Can a town reinvent itself before its economic engine disappears?

Q: What is Tabubil like?

It's in a beautiful setting, up in the mountains, right in the middle of the island of New Guinea, about 30 kilometers from the border with the Indonesian part, West Papua. The rain is unbelievable—it's one of the wettest places in the world, with about eight meters of rainfall annually.

There is an airport, but for the mine and most of the necessities, the Fly River is the key way in or out. It's a four-hour drive from Tabubil to the river, then four days by boat to the coast. All the ore from the mine goes out on the river and all the inputs to the mine come in on the river. It's a very complex logistics chain. Developing the Ok Tedi mine, some 30 years ago, was an extraordinary engineering feat.

The town was built and is still run by the mine as distinct from the local, provincial, or national government. Undoubtedly because of that, it's much better managed than any other town in the country. It's a classic mining town, neat but a bit boring. It has the best hospital in the country. The formal town has around 8,000 people. Outside town, there are another 20,000 people in settlements, and this population is growing incredibly quickly as people move from traditional villages to be near the mine, in part to participate in the cash economy, but also for the services, particularly health and education.

Q: There was some discussion of the mine closing as early as 2013. Is that happening?

The future of the mine is a very topical subject. There's a periodic lease renewal that's being debated. There have been nine previous renewals. The agreements require legislative backing as well as endorsement by the local communities, so at the moment, there is a complex set of deliberations underway. Some people are advocating mine closure while others want its continuation.

Ok Tedi is a large mine by global standards. It provides on the order of 18% of the country's GDP, so it is difficult to envisage closing such a lynchpin of the economy, especially when there's probably another 20 or 30 years of economic life in the mine. It's 100% Papua New Guinean owned. About 36% is owned by the PNG government directly. The remainder is owned by a trust that is physically located in Singapore and serves as a vehicle for channeling mining proceeds into development initiatives for the benefit of communities affected by the mine but also the broader Papua New Guinea community.

Over the last six months, a new government has been elected to power, and they have expressed an interest in capturing all the proceeds from the mine. This has become an interesting, complex, and fiercely debated issue. But if you cut through all of that, the mine will almost certainly continue to operate.

Q: How did the Tabubil Futures Initiative come about?

The trust came about 10 years ago in the wake of an environmental disaster when a tailings dam broke and flooded into the Fly River system. At that time, BHP Billiton was the largest shareholder and operated the mine. Because of this big embarrassment for BHP, they wanted to close the mine down.

However, the government of the day took the view that the country simply couldn't afford for the mine to close. The upshot of all this was that BHP gave its ownership to the people of Papua New Guinea through this trust. I guess the thinking behind the trust was that PNG governments, putting it bluntly, have a history of corruption and poor service delivery. The trust mechanism was put in place as a way of circumventing the inevitable, corrupt pressures for people to get their hands on the money. There are now several billion U.S. dollars sitting in Singapore to fund development programs, one of which is the Tabubil Futures Initiative.

My wife and I spent the 1970s living in Papua New Guinea before I went to SOM. Since graduating I spent the bulk of my career as a consultant and then as an entrepreneur. The chairman of the trust, Professor Ross Garnaut, was a friend from those Papua New Guinea days. He's a well-known public policy economist from Australia, previously served as Australia's ambassador to China, and until recently was the chairman of the trust as well as the chairman of the Ok Tedi Mining Company.

He saw that Tabubil has the potential to be much more than a mining town, and it was his idea to start working toward that. Three years ago he had asked me if I'd come and think through what we might do to make this a reality and to begin implementing some of these initiatives.

In the early days, it was very much a thinking and planning exercise. I didn't want to build a big bureaucracy. As we got towards implementing various initiatives, I chose to use experts who would come in for a relatively short period of time. Currently I've got three people working with me as a small, high-level team.

We are engaged in three streams of work: establishing new municipal government arrangements; putting in new infrastructure; and working on are commercial joint ventures to broaden the community's economic base. For example, we are initiating a vertically integrated agribusiness, investigating cement manufacturing using local gas and limestone supplies, and orchestrating a new gas-fired power station. Part of the appeal of working in a place like this is having the opportunity to shape such a broad agenda.

Q: What did you draw on for models?

There was a classic example of an outcome that we're trying to avoid. Misima was a viable town in PNG, with a vigorous mining economy. At the end of the mine's life, it simply closed down and reverted to jungle. The local communities had no lasting legacy from the development.

I wasn't aware of any positive models that we could draw on, so really, it was very much an exercise of thinking things through from first principles. As different initiatives crystallized, we were able to draw on other models. For example, when we started thinking about a power plant, there were plenty of other power stations and power experts around that helped point us in the right direction.

Q: How do you create an organic and self-sustaining town where you know the core economic driver will disappear in a couple of decades?

You have to broaden the economic base. In the early days, there were lots of cynics arguing that it was all a waste of energy and effort, but I don't believe that is the case.

For example, the mine trains its own apprentices. We've taken over running this activity and built it into the Star Mountains Institute of Technology, which is now training apprentices both for Ok Tedi and other employers. We're working towards a joint venture with an Australian university, which, if it eventuates, would enable us to build this technical training initiative into a university-level school of mining.

There's just such a pressing shortage of education in the country, and the existing universities are all fairly run down, so this represents a promising opportunity to build a new institution with very high academic standards.

In addition to this education initiative, we can capitalize on new resource-development opportunities in the region. Part of our thinking is that as Tabubil grows, it can become an attractive location for the corporate headquarters that will be required to manage developments that are in the pipeline.

