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PNG SUSTAINABLE DEVELOPMENT PROGRAM LTD

2007ANNUAL REPORT

www.pngsdp.com

PNG SU

STAINAB

LE DEVELO

PMEN

T PROGRAM

LTD 2007 AN

NU

AL REPORT

L423 - ACA SDP AR 2007 Covers Impo 14/5/08 1:38 PM

P N G S U S T A I N A B L E D E V E L O P M E N T P R O G R A M LT D - M I S S I O N A N D V A L U E S

P N G S U S T A I N A B L E D E V E L O P M E N T P R O G R A M LT D - S T R AT E G I CO B J E C T I V E S & L O N G T E R M G O A L

OUR MISSIONPromoting development that meets the needs of the present generation and establishes thefoundation for continuing progress for future generations of Papua New Guineans.

OUR VALUESWe recognise the significant onus of trust, responsibility and challenge that has been placed uponthe Company.

We will be honest, fair and accountable in all our dealings, while promoting equality and efficiency inour conduct and activities.

We commit ourselves, through the activities of the Company, to promote and improve the quality oflife of current and future generations of the people of Papua New Guinea, especially of WesternProvince.

OUR ACTIONS - We will achieve these by:• investing and managing wisely the income and resources of the Company;

• undertaking investments and projects that provide significant short and long term benefits tothe people, local communities, provinces and the nation;

• meeting the best financial, physical, cultural, social and environmental standards in all ouractivities; and

• working together with the people of Papua New Guinea in partnership with the government,churches and other non-government development and business partners.

PNGSDP'S STRATEGIC OBJECTIVES• To improve basic infrastructure and

services that are critical foreconomic development in asustainable way.

• To invest in sustainable economicactivities that will raise householdincomes and empower localcommunities to participate insustainable development.

P N G S U S T A I N A B L E D E V E L O P M E N T P R O G R A M LT D - M I S S I O N A N D V A L U E S

P N G S U S T A I N A B L E D E V E L O P M E N T P R O G R A M LT D - S T R AT E G I CO B J E C T I V E S & L O N G T E R M G O A L

PNGSDP'S LONG TERM GOALTo promote diversified andbalanced economicdevelopment of the Nation,especially Western Province,providing for improved well-being and self determination oflocal communities beyond thelife of the Ok Tedi mine.

CORPORATE DIRECTORY

Head OfficePNG Sustainable Development Program Ltd

7th Floor, Pacific PlacePO Box 1786, Port Moresby 121

Papua New GuineaTel (675) 320 3844

(675) 320 3845 Fax (675) 320 3855

Registered OfficeDrew Corp Services Pte Ltd

20 Raffles Place #09-01Ocean Towers

Singapore 048620Tel (65) 6531 4187 Fax (65) 6533 1542

(65) 6531 2266 (65) 6533 7649

AuditorsPricewaterhouseCoopers

8 Cross Street#17-00 PEC BuildingSingapore 048424

PricewaterhouseCoopersCredit House, Cuthbertson Street

PO Box 484 Port Moresby 121Papua New Guinea

LawyersGadens Lawyers

PO Box 104212th Floor, Pacific Place

Port Moresby 121Papua New Guinea

Front Cover Photos: Kerevat Bridge, East New Britain;PNG Microfinance; Solar Energy; Kebeguili CommunitySchool, Milne Bay.

Back Cover Photos: CSIP Water Supply Project, YapurakVillage Morobe Province

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P N G S U S TA I N A B L E D E V E LO P M E N T P R O G R A M LT D A N N U A L R E P O R T 2 0 0 7

PNGSDP MISSIONSTATEMENT,LONG TERM GOAL & OBJECTIVES IFC

Letter from the Chairman 1

TABLE OF CONTENTS 1

CHAIRMAN'S REPORT 2

CEO'S REPORT 4

PNGSDP'S STRATEGIC FRAMEWORK 5

PNGSDP'S HISTORY 6

OK TEDI MINE 7

INCOME & EXPENDITURE 8

FUNDS MANAGEMENT 10

THE DEVELOPMENT FUND 11

WESTERN PROVINCE PROGRAMS 12

• Strategic Development Programsand Projects 12

• Community and Social InvestmentProgram 16

• Agriculture Development Program 18• Energy, Rural Electrification &Communications 19

• Environment, Tourism and FisheriesDevelopment Program 20

• Forestry Program 21• Infrastructure Program 22• Microfinance 24NATIONAL PROGRAMS 25• Community and Social InvestmentProgram 25

• Energy and Rural ElectrificationProgram 26

• Forestry Program 27• Agriculture Program 28• Infrastructure 29• Microfinance 31MANAGEMENT REPORT 32• Management Chart 33ADVISORY COUNCIL REPORT 34CORPORATE GOVERNANCEREPORT 36• Board of Directors 36• Corporate Governance Statement 40SUBSIDIARIES & JOINT VENTURES 45PNGSDP FINANCIAL STATEMENTS 47

LETTER FROMTHE CHAIRMAN

PNG Sustainable Development Program LimitedPort Moresby, Papua New Guinea

11 April, 2008

The Independent State of Papua New GuineaBHP Billiton LimitedOk Tedi Mining Limited

In accordance with Clause 20 of the Company's Program Rules under the Articles of Association of the PNGSustainable Development Program Limited, I submit to the Independent State of Papua New Guinea, BHPBilliton Limited, and Ok Tedi Mining Limited, the Annual Report 2007, covering the financial year ending 31December 2007. The Annual Report also includes the financial statements and the report of the Auditor.

Furthermore, in accordance with Clause 19.3 of the Program Rules of the Company, the key elements of theAnnual Report will be presented for discussion at the Annual Report Meeting of the Company, to commenceat 9.00 am on Tuesday 3 June 2008 at the Conference Hall, Holiday Inn Hotel, Port Moresby.

Sincerely,

ROSS GARNAUT AOChairman Board of Directors

2007 ANNUAL REPORT CONTENTS

The company website - www.pngsdp.com - contains this report and additional information

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C HA I RMAN ' S R EPORT : A m e s s a g e f r o m R o s s G a r n a u t

The past year has been oneof advancement at PNGSustainable DevelopmentProgram Limited (PNGSDP).The Company has performedwell - progressing onour objectives includingincreasing our capacity todeliver on a growing numberof community development

and investment programs as well as building thefoundations for key projects inWestern Province andNationally.

PNGSDP has three main areas of responsibility - thegovernance of Ok Tedi Mining Limited (shared withtwo other shareholders), the management of theLong Term Fund, and the application of a share ofcurrent dividends toward sustainable developmentin Western Province and the rest of Papua NewGuinea.

Ok Tedi Mining

The Ok Tedi Mine has again performed solidly, withhigh metal prices underwriting high profits and cashflows. Major investment in a facility to remove and tostore safely sulphur from mine tailings had first claimon cash flows. PNGSDP's dividends afterwithholding tax to the Papua New Guineagovernment were US$234 million. The large royalty,income tax and dividend payments from OTML wasthemain source of the considerable fiscal strength ofthe Provincial and National Governments, and amajor element in strong national economic growth.

The Long Term Fund

The Long Term Fund will be applied to sustainabledevelopment in Western Province and Papua NewGuinea for at least 40 years after the eventual closureof the Ok Tedi mine. This year PNGSDP'smanagement of the Long Term Fund yielded anincrease from US$376.6 million at the end of 2006, toUS$594.2 million at the end of 2007. The increaseincluded earnings of US$64.1 million, representing areturn of 14.08 % on average funds employed. Thistakes the average returns on the Long Term Fundfrom the first year in 2002 - 2007, to 9.9%.

The PNGSDP Board is pleased with this return giventhe equity and bond market turbulence in the

second half of the year that led to large losses inmany overseas investment funds. Papua New Guineainvestments again contributed healthily to the goodreturns.

The Long Term Fund is being managed to securesound returns, without taking large risks on the totalportfolio. The health of the Long Term Fund providesconfidence that PNGSDP will be in a position tomake substantial contributions to the developmenteffort in Western Province for a long period aftermine closure.

Investment and development ofinfrastructure and services

Importantly, PNGSDP also has responsibility for theapplication of one third of the current dividendsfrom the Ok Tedi mine to sustainable developmentin Western Province and the rest of Papua NewGuinea (two thirds).

While maintaining its national development effort,PNGSDP in 2007 gave special attention to improvingvillage services and long-term developmentinfrastructure inWestern Province. It was pleasing tosee so many Community Sustainable Developmentand Social Investment Program projects take shape,with a high proportion reaching completion by theend of the year - inWestern Province as well as acrossthe rest of Papua New Guinea.

The Company's micro-finance subsidiary, PNGMicrofinance Limited (PNGMFL), now providesaccounts for 49,334 people in Western Province(April 2008). During the year under review, the Boardapproved funding for extending the establishedbranches in Daru, Balimo, Kiunga and Tabubil to LakeMurray, Obo and Morehead. By the end of 2008, weexpect that a majority of households in WesternProvince will have an account with PNGMFL. Most ofthe clients of PNGMFL until recently had no access tobanking services at all. Our aim is eventually toprovide simple banking services to people in allcommunities in Western Province.

In addition, PNGSDP, through support for itssubsidiary PNGSEL, has provided power for manyhouseholds in villages and small towns in WesternProvince. Rural electrification is being extendedrapidly through the North Fly region. It is PNGSDP'sobjective for a majority of households in the



CHA I RMAN ' S R EPORT : A m e s s a g e f r o m R o s s G a r n a u t

Province soon to have access to electric power. Themodel for PNGSDP support for infrastructureservices like microfinance and power is for PNGSDPto contribute to initial development, and for theservices to be sustained commercially through userpayments for services.

Considerable progress was made on theidentification of major, long-term, infrastructure andincome-generating projects in Western Province - toensure continuation of development momentumafter the eventual closure of the Ok Tedi mine. Thereare now good prospects of establishing on a soundcommercial and therefore sustainable basis, a majordeepwater port and industrial area at Daru andadjacent areas of Western Province. These facilitieswould build on the energy (natural gas and hydro-electric) resources of Western Province and adjacentareas of the southern coastal region. They wouldenhance the prospects for a number of sustainableforestry, agricultural, fisheries and eco-tourismprojects that are the subject of currentconsideration.

Partners and key stakeholders indevelopment

The Company attaches high importance to itsdevelopment partnerships with internationalfinancial institutions, including the World BankGroup, Australia's AusAID, and the EuropeanInvestment Bank. PNGSDP looks forward todeepening development cooperation with thesepartners and extending it to others in the year ahead.

The year under review was historically significant inPapua New Guinea. The mid-year national electionssaw the return of the first Papua New GuineaGovernment to run a full parliamentary term,Sir Michael Somare's National Alliance-ledGovernment. The elections also saw the return ofWestern Province Governor, Bob Danaya. Wecongratulate the Prime Minister and the Governor,and look forward to working with them and theirGovernments on national and provincialdevelopment in the years ahead.

Leadership at PNGSDP

The major progress and ambitious forward programsof the Company are being delivered by an effectiveexecutive management team and staff located in

Port Moresby, and more recently, in WesternProvince.

Chief Program Officer, David Sode, was appointedChief Executive Officer on 10 March, 2008. David hashad a distinguished career as Chief Commissioner ofPapua New Guinea's Internal Revenue Commissionfor over a decade, and as an effective Chief ProgramOfficer of PNGSDP over the past year. Mr. Sode willcomplete the strengthening of administrativestructures with a view to enhanced program deliverycapacity that was commenced by Robert Igara overthe past year.

Mr. Igara, who led the Company successfully throughits formative years, was given high responsibilities ina new position as Executive Director. In this role, hewill establish the foundation for the majorinternational port, industrial area and linkedinfrastructure in Western Province. Robert hasplayed a significant role in establishing PNGSDP as amajor business and contributor to development inPapua New Guinea, with exemplary standards ofintegrity. The success of this ambitious undertakingon which Robert is now working will make a majorcontribution to national development, in addition tosecuring the future of basic infrastructure throughWestern Province. On behalf of the Board, I wouldlike to thank Robert for his contribution and serviceas CEO.

Camillus Midire has succeeded Mr. Sode as ChiefProgram Officer. Mr. Midire applies developmentprogram skills honed as Director of the NationalPlanning Office, earlier experience in PNGSDP, and asChief Executive Officer of Sustainable InfrastructureLimited. David, Robert, Camillus and Chief FinancialOfficer, Vere Arava, comprise a senior managementgroup of exceptional quality.

The progress PNGSDP made during this year hasreflected the efforts of an outstanding group ofpeople - our executive management team and staff.On behalf of my fellow directors, I thank them fortheir hard work throughout a demanding period.

Finally, I am grateful for the continued, largecontributions of an effective Board and thank theDirectors for their commitment to the work of theCompany.

Ross Garnaut


C E O ' S R EPORT : A m e s s a g e f r o m D a v i d S o d e

This yearwas one of expansion forPNGSDP - an expansion driven bythe increasing size of ourmandate through the recognitionby people from all over PapuaNew Guinea (PNG) for the needfor greater infrastructure andservices as well as economicactivities to underpin sustainabledevelopment for present andfuture generations.

As an organisation, PNGSDP has undergone a process ofinternal 'maturation' to effectively and efficiently deliveron the complexity of our unique project portfolio.

My management team and I are firmer in our convictionthat for PNGSDP to contribute to the sustainabledevelopment of PNG in preparation for the mine closure,we must do all things right - the little things as well as thebig things. So while our very important small to mediumcommunity development projects can be seen in manyparts of the country, we felt it was time to seriouslyembark on the delivery of large scale projects that willpositively and significantly impact the social, economicand environmental welfare of the current and futuregenerations of the people of the Western Province andPapua New Guinea.

