Canberra, 30 June 1967

Confidential

Policies for private investment in Papua and New Guinea

The purpose of the submission is to bring to Cabinet's attention some issues raised by the Territory's growing need for overseas investment and to obtain Cabinet's endorsement of some elements of an investment policy for the Territory.

2. The following issues are involved:

(a) the need for investment publicity and promotion

(b) Asian investment

(c) local participation–preventing excessive foreign control

(d) investment insurance.

3. At present most of the private inflow of capital to the Territory comes from Australia; in 1964–65 this inflow was estimated to be approximately $5 million. This compares with the Australian grant to the Territory of $56 million during the same year and of $70 million for the present year. There is clearly a need to accelerate the flow of private investment both from Australia and elsewhere, in order to shift some of the burden of Territory development from the public sector to the private sector.

Investment promotion

4. One way of increasing private investment in the Territory would be to do more by way of promoting foreign investment whether from Australia or from other sources. Apart from Australia the main prospective sources are the United Kingdom, U.S.A., Japan and the E.E.C.¹ countries.

5. I consider the U.S.A. holds out reasonably attractive prospects particularly as it is understood that the United States' interest equalisation tax would not apply to investment in Papua and New Guinea. Some U.S. investors have already expressed interest in the Territory and the Chase Manhattan Bank of New York has raised the possibility of arranging a seminar to create greater interest among American financial institutions in investment in Papua and New Guinea.

6. Promotional efforts directed at the U.S.A. in respect of investment in Papua and New Guinea would not be on too large a scale and would be in proportion to the investment opportunities available in Papua and New Guinea. The Treasury doubted whether, in general, a publicity and promotional programme would have the effect of markedly stimulating overseas investment in the Territory. As against this I consider that worthwhile results would follow from a suitable programme of a selective character which could be developed at a cost of approximately $35,000 in 1967/68. I would propose that the broad lines of an investment publicity and promotion programme be worked out in consultation with the Department of Trade and Industry and the Treasury and where appropriate, the overseas facilities of these departments be utilised.

Local participation

7. Almost all the funds required for major projects in the private sector in the Territory are at present provided by expatriate capital mainly from Australia. As the pace of development quickens and unless measures are taken to redress the balance, the situation will arise where all major investments in mining, agriculture, forestry and secondary industry will be mainly or wholly owned, managed and financed by expatriates. This would remove any possibility of developing a concept of partnership between expatriate and local, particularly indigenous, enterprise in the Territory. The situation would also be likely to give rise to criticism from Territory public opinion long before self-government was attained.

8. To mitigate these problems and to facilitate a reasonable degree of local participation in major new projects some special arrangements may need to be made. The purpose of such arrangements would be to provide means of participation by local investors either in the present, or in the future. If nothing is done now, we may find in a few years time that a serious situation has been created which cannot be remedied at all or cannot be remedied in time to avoid grave problems including a serious reduction in private investment.

9. A part from the earlier case of Government participation in Commonwealth New Guinea Timbers Limited, which was agreed to in 1952, Cabinet has in recent decisions recognised the need for local participation in the Territory in specific cases, notably with Harrisons and Crosfield (A.N.Z.)² Ltd. for an oil palm venture in New Britain and with Conzinc Rio Tinto of Australia in the development of copper deposits in Bougainville.

10. Treasury felt that a policy of encouraging local equity participation in foreign investment undertakings would not be likely to deter potential overseas investors. They considered, however, that any attempt to make it compulsory for investors to provide for Territory participation could deter significant amounts of investment and moreover that because of the limited funds available from the private sector the provision of meaningful local participation could result in a substantial additional call on capital funds from official sources. I agree that it will be desirable to avoid making it compulsory for companies to provide for Territory participation, and also that, any special arrangements set up to provide a machinery for participation, should be designed so as to avoid any continuing demand for funds from official sources.

11. The recently established Papua and New Guinea Development Bank³ is authorised to take up equity holdings in development projects in appropriate circumstances. In this way some local participation may come about in specific projects. I am studying other possible arrangements including a variety of possible financing arrangements whereby significant Territory participation in major projects can be promoted.