Q: You've mentioned that elections are contentious and that there are problems with corruption. How do all of these factor into setting up the civic government for Tabubil?

Well, we took the view, rightly or wrongly, that the best form of government will be a corporate-style entity rather than a democratically elected system. Basically, the people who are going to put the money in will have the lion's say. The plan is to have a board with representatives from a number of different stakeholders, including local people, but run it like a corporation rather than like a conventional municipal authority.

The thinking behind this was twofold—one, efficient decision making, and two, providing a sound custodian of the wealth that we'd be spending. This does run contrary to a democratic form of local government, but the concern was the politics and the corruption. Perhaps we fell into the trap of ideologically unsound pragmatics, but in my heart of hearts, I'd, unfortunately, have to say that this is the right way to go. If you look at every layer of government in the country, it simply doesn't function effectively, so we have to try something different.

It's unclear how long the arrangement will last, but even, say, 15 years would enable us to make a lot of progress, whereas with a broken-down and corrupted local government, it's hard to imagine much progress being made.

A corporate system of town governance will need legislative backing, and we propose tacking this onto this next extension of the mining lease, scheduled to be in place towards the end of the year or early next year, assuming the politics can be bedded down.

Q: What are some of the other key initiatives?

We have been working on affordable housing. Traditionally a three-bedroom, middle-class house cost U.S. $700,000 in Tabubil. Figuring that someone can spend roughly a third of their income on housing, a sustainable housing solution should cost no more than $180,000. So there is a huge disconnect between the cost of conventional housing and the requirements for a properly functioning property market. We needed a completely different way of doing things.

There are no local building materials. We considered precast cement, but lacked the minimum economic scale to get this going. It might be possible in the future; it's not practical now. Like so many of these issues on the agenda, we faced a chicken-and-egg problem: until you get something going, nothing seems to make sense.

To bust through that impasse, we researched low-cost housing initiatives around the world, looking at modern materials, prefabrication, and integrated supply chains. Housing in such a remote location is very much a logistics and design problem. We now have an attractive solution that is costing $80,000 a dwelling, a major step change in cost structure.

But we're not mixing objectives. This is a housing-oriented initiative. It's not a broad industry development initiative. While it would be legitimate to use this housing initiative as a vehicle for creating local employment and a local industry, there's only so much money in the pool to allocate to housing, so we want to get as much housing done as we can with the available resources. We opted for a different philosophy from what we've seen elsewhere, where an initiative such as this has been used to pursue several different objectives. I could be right, could be wrong, but that's the way we chose to go with it.

Q: You mentioned an agribusiness project. What is the food situation now?

Effectively all the food consumed in Tabubil is imported either from the highlands of PNG or flown in from Australia. It's incredibly expensive and poor quality. Usually, fruit and vegetables have been in cold storage for months.

The Min people, the traditional inhabitants of the area, were hunter-gatherers, so there's no agriculture tradition in the region. Tabubil is one of the wettest places on Earth, so the soils are leached and not particularly suitable for agribusiness. There is a little bit of market gardening around but not much.

We're trying to leapfrog the technology by putting together a joint venture with an Israeli company that will use very sophisticated irrigation technology to add nutrients in controlled greenhouse environments. We are planning to develop this initiative on a large area of reclaimed mine tailings which have been dredged from the river.

This is another case where we're not trying to achieve multiple objectives. The objective here is to get food security, because at the moment, with everything being imported, when the levels in the river go down, seasonally or in droughts, you can't get food in. That was a problem when the greater town was about 6,000 people, but that it's now 30,000 and growing, we face the risk of a social catastrophe, where people starve. So we had a single-minded focus on feeding this community through the weather cycles.

Q: Papua New Guinea is a unique place, with more than 800 languages and hundreds of ethnic groups. It is still heavily rural and there has been a real effort to protect traditional landholders. How does that shape the projects you are looking at?

I've been working on a joint venture with a big energy company to set up a gas-fired power station to replace power generated by imported diesel. The economics of some of these initiatives are quite extraordinary, something you'd never see in a more competitive environment. This power initiative is a $200 million investment, and the payback on it is about three years with the saved cost from displacing imported diesel.

But land tenure is a key complexity, because the project requires corridor access for a 150-kilometer transmission line. This involves a very complex and slow process of negotiations with about 15 different communities. If it's not done well, the solution won't be sustained.

With other initiatives, we try to avoid this complexity by staying on land currently leased to the mine, where previous deals have been negotiated with the traditional owners, who have received compensation for the alienated land. It follows that available land is an incredibly scarce and valuable resource, so we're figuring out how to make most efficient use of it.

Our new housing solutions reflect this shortage, as does the food-security initiative on the tailings reclamation area already managed by the mine. Land is such a deep-seated aspect of traditional culture that you'd have a revolution on your hands if you just tried to push through land developments. Some project sponsors have cut corners and this has led to serious unrest. Even when deals are done properly, people in some of the very remote areas are being asked to agree to something that they do not understand. If you've never seen a major mine development, you can't imagine what you're signing up for.

So this is one of these unbelievably complex issues, and while the government's trying to, I think, be sensitive about these issues, the whole PNG economy is underpinned by mining and resources. Inevitably, if there are going to be mining developments, it will lead to conflict with traditional land ownership and existing village communities. The resource curse, or so-called Dutch disease, is alive and well in PNG.

Interview conducted and edited by Ted O'Callahan.