The callsIn 2007, PNGSDP received a large number of applicationsfor all manner of projects ranging from local sports andreligious activity sponsorship to substantial national andinternational proposals for social and economic projects.These applications have been reviewed and taken on forfurther appraisal.

The challenge we continue to face in considering thecalls on PNGSDP is for the applications to contain modelsof development and investment which are acceptable tothe Company. To address this challenge PNGSDP willembark on an information campaign to assist potentialapplicants with their future submissions.

Our transformationPNGSDP implemented a number of recommendationsfrom two international reviews undertaken by the BostonConsulting Group and by Professor Dwight Perkins ofHarvard University.

The outcomes from these reviews have resulted in theexpansion of the Company structure - in particular,building the capacity of both the program and centralfunctions to accommodate the increasing demands forproject delivery. In this regard, PNGSDP remains fortunatein our ability to continue to attract quality PNG nationalsto the Company, including those with industry specific

expertise, thereby enabling us to set our goals ondelivering more community projects and to pursue largescale projects.

Our commitment to deepening staff capabilities was animportant focus during the year with the recognition thatskill development is essential to meeting the increasingdemands and complexity of our programs. Threeinternational advisors were appointed to assist in theprofessional development of our pool of talent and forefficiency of project delivery.

Our expansionThis year saw the opening of our Kiunga regional office, tobe fully manned to cater for the entire province. We seethe presence of this new facility as a means wherebyPNGSDP will be able to better service the growing needfor the people of Western Province to be in direct contactwith us.

In addition, the Company purchased land in Daru and is toset up a further presence through project units related tosustainable environment and fisheries.

PNGSDP has also widened its National and WesternProvince activities in relation to rural electrification,financial services and a range of infrastructure programsdetailed in this report.

The delivery of large-scale strategic investment andinfrastructure projects has led to the creation of adedicated division, within our ProgramManagement area,supported by quality national and international resources.

Our partnersDuring the year, we continued to partner withgovernments, non-government organisations,international donor agencies and investment managerpartners in the commencement and the delivery ofstrategic projects. We anticipate that this involvement willcontinue and increase in the year ahead.

The futureWe will pursue in earnest, further co-operation with keystakeholders to build constructive developmentpartnerships.

We will continue to accommodate the significant increasein income due to Ok Tedi Mining Limited's robustperformance by wise investments within and outsidePNG.

We will seek to implement high value projects - buildingon the preparatory work accomplished during 2007 -which promote education, health, environment, wealth,social and economic welfare for the people of WesternProvince and the rest of Papua New Guinea.

David Sode


PNGSDP'S STRATEGIC PARTNERSHIPAPPROACH

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PNGSDP ' S S TRAT EG I C F RAMEWORK

PNGSDP'S STRATEGIC DEVELOPMENT AREAS AND ACTIVITIES

Community & SocialInvestmentSpecific emphasis oncommunity basedinitiatives, advancinghealth servicesimprovement, educationalopportunities andHIV/AIDS prevention.

Environment &ConservationExploring opportunitiesassociated with climatechange, conservationmanagement areas, andmitigation ofenvironmental impacts ofOk Tedi mine operationsand other major projects.

Investment inRenewable ResourcesInvestment in sustainabledevelopment of PNG'sbio-diversity includingcommercial, agriculture,forestry, fisheries and eco-tourism.

Financial Services &Business PromotionMicrofinance (Savings andCredit) services and ruralproduction credit facilitiesas well as training in smallbusiness development.

Energy & ElectrificationInvestment in majorelectrification projects andsmall urban and ruralenergy projects;development of bio-fuelsand alternate renewableenergy projects forelectrification of remotecommunities and villages.

Industrial, Urban &Rural InfrastructureDevelopment of Daru portand industrial infrastructure;rehabilitation, maintenanceand expansion of road, waterand air transportinfrastructure as well aswater and sewerageinfrastructure.

Natural ResourcesInvestment (emergingarea)Facilitating and creatingopportunities for investorsin the development anduse of Western Province'shydrocarbon andhydroelectric potential.

Communications &Information Services(emerging area)Facilitating and creatinginvestment opportunitiesin information andcommunicationtechnology services.

PNGSDP is proactivewhere there is no established

project partner:• Committed to working with others in orderto create and foster the required capacity,

experience and interest to undertake projects instrategic development areas;

• Investor-management partners must be willing toinvest equity and take the leading role in themanagement of new joint ventures.

PNGSDPworks primarilythrough commerciallyoriented project partners applyingresources efficiently to the delivery ofservices on a continuing basis:• Profitable core commercial business sustains theoperations of the project partner;

• Support from PNGSDP to expand core business orundertake new business in order to achieve specifieddevelopment objectives through management contracts;

• Except in special cases, PNGSDP must be assured thatprojects undertaken in this way will be sustained throughinternal revenue generation.

PNGSDP leverages its financial, management &technical resources:• Community resources of land, labour and skills;• NGO management, technical expertise and networks;• PNG Government institutional & development

resources;• International development financing, expertise

and networks;• Private sector management, technology,

markets, networks and commercialfinancing.

PNGSDP works through credible project partners:• Community-based organisations;• Government agencies & State-owned enterprises;• Business enterprises;• International development institutions and NGOs.


PNG SUS TA INAB L E D EV E LOPMENT PROGRAM LTD H I S TORY

PNG Sustainable Development Program Ltd(PNGSDP) is a unique organisation created as theresult of an agreement between the IndependentState of Papua New Guinea (the State) and theworld's largest mining company, BHP Billiton, withhead-quarters in Australia.

Incorporation and governance frameworkPNGSDP is a Papua New Guinean institutionincorporated in Singapore as a not-for-profit limitedliability company and registered and operates inPNG as an overseas company.

PNGSDP is governed by its Constitution, which iscomprised of the Memorandum and Articles ofAssociation and Program Rules.

An independent Board consisting of seveninternational and Papua New Guinean directors,controls and manages the affairs of the Companyand reports to PNG stakeholders annually.

The Company commenced operations in PortMoresby, Papua New Guinea in November 2002 witha Papua New Guinean Executive Officer andprofessional team.

MandateThe objective for which PNGSDP was created is tosupport sustainable development through projectsand initiatives to benefit the people of Papua NewGuinea, especially the people of Western Province,during the period after closure of the Ok Tedi Mine.

In addition to being a development agency, PNGSDPis a substantial PNG financial institution as well as ajoint owner of the Ok Tedi Mine in Western Province.

Assurance and indemnificationAs a shareholder of OTML, through its Director to theBoard of Ok Tedi Mining Limited (OTML), PNGSDPseeks to ensure sound commercial operations ofOTML, responsible management of environmentaland social issues, and seeks to sustain the excellentinfrastructure established by OTML for broader socialand economic development beyond mine closure.

Under the agreements establishing PNGSDP,PNGSDP indemnifies the State and BHP Billitonagainst environmental claims related to activities ofOTML; provides indemnity over the IndependentDirectors on the Board of OTML; and also subsidisesOTML's Finance Facility.

Ok Tedi Mine



OK T ED I M IN E

Ok Tedi Mining Limited operationsOk Tedi Mining Ltd was the single largest businesscontributor to the PNG economy in 2007.

Increased metal prices coupled with strong mineperformance saw significant distribution ofdividends to shareholders in 2007. PNGSDP receivedUS$260 million (K760.2million) over the year.

Ok Tedi support for developmentOTML through Ok Tedi Development Foundation(OTDF) delivers development projects andadministers nine Community Trusts. It is alsoresponsible for development and implementation ofa Community and Regional Development Strategyfor Western Province, which places particularemphasis on the mine-impacted communities.

Mine closure planningBased on the current mine plan, Ok Tedi Mineclosure is scheduled for 2013. It is well recognisedthat cessation of production at Ok Tedi will have anenormous impact on the economy of PNG, WesternProvince and the livelihood of many people,including nearly 2000 OTML employees from all overPNG.

OTML updated the Mine Closure Plan to incorporatethe Decommissioning and Infrastructure Plan, theMine Area Rehabilitation Plan and the Social andEconomic Report. As a result of these additional planfeatures, it has been necessary to constitute asteering committee, mine closure planningcommittee and working groups for each plan, withPNGSDP representation on all.

OTML and mine-affected communityconsultationsIn 2001, communities affected by the mine providedtheir consent to the mine continuing its operationon the basis of new Community Mine ContinuationAgreements (CMCA).

2001 • Establishment of nine CMCAsincorporating a total of 152 villages and

approximately 60,000 people in a region of over 400kilometres from Telefomin, down the Fly River, to

the coast.

2005 • New information became availableindicating that the activities of the mineover 25 years are associated withsedimentation building up in the riverbed, increased flooding and acid rockdrainage in the Fly River system.

2006 • OTML and CMCA Communitiesundertook a formal review of theCommunity Mine ContinuationAgreements in order to incorporateissues regarding the newenvironmental information. Thecompensation package of K1.1 billion isderived from three funding sources:OTML, PNGSDP and PNG Government'sTax Credit Scheme.

2007 • As a result of community consultation,the Ok Tedi Fly River DevelopmentFoundation is been established to dealwith related issues and theimplementation of projects. PNGSDPhas funded the design phase of theFoundation.

• Women and children have beenformally recognised through 10% of thecompensation package focusedspecifically on these populations in theimpacted communities.

• A mitigation plan has been undertakenby the OTML and the PNG Governmentfor removing sulphur from mine wasteand storing it at Bige.

PNGSDP continues to foster a supportive butindependent role in the CMCA process.


I N COME & E XP END I TUR E

Funds StatusPNGSDP is a company registered in Singapore and'limited by guarantee', which means that it has noshare capital, debentures, share options or unissuedshares. The Program Company's operations aregoverned by a set of rules and agreements thatpertain to its unique structure and circumstances.

Under its Constitution, the Program Company maydo all such things to achieve the objects for which itwas established. The Rules of PNGSDP specifyprocedures for the application of income receivedand the determination of contractual obligations, aswell as investment policy and guidelines.

The total net assets of PNGSDP in 2007 amounted toUS$822.9 million (K2.3 billion). In accordance withthe Rules of PNGSDP the assets of the ProgramCompany are represented by the Members'Subscription, the Long Term Fund, the DevelopmentFund and the General Fund as documented in thetable below.

PNGSDP is party to a number of agreements, dated11 December 2001, which confer both actual andcontingent liabilities on the Program Company.Obligations arising under these agreements aresecured by an equitable charge over the dividendstream attached to PNGSDP's shares in OTML. Thischarge is held by a security trustee, Insinger Trust(Singapore) Ltd.

The PNGSDP Group also includes subsidiaries andjoint ventures of the Program Company, namely

OTML, PNG Microfinance Ltd, PNG SustainableEnergy Ltd and PNG Sustainable Infrastructure Ltd.The contribution of OTML to the PNGSDP Group isaccounted for as an investment in a jointlycontrolled entity by the Program Company. Theassets of the PNGSDP Group do not appear on thebalance sheet of the Program Company.

Contractual ObligationsPNGSDP has contractual obligations arising out of anumber of agreements dated 11 December, 2001with implications for the balance sheet of theProgram Company.

Under the Deed of indemnity with BHP Billiton, theProgram Company has agreed to indemnify BHPBilliton against any liability under claims for bothenvironmental damage arising out of the operationof the mine after 7 February, 2002, and breach ofenvironmental laws in relation to mine operationsbefore 7 February, 2002.

Under the Deed of Indemnity with the State,PNGSDP has agreed to indemnify the State againstall liability arising under a claim for environmentaldamage caused by the operation of the mine before7 February, 2002 resulting from an act or omission byBHP Billiton in breach of its obligations under itsmanagement agreement or in breach ofenvironmental law.

Under the Option Deed, the Program Company hasagreed at the request of OTML to indemnify theindependent directors of OTML in respect of claims

Representation of PNGSDP Assets

US$ PNG KinaMembers' Subscription 17 47General Fund 2,903,581 8,094,734Long Term Fund 594,167,011 1,656,445,528Development Fund 225,875,148 629,704,901Total Funds 822,945,757 2,294,245,210

Total Net Assets of PNGSDP in 2007

US$ PNG KinaCurrent Assets 496,497,667 1,384,158,536Non Current Assets 333,563,190 929,922,470Liabilities 7,115,100 19,835,796

Net Assets 822,945,757 2,294,245,210



I N COME & E XP END I TUR E

against them arising out of their acting as suchdirectors to the extent that appropriate insurance isnot available on commercial terms.

Under the Subsidy Deed, PNGSDP has agreed to payas a non-refundable subsidy an amount equal toincreased borrowing costs and charges incurred byOTML as a result of not being a subsidiary of BHPBilliton. The amount of this subsidy is restricted up toan average weighted increase of all rates, costs andcharges of 2.5% and on a maximum loancommitment of US$120 million.

IncomeThe Company is required by its rules to apply itsincome to a Long Term Fund and the DevelopmentFund. The Long Term Fund represents 2/3 of netincome received from OTML after deductingoperating expenses and all other legal contractualobligations, and the Development Fund representsthe remaining 1/3.

• The Company received gross dividend incomeof US$260.0 million (K760.2m) from OTMLduring 2007. This compares with dividendincome of US$312 m from OTML during 2006.

Total investment income from funds investedamounted to US$71.9 million (K210.3m). Return oninvestments represents an increasing source ofincome to the Company since 2002.

PNGSDP pays the same taxes to GoPNG that wouldhave been paid by BHP Billiton if the Ok Tedi minehad continued to operate under its previous

ownership. A 10% dividend withholding tax ofUS$26.0 million (K76.0m) was deducted in respect ofdividend income from OTML and paid to the PNGInternal Revenue Commission during 2007. NoSingapore income tax is payable on the basis thatnone of the Program Company's dividend or interestincome is remitted to Singapore.

