outside interests, including other states, to try and interfere or influence political outcomes.
John Morrell (03:41): That’s an interesting point, Paul, because my next question was going to be: given the complexity of politics in PNG and that you said there aren’t ideology-based political parties—you don’t have a left-wing party, you don’t have a right-wing party, political parties largely operate around individual people—my question is, what role does foreign policy play in PNG politics? I know, having spent a lot of time in Papua New Guinea, a lot of time is spent talking about relations with Australia for obvious reasons. But there’s more and more Western press going toward what China is doing in PNG and the broader Pacific. So how do these—not just how foreign actors, potentially foreign governments, maybe meddle in PNG politics—but just in terms of regular electoral politics, what role does foreign policy play vis-à-vis Australia, the United States, China, or whomever?
Paul Barker (04:38): Well, Australia was always the dominant player here. It was obviously the former colonial power and it provided—and it continues to provide—the largest level of development assistance, and it’s a major trading partner. But things have changed considerably over recent years, particularly with some of the major resource projects that Papua New Guinea has: minerals and oil and gas, particularly gas in recent years. Trade arrangements have shifted considerably. So now the major exports are going to China, Japan, but also to Australia still and elsewhere. And there’s been a shift from the exclusive, almost exclusive dominance of Australia and of course the multilateral funders—the World Bank, the Asian Development Bank and others—to other sources of development assistance, and they certainly include China. You’ve got the European Union and others, but China has become increasingly important both on the trade side but also on the development assistance side, particularly in the 2010s and since.
John Morrell (06:05): What is China’s motive? How should the outside world interpret what China is doing in PNG and the broader Pacific? PNG—sometimes you almost have to describe the Pacific region as PNG plus the broader Pacific. I mean, after all, 90% of the Pacific population is in PNG. It really is almost an outlier as to how big it is. It’s a viable market. The Chinese are interested in the extractive industries. But whether it’s in PNG or the broader Pacific region, how should the outside world interpret what China’s doing? Is this just competitive business and China’s looking to make money? Is there geopolitics behind this? How should we interpret what this means, what China’s doing?
Paul Barker (06:51): Well, of course, going back a long time, China has seen the South Pacific to some extent as its own backyard. Going back hundreds of years—the 1400s—they were very much trading globally until they decided, or one of their emperors decided, that he wanted to disconnect from the rest of the world. And they became much more inward looking.
But there has been longstanding trade of some sort and also human movement. There’s been a sort of diaspora—a Chinese diaspora—moving down to Southeast Asia, but also in the 19th century into Australia and through Papua New Guinea. Papua New Guinea and the South Pacific, of course, are resource rich. As an ocean area, it’s got extensive marine resources. And of course with its growing population—well, it’s more stabilized, but China has a vast population and certainly its demand for marine products is very considerable. Traditionally the fishing fleets were from the United States, from Taiwan, from South Korea. But increasingly the Chinese fishing fleet has extended operations far and wide into the Pacific.
But other resources include mineral resources as well as—I mentioned—oil and gas. So mineral resources include transitional energy resources like nickel and copper. But we also have extensive gas, some oil, but extensive gas in Papua New Guinea as well. And the Chinese certainly are resource hungry. For a long time, the relationship with the South Pacific and extending into Australia—of course, coal and iron ore has been shipped from Australia for decades into China, and Papua New Guinea has been exporting some of these minerals and gas into China as well.
There hasn’t until more recently been extensive actual investment by Chinese companies into the resource sector in Papua New Guinea. But that has grown with the investment in the Ramu Nickel project in Madang province in PNG, which really commenced at the beginning of the 2010s. But they have extensive—they also have a 50% shareholding in the Porgera mine. And for future prospective mines, they have major interests, particularly in the very large prospective Frieda copper mine in West Sepik province. But also, as I say, some of the resources that are being exported, including gas, are certainly going to China and also elsewhere in East Asia.
