China’s strategic land acquisition right on our border

While the Australian Government prepares to give the Papua New Guinea Government yet another cash "loan" (One PNG has zero capacity to repay in the immediate future) China has skilfully and rather cheaply make a strategic acquisition right on our northern border.

For several years a proposed Ihu Special Economic Zone, including Kikori, in the Gulf Province has been promoted by various interests, including the Member for Kikori in the PNG National Parliament, Soroi Eoe, who is the Foreign Affairs and Trade Minister in the Marape Government – and has been Acting Prime Minister while Marape has been in the United States.

The project has been heavily criticised on social media in the Papua New Guinea, but it has been endorsed by the PNG Cabinet, and the Gulf Provincial Government.

Kikori-Ihu is located on the Gulf of Papua and is the closest medium size community to Daru which is in the adjoining Western Province. There is no road connection between the two, but I would estimate the distance between them is between 300km and 350km.

The Kikori-Ihu area is very strategically located – for Australia and for Papua New Guinea. It is relatively close to Cape York and for Papua New Guinea it is strategically located near the offshore gas fields which are close to development. The important pipeline linking the PNG Gas Project to the coast, and then on to Port Moresby, passes through the Gulf Province, and the Kikori electorate.

The Kikori-Ihu area is underdeveloped. Living standards are low, agriculture is limited, and there are no substantial industry projects in existence.

It is therefore hardly surprising that the powerful local MP, and his community, want substantial investment. The Special Economic Zone legislation passed by the PNG National Parliament provides massive taxation, import duty exemptions, foreign worker approvals and other benefits that may run for 10 year periods.

The Ihu Special Economic Zone was approved by the National Government last year under the SEP legislation and there has been speculation ever since how it would be progressed.

One assumes, or hopes, that the Australian High Commission in PNG, and the Department of Foreign Affairs and Trade, have had a watching brief on this proposal given its strategic location to Australia.

Well if it hadn't it would now be more than watching as last Friday a part of the puzzle when it came to how the proposal would gain some substance was revealed.

When the PNG Foreign Minister, and Kikori MP, visited China as guest of his PRC counterpart several months ago he raised the Ihu Special Economic Zone in discussions. It was not formally mentioned in the communique issued after his talks with China's Foreign Minister.

Late last week, while Mr Eoe was Acting Prime Minister, he announced that China had "generously" given Papua New Guinea a grant (not a loan) of K80 million (about $A35 million) for the Ihu Special Economic Zone Project. In accepting the grant Mr Eoe was fulsome in his praise of China, and of course the PRC Ambassador in Port Moresby who has been actively promoting it.

The immediate question is – what would K80 million deliver for China in return?

To me the answer is quite simple. It gives China an effective veto when it comes to foreign investors interested in the project! It was not made clear in the announcement how the K80 million will be spent.

But whatever it is used for, there can be no doubt China has achieved quite cheaply a strategic advantage on our northern border, and in an undeveloped PNG Province which has enormous untapped gas, and probably oil, resources.

And just how strategically important China regards this "investment" can be measured by a comparison with the proposed Pacific Marine Industrial Zone near Madang. For that proposal, China gave PNG a loan of K200 million, which it has been repaying ever since even though there has been zero development on the site.

So Madang gets a loan – Ihu-Kikori gets a non-repayable grant!

It is clear that as Australia's relations with China have deteriorated, China has shifted its focus to the Papuan Provinces closest to Australia – Western Province (Daru) and nnow the Gulf Province.

As I wrote last December, a major Chinese fishing company, strongly supported by the PRC Government and Embassy in Port Moresby, has been in discussions with the national government, and the Western Provincial Government, for the establishment of a major "fisheries facility" on Daru, the PNG community nearest to the Australian islands in the Torres Strait.

This project, far-fetched though it may seem, is most definitely not dead. Discussions continue, and no doubt the first priority will be the construction of a wharf of Daru capable of berthing Chinese naval vessels!

Exactly what will happen at Ihu and Kikori will depend on whether the ambitious plans being promoted by the local MP and the company he effectively heads that claims ownership of the project is able to attract substantial investors. China will most likely seek to strengthen its initial modest contribution by building yet another substantial wharf! Right on our doorstep!

But there are yet two other reasons why Australia must be watching this project – and frankly why our apparent refusal to examine whether we should have engaged with the Foreign Minister and his community on the project in even a scaled-down form is just hard to explain.

Firstly, Kikori-Ihu are very close to the Purari River. Some years ago Origin Energy was interested in the development of a major hydro-power project on the river. Extensive work that confirmed its viability was undertaken by reputable Australian engineering firms. The work demonstrated that a staged hydro scheme could deliver electricity to the whole of Papua New Guinea, and with further development provide cheap and green energy to North Queensland.

Sadly the proposal has stalled, with Origin losing interest, and the PNG Government quite unable to afford the estimated $5 billion plus construction cost.

But its time may come….and it may come sooner than seems likely today.

Last year Andrew "Twiggy" Forrest visited PNG for discussions with the Prime Minister and senior ministers. The discussions included the Purari hydro scheme, as a green energy project AND a smelter that would process iron ore from Australia and elsewhere.

While Andrew Forrest was non-committal about investing in a smelter, I know the possibility was discussed which is hardly surprising given his position as a major iron ore producer, and green energy advocate. He has more recently expressed a strong interest in looking at "green energy" projects in Papua New Guinea.

The Kikori-Ihu special economic zone would be ideally suited to a major industry, like a smelter, if it could also access affordable and unlimited power. Purari certain offers that.

What we don't know is whether or not Andrew Forrest has used his extensive China connections to promote a joint venture, or encourage China to invest in the special economic zone on its own. I incline to the view China's initial K80 commitment is unrelated to Mr Forrest, but a strategic opportunity China has skilfully capitalised on.

What we do know is that whatever happens, now China has given the PNG Government and the Kokori project a modest initial grant, it has "a seat at the table" that it could utilise to build infrastructure such as a port….and maybe a smelter, with or without the involvement of Andrew Forrest.

The really troubling aspect of the latest development in China's unending pursuit of greater influence in Papua New Guinea is that the Australian Government has been sidelined from a project that while it is over-ambitious, and won't proceed in its grandiose format, it unquestionably presents national strategic interest concerns given its proximity to our mainland, and our sea lanes.

And in the meantime Canberra apparently plans to "lend" PNG another $300 million plus in the apparent belief it "enhances" our relationship with our closest neighbour, and diminishes that of the Peoples' Republic of China.

It does neither!