PRESS STATEMENT- 26TH JULY 2018
THE CONVERSION OF CAPITAL ASSETS TO LIABILITIES CALLED “FREE CARRIED INTERESTS” IN MINERAL AND PETROLEUM DEVELOPMENT PROJECTS IN PAPUA NEW GUINEA.
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 amazing 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 costs are 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 partner would usually end up with a very small interest in the project, due to their inability to raise significant monetary capital to purchase more 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 being the landowners and the government of Papua New Guinea transfer their ownership of the wealth to the mining or Petroleum Company? Or did they transfer their ownership of the wealth to the mining or Petroleum Company at all? The answer to all these questions is obvious. The ownership of the asset or wealth has not been transferred to the mining or petroleum companies at any time. The owners had lost their ownership through sheer stupidity and incompetence resulting them losing their wealth to the developers for decades.
The correct formulae for the sharing of equity by all involved in a project should instead take into consideration the owner’s asset value of the quantity of mineral or petroleum which has been discovered and available for extraction and the exploration cost of the mining or petroleum company that has discovered the asset.
The owners would usually end up with a greater stake in the project with the exploration company with a lesser interest, with development costs being funded by a bank repayable by the project or each partner raising funds else where .