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Joint Understanding between Papua New Guinea and Australia on further cooperation on the PNG LNG Project

This Joint Understanding sets out mutual understandings and further cooperation between Papua New Guinea and Australia in support of the PNG Liquefied Natural Gas (LNG) Project. Underlying this Joint Understanding is an appreciation of the potential of the Project to transform Papua New Guinea’s economy and the Australia-Papua New Guinea bilateral relationship. It builds on the commitment made by our Governments at the 2009 Australia-Papua New Guinea Ministerial Forum to collaborate on support for the PNG LNG Project, including through support for training and development and targeted technical assistance. It also reflects the valuable discussions between Papua New Guinea Ministers, led by the Hon Arthur Somare MP, and Australian Ministers, led by the Hon Simon Crean MP, in Canberra in October 2009.

1. Papua New Guinea and Australia acknowledge the importance of ensuring a robust framework for effective and transparent governance of LNG Project revenue is in place well in advance of the first flow of revenue to Papua New Guinea (anticipated to take place in 2014).

2. Australia will provide advice to Papua New Guinea on the structure and operation of Australia’s Future Fund and Infrastructure Funds, and other relevant international examples, to assist Papua New Guinea develop a Fund (or Funds) to manage effectively the PNG Government’s future petroleum (oil and gas) revenues.

3. Papua New Guinea will provide early advice to Australia on the goals and objectives of the Fund (or Funds) it sets up to manage the PNG’s Government’s share of the LNG Project revenue to help Australia to ensure that its ongoing support is consistent with Papua New Guinea’s development goals and plans as set out in the National Strategic Plan and the Long-Term Development Strategy.

4. Both parties acknowledge that the Generally Accepted Principles and Practices (GAPP) – the Santiago Principles – which provide a framework to properly reflect appropriate governance and accountability arrangements, as well as the conduct of investment practices on a prudent and sound basis, will be utilised in the establishment and operation of the PNG Fund (or Funds).

5. Early cooperation will focus on aligning the structure of the PNG Fund (or Funds) with Santiago Principles 1, 2, 4, 6, 7, 8, 10, 11 and 12:

  1. Principle 1 – the legal framework for the Fund should be sound and support its effective operation and the achievement of its stated objective.
  2. Principle 2 - the policy purpose of Fund will be clearly defined and publically disclosed.
  3. Principle 4 – there should be clear and publically disclosed policies, rules, procedures, or arrangements in relation to the Fund’s general approach to funding, withdrawal, and spending operations.
  4. Principle 6 – the governance framework for the Fund should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the Fund to pursue its objective.
  5. Principle 7 – The owner (ie the Government) should set the objectives of the Fund, appoint the members of its governing body(ies) in accordance with clearly defined procedures, and exercise oversight over the Fund’s operation.
  6. Principle 8 – The governing body(ies) should act in the best interest of the Fund, and have a clear mandate and adequate authority and competency to carry out its functions.
  7. Principle 10 – the accountability framework for the Fund’s operations should be clearly defined in the relevant legislation, charter, other constitutive documents, or management agreement.
  8. Principle 11 – An annual report and accompanying financial statements on the Fund’s operations and performance should be prepared in a timely fashion and in accordance with recognised international or national accounting standards in a consistent manner.
  9. Principle 12 – the Fund’s operations and financial statements should be audited annually in accordance with recognised international or national accounting standards in a consistent manner.

6. As a part of the process, Australia will assist with Papua New Guinea’s engagement with the International Forum of Sovereign Wealth Funds. Participation by Papua New Guinea will assist it in developing an understanding of, and implementing, the Santiago Principles, and will facilitate the exchange of views on issues of common interests with other Sovereign Wealth Funds.

7. To assist Papua New Guinea obtain the maximum development benefit from the PNG’s resource sector, Papua New Guinea and Australia will identify appropriate technical and other assistance for the Government of Papua New Guinea, building on support currently provided under Schedule 4 to the Partnership for Development. Potential areas for further assistance include resource tax administration, financial market risk management, revenue stabilisation funds and corporate, environmental and safety regulation.

8. Australia is supportive of Papua New Guinea implementation of the Extractive Industries Transparency Initiative (EITI). Papua New Guinea will undertake early consideration of the alignment between EITI principles and the objectives of the PNG Government and Project sponsors and assess the potential benefits of implementing EITI, or adopting EITI principles.

9. Papua New Guinea and Australia will decide on the scope of economic modelling, to be led by the AusAID Chief Economist, to identify potential impacts of the LNG project across a range of economic and development variables, before the end of 2009.

10. Noting the World Bank is preparing advice for PNG Treasury on international experience with managing resource revenues, Australia will support further analysis or other assistance in this area, if requested by Papua New Guinea, in coordination with other development partners and international research centres.

11. Australia will continue its commitment to support training and skills development opportunities to ensure Papua New Guinea capitalises on this critical dimension of the Project through current programs and the forthcoming Higher Education schedule to the Partnership for Development.

12. Papua New Guinea, noting the great potential for the Project to provide training and work opportunities for the wider Pacific Islands region, will commence internal discussions on the issue of participation in the Project workforce by nationals of other Pacific island countries.

13. Papua New Guinea and Australia, noting the importance of a more frequent and focussed exchange on the impacts of the extractive industry more broadly, will establish a subcommittee of our annual Ministerial Forum to facilitate cooperation and review progress on the matters set out in this Joint Understanding. Terms of reference will be settled at the earliest opportunity.