ExpenditureExpenditure on projects under the SustainableDevelopment Program accounted for over 86% ofthe Program Company's expenditure in 2007,amounting to approx. US$21.7million (K63.3m).

The Company spent US$0.9million (K2.6m) onAdministration during 2007, comprising staff costs,travel, insurance, financial expenses, professionalservices and information services amongst othercosts.

The Company spent US$1.2million (K3.6m) ongovernance in 2007. Over half was comprised ofdirectors' fees, with the remaining spent on Boardadministration, the Annual Report and stakeholdermeetings, the Company audit, the Advisory Counciland the Company Secretary.

In accordance with its rules a yearly budget ofadministration costs is approved by the Boardof Directors. Expenses attributable to theoperation of the Company cannot exceed15% of the average annual income of theCompany during the immediately preceding3 years.

Income in 2007US$ PNG Kina

Dividend OTML 260,000,000 760,233,918Investment Income 71,935,573 210,337,933Total 331,935,573 970,571,851

Expenditure 2007US$ PNG Kina

Governance 1,219,821 3,566,728Administration 904,421 2,644,506Contractual Obligation 470,623 1,376,091Investment ProgramExpense 743,821 2,171,889Development ProgramExpenditure 21,667,421 63,355,032Total 25,006,098 73,117,246


F UNDS MANAGEMENT

obligations as specified in the rules of the programrelating to the application of the income received.Under the Rules of the Company, Funds from theLong Term Fund must be invested in 'low risk'investments.

The primary objective of the investment program ofPNGSDP is to increase the size of the Long TermFund through interest rate earnings, dividendincome, capital gains and foreign exchange gains. Asthe size of the LTF builds up before Mine Closure,annual investment income will ideally increase tothe point where investment earnings can meet theannual expenditure requirements of the ProgramCompany without materially reducing real capital ofthe Fund.

Whilst the Development Fund is primarily utilised bythe Sustainable Development Program to makeexpenditures on projects, each year the balance ofthe Development Fund which has not beendisbursed is invested through the InvestmentProgram, with the objective that it will be availablewith interest for expenditure on projects in lateryears.

The Board of Directors has established anInvestment and Finance Committee to oversee theCompany's Investment Policy and Guidelines.

In 2007, the Long Term Fund increased from US$376.6million (K1.0 billion) to US$594.2million (K1.66billion).Due to the strong performance of the Ok Tedi Mine in2007, the value of the Long Term Fund has increasedsignificantly. The weighted average return on theinvestment, the value of the Long Term Fund was14.08% compared to 7.8% in 2006.

LONG TERM FUND (Weighted Average)

20032004200520062007

Long Term FundBalance US$ in Millions 42.1 79.4 175.5 376.6 594.2

Weighted Average Rateof Return 8.06% 2.14% 4.44% 7.80% 14.08%

Investment in Bank South Pacific

Bank South Pacific commercial centre

Investment Funds of the ProgramCompanyThe Long Term Fund (LTF) represents 2/3 of netincome received from OTML after deductingoperating expenses and all other legal contractual



TH E D EV E LOPMENT FUND

The Development Fund is used to supportdevelopment projects under the SustainableDevelopment Program. PNGSDP works togetherwith projects partners in order to identify, developand finance projects which meet our sustainabledevelopment criteria.

The Development Fund receives one third ofdividend income from OTML after deductingoperating expenses, contractual and other legalobligations.

Between now and mine closure in 2013, one third ofthe Development Fund is allocated to the WesternProvince Fund, and two thirds is allocated to theNational Fund. After Mine Closure, income from OkTedi Mining Ltd to the Development Fund will ceaseand the Long Term Fund will be utilised to supportongoing activities of the Sustainable DevelopmentProgram, which PNGSDP should be able to sustainfor 40 years or more after Mine Closure.

Following Board approval, PNGSDP managementmust conclude a Project Funding Agreement withproject partners in order for financial resources to beallocated for implementation of the project. Onlyfunding that has been approved through thisprocess can be disbursed from the DevelopmentFund.

Development Fund project allocations andexpenditures in 2007New projects approved in 2007 amounted to K61.3million. This is K0.9m less than K62.2m of new

projects approved during 2006.

The rate of the Development Fund disbursementsincreased the same as for 2007. K63.4m wasdisbursed during 2007 compared to K49.1m in 2006.

The balance remaining against approved projectfunding of K88.6m at the end of 2007 represents anumber of sizable projects that have been approvedand are now in the initial phase of the project cycle.

Expenditure of the Development Fund at a rate ofK150m per year is an approximate figure whichrepresents the size of the Sustainable DevelopmentProgram.

Cumulative approved project fundingSince 2002, cumulative approved project fundingfrom the Development Fund amounts to overK222m. Cumulative disbursements on WesternProvince and National Projects have been roughlyconsistent with the 1/3, 2/3 split that determines thesize of the respective funds. Cumulative approvedproject funding for Western Province is about halfthe value of the National Fund. This reflects thepriority that the Company continues to place onsupporting sustainable development in WesternProvince.

On the following pages of this report, theSustainable Development Program is reviewedby region and by sector in order to providemore information specific to the projects thatare currently being supported.

Project Funding Approvals and DisbursementsSince 2002

K US$Cumulative Approved ProjectFunding 2002-2007 222.4m 73.5mNational Fund 79.0m 25.9mWestern Province Fund 143.4m 47.6mTotal Cumulative Disbursements2002-2007 135.2m 46.0mNational Fund 99.2m 33.2mWestern Province Fund 38.3m 12.8m

Project Funding Approvals and Disbursements2006 K US$New Approved Project Funding 62.2m 20.5mDisbursements 49.1m 16.2mBalance remaining againstApproved Project Funding 90.8m 30.0m2007 K US$New Approved Project Funding 61.3m 21.9mDisbursements 63.4m 21.6mBalance remaining againstApproved Project Funding 88.6m 30.3m


W E S T ERN PROV IN C E PROGRAMS

About theWestern ProvinceWestern Province is PNG's largest province covering97,300 square kilometres, or approximately one-fifthof PNG's land mass. The Province borders Indonesiain the west and Australia in the south, and alsoSandaun (West Sepik) Province, Southern HighlandsProvince and Gulf Province.

The official population of Western Province,according to the 2000 census, was 153,304 (3% ofthe total official PNG population). Population densityin Western Province is considered very low at lessthan 2 persons/sq kilometres, reflecting limitedavailability of arable land.

Western Province has considerable untappedeconomic potential based on the sustainabledevelopment of its sizeable resource base.

Western Province ProgramThe Company continued to apply one third of itsDevelopment Funds allocated to the WesternProvince Program to support the development andimplementation of sustainable projects in theProvince during the year. These projects includefeasibility studies and investigations into a numberof infrastructure and economic projects with thepotential to attract investment into the Province.Actual construction started on one road projectwhile the community rural electrification programcontinued to roll out. At the community level,PNGSDP continued to work in partnership withcommunities and community based organisation to

deliver small scale projects in health, education,economic and capacity building services which arealready beginning to have direct impact on thelivelihood of communities. Efforts to improveincome earning opportunities for communities havebeen greatly enhanced by the availability of microfinance services. Continued attention was given tothe development of human capital as a foundationto long term sustainable development with thesupport for establishment of a specialised technicaltraining institution that would provide bothnationally and internationally recognised technicalcourses. PNGSDP recognises the special plight forwomen and children and provided funding supportfor this cause under the new CMCA fundingarrangement. The overall objective under theWestern Province Program is to assist develop theproductive capacity of the Province in preparationfor mine closure and in readiness for life after themine.

Strategic Development Programs andProjectsDuring the year, the Company disbursedK22.9 million under the Western Province Programwith a cumulative disbursement of K38.3 millionbetween 2004 and 2007. Under the CommunitySustainable Development Program (CSDP) WesternProvince Program K1.4 million was disbursed in 2007and 3.7 million cumulatively disbursed between2004 and 2007.

In line with its mandate for Western Province tomitigate the impact of mine closure through thepromotion and support for sustainabledevelopment, PNGSDP stepped-up operations inthe area and increased its presence through theopening of a local office in Kiunga and a project sitein Daru.

• New CMCA entity - Ok Tedi Fly RiverDevelopment FoundationMine impacted communities are becomingincreasingly empowered through betterorganisation, improved access to financialresources and support from development andjoint-venture partners. This applies particularly tothe roughly 60,000 people who are representedby the nine CMCA Trusts, including the mine area

Aerial view of Awaba



WEST ERN PROV IN C E PROGRAMS

Strategic Development Programs andProjects (cont'd)

communities covered by a special Mining LeaseAgreement. The development of sustainableinitiatives in the CMCA Trust communities is ofspecial significance in PNGSDP's WesternProvince Program.

Upon the successful completion of the CMCAreview, the PNGSDP Board approved an annualcommitment of 2.5% of OTML dividends or K21.5million (whichever is greater) for project fundingto the Ok Tedi Mine impacted communities forthe next 6 years up to the Mine Closure in 2013.

In addition, the process of establishing a newCMCA development entity proposed as Ok TediFly River Development Foundation (OTFRDF),commenced with involvement of CMCACommunity leaders, OTML, the Fly RiverProvincial and National Government agencies,church and women leaders. As part of PNGSDPobligations in the CMCA MoA, the companyspent K722,000 for the design consultancy of thenew entity. The establishment andimplementation phases are being progressed.

PNGSDP is working closely with the new CMCAdevelopment entity and with the nine CMCATrusts under the Western Province Programoperating from its Kiunga office.

• Development Partnership MoA betweenPNGSDP and the Fly River ProvincialGovernmentThe Fly River Provincial Government (FRPG),including the three districts - North, Middle andSouth Fly - and all 14 local level governments, isalso an important partner for PNGSDP.

During 2007, PNGSDP and FRPG continued towork together for the promotion of sustainabledevelopment in Western Province. AMemorandum of Agreement (MoA) between theCompany and FRPG was developed andapproved in principle by the PNGSDP Board.

The MoA captures the:• governance structure by which both parties

will support and undertake jointly and theroles and contributions of government

(National & FRPG), major development partnersand business enterprises; and

• overall structure and processes forconsultation, implementation andreviewing of sustainable broad-basedeconomic and social developmentprograms and projects for the benefit of thepeople of Western Province.

It is anticipated that the Western ProvinceDevelopment Consultative Committee andWestern Province Sustainable DevelopmentProgram Management Committee establishedunder this MoA will provide the necessaryframework for effective implementation of thisagreement. The related programs and projectswill be implemented in line with the prioritiesstated in the National Government's Medium-Term Development Strategies and WesternProvince Development Plan 2010.

• Women's & Children's ProgramIn May 2007, in collaboration with keystakeholders PNGSDP initiated the Women'sStakeholder Workshop in Port Moresby tosupport the objective of mainstreaming the roleof women and children in sustainabledevelopment. The workshop, facilitated byPNGSDP, was attended by women representingthe CMCA areas, as well as National and ProvincialGovernment and Churches, and representativesfrom PNGSDP's Board, Advisory Council and staff.

Presentations from the CMCA women, Ok TediMining Ltd, the Department of National Planning& Monitoring, PNGSDP and the Western Provincewomen's network were discussed and an actionplan developed covering the recommendationsmade at the workshop and PNGSDP ProgramRules.

A minimum of 10% of PNGSDP's CMCA fundingwill be allocated specifically to supportinfrastructure projects designed to advance theaction plan and the CMCA objective ofmainstreaming the role of women and children insustainable development.

With regard to immediate interventions, theCMCA women have expressed their desire for theresources to be focused on:




• Developing specialised women's healthservices with an emphasis on all aspects ofinfrastructure, personnel capabilities andtraining and a strategy on HIV and AIDS;

• Increasing accessibility to microfinanceservices for Western Province women withan emphasis on credit facilities forinvestment to support small cottageindustries; and

• Trialing a scheme to provide market accessfor traditional crafts that are of high qualityand which have potential for sale throughfair trade or other similar arrangements.

• PNGSDP Strategy for OTML Mine ClosurePlanningPNGSDP is mindful of OTML's mine closureplanning process as provided under the Mining(Ok Tedi (Ninth Supplemental) Agreement) Act2001. As such, the Company is part of theplanning discussions on the Mine Closure Planenvisaged for submission to the State in 2009(mine closure in 2013 under current mine plan).

The Company is aware of the need for its long-term presence and level of investment anddevelopment in Western Province to provide analternative economy to Western Province afterthe closure of the Ok Tedi Mine. In addition, thereis a focus on issues related to properenvironmental management and monitoring.

• Aquaculture2007 focused on community consultations,awareness workshops and multiple Middle andSouth Fly site visits to a number of commercialpontoon trial sites.

A selection of five Middle Fly sites and four SouthFly sites were determined by physical suitability,variance of the growing environment, access tologistic support, catch-ability of supplementalfeed and commitment of the respectivecommunities. A revised experimental design waswritten and associated budget determined for

the culture of barramundi at commercialstocking densities across the nine sites.

A series of site investigations between SturtIsland, South Fly and Aiambak, Middle Fly wereundertaken by the Ok Tedi DevelopmentFoundation (OTDF) Fisheries Team to determinebarramundi restocking sites. Suitable releaselocations were also identified.

PNGSDP decided that a number of major projectsare required to develop an alternative economythat would underpin the future of WesternProvince after the Ok Tedi Mine closes. As a result,it was determined that the foundation projectthat will drive the Western Province IndustrialProjects is a deep water port to be built on DaruIsland.