John Morrell (10:14): How transparent are these deals with China? As I imagine, these mining operations—these aren’t investments coming from the Treasury of China or the Foreign Ministry. These are purchases, acquisitions, spending decisions by Chinese state-owned enterprises. Money comes from Chinese state-owned banks. The work in Papua New Guinea is done by Chinese state-owned construction companies. That’s the normal model. But in Papua New Guinea and the broader Pacific, how transparent are these deals with the Chinese? For example, can a citizen in PNG listening to this go on and just Google what China’s doing, what the arrangements of the capital flows are? Are these loans? If so, on what terms? How accountable are these programs to the public in PNG? Chinese work in other emerging markets is oftentimes defined by secrecy. Is that what you see in PNG as well?
Paul Barker (11:22): Very much so. As you know, sometimes the private sector and the state are a little indistinguishable. Ramu Nickel Mine ostensibly started off with a Chinese private corporation, but it’s now a subsidiary of one of the largest state-owned minerals corporations. The bulk of the contracting companies—and we now have the dominant, or almost exclusive, construction industry and road construction maintenance, port construction—being done by state-owned enterprises. And you have a large number of state-owned enterprises.
As one engineer said to me, he only deals with three Chinese enterprises that were brought in actually by a private operator because they’re relatively straightforward. But the vast majority—they’re supposedly independent entities, but you know that, and as he observed, they all belong to the same parent entity: the state. And they appear to do artificial competition with each other. So it’s one’s turn this time, it’s another’s turn next time, and they’ll always make sure that one of them comes in with the lowest bid. And so invariably, they’ve been securing all the loans from the Chinese-funded projects, but also from the projects that have been funded by multilateral finance entities like the Asian Development Bank and some other parties.
And that has actually also driven out the other companies. So if you’re looking for other companies even to put in a bid, they’re no longer available. You need to have won some recent contracts to actually be on the ground. And when these Chinese state-owned enterprises have basically taken over the market, there’s no one else there to compete with them.
In terms of transparency, the financing arrangements which come from China and all the other transactions have invariably been highly opaque. And when it comes to that Ramu Nickel project, it was granted every imaginable concession. For some reason, the government of the day—around 2010—granted it major tax concessions.
John Morrell (14:19): You mean concessions by local government in PNG. So it’s getting not just subsidies from Beijing, it’s also getting tax incentives from local government as well. Interesting.
Paul Barker (14:24): The PNG government at the time. Yeah, the Papua New Guinea government wanted to get that mine operating. And although the exploration was done by a Western company, there was no one rushing to take up the investment. So they were offered all these concessions. And as a result of negotiations, they were given an extraordinary tax holiday, which was basically a 10-year tax holiday that commenced when the company itself decided they’d reached full production. So they’ve been in operation since the early 2010s and they’re still, as far as I know, not actually paying corporate tax.
They’ve also been granted 50% of their workforce being allowed to be basically imported labor. So again, all kinds of issues there. Mining for nickel causes very extensive surface damage—the extraction of nickel. And so there’s extensive environmental damage and some of their waste is ending up offshore. And there are big questions environmentally over that as well. So there’s some local processing and the major processing occurs in China. But there are a lot of issues and you have to say, what are the actual benefits from this mine? Yes, they participate in the local economy in the local town and that gives a bit of a boost, but in terms of the potential for a resource project, very little in terms of tax revenue and other local benefits, including for the local workforce.
On an apocryphal note, a friend of mine applied for a job there and he was told, “We would like to employ you, we like your CV, but why would we employ you when we can source our labor force from China?”
I have to also add that that mine, because it was the first mine in the Pacific—I mean they’ve got extensive mines and they dominate the mining for nickel in the world, but particularly through their mining operations in Indonesia—but that mine in Papua New Guinea was very much the first mining operation in the Pacific. Now they’ve also got mines in Solomon Islands. They’ve got some very, very substandard mining operations in the Solomon Islands for aluminum as well as now for nickel as well.
But the PNG mine was like a trial exercise and it went through extensive learning curves. There were damage to their pipelines, there were environmental breaches. In fact, the PNG authority did close them on a few occasions on the basis of breaches, including labor force and work and employment conditions breaches. It is said that they’ve learned some lessons from that, so that mine gives tuition for other operators who want to operate in the Pacific to pick up some of the tips of how to function. So yeah, it’s been an interesting scenario there.