Asian investment

12. Papua and New Guinea like other developing countries where the economy is based largely on the exploitation and export of natural resources is likely to prove an attractive field of investment to Japanese interests. However under existing Cabinet directions Asian investment is not to be canvassed and Asian investment proposals can only be approved under certain restricted conditions and under special procedures.

13. There has been no adverse reaction reported from the local people against recent approvals given to proposals involving Japanese investment in the Territory.⁴ In view of this and because of the need for a substantial increase in private investment it would now appear desirable to consider easing some of the current restraints on Asian investment. The first steps could be taken to lay down and make known for the guidance of intending investors broad rules under which Asian participation in investment in Papua and New Guinea will be accepted. Existing administrative procedures might be simplified to obviate delays and inconveniences which tend to inhibit investment at present. Indeed it might now be timely for the policies relating to Asian investment and associated administrative arrangements to be reviewed by a committee of the Prime Minister's, Trade and Industry, Treasury, External Affairs and Territories Departments, consulting other departments as necessary.

Investment insurance

14. A number of requests have been made seeking Government guarantee against loss of investment (especially through expropriation or restrictions on transfer of earnings and repatriation of capital) in the event of future adverse political developments in the Territory. It has been suggested in these representations that the absence of such a guarantee retards new private investment. It is hoped that to some extent hesitations on the part of foreign investors which may be due to the absence of an investment guarantee can be overcome by the proposed programme of investment promotion. Moreover any arrangements which may be made to ensure local participation in major projects could be regarded as representing a degree of insurance of such investment.

15. The question of investment insurance could therefore be left to one side for the present. It could be if necessary reviewed in the light of the results of the proposed investment promotion activities and in the light of an examination of proposals referred to in paragraph 11 for an arrangement ensuring local participation in major Territory projects.

Recommendation

16. I recommend–

(a) that a modest programme of investment promotion appropriate to the Territory's needs be authorised; the broad lines of the programme for 1967–68 be worked out in consultation with the Minister for Trade and Industry and the Treasurer and that the provision of necessary funds be considered at the time the 1967–68 budget is being framed;

(b) that arrangements relating to Asian investment should be reviewed with a view to easing the restraints on Asian investment. The review to be undertaken by a committee consisting of Prime Minister's, Trade and Industry, Treasury, External Affairs and Territories Departments, consulting other departments as necessary;

(c) that the need for adequate opportunities, and possibly the need for additional arrangements for Territory participation in major overseas investment enterprises in Papua and New Guinea be noted, any such arrangements to be designed in such a way as to avoid continuing demands for funds from official sources;

(d) the need for investment insurance in the Territory be reviewed again if necessary in the light of the results of promotional efforts to encourage overseas investment and the establishment of a policy regarding local participation, if these measures are approved.⁵

[NAA: A1838, 936/3/1 part 2]

1 European Economic Community.

2 Australia and New Zealand.

3 During a speech on 6 July 1967 marking the opening of the Bank, Barnes commented that it had 'been set up as part of the Government's policy of economic development of the Territory ... [It] will add another important service by making credit available to both indigenous and expatriate producers and businessmen who have sound projects to put forward. It will especially serve the small producer and the small business man' (NAA: A1838, 936/14/2 part 1).

4 See Documents 57 and 60.

5 On 19 July, Cabinet approved a promotion program to be funded from the Administration's vote for 1967–8 (see Document 136). The outlines of the program were to be established initially by the interdepartmental committee referred to in paragraph 16(b). The recommendations contained in paragraphs 16(b) and (d) were approved. With regard to 16(c), Cabinet 'agreed that the desirability of Territories participation in major overseas investment enterprises be noted, but [decided] that there need be no over-rigid application of rules or guidelines to this end'. Cabinet also endorsed Barnes' advice in 16(b) on official sources (decision no. 418(M), NAA: A5842, 320).