The Strategic Investments Group was assembledin 2007 with the objective of developing anumber of strategic investment projectsconsidered by the Board to have potential butrequiring detailed feasibility studies to confirmtheir viability.

• Daru Deep-Water Port - Feasibility StudiesThe major challenge for the StrategicInvestments Group was to address all the issuesrelated to the Daru Port Project, particularly thosethat required detailed work including theenvironmental impact statement, theengineering options, the volume through-putand the selection of a strategic partner asinvestor/manager.

PNGSDP is committed to complying withrequirements and environmental obligations setout by the PNG Government. In order to fulfillthese obligations specialist environmentalconsultants, including hydrologists and marineecologists, were engaged by the Company toconduct baseline environmental investigationsaround the proposed port site, especially aroundDaru and Bristow islands (see page 22).

• Oriomo Industrial Park - Concept PlanningThe Lands and Physical Planning Board hasrecommended a 4,000 hectare area at Oriomo





for the Industrial Park Site. The leases for the PortSite and the Industrial Park will be considered bythe Lands Board in 2008.

• Oriomo Industrial Park and Daru Port - LandAcquisitionWork on land acquisition was advanced for boththe Daru Port and the Oriomo Industrial Park. TheState has commenced the process for compulsoryacquisition for the Daru Port Site and a license hasbeen issued for preparatory work to be done onthe site.

• Gas Pipeline - Pre-feasibility StudiesTwo baseline studies were undertaken to providebetter information for a potential gas pipelineand a gas project. A scoping study was jointlycommissioned by Oil Search and PNGSDP toverify the gas reserves potential in WesternProvince. PNGSDP also commissioned BrassEngineering International to carry out a study ofthe gas pipeline route.

• Purari Hydro Power - Pre-feasibility StageThe Strategic Investments Group met withpotential users of the Daru Port and the OriomoIndustrial Park. The two main reasons forinvestment and sustainable developmentinterest in Western Province and PNG Nationallyare the potential for low cost energy from thePurari Hydro Power Project and the deep waterport at Daru.

The development of the Purari Hydro PowerProject and supplemented gas development willprovide very competitive energy to underpin theWestern Province Program of Industrial Projects.

• Pyrite Concentrate- Pre-feasibility StudiesTo minimise environmental risk, OTML decided in2006 to build a pyrite flotation plant and to pipeits pyrite concentrate from the plant via apipeline to Bige. That work has progressed in2007 with construction expected to becompleted in the middle of 2008.

In 2007, PNGSDP commenced studies to assessthe commercialisation of the pyrite concentrateand to ensure the minimisation of environmentrisk. Both technical and commercial studies werecommenced in 4th quarter of 2007 and thesestudies will continue in 2008.

Environmental Impact Study, Public Hearing, Daru

Tailings pipe, Tabubil - Kiunga

Popular mode of transport, Arob Lakes



Community & Social Investment ProgramThe Community and Social Investment Program(CSIP) supports projects which help communities tomeet their own sustainable development goals,representing funding between K50,000 andK250,000. Project funding is contingent on Boardapproval.

The CSIP model requires partners to bring their ownmaterial and financial resources to the project.PNGSDP contributes funding provided projectpartners and communities contribute in cash andmaterial support to significantly increase eachproject's value and impact on communities,especially on future operations and maintenancecosts.

To date nearly half of all Community SustainableDevelopment Projects supported by the Companyare located in Western Province. During the year, theCompany committed K1.3 million under theWesternProvince Program with a cumulative disbursementof K4.8 million between 2004 and 2007.

• Education and CommunityNew HF radio systems have been purchased toimprove communication links with schools andaid posts in the Arufi District [Partner: ECPNGArufi District].

To improve education in Kiunga Montfort,support has been provided for the acquisition ofmodern teaching aids and new equipment for acomputer laboratory, science laboratory andhome economics classroom [Partner: KiungaMontfort Technical Secondary School].

With an increasing number of visitors to theAwaba region, funding has been provided forbuilding materials to erect a replacement guesthouse to cater for these visitors [Partner:Evangelical Church of PNG Awaba District].

• HealthThe North Fly Malaria Prevention Program - Phase1 and Phase 2 -was undertaken and completedduring the year. These health projects saw thedistribution of long-lasting malaria bed netsacross communities from Matkomnai andSisimakam to Kiunga [Partners: AustralianDoctors International; Western Province HealthDivision; Rotary Against Malaria; CatholicDiocese; PNG Defence Force].

Delivery of medical supplies to Daru Hospital

Consultative Group, Community Mine ContinuationAgreement (CMCA)

Community Conversations workshop, HIV Program,Kiunga




Community & Social Investment Program(cont'd)• Infrastructure andWater

The Bedamuni Communities DevelopmentProject supported the purchase and installationof a mobile mill for timber harvesting to renovateand construct new buildings [Partners: BedamuniScripture & Overseas Development Trust].

Access to safe drinking water continues to beachieved with several projects funded andcompleted during the year for communities inthe Suki Fly Gogo, Middle Fly and ManaweteCMCA Trust areas [Partners: DevelopmentFoundation Trusts of the Local Communities, OkTedi Development Fund and LivingWaters]. Thesecommunities contributed to construction andlogistics support and have been trained in themaintenance and repair of these systems toensure their sustainability. In addition, fundinghas been provided to develop water systems forthe Bamu Community [Partners: Bamu LLG;Member for Middle Fly] and the Arufi Community[Partner: ECPNG Arufi District].

• Star Mountains Training InstituteOTML's trades and technical training facility in

Tabubil is recognised as an important part offurthering skill development in Western Provinceand nationally. PNGSDP seeks to expand thisfacility into the Star Mountains Training Institute(SMTI). It is expected that the Institute willprovide world class technical training into thefuture for people from Western Province and therest of PNG as well as other parts of Asia Pacific.The Box Hill Institute of TAFE (Victoria, Australia) isthe technical advisor to PNGSDP on thedevelopment of SMTI.

Plans are underway to increase the capacity ofTabubil to house the expanded trainingprograms in the immediate future and to allowfor the growth of SMTI over the years leading upto the mine closure.

A MoA was jointly signed by PNGSDP and OTMLwhich sets out the general conditions andarrangements for the cooperation between thetwo parties in the development of SMTI. As aresult of the MoA, the Interim ProjectManagement Committee has been establishedwith representation from OTML and PNGSDP, aswell as independent members representing theindustry.

Daru Inlet



Agriculture Development ProgramIn 2007, the Agriculture Development Programevolved from a series of project portfolios into anintegrated program, specifically focused on theimprovement of rural livelihoods by means of thepromotion of agricultural projects encompassingcommercial and developmental interests.

• Lake Murray Village Rubber ProjectCommencing in 2005, the Lake Murray VillageRubber Project is part of a phased program ofrubber development in Western Province.PNGSDP with the partnership of North Fly RubberLimited (NFRL) and the Ok Tedi DevelopmentFoundation, and with the participation of 840households in the Lower Middle Fly, targeted2,200 hectares of customary land for the plantingof high-yielding rubber.

The Company, through its subsidiary, PNGMicrofinance Ltd, further assisted the growersthrough the provision of up to K4.8 million insustenance loans. The inclusion of this uniquecredit facility has ensured the participation ofover 1,000 growers, of which 569 growers havesuccessfully borrowed approx. K1.3 million for theplanting and maintenance of over 900 hectaresof rubber.

In terms of development costs, PNGSDP hasextended over K3 million to NFRL and reportsindicate that the rubber blocks are maintained toa high standard, which is critical to the farmers'ability to sustain their livelihood once tappingcommences.

To the end of 2007, the cumulative milestonesachieved included:

Land area prepared 1,024 hectares

Cover crop planted 996 hectares

Rubber trees planted 926 hectares

Numbers of participating growers 793

Total development funds disbursed K3.0 million

Total expenditure on sustenance loans K1.38 million

The project has achieved 42% of total rubberplanting against that budgeted and involved 94%of growers targeted. With 27% of total budgetexpended on sustenance loans, farmers hadaveraged 1.16 hectares rubber planting over theperiod.

Rubber Nursery, Lake Murray




Energy, Rural Electrification &CommunicationsPNGSDP is focused on developing investment inmajor electrification projects and small urban andrural energy projects inWestern Province, along withthe development of bio-fuels and alternativerenewable energy projects for electrification ofremote communities and villages. In addition,emerging areas of focus include the facilitation andcreation of opportunities for investors in WesternProvince's hydrocarbon and hydroelectric potential,as well as information and communicationtechnology services.

In pursuit of PNGSDP's mission, electricityinfrastructure is critical to underpinning socio-economic development across PNG. PNGSDPestablished PNG Sustainable Energy Limited(PNGSEL) and PNG Sustainable Infrastructure Limited(PNGSIL) to pursue the development of ruralelectrification and infrastructure in Western Provinceand nationally.

PNGSDP's total financial assistance for ruralelectrification in Western Province in 2007 was K10.6million, making a cumulative total since 2005 (year ofrural power project commencement) of K23.5million.

Through PNGSEL, PNGSDP undertook andcompleted Phase 1 of Western Province RuralPower & Communication Project. The project sawthe rehabilitation and development of the mini-gridrural power and communications infrastructure in sixsmall urban and rural communities in Awaba,Balimo, Lake Murray, Obo, Wipim and Morehead.

As part of Phase 1, 800 solar home systems wereinstalled in Ngao, Kodoro, Tureture, Kunini, Boze,Kadawa, Sui, Parama, Dorogori and Katatai,impacting and benefiting over 4,800 people in thesevillages.

Phase 2 construction of the Tutuwe CMCA Trust ruralpower electrification project will commence in thefirst quarter of 2008. Design and scoping of ruralelectrification in the remaining CMCA Trusts areexpected to be completed in 2008.

Phase 3 of the rural electrification program forWestern Province will investigate developmentof rural electrification in all other areas ofWestern Province and investigations areplanned to commence in 2008.

Investigations for rural electrification werecompleted in six of the nine CMCA Trustscommunities in Western Province.

Installation of solar power, Kadawa Benefits of the rural electrification program, Dorogori



Environment, Tourism and FisheriesDevelopment Program

• Sustainable Aquaculture Project

Established in June 2006, the Project progressedon a number of fronts during the year. Alternatesite investigation studies were undertaken bytechnical experts on Daru Island for the proposedhatchery and a re-design of the hatchery layoutand operations were completed. Governmentagencies were consulted on the acquisition ofland for the hatchery and also for construction offacilities on the newly acquired land. In addition,community consultations and awarenessworkshops on Daru Island on the restockingprogram and pontoon site selection in the SouthFly and Middle Fly were held. In the later part ofthe year, on-going hatchery land issues includingownership disputes were resolved with thepurchase of 8.2 hectares on Daru Island.

• Barramundi Habitat Conservation &Restocking Project

In 2007, community consultations wereconducted on the use of customary land for the

conservation program. A survey was completedof a route for transportation of fingerlings fromthe proposed site monitoring station to therestocking site at Arob lakes.

• Community-Based Tourism Program

It was decided by the Board to progress thescoping for a community-based tourism programfor Western Province, including identifying asuitable investment and management partner.

Scoping activities undertaken in 2007 providedinsights into successful eco-tourism modelswhich exemplify social sustainability andincorporate local and indigenous communities.

Details gathered included:

• Eco-lodge facilities - the scope of design andstructures of the eco-lodges for variousniche markets, which could be replicated indifferent parts of Western Province;

• Service and product offerings - thepromotion and demand of various offeringsby different types of eco-lodges being

Aquaculture Awareness Program, Samari Village,Kiwai Island

Chris Moraitis, Australian High Commissioner feedingbreeding stock, Barramundi Project, Daru


managed and operated by resource owners andprivate sector tourism companies;

• Eco-lodge management - exploreopportunities with investment partners forcollaboration in managing similar eco-lodges in Western province and PNG;

• Recognised experts - identify experiencedexperts to assist PNGSDP develop a programfor a sustainable community-based eco-tourism industry for Western Province.

Further investigations are planned to beundertaken to identify potential investment andmanagement partners to work together withPNGSDP in developing the tourism industry inWestern Province.

Forestry ProgramDuring the year, a number of key sustainable forestryprojects in Western Province were identified andresources invested towards their development.

• Investigation of commercial eaglewood

A commercial eaglewood development is being

investigated by PNGSDP with the aim ofdeveloping it as a viable income generatingsource for Western's rural communities. Lack ofbasic information on this high-valued treespecies such as the harvesting technique,grading and market access was identified in afield assessment and appraisal study in Western'sNorth and Middle Fly districts. This lack ofinformation has resulted in discriminateharvesting of trees not having oil or gaharu,thereby affecting the long-term sustainability ofthe eaglewood resources.

To address this problem, PNGSDP collaboratedwith Forest Research Institute (FRI) in 2007 toundertake community-based forestry educationprograms in remote communities in the Ok Tedi-Kiunga, LakeMurray, Suki andNomad. FRI reportedfindings indicating that more than 50% of theparticipants in the programs have benefited andthat the people are now better vested withinformation on eaglewood - specifically gradedetermination, harvesting and storage, therebyresulting in better quality products.

PAGE 21P N G S U S TA I N A B L E D E V E LO P M E N T P R O G R A M LT D A N N U A L R E P O R T 2 0 0 7


Pristine forest area, Bamu, Middle Fly Nursery, Agro-forestry Project



Infrastructure Program• Daru DeepWater Port Project

PNGSDP contracted the Snowy MountainEngineering Corporation to complete thetechnical feasibility study on the selected site forthe Daru Deep Water Port.

The Environmental Impact Statement (EIS)studies progressed well this year. Several studiesrelating to the EIS were completed including thefollowing studies:

• the socio economic impact on thecommunity of Daru if the port projectproceeds;

• sedimentation movement study todetermine the movement of the sand barsaround Daru Island and the impact it willhave on the proposed shipping channel;

• water quality and biological baseline study.

A successful Public Hearing on the EnvironmentalImpact Statement was organised by theDepartment of Environment and Conservation(DEC) in Daru in November 2007. As a result ofthis hearing, two other studies were requested.These studies include a ground waterinvestigation and the terrestrial study on theimpacted area. Comments from all stakeholdersare being reviewed and will be allowed for in thefinal document of the EIS to be submitted to DECfor consideration. Pending the results of thesestudies, an Environment Permit will be granted inearly 2008, paving the way for a Deep Water Portto be constructed in Daru.

Throughout the year discussions took place withseveral parties who were interested in thedevelopment and funding of the Port. A numberof international delegations visited Port Moresbyand were shown the project site.

Other companies have signed up agreements forthe exchange of information to allow thesecompanies to submit bankable proposals for thisproject. Major users have shown interest in theuse of the port as well.

PNGSDP has obtained occupation licenses foreight portions of land for the development of aresidential estate in Daru, and a township andindustrial park at Oriomo in Western Province.Plans are underway to develop these portions ofland as soon as titles are granted.

Detail survey work has been done on theundersea lease of the port site. These plans havebeen submitted to the Department of Land'sSurveyor General's office for registration tofacilitate a title.

• PNG Sustainable Infrastructure Limited(PNGSIL)

PNG Sustainable Infrastructure Ltd (PNGSIL)through 2007 was a fully owned subsidiary ofPNGSDP, with the bulk of its work focusing onprojects that are development in nature.Public Hearing, Environmental Impact Study, Daru




Infrastructure Program (cont'd)In collaboration with the Administration of the FlyRiver Provincial Government, PNGSIL continuedto undertake preliminary investigations into theconstruction of key road infrastructure inWesternProvince.

The key objectives that underpin its InfrastructureProgram remain: to provide transport access tofacilitate investment, business and accessibility tosocial services; to build local contracting capacitythrough facilitation of Joint Venturearrangements between local constructioncompanies and reputable companies fromoutside the Province; and to promote theconcept of 'whole of life asset management' inthe development of infrastructure. A majorstrategy in the selection and prioritisation ofprojects is the development of selected growthcentres, with transport accessibility being thecatalyst to promote such growth.

In Western Province, progress was made on anumber of key projects:

• Kiunga to Kokonda Road in the North FlyDistrict - PNGSIL successfully facilitated theestablishment of the first joint venturepartnership between the Lower Ok TediInvestment Company (LOTIC), a land ownercompany and a Western New Britain basedcompany, for the construction of the Kiungato Kokonda Road in the North Fly District. Aconstruction contract valued at K16.3million was awarded to the JV andconstruction of the road commenced in mid2007.

• Gre to Drimgas Road in the North Fly District- A survey of 27 kilometers was completedand design work commenced.

• West Bank Road in the North Fly District - Asurvey of 79 kilometers was completed anddesign work has commenced.

• Transfly Highway in the South Fly District -The project feasibility study of over 200kilometers was completed.

• Daru Water & Sewerage in the South FlyDistrict - A feasibility study, and stakeholderand community consultations werecompleted and paved the way for full design

and construction to commence. This project isundertaken in collaboration with the PNG WaterBoard (PNGWB), the current owner and operatorof the Daru facility. At the same time discussionsare continuing with the PNGWB and itsshareholder, the Independent Public BusinessCorporation (IPBC), on a possible businessstructure to manage and operate the Darufacilities, which will ensure its operational andcommercial sustainability.

PNGSIL also managed on behalf of PNGSDP, inconjunction with OTML and the CMCA Trusts, theconstruction of a number of water supplyprojects in the CMCA Trust Communities,covering a total of 45 villages. These projectswere successfully completed in 2007 and areproviding good safe drinking water to thecommunities.

Major washout, Kiunga to Kokonda Road, North Fly

Current conditions, Kiunga to Kokonda Road



MicrofinancePNG Microfinance Limited (PNGMFL) offers a rangeof business loans for micro business operators,working capital loans for small andmedium businessoperators, asset purchase loans for small andmedium business operators, and agri-business loansfor farmers and business operators involved inagricultural-support type businesses.

Until June 2007, PNGMFL was a PNGSDP subsidiarycompany. At that time there was a sell down withthe reallocation of shares that lead to thereclassification of PNGMFL as an associate companyof PNGSDP. The other shareholders are the Bank ofSouth Pacific and the International FinanceCorporation (IFC), the financial arm of the WorldBank as its new shareholder. The investment by theIFC is a milestone for Papua New Guinea as it is thefirst direct investment made in PNG by the IFC sincePapua New Guinea became a member of the WorldBank Group over 30 years ago.

SUMMARY OF SAVINGS SERVICES -WESTERN PROVINCE

2005 2006 2007

NO. OF VALUE OF NO. OF VALUE OF NO. OF VALUE OFDEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS

TOTAL 22,861 K3,754,908 34,575 K7,770,480 45,183 K12,269,205

SUMMARY OF LENDING SERVICES -WESTERN PROVINCE2005 2006 2007

LOANS VALUE OF LOANS VALUE OF LOANS VALUE OFAPPROVED LOANS APPROVED LOANS APPROVED LOANS

TOTAL 480 K450,397 2,064 K2,513,183 3,493 K6,901,756

Bringing banking services to rural communities



NAT I ONA L PROGRAMS

This program is supported by two thirds of theCompany's Development Funds. The Company onits own and in cases, in collaboration with theGovernment and other development partnerssupported a number projects nationwide intransport infrastructure, energy development,agriculture, forestry and micro finance services. Thedevelopment impact of its interventions particularlyin transport infrastructure and micro finance arehighly visible. At the community level, the Companycontinued to support communities and communitybased organisations in delivering projects in health,education, agriculture, community infrastructureand capacity building services including HIV anddevelopment. The aim of this program is to supportthe National Government in pursuing and achievingits development objectives while at the same time,by working with local communities and communitybased organisations, they are empowered todevelop themselves.

During the year, the Company disbursed K45.6million under the National Program with acumulative disbursement of K109.8 million between2004 and 2007. Under the CSDP, K3.0 million wasdisbursed in 2007 and K8.0 million cumulativelydisbursed between 2004 and 2007 for Nationalprojects.

The Daru Port Project is funded through the NationalProgram. Further details on 2007 activities can befound on page 22. PNGSDP also progressed the StarMountains Training Institution, which is alsoclassified as a National Program (see page 17).

Community & Social Investment ProgramThe Community and Social Investment Program(CSIP) supports projects that help communitiesmeet their own sustainable development goals.

The CSIP model requires partners to bring their ownmaterial and financial resources to the project.PNGSDP will contribute funding provided projectpartners and communities contribute in cash andmaterial support to significantly increase eachproject's value and impact on communities,especially on future operations and maintenancecosts.

Since 2002, over K7.1 million has been committed insupport of Community Sustainable DevelopmentProjects with K3.7 million committed to approvedprojects in 2007.

• Agriculture

2007 saw progress on a number of ruralcommunity agriculture projects focused onimproving vegetable and livestock yields. Theultimate aim of these projects, including theKiriwina Community and Kairuku-HiriCommunity Agriculture Projects [Partner:National Agriculture Research Institute] and theErap Valley Community Agriculture Project[Partner: Lutheran Development Service] is todevelop sustainable income generation throughquality food production.

• Education and Community

PNGSDP continued its support of the Programs ofLeadership PNG with further funding towards thedevelopment of a leadership culture throughlearning programs to enhance the skills ofemerging and current leaders.

Through PNGSDP's funding and the efforts ofproject partners, a number of school relatedconstruction projects were completed, includingthe building of two dormitories - one male andone female - at the Santa Maria High School onGoodenough Island [Partner: Santa Maria HighSchool] and four double story classroombuildings for the Kebegiuili Community School[Partners: Kwato Church and Local BusinessHouses]. The year also saw the completion of theclassroom construction for the City Mission Farm,NCD [Partner: Port Moresby City Mission].

In addition, construction of a new girls' dormitoryis underway at the Don Bosco High School inAramiri Gulf Province [Partner: Salesians of StJohn Bosco], which will provide boarding andclassroom facilities for 100 school girls.



Community & Social Investment Program(cont.)

35 schools are expected to benefit upon thesuccessful completion of the procurement andinstallation of radio communications equipmentfor the Baptist Primary School CommunicationsCapacity Building [Partner: Mt Hagen BaptistChurch].

Importantly, specially designed facilities forpeople with disabilities were completed in 2007[Partners: Callan Services, Kundiawa CatholicDiocese, Cristoffel-Blindenmission] therebyproviding further opportunities for people withdisabilities to actively contribute to their localcommunities through Callan Services.

• Health

During the year, several health buildings wereconstructed including the erection of a newhospital wing for the Kompiam Rural HealthCentre, Enga Province [Partner: Baptist Union]and the relocation and replacement of facilitiesfor Gogolme Health Centre, Simbu Province[Partner: Kundiawa Catholic Diocese].

Construction is underway for health facilitiesincluding two single wards for Mainohana HighSchool in Central Province [Partners: BereinaCatholic Diocese and New Zealand Aid].

Improvements are also being made to thedormitories for female community workers at theKudjip Nazarene College of Nursing in theWestern Highlands Province [Partner: KudjipNazarene College of Nursing].

• HIV and Development

PNGSDP has recognised HIV as a rapidlyexpanding, generalised epidemic and thattransmission of this disease can only be slowedby new social norms and practices at thecommunity level. For this reason, PNGSDP hascommenced a program of supporting structuredcommunity discussions in collaboration withcommunity based organisations around thecountry and internationally, with the aim ofdeveloping and supporting viable communitybased initiatives.

In 2007, PNGSDP provided K200,000 to supportthe Business Coalition against HIV and AIDS withfurther grants of K200,000 to be provided in 2008and 2009 per agreement. In addition, PNGSDPsupported and hosted a major conference andworkshops for community leaders across PNGfocused on engaging local communities in theresponse to HIV.

PNGSDP recognises HIV and AIDS is a major riskfor the social sustainability of our own programsand projects so new policies are being developedon a Company-wide level in order to mitigate thisthreat.

• Infrastructure andWater

Through the support of PNGSDP, St Joseph'sSecondary School Tari [Partner: St Joseph'sSecondary School] has installed rain waterharvesting equipment and is undertaking thecultivation of land. Safe drinking water will also beavailable to the Pes community in SaundaunProvince upon the completion a gravity fed watersystem [Partners: Aitape Catholic Diocese; Villagein-kind contribution].

The community of Brugam in the East SepikProvince expects to benefit from improvedelectricity services through the Electrification forEducation and Health Services project [Partner:South Seas Evangelical Church].

Energy & Rural Electrification ProgramThe National Program supports energy and ruralelectrification projects that are financed under theNational Program Fund. National Program projectsmay also include projects located in WesternProvince.

An important development strategy under theNational Program is to attract key developmentpartners in projects. PNGSDP undertakes thisstrategy by taking the initial lead role in projectidentification and then engaging developmentpartners to undertake the feasibility study andpreparation of a business model.

The pilot Teachers' Solar Lighting Project (TSLP)impacts 3,000 teachers in six provinces includingWestern Highlands, East Sepik, New Ireland, Milne

PAGE 26




Energy & Rural Electrification Program(cont.)Bay, Western and Autonomous Region ofBougainville. PNGSDP is a co-sponsor of TSLP alongwith the Global Environment Facility (GEF), Teacher'sSavings and Loan Society Ltd (TSLS) and the PNGGovernment. While the World Bank oversees theimplementation of TSLP, PNGSDP has approval forPNGSEL to be the executing agent for the project.PNGSDP's co-funding of US$100,000 is designatedfor PNGSEL's management of the project. Teachers inrecipient provinces will commence purchasing ofthe solar home system during the first half of 2008.

The final feasibility study report was completed inJuly 2007 on the Togarao mini-hydroelectric project,which is located in Central Bougainville in theAutonomous Region of Bougainville.Implementation is expected to commence in early2008. Co-funding is being progressed with AusAid.

Forestry ProgramAligned with PNGSDP's sustainable forestrydevelopment, PNGSDP's acquired equity in theCloudy Bay Forestry Management Area (FMA)represents a significant investment in a forestryproject.

• Cloudy Bay Sustainable Forestry Limited

In 2007 PNGSDP acquired an equity share of 80%from the Cloudy Bay Sawmilling and Timbers, asubsidiary of the Constintinou Group ofCompanies that operates the Cloudy Bay FMA.This investment represents PNGSDP's first forestryinvestment to date in Papua New Guinea.

As a major shareholder in the timber business,PNGSDP had the management entity namechanged from Cloudy Bay Timber Ltd to CloudyBay Sustainable Forestry Ltd (CBSFL). This namechange reflects on the Company's desires forsocial, economical and environmentalsustainability through the best forestry practicesglobally.

PNGSDP effectively manages the Cloudy Bayproject through its entity, CBSFL. Its operation is a100% downstream processing, utilising the fibreresources of the Cloudy Bay FMA. Through the

Power’s on, Rural Electrification Program

Board inspection, Cloudy Bay operations

Timber Mill, Cloudy Bay



project, the Company's objective is to transferownership to an investor-manager that can assistwith development of community and socialinfrastructure initiatives for the Cloudy Bay FMA inthe future.

Community and social infrastructure initiativesfor the Cloudy Bay FMA will be underwritten byPNGSDP over the next 35 years.