John Morrell (19:19): The picture you paint certainly sounds that way. And what you describe in terms of Chinese—big Chinese investments, big Chinese loans that finance public works projects—the fact that the BRI programs have limited local economic impacts because all of the capital is brought in from China, the laborers are brought in from China, interest is paid to China offshore. This is a common descriptor of Chinese projects. But what also then frequently accompanies these Chinese projects is political discontent because local communities see the lack of downstream investment, the lack of any sort of local return. They see the environmental damage that’s associated with these programs. So the picture you paint of what China’s doing, at least in PNG—are you beginning to see political blowback in terms of there’s a political price to pay for being associated with these programs? Or is the public still in the dark and they really don’t even know that this is happening?
Paul Barker (20:37): Well, there certainly have been complaints. There have been local protests at times when you’ve had environmental damage and when there’s been disruption of some sort—local fishermen haven’t been able to fish in marine waters where the sea has turned red. And there have been independent reviews which have highlighted that there is environmental damage. But the authorities have tended to side with the companies and say, “Well, it’s nothing to worry about.” But nevertheless, as I say, the authorities have closed the mine down on a few occasions. There is discontent.
There’s also discontent with the construction projects that are occurring—the road projects—because invariably it’s a well-known observation that many of these projects are not built to standard. So it’s commonly referred to with a certain level of discontent, or humor sometimes as well, that the road projects are not built to standard and then have to be reconstructed shortly afterwards.
There’s also discontent and invariably there are local disputes that come between the workforce in some of the construction projects and the local workforce. That’s partly also perhaps because of just different lifestyles. The Chinese workers are usually working pretty hard and solid hours. Many of them want to get back to China as soon as possible. They don’t really want to be working over here. The local workers are taking a more relaxed approach to life in the field. But anyway, there is conflict that does sometimes develop and we’ve seen that even on some of the better-managed projects—tensions that exist between the workforce—plus a strong feeling by many that why are there so many overseas workers on those construction sites? Surely the purpose of construction is partly to construct something, but it’s partly to generate employment for Papua New Guineans in a country where there’s a fairly substantial level of unemployment and the need for opportunities in these fields. So tensions are created there.
John Morrell (23:16): And that makes sense. And you mentioned, Paul, that in addition to the lack of—the fact that local content requirements are either not enforced or they’re simply ignored—laborers are brought in from overseas. You also mentioned that these Chinese commercial interests, these Chinese state-owned enterprises, have now developed monopoly positions in road construction, port maintenance. They’ve kind of put any local competition out of business. It’s interesting you say that because I know in the case of Kiribati, your neighbor in the Pacific to the north—very few, certainly very few people in America, realize that while Kiribati’s total land mass is pretty small, it takes five hours to fly from the easternmost island of Kiribati to the westernmost island of Kiribati, slightly more time than it takes to fly from DC to Los Angeles. So Kiribati—not much land mass, but more oceanic territory than any other country in the world.
Kiribati produces none of its own fish because Chinese state enterprises have a monopoly position in Kiribati fisheries. Chinese state enterprises own a majority of the land, the physical terra firma, in Palau. In PNG, Chinese SOEs have monopoly positions in construction and port maintenance. So my question is, how can that be walked back? Is there a role maybe for groups like INA or the local business groups to try to pull back some of the market positions that Chinese SOEs have accrued so that local firms can bid on public works projects, local companies can begin producing fish? How does PNG and any of your neighbors in the Pacific begin walking this back to try to create more of a level playing field where the Chinese SOEs have so distorted it?
Paul Barker (25:28): Well, on a regional basis, we’ve got the Pacific Islands Forum, which is a mechanism for all the Pacific Islands to work together on resource management issues, on environmental issues, on educational and other issues. And fisheries is one of their major priorities, and trying to get cohesion between all the Pacific Islands on resource management is a crucially important issue. It’s sometimes challenging and sometimes the Pacific Islands do have issues and the cohesion diminishes. But it’s—and we’ve had some incidents around that in recent years—it’s certainly true outside players, and particularly China, do sometimes try to drive a wedge in there so as to be able to access marine resources, but also to be able to create affiliations with particular countries which have become effectively dependencies, so that the cohesion in resource management is weakened. Also, cohesion in security and other aspects has also diminished.