Agriculture Program• Smallholder Agricultural Development

Project

The Smallholder Agricultural DevelopmentProject (SADP) is an initiative of the Governmentand the International Development Agency (IDA).The project will enhance oil palm smallholderproductivity in two Provinces. There are threeproject components supported by PNGSDP:

• Northern Province Road Construction andRehabilitation: In 2007, the Board approvedexpenditure of US$2.9m on this project(100% of the project). The objective is tobuild or complete roads to approximately1000 smallholder blocks. Some of thesegrowers have been waiting ten years for aroad to evacuate their produce. PNGSIL isassisting to progress this project despitecatastrophic flooding in the Province in late2007.

• Sustainable Road Maintenance: During theyear, the Board approved in principle$US1.1m to assist the establishment of asustainable system for road maintenance inNorthern and WNB Provinces. Additional“seed money” for a maintenance trust fundwill come from the PNG Government andIDA, and on-going replenishment will comefrom a levy on growers and millingcompanies. The trust fund will be used tobuy and replace road fleet and equipment ineach project area and to cover operatingcosts. Improved road maintenance willincrease oil palm production as well asfacilitating other income generatingopportunities.

PAGE 28

Unprocessed timber

Sawn quality timber, Cloudy Bay Sustainable Forestry

Dining table made by Cloudy Bay Furniture



Agriculture Program (cont.)• In-filling Credit Scheme: PNGSDP has

committed to a guarantee of $US3.1m toPNG Microfinance Limited who will beestablishing a credit facility of up to$US6.2m for smallholders in Northern andWNB Provinces. Loans will be made availablefor the planting of oil palm on new blocks.All new blocks will be on existing feederroads.

InfrastructurePNGSIL also managed infrastructure projects in otherprovinces on behalf of PNGSDP. Progress of theseprojects are summarised as follows:

• The National Roads Maintenance andRehabilitation Project (NRMRP)

This program involves rehabilitation andreconstruction of a total of 170 kilometers of keyroad infrastructure in a number of selectedprovinces.

In addition to the financing by the PNGGovernment, PNGSDP agreed to support theK89.8 million project, along with the NationalGovernment and the Provincial Governments,through an additional K26.9 million counterpartcontribution to Phase 1 of the National RoadsMaintenance and Rehabilitation Project (NRMRP),covering the six provinces of Central, Oro,Morobe, West New Britain, East New Britain andManus.

Phase 1 of the Program ended in 2007 with thecompletion of the following projects:

• Construction of a two-lane concrete deckKerevat Bridge in East New Britain Province;

• Re-gravelling of Aseki Road from GumiJunction to Okinawa village, MorobeProvince; and

• Upgrading and sealing of the KokodaHighway between Uhita and Embara, OroProvince.

The program has had very positive results inimproving transport access to markets andservices for communities in those provinces.


Solid foundation, Kerevat Bridge, East New BritainProvince

Under construction, Kerevat Bridge, East New BritainProvince

Kerevat Bridge in use


Infrastructure (cont.)PNGSDP has agreed in principle to support Phase2 of the program, which will cover the same sixprovinces, and has successfully negotiated withthe State and the World Bank to include the twoadditional provinces of Gulf and WesternProvince. Phase 2 will commence in 2008 andPNGSIL will continue to manage the program forPNGSDP.

• Kokopo Roads - East New Britain Province

PNGSDP agreed to fund this project whichinvolves the upgrading and sealing ofapproximately 5 kilometers of roads in Kokopotown, East New Britain Province, at a total cost ofK13.2 million. The contract for this project wasexecuted in late 2007 and was awarded to HebouConstruction (PNG) Ltd and work hascommenced.

• Togarao Access Road - Bougainville Province

In early 2007, PNGSDP signed a Heads ofAgreement with the land owners of Rotokas,Wakunai in Central Bougainville for theconstruction of the Togarao Mini Hydro project.As part of the hydro development project, a 21kilometer access road will require improvementand upgrading. PNGSDP through PNGSIL in 2007carried out a feasibility study and investigation ofthis road section and construction of twocompact 200 bailey bridges. The study has beencompleted and design work has commenced.

Locally sourced river stones for road works

Prior to road upgrade, West New Britain





MicrofinancePNG Microfinance Ltd currently operates fourbranches outside of Western Province. These arelocated at Koki in the National Capital District; Alotau,Popondetta and Kimbe. These branches accountedfor 62% of total depositors and 55% of totaldepositors' balances held by the company during2007.

The local economies of these areas are quite strongand offer a range of lending opportunities. Alotau,Popondetta and Kimbe are locations that host largeoil palm developments and many of the PNGMicrofinance customers at these locations arethemselves smallholder oil palm producers.

71% of all loans approved and funded by PNGMicrofinance in 2007 were for small businessoperators at these four branches.

MICROFINANCE

Summary of Savings Services - National (excludingWestern Province)2005 2006 2007

NO. OF VALUE OF NO. OF VALUE OF NO. OF VALUE OFDEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS

TOTAL 19,024 K4,343,972 50,684 K9,837,371 82,666 K14,781,998

Summary of Lending Services - National (excludingWestern Province)2005 2006 2007

LOANS VALUE OF LOANS VALUE OF LOANS VALUE OFAPPROVED LOANS APPROVED LOANS APPROVED LOANS

TOTAL 2,070 K2,096,434 4,604 K8,921,004 5,651 K12,166,466

Microfinance customers


MANAGEMENT R EPORT

As noted in the CEO's Review, 2007 saw changesimplemented across the Company, including thoserelated to human resources.

Development of human resources anddeepening skill setsA number of key positions were established todeepen the skill set at the Program level and toensure proper expertise in the Company'sadministration area. The new roles encompass arange of fields including clerical, human resources,infrastructure, agriculture, forestry, mines, petroleumand community initiatives.

Establishment of regional officesDuring the year, a regional office was established inKiunga with the aim of ensuring the Company'sphysical presence in Western Province, as well as on-the-ground program oversight and to strengthenrelationships with local communities. In addition, aproject site was also opened in Daru.

These offices are staffed by PNGSDP employees and

provide a convenient location for local communitymembers to interact and obtain information aboutthe Company and its programs within the region.

Professional developmentStaff participated in a number of training programsthroughout the year, including the development ofappropriate skills in computer-related applicationslike Microsoft Office (MS Outlook and MS Project2003), Microsoft Dynamics GP (project managementand systems administration) and PayGlobal(HR/Payroll system).

Staff also attended a number of seminars run byexternal organisations and individuals.

Staff of the CompanyAs at 31 December 2007, the Company had 49Program Management and Administration staffoperating from the Company's Head Office and itsregional offices.

The Company is also supported by a team ofnational and international advisors.



PNGSDP MANAGEMENT CHART

Management of PNGSDP

Chief Executive O�cerPersonal Assistant

Advisory Council

Corporate Governance Manager - Corporate Governance & Special Projects

Executive O!cerO!ce Clerk

Funds Manager Newton Investment Management LtdSchroder’s Ltd

Chief Program O!cerExecutive & Research Assistant

Chief Financial O!cer

Sustainable Infrastructure Development Program Manager (Infrastructure)

Western Province Sustainable Development

Program manager Admin O!cer

Sustainable Environment, Aquaculture and Tourism

Program Manager Program Assistant Admin O!cer

Strategic InvestmentsAdvisor – Mining & PetroleumManager – Technical Administration Manager Receptionist/Secretary Support Driver

Mine Closure Senior Program O!cer (CMCA)

Project & Business PartnersResponsible for management andImplementation of Projects

Community & Social investment Program

Program Manager – CSIP Senior Program O!cer –HIV & Development Senior Program O!cer –Western Province Program O!cer – National Program assistant

Sustainable Agriculture Development Program Manager (Agriculture) Program O!cer (Agriculture)

Sustainable Forestry Development Senior Program O!cer (Forestry)

Communities & People of Papua New Guinea (Especially Western Province)

Finance & Administration Team HR & AdministrationManager Accountant Assistant Accountants

Accounts O!cerReceptionist/Secretary Driver/General O!ce Assistant

O!ce Assistant

Page 32 Photos: PNGSDP MANAGEMENT AND STAFFTop Photo from left to right. Front row: Boge Lohia, Ginia Siaguru, Iabomai Ataia, Carolyn Murray, Emma Tege, Iga Ila, FaeMaso, Julie Malan and Dorothy Pomat. Back row: Wesley Mondo, Jennifer Krimbu, Jason Midire, Jaru Bisa, Daniel Ikupu, PetrusYama, Jethro Apinas and Nathan Lowa.Bottom Photo from left to right. Front row: Lalatute Avosa, Patricia Kila, Lawrence Stephens, Susil Nelson, Vere Arava (CFO),David Sode (CEO), Camillus Midire (CPO), Aloysius Aihi, Mathew Kanua and Mark Soi. Back row: Sen Hugo, Vina Mero, PoniKorua, David Tau-Loi, Sam Tupou, Michael Poesi, Ian Middleton, Stanis Tao, Fred Uraru and David Konga.Those not in group photo: Robert Igara, Joe Ikau, Paddy Boe, Timothy Kondo, Alberta Bauri, Legu Lee, Rupa Oa


A DV I S OR Y COUNC I L R EPORT - ADV I SORY COUNC I L MEMBERS

The Advisory Council provides the CEO with strategicadvice on the development and implementation of theSustainable Development Program, including adviceon the integration of the Company's initiatives withoverall development objectives of PNG.

The Advisory Council also provides assistance withsharing and disseminating information about the

Sustainable Development Program to project partnersand stakeholders.

Two additional functions of the Advisory Council are toprovide feedback on particular project proposals andto assist in monitoring and reviewing projects that aresupported by the Company.

The Advisory Council meets quarterly to considerpapers presented by Management.

Ms Felecia Dobunaba,OBEChairperson BA• Re-appointed on2 December 2005

Ms Dobunaba has extensiveknowledge and experience insocial and developmentplanning and programimplementation. She hasserved as the Deputy Directorof the Office of NationalPlanning and as Secretary ofthe Department of HomeAffairs and Youth. MsDobunaba also served as theDirector-General (CentralAgencies Co-ordinationCommittee Secretariat) for theDepartment of Prime Ministerand National Executive Council

Ms Donunaba is currently aconsultant providing advice onpublic administration andstrategic planning matters.

Dr Betty LovaiBASW, BASW(Hon), MA,PhD• Re-appointed to theCouncil on 2 December2005

Dr Lovai has workedextensively amongst the poorin urban and rural areas. Herresearch and teaching hasfocused on situation studies ofcommunities and villages.

Dr Lovai brings to the AdvisoryCouncil her experience as aconsultant to many esteemedorganisations, including theUnited Nations DevelopmentProgramme (UNDP), the AsianDevelopment Bank (ADB),AusAID, Japanese InternationalCooperation Agency (JICA) andWorld Vision.

Currently, Dr Lovai is also Lecturerin SocialWork at the University ofPapua New Guinea.

Rev Samson LowaBDiv, Bed, Dip SecTeaching, Dip Theo• Re-appointed to theCouncil on 2 December2005

Rev Lowa was a secondaryschool teacher before enteringthe Church. He brings to theAdvisory Council hisknowledge and skills asModerator of the UnitedChurch of Papua New Guineaand the Solomon Islands aswell as president of the PapuaNew Guinea Council ofChurches.

Currently, Rev Samson alsoserves as a Director on theBoard of a number oforganisations, includingEvangelism Exposition MinistryInternational (based in FortLauderdale, Florida), the Bankof Papua New Guinea and PostPNG.

Mr Steve NionBSc, MSc• Re-appointed to theCouncil on 2 December2005

Mr Nion brings to the AdvisoryCouncil many years ofexperience in the miningsector of PNG, includingresponsibility for managingPapua New Guinea'sGeological Survey as thecountry's Chief Geologist.

Mr Nion is the alternative PNGRepresentative on theCoordinating Committee ofthe Coastal and OffshoreGeosciences Program in Eastand South East Asia.

Currently Mr Nion also servesas the Deputy Secretary of theDepartment of Mining.

The Advisory Council and its Responsibilities



ADV I SOR Y COUNC I L R EPORT - ADV I SOR Y COUNC I L MEMBERS

Advisory Council Meetings in 2007

Meetings AttendedMs Felicia Dobunaba 4/4Mr Blasius Iwik 4/4Dr Navu Kwapena 4/4Dr Betty Lovai 3/4Rev Samson Lowa 3/4Mr Steve Nion 3/4Mr Paul Songo 2/4

2007 Advisory Council Highlights

During the year, the Advisory Council met to review Management papers.In addition it also undertook the following activities:

• Acted as independent observers of the CMCA review process;• Participated in the Women's Stakeholder Workshop held for CMCA women;• Took part in the public hearing for the Environmental Impact Statement on

the proposed Daru port;• Conducted discussions with Elizabeth Reid, specialist consultant, on HIV and

Development;• Organised briefing by PNGSDP to National Heads of Department and

members of the Central Agencies Coordination Committee at Loloata.

Dr Navu KwapenaBSc, MSc, PhD• Re-appointed to the Councilon 2 December 2005

Dr Kwapena is an EnvironmentalEcologist and Botanist dedicated tothe protection of native PapuaNew Guinean fauna and flora, andthe sustainable use of naturalresources including equitabledistribution of the benefits ofresource exploitation.

Dr Kwapena brings to the AdvisoryCouncil many years of experiencein the Department of Environmentand Conservation, includingservice as Acting Deputy Secretaryand First Assistant Secretary forWildlife Research, Managementand Conservation.

Dr Kwapena is currently a TechnicalAdvisor to the Department ofEnvironment and Conservation.