And we’ve seen that, as you say, with Kiribati, which partly broke from the fold. There’s been good work that’s been achieved in trying to re-engage the Pacific to try and get consistent policies. But we’ve seen it with some parts of Micronesia—other parts of Micronesia as well—which appeared to break from the fold. And a lot of work was then done to get the Pacific Island Forum together to be able to hold consistent positions.
But in terms of locally, we also know both from some PNG experience but also some other regional experience—as from Timor-Leste—that if you sit in your negotiations with the Chinese, they will have a standard format project financing and agreement, financing and contracting agreement. And they like it to be under Chinese law, not under local law. And invariably it’s determined by the Chinese and it includes large Chinese workforce. And invariably, as we’ve seen with all their finance projects, they like it to be pretty opaque with confidentiality clauses that prevent information sharing.
If you do push back, however, we do know you can get concessions on that and you can get better deals. But it means that you have to be determined and you have to say no, we’re not going to have a 50% or 100% Chinese workforce on this construction project. We are going to have local engineering companies participating in the design and in the oversight, and we want various other concessions, and we need it to be determined under PNG law or at least under some sort of mutual legal oversight arrangement.
It is possible—they’re not going to volunteer that. So if you just get the de facto model, it’ll be a model that’s entirely on their terms. But if you do the push back, and that requires a certain amount of research—you need to know, and you need a level of transparency to be able to push people in government to be willing and able to negotiate more firmly. So the more that one has in each of the Pacific Island countries in terms of open government, open contracting, open budgeting, and the entitlement of the parliament for a start, but then wider citizenry to be participating and have oversight, to have the audit agreements and subsequent implementation subject to the Auditor Generals of their countries, the Supreme Audit—these are all mechanisms that enhance the capacity to hold these agreements and the negotiators of these agreements more accountable.
Because as I say, it’s not just in contracting for construction projects, but it’s also in the negotiation of resource contracts and agreements where often they’re all done behind closed doors and the first anyone sees of them is a reference in the newspaper to a wonderful new project that’s just been signed with the Chinese. We do know that—and I’ve heard this from various leaders in government in PNG—when the Chinese do roll out the red carpet in Beijing, leaders of countries are certainly enchanted by this. They often get a bit of a less formal treatment when they go to some of the other international capitals, but Beijing really knows how to roll out the red carpet and treat leaders from even very small countries in a very grand manner.
And then when the documentation is pulled out—as I’ve heard observed of one prime minister here—yes, he will sign anything after that red carpet is rolled out. And then it’s a case of some of his colleagues working very, very hard to then sideline those projects, examine them more closely and put them on the side. But it’s—yeah, it’s a technique that they’ve learned. Some of the other countries around the world have started to learn that. If you want to—if you don’t want China to have their way on everything, you actually have to make sure that you treat their leaders in a grander manner when they visit their national capitals.
But also it is critically important that we have options made available. As one ambassador from Europe observed to me recently, traveling through the Solomon Islands, she said Solomon Islanders do not want to have the option of only dealing with Australia and China. They want to have other options. They want those options in the field of construction, resource development, resource extraction, resource utilization, but also in terms of education and other areas. And of course, that also relates to security issues because we’re seeing increasingly in the Pacific security agreements being signed up, police cooperation agreements signed up with China. And again, they may—they no doubt have great skills and techniques, the Chinese police—but it tends to come with more than just a police arrangement. It tends to come with a load of strings attached, and that does cause a level of concern within the community.
So it is a case that the communities want engagement. They want engagement with other countries. They want engagement with Europe and of course they want engagement with the United States. And that engagement is not just on a security basis, it’s not just on individual contractual matters—it’s broader. They want the trade, they want investment. And generally, from some surveys conducted in Papua New Guinea, people like the traditional investors—the investors from Australia, New Zealand, the United States—they prefer them. But the fact is, sometimes we see an absence of them. You see one or two big companies, but then sometimes maybe it’s because countries like Australia, their economy is doing quite well. They feel quite happy just to stay at home and invest at home, avoid risks. Whereas if you’re a larger business or even a very small micro enterprise in China, your opportunities may be more limited back home and you’re looking for those opportunities outside. So they’re often willing to come where others are less willing to come.
Certainly Papua New Guineans, from a survey—as I say, by an institute in Australia—it certainly highlighted that Papua New Guineans, and I think the same goes across much of the Pacific, do like their traditional engaged partners and investors and they would like to see that diversity. And that is also because small businesses—not just construction businesses, but other small businesses—are feeling that they’re being squeezed out. So you get the businesses coming in, particularly from Fujian province in China. And they work as a sort of collaboration amongst themselves. Many of them are relatively poor people. They often come in as workers in the construction companies or even the mining companies. And then they stay, they look for opportunities, they look for local partnerships, and they then set up their businesses here. They may not be the formal business owner, but they’re effectively the beneficial owner of these businesses.
But they then develop a sort of whole value chain network through to Fujian and elsewhere in China, which is able to undercut all the retail businesses—the Papua New Guinean retail businesses—also even what we call the old Chinese businesses that have been here for maybe up to a hundred years or more are squeezed out because they can’t compete with this value chain, which often bypasses—uses log ports, uses also the mining port. So the mining port for Ramu Nickel is often quoted as being a venue because it’s sort of—there’s less oversight there. It’s a venue whereby goods and material are brought in from China, which then are dispersed through the market networks of all these micro, small and micro enterprises and middle-sized supermarkets as well.
And there’s accusations that you have the businesses bypassing the labor laws of PNG, the environmental laws, the tax laws—not paying value added tax or general service tax, not paying salary and wages tax. So extensively bypassing revenue mechanisms, but also other environmental and social laws in PNG. And they’re then competing with local firms. Sometimes they may be overseas firms as well. And they invariably can out-compete them because they don’t have the same level of costs. Their supply chain is fairly direct and they don’t have those standards and costs that they have to meet. And that invariably causes discontent for local businesses. On the other hand, you can say that they are providing a service. They’re providing goods and services often right out into some of the most remote communities. But on the other hand, there’s extensive discontent that when Papua New Guineans are producing agricultural goods, they then go to all the stores—which are Chinese-owned stores—and the benefits tend to go straight offshore again.
John Morrell (38:56): Yeah, what you describe—almost these closed ecosystems that these Chinese firms come in with, they have direct sourcing agreements, parallel value chains as you put it, back in Fujian province or elsewhere in China. And because these enterprises, as you say, they’re not bound by the same sets of laws, they can kind of pick and choose which laws they follow and which they don’t, such as environmental impact assessments or whichever the laws may be. They can then undercut local businesses, but also businesses from other markets, which ultimately is what distorts the playing field.
But Paul, you did mention reason for optimism—that countries in the Pacific are learning that you can push back. You have to do it diplomatically. You have to do it intelligently. Even the small markets of the Pacific can get concessions if they’re willing to push back. And your final point, if they have data, if the data is available—I know that’s what INA is working on with CIPE and with other partners, and through other mechanisms—it’s not that INA or CIPE or anyone else is saying, “We don’t want to do business with China.” China’s not going anywhere. China is going to be a player in the Pacific for a long time, just by virtue of geography. But there is a desire to have options, to not be only reliant on China, and that Chinese actors should have to play by the same rules as everyone else. And so it is good to hear that progress is possible.
That’s why CIPE values so much working with you, Paul, working with the Institute of National Affairs. Again, it’s the leading independent policy think tank in Papua New Guinea working on these issues. Paul, we’re going to want to have you back on again soon because there’s so many different directions we could take this conversation. But it is good to hear that you think progress is possible and that people in the Pacific—even the countries that are publicly perceived as being close partners of Beijing—even those countries want options. They don’t want to be exclusively reliant on China just like they didn’t want to be exclusively reliant on Australia a generation ago. They want options, and I think that’s what CIPE is trying to make possible.
Paul, this has been fascinating. Like I said, we’d love to have you back on again soon because this is such a big topic. Thank you, Paul, for taking the time to join us. Everyone, I encourage you to please look up the Institute of National Affairs. They do fascinating work with CIPE and with other partners. They are the leading independent policy think tank in PNG. They work to disseminate their results as widely as possible to inform the community, to inform citizens. So I encourage everyone to check out their work. Paul Barker, thank you so much. We look forward to talking with you again soon.
Paul Barker (41:58): Thank you very much, John, and good to talk to you and partner with you.