Mr Blasius IwikDip Rel Studies• Re-appointed to theCouncil on2 December 2005

Mr Iwik represents the interestsand perspective of landownersof Western Province on theAdvisory Council.

He has served with the RomanCatholic Church in Kiunga,Western Province for manyyears including as a pastoralworker with St. Brigit's Parishand later as DiocesanDevelopment Secretary.

Currently Mr Iwik isCommunications and PublicRelations Officer with addedresponsibilities for CatholicEducation with the RomanCatholic Church, Kiunga.

Mr Paul Songo• Appointed to the Councilon 13 November 2006

Mr Songo is the ConsultantAdvisor on Provinces & LLG inthe Public Sector ReformManagement Unit of theDepartment of Prime Ministerand National Executive Council.

He has held the position of thePNG High Commissioner toAustralia and served asSecretary of the Department ofPersonnel Management andSecretary of the Department ofHealth.

Mr Songo brings to theAdvisory Council many years ofpublic sector experience,particularly in the area ofcapacity building.


CORPORAT E GOV ERNANCE R EPORT - TH E BOARD OF D I R E C TOR S

Professor Ross Garnaut, AOChairman, Non-executive DirectorBA, PhD, FASSA

Skills, experience and expertiseRoss Garnaut is Distinguished Professor of Economics atThe Australian National University and also ViceChancellorial Fellow and Professorial Fellow at theUniversity of Melbourne.

For more than three decades, he has frequently beenconsulted on economic and foreign policy at theministerial, including Prime Ministerial, level in Australiaand several other Asia Pacific countries, as well as holdingthe post of Australian Ambassador to the People'sRepublic of China (1985-1988). Professor Garnaut iscurrently conducting a review commissioned by theAustralian Prime Minister and Australian State Premiersexamining the impact of climate change on the Australianeconomy and potential medium to long-term policies toameliorate these.

Professor Garnaut has a long connection with Papua NewGuinea since serving as First Assistant Secretary and Deputyto Finance Secretary in Papua New Guinea's Department ofFinance responsible for financial and economic policy at thetime of independence (1975-1976).

In addition to his Directorship of Ok Tedi Mining Ltd as thenominee of PNGSDP, Professor Garnaut is also theChairman of Lihir Gold Ltd and Chairman of theInternational Food Policy Research Institute (WashingtonDC). Professor Garnaut is on the Board of Directors ofnumerous international research and policy organisations,including the Lowy Institute for International Policy(Sydney), the Centre for Strategic and InternationalStudies (Jakarta) and the China Centre for EconomicResearch (Beijing).

Professor Garnaut is the author of over 35 books andnumerous influential articles in scholarly journals oninternational economics, public finance and economicdevelopment, particularly relating to East Asia and theSouthwest Pacific.

Age: 61 Residence: Canberra, Australia

Honourable Sir Ebia Olewale KtNon-executive Director, Chairman of the WesternProvince Committee

Skills, experience and expertiseOriginally from Western Province, he served hispeople as Member of the House of Assembly for 14years between 1968 and 1982. During the course ofhis political career, Sir Ebia was responsible as theMinister for Justice in 1975 for the adoption of PapuaNew Guinea's Independence Constitution.

He played a major role in the Nation's preparation forIndependence as a member of the Special SelectCommittee and also in the capacities of Minister forEducation and Commerce during the self-government period. Following the 1977 elections, SirEbia served as Deputy Prime Minister, as well asMinister for Justice and Minister for Foreign Affairsand Trade.

Sir Ebia's skills as a Parliamentarian andrepresentative of his people have receivedinternational recognition. In 1994 he supported thefirst multiracial election in post-apartheid SouthAfrica as a member of the Commonwealth ObserverMission.

In addition, Sir Ebia has played an important role indeveloping tertiary education in PNG, especiallyduring his appointment as the Chancellor of theUniversity of Goroka.

Prior to his appointment on the PNGSDP Board, hewas a consultant to Ok Tedi Mining Ltd.

Age: 68 Residence: Daru, Western Province andPort Moresby, PNG

PAGE 36



CORPORAT E GOV ERNANC E R EPORT - TH E BOARD OF D I R E C TOR S

Honourable Jim Carlton, AONon-executive DirectorBSc

Skills, experience and expertiseMr Carlton's expertise spans leadership roles inmanufacturing industry, management consulting,government and the non-profit sector.

Mr Carlton is Chairman of the Australian InnovationAssociation, a Council Member of the AustralianStrategic Policy Institute, a Board Member of theAustralia New Zealand School of Government and aSenior Adviser to the Boston Consulting Group.

Mr Carlton was a Member of the Federal Parliamentin Australia, serving as Minister for Health andMinister Assisting the Minister for NationalDevelopment and Energy. He also held a number ofShadow Ministry positions in Opposition, includingTreasury, Defence and Sustainable Development &Environment, and has completed the SeniorManagers in Government Program at the John F.Kennedy School of Government, Harvard University.

He also brings to his role as Director, extensiveexperience in international development, serving asa Commonwealth observer at the return of Zambiato democracy, on the Australian Foreign Minister'sAid Advisory Council, and on the Australian NationalAdvisory Council on Peace and Disarmament. MrCarlton has also had experience in the non-profitsector, including seven years as Secretary General ofthe Australian Red Cross. He has also served on theAustralian National Commission for UNESCO, and asChairman of the Advisory Council of the NationalArchives of Australia.

Age: 72 Residence: Melbourne, Australia

Mr Donald Manoa, MBENon-executive Director, Chairman NationalCommittee

Skills, experience and expertiseMr Manoa has a broad range of expertise and skills inindustry and as a director. He is Chairman of theGazelle Restoration Authority and the New GuineaIslands Produce and Agmark Group of Companies.He is also a member of the Board of Directors of KinaFund Management and First Investment Finance Ltd.

Mr Manoa brings to his role as Director many years ofbusiness experience in Papua New Guinea. He wasGeneral Manager of Shell Papua New Guinea Limitedand General Manager of the Papua New GuineaElectricity Commission. He has been Chairman ofShell (PNG) and Shorncliff PNG Ltd, and also amember of the Board of Directors of ANZ BankingGroup (PNG) Ltd, Barclay Bros (PNG) Ltd and AirNiugini.

Mr Manoa has contributed in a number ofcommunity services roles including asCommissioner in the National Provident Fund. Healso served as Honorary Counsel for the Netherlands.

Age: 60 Residence: East New Britain, PNG

PAGE 37


CORPORAT E GOV ERNANCE R EPORT - TH E BOARD OF D I R E C TOR S

Ms Patricia CaswellNon-executive DirectorBA(Hon), BEd

Skills, experience and expertiseMs Caswell is Chief Executive Officer of the VictorianAssociation of Forest Industries in Melbourne,Australia. She is a Director on the Australian MineralsEnvironment & Energy Foundation, a member of theEnvironment Advisory Group for theWestern MiningCorporation and is on the Canberra UniversityCentre for Developing Cities Board.

Coming from a background as a secondary schooland TAFE teacher and trade union leader, Ms Caswellhas developed her career into the area of sustainableresource management.

Ms Caswell has extensive experience with variousprivate and public bodies in Australia, including asExecutive Director of the Global SustainabilityInstitute at the Royal Melbourne Institute ofTechnology University in Melbourne. She has alsoserved as Executive Director of the AustralianConservation Foundation and PLAN InternationalAustralia.

Age: 59 Residence: Melbourne, Australia

Dr JakobWeissNon-executive Director, Chairman, Investment andFinance CommitteeBA, MBA, PhD

Skills, experience and expertiseDr Weiss is Dean Emeritus of the Department ofEconomics at the College of Management in Tel AvivIsrael. He was also Adjunct Professor of Economics atBen Gurion University in Israel, GeorgetownUniversity, USA, and the State University of NewYork,USA.

Dr Weiss was a long-serving official with the Bank ofIsrael and for three years with the US Federal ReserveBank. He served as a member of the Board of theMercantile Discount Bank of Israel, and on the Boardand as Chairman of the Investment Committee of alarge pension superannuation fund with operationsin the United States, Europe and Israel.

Dr Weiss also has many years of experience workingin PNG. Between 1988 and 1994, and again between1999 and 2002, he was seconded from the IMF to theBank of Papua New Guinea, where he has continuedto act as an advisor. He has also worked as an advisorin several former Soviet Republics.

Age: 72 Residence: Ramat Hasharon, Israel



CORPORAT E GOV ERNANC E R EPORT - TH E BOARD OF D I R E C TOR S

Mr Lim HowTeck, PBMNon-executive Director, Chairman of the AuditCommitteeBACC, FCPA (Singapore/Australia), FCMA (UK), FSID,AIBA

Skills, experience and expertiseMr Lim, a certified public accountant, has extensivefinancial experience and serves on several statutoryboards in Singapore and corporations around theworld.

Mr Lim is Executive Chairman of RedwoodInternational Pte Ltd, Chairman of Certis CISCOSecurity Pte Ltd, Singapore Commodity Exchange(SICOM) and Deputy Chairman of Tuas Power Ltd.He is also a Board Director of IFS Capital Ltd, PhillipResources Fund Special Purpose Company, UMSHoldings Ltd, Jurong Port Pte Ltd, LassetersInternational Holdings Ltd, Orangestar InvestmentHoldings Pte Ltd, M&C REIT Management Ltd/M&CBusiness Trust Management Ltd (CDL HospitalityTrusts), Rickmers Maritime, Mermaid Maritime PCL,MacarthurCook Investment Managers (Asia) Ltd andARA Asset Management Ltd.

Until his retirement in 2005, Mr Lim was a Boardmember, Executive Director and Group ChiefFinancial Officer of Neptune Orient Lines Ltd ofSingapore.

Mr Lim has been honoured with a PBM by theSingapore Government for his contribution toSingapore. He has also been awarded the EducationMedal from the Singapore Ministry for Educationand the Good Services Medal from the SingaporeCivil Defence Force.

Age: 57 Residence: Singapore


CORPORAT E GOV ERNANCE R EPORT

CORPORATE GOVERNANCE STATEMENTAs a Company 'limited by guarantee', PNGSustainable Development Program Limited does nothave shareholders. The objectives and operations ofthe Company are governed solely by theMemorandum and Articles of Association of theCompany and by the Program Rules, which togethercomprise the Constitution of the Company. TheCompany is registered at 20 Raffles Place #09-01,Ocean Towers, Singapore and has a CompanySecretary operating at that address. The Company'smanagement office is located in Port Moresby,Papua New Guinea.

This report reflects PNGSDP's corporate governancepractices as at 31 December 2007.

The Board, its key duties and responsibilitiesThe Board must independently oversee theoperations and projects of PNGSDP in accordancewith the Articles of Association and the ProgramRules.

The Board is not subject to the direction or control ofthe Independent State of Papua New Guinea or BHPBilliton. However, in accordance with theMemorandum and Articles of Association, changesto the Program Rules and structure can only bemade with the consent of those parties.

The Board reserves certain functions for itself.Broadly, the duties of the Board include:

• Oversight and review of the overall strategy ofthe Company to ensure it is consistent with thestrategic objectives and that adequate riskmanagement procedures are in place;

• Periodic review of PNGSDP's structures andoperations to ensure they are conducted inaccordance with the Rules;

• Appointment and evaluation of the ChiefExecutive Officer and review of the function andperformance of other key senior management;

• Determination of which projects are funded bythe Company;

• Review periodically the development outcomes

and achievements of PNGSDP in terms of theCompany's strategic direction;

• Consideration of the income and expenditureaccounts and balance sheet;

• Appointment and evaluation of the Auditor;

• Meet at least annually with the AdvisoryCouncil; and

• Provide accountability, at least annually, on theperformance and operations through publisheddocuments and an Annual Report Meeting.

Board composition and appointment

The Articles of Associate require that the Board has aminimum of four and at all times no more thanseven directors.

As at the date of this report, the Board of Directorsconsists of seven members. The appointment of thedirectors is made in accordance with the Articles:three non-executive directors including theChairman appointed by BHP Billiton; the Minister forTreasury, the PNG Chamber of Commerce andIndustry and the Bank of PNG each appoint one non-executive director; and an independent Singapore-resident non-executive director is also appointed.

As at 31 December 2007 the Board consisted of:

Dr R Garnaut, Chairman, Non-Executive Directorappointed by BHP;

Honourable J Carlton, Non-Executive Directorappointed by BHP;

Ms P Caswell, Non-Executive Director appointed byBHP;

Honourable Sir E Olewale, Non-Executive Directorappointed by the Minister of Treasury, PNG;

Mr D Manoa, Non-Executive Director appointed bythe PNG Chamber of Commerce and Industry;

Dr JWeiss, Non-Executive Director appointed bythe Bank of PNG; and

Mr Lim HT, Non-Executive Director,Singapore resident.



CORPORAT E GOV ERNANC E R EPORT

Conflict of interestPNGSDP is aware of the importance of managingconflicts of interest. Directors continually monitorand disclose any potential conflicts of interest thatarise. In addition, any director with a materialpersonal interest in a matter being considered by theBoard must declare this interest and must not voteon any matter which relates to that interest.

Board MeetingsThe Board holds three meetings a year at aminimum. It also meets whenever it is necessarybetween these formal meetings, to carry out itsresponsibilities.

In carrying out the business which is to betransacted at a Board meeting, directors are requiredto raise any questions they may have, request furtherinformation if needed, raise concerns and vote onmatters before the Board, according to their ownjudgement.

As stipulated in the Articles of Association, a quorumrequires one BHP appointed director and one PNGdirector. Decisions are made by majority, but mustinclude at least one BHP appointed director and onePNG appointed director.

During 2007, the Board had five scheduled meetingsin Singapore and a varying number of BoardCommittee meetings during the period to 31December 2007. All Board members were inattendance for each meeting and, in addition,regular informal teleconferences were held to

discuss progress with the Sustainable DevelopmentProgram. The Board continued its policy to visitPapua New Guinea every three months prior to itsscheduled meetings. Details of attendance arecontained later in the Corporate GovernanceStatement.

Access to Information and Independent Advice

All directors are given unrestricted access to allrecords and information relating to PNGSDP.Directors are encouraged to speak with members ofsenior management at any time to request relevantinformation.

Directors are entitled to seek independent advice onany matter which relates to PNGSDP at theCompany's expense, but must ensure that costs arereasonable and advise the Chairman beforeobtaining the advice.

Role of Board Committees

The Board has established a number of expertCommittees to assist in its duties and responsibilities.Board Committees allow matters to be discussedand considered in greater detail. The BoardCommittee structure utilises the skills andexperience of the PNGSDP Directors to a maximumadvantage for the benefit of all stakeholders. BoardCommittees are formed in response to the needs ofthe Company and the Board may appoint furtherBoard Committees as it sees fit.

Staff development workshop


CORPORAT E GOV ERNANCE R EPORT

Company Secretary

Ms Madelyn Kwang, Senior Manager of DrewCorpServices Pte Ltd, has the chief responsibility for thecompany secretarial requirements of the registeredcompany, PNG Sustainable Development ProgramLimited.

Ms Kwang, through the appointment of DrewCorpServices Pte Ltd by the PNGSDP Board, is responsiblefor:

• monitoring Board policy and ensure thatprocedures are followed;

• distribution of the Board agenda and briefingmaterials before each meeting;

• recording, maintaining and distributing theminutes of all General Meetings of theCompany;

• notifying the directors of Board meetings; and

• assisting in oversight of the Company'scompliance.

Current Committees of the BoardIn order to assist it with its work, the Board hascreated four main Committees from amongst itsmembers. These are the Audit Committee, theInvestment and Finance Committee, the NationalProgram Committee and the Western ProvinceProgram Committee.

The Board appoints the Chairman of the Committeewho cannot also be the Chairman of the Board.

Each Committee receives reports from Managementand independent external experts and makesrecommendations to the Board based on thereports.

PNGSDP Board Committee Membership - from 1 January 2007 to 31 December 2007

Audit Investment & Finance National Program Western Province Program

Lim How Teck (Chair) Jakob Weiss (Chair) Donald Manoa (Chair) Sir Ebia Olewale (Chair)Ross Garnaut Ross Garnaut Jim Carlton Don ManoaJakob Weiss Lim How Teck Patricia Caswell Jim Carlton

Sir Ebia Olewale Patricia CaswellRoss Garnaut (ex-Officio) Ross Garnaut (ex-Officio)

Directors' meetings in 2007The number of Board and Committee meetings during the year the director was eligible to attend and thenumber of meetings attended by each director was:

Board Audit Investment & National WesternCommittee Finance Committee Committee Province Committee

Ms Patricia Caswell 5/5 -/- -/- 4/4 4/4Hon Jim Carlton 5/5 -/- -/- 4/4 4/4Dr Ross Garnaut 5/5 5/5 5/5 4/4 4/4Mr Lim How Teck 5/5 5/5 5/5 4/4 4/4Mr Donald Manoa 5/5 -/- -/- 4/4 4/4Sir Ebia Olewale 5/5 -/- -/- 4/4 4/4Dr Jakob Weiss 5/5 5/5 5/5 4/4 4/4




Stakeholder Communication and Membermeetings

The Board of Directors reports regularly to theMembers, the Government of Papua New Guinea,BHP Billiton, Ok Tedi Mining Limited, and to otherPapua New Guinea stakeholders.

The Annual General Meeting of Members wasconvened on 22 May 2007 in order to adopt the2006 Directors' Report and Accounts.Representatives of the Company's auditor for 2007,PriceWaterhouseCoopers, were present at themeeting.

No extraordinary meetings were held during thisperiod by the Members of the Company.

Under the Rules, the Company must hold an AnnualReport Meeting every year. The 2006 Annual Reportwas presented at the fifth PNGSDP Annual ReportMeeting, convened at the Holiday Inn ConferenceRoom in Port Moresby on 22 May 2007. The Meetingwas officially opened by Bank of Papua New GuineaGovernor, Mr Wilson Kamit, and was attended byrepresentatives of key stakeholders. The Chairmanand all Non-Executive Directors of the Board, theChief Executive Officer and all senior program staffwere present to represent the Company at themeeting as well as representatives of the Company'sauditors.

Board delegation to management

The Board has delegated authority to the CEO tomanage the day-to-day leadership and operations ofPNGSDP within the delegation limits that are set outin the Program Rules and those set by the Boardfrom time to time. The Executive Officer may sub-delegate responsibilities within these limits;however, the Executive Officer remains accountablefor all authority that has been delegated tomanagement.

Felecia Dobunaba with Alan Breen and governmentrepresentative

Sir Ebia Olewale (PNGSDP), Alan Breen (OTML), RobertIgara (PNGSDP)

Mujse Werror (OTML), Susil Nelson (PNGSDP)


CORPORAT E GOV ERNANCE R EPORT - ORGAN I S AT I ONA L CHART

Board of Directors of PNGSDP Limited

Dr. Ross GarnautChairman

Hon. Jim Carlton Mr. Don ManoaMs Patricia Caswell Sir Ebia OlewaleMr Lim How Teck Dr. Jakob Weiss

BHP BILLITON GOVERNMENT OF PAPUA NEW GUINEA

Board of DirectorsOk Tedi Mining Ltd

Members of PNGSDP Ltd

Hon. Jim CarltonMr. Don ManoaMr. Lim How Teck

Auditors

PricewaterhouseCoopers

Board of Directors of SubsidiaryCompanies

PNG Microfinance LtdPNG Sustainable Energy Ltd

PNG Sustainable Infrastructure LtdCloudy Bay Sustainable Forestry Ltd

Investment Program Sustainable Development Program

Advisory Council

Ms Felecia Dobunaba,Chairperson

Dr. Betty LovaiRev. Samson LowaMr. Paul SongoMr. Steven NionMr. Blasius Iwik

Dr. Navu Kwapena

Company Secretary

Ms. Madelyn Kwang

Chief Executive Officer

Mr David Sode

Manager - Corporate Governance

Ms Susil Nelson

Funds Managers

Newton InvestmentManagement LtdSchroders, London




PNGSDP's relationship with OTML is unique in manyrespects given the responsibilities vested in PNGSDPby the State and BHP Billiton, as disclosed earlier inthis Annual Report. PNGSDP has a 52% shareholdingin Ok Tedi Mining Ltd, however it does not haveabsolute control over the investment in OTML butshares control with the two other shareholders - theState and INMET.

Since 2002, PNGSDP has established four companiesto undertake investments and provide serviceswhich improve the quality of life of communities,especially in rural areas. These companies are CloudyBay Sustainable Forestry Ltd, PNG Microfinance Ltd,PNG Sustainable Energy Ltd and PNG SustainableInfrastructure Ltd.

Through this strategy significant resources andexpertise can be brought to specific investments,including infrastructure and social services abovethe funding support available from PNGSDP. Eachcompany is an independently run, registeredbusiness with shareholders, a Board of Directors anda professional management team.

PNGSDP's SUBSIDIARIES AND JOINTVENTURE COMPANYCloudy Bay Sustainable Forestry Limited

• PNGSDP acquired 80% of Cloudy BaySustainable Forestry Ltd (CBSFL) in 2007.

• CBSFL promotes sustainable forestry practiceswhich are aligned with PNGSDP's mandate. Itoperates in the Central Province of PNG and alsoharvests, mills and sells timber products.

PNG Microfinance Limited

• PNGMFL is a 48.65% owned subsidiary ofPNGSDP. The Bank South Pacific also holds 32%of the company and, during 2007, InternationalFinance Corporation became a 19.35% owner ofPNGMFL when it issued additional shares of2,400,000 fully paid at an issue price of K1.00 pershare.

• It was established in 2003 as a vehicle to providefinancial services to low-income householdsand village communities throughout PapuaNew Guinea. PNGMFL was one of theCompany's first major investment initiatives thatpioneered PNGSDP's sustainable developmentbusiness model.

PNG Sustainable Energy Limited

• PNGSEL is a 50/50 joint venture betweenPNGSDP and SMEC Developments followingcompletion of the process of its share issueduring 2006. SMEC Holdings Ltd is an Australiancompany that undertakes major electrical andcivil works projects all over the world and has along track record of major projects in PapuaNew Guinea.

• PNGSEL has been operating from its head officein Port Moresby since 2005. SMEC providesmanagement services to PNGSEL until suchtime as PNGSEL has established its ownmanagement capability.

• The two shareholding companies are equallyrepresented by one nominee director.According to the shareholder agreement, allsignificant and key management decisionsrequire the unanimous agreement of PNGSDPand SMEC.

PNG Sustainable Infrastructure Limited

• PNGSIL is a wholly owned subsidiary of thecompany incorporated on 3 January 2006.

• The main purpose of the subsidiary is to addressthe development of infrastructure especially inWestern Province. It will target in particularprojects that involve development andmaintenance of road, airstrip, jetty, water andsewerage infrastructure.



PNG Sustainable Energy Limited is a PNGSDP jointventure with Snowy Mountain EngineeringCorporation (SMEC).

Cloudy Bay Sustainable Forestry Ltd, PNGMicrofinance Ltd and PNG SustainableInfrastructure Ltd are subsidiaries of PNGSDPbecause they are entities over which PNGSDP haspower to govern financial and operating policies,accompanying a shareholding of more than half ofthe voting rights.

The relationship between PNGSDP and all four of thecompanies it has established is on two levels; bothon the basis of an owner/investor or shareholderrelationship, as well as a client/project partner ordevelopment agency relationship.

As an owner/investor PNGSDP nominates onedirector to each subsidiary Board. As set out in theconstitution of each company, these directors canbe sourced internally from the PNGSDPManagement team or externally.

The PNGSDP-nominee directors report to the CEO ofPNGSDP on all matters discussed at Board level. TheCEO of PNGSDP is responsible for reporting to theBoard of PNGSDP on the activities of all threecompanies at each Board meeting.

As previously noted, all four companies areimplementing Sustainable Development Projects onbehalf of PNGSDP under management servicesarrangements.

The client/project partner relationship withsubsidiary companies is managed in the same wayas all other relationships with project partners.Project proposals are appraised with the samecriteria for economic, environmental, social andinstitutional sustainability as any other project. Eachproject must be presented individually to thePNGSDP Board by PNGSDP management forendorsement.

Cloudy Bay Sustainable Forestry Ltd, at the settlementsigning ceremony Dr. Jakob Weiss, George Constantinouwith Sir Ebia Olewale

R. Igara (PNGSDP), P. Thornton (PNGMFL) and PNGSDPBoard members, Dr. Weiss, Sir E. Olewale, Hon J. Carlton,P. Caswell and Mr Lim How Teck

PAGE 46



PNGSDP LTD F I NANC I A L S TAT EMENTSF O R T H E F I N A N C I A L Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 7

DIRECTORS’ REPORTThe directors present their report to the members together with the audited financial statements of the Groupfor the financial year ended 31 December 2007 and the balance sheet, income statement and statement ofchanges in equity of the Company for the financial year ended 31 December 2007.

DirectorsThe directors of the Company in office at the date of this report are as follows:Ross Gregory GarnautJakob WeissJames Joseph CarltonPatricia Joy CaswellDonald Wabirao ManoaLim How TeckSir Ebia Olewale

Arrangements to enable directors to acquire shares and debenturesNeither at the end of nor at any time during the financial year was the Company a party to any arrangementwhose object was to enable the directors of the Company to acquire benefits by means of the acquisition ofshares in, or debentures of, the Company or any other body corporate.

Directors' interests in shares, debentures and share optionsThe Company is limited by guarantee and has no share capital, debentures, share options or unissued shares.None of the directors holding office at the end of the financial year had any interest in the shares or debenturesof any related corporations.

Directors' contractual benefitsSince the end of the previous financial year, no director has received or become entitled to receive a benefit byreason of a contract made by the Company or a related corporation with the director or with a firm of whichhe is a member or with a company in which he has a substantial financial interest, except as disclosed in thefinancial statements, and except that Dr. Ross Gregory Garnaut is a nominee director of the Company's jointlycontrolled entity and receives remuneration in this capacity, which is payable by the Company.

Independent AuditorsThe independent auditors, PricewaterhouseCoopers, have expressed their willingness to acceptre appointment.

On behalf of the directors

ROSS GREGORY GARNAUT DONALDWABIRAOMANOADirector Director

LIM HOWTECKDirector (Audit Committee Chairman)


PNG SDP LTD F I NANC I A L S TAT EMENTSF O R T H E F I N A N C I A L Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 7

STATEMENT BY DIRECTORSIn the opinion of the directors,

(a) the income statement, balance sheet and statement of changes in equity of the Company and theconsolidated financial statements of the Group as set out on pages 47 to 89 are drawn up so as to give atrue and fair view of the state of affairs of the Company and of the Group as at 31 December.

(b) at the date of this statement, there are reasonable grounds to believe that the Company will be able to payits debts as and when they fall due.

On behalf of the directors

ROSS GREGORY GARNAUT DONALDWABIRAOMANOADirector Director

LIM HOWTECKDirector (Audit Committee Chairman)




INDEPENDENTAUDITOR'S REPORTTOTHEMEMBERSOF PNG SUSTAINABLE DEVELOPMENTPROGRAM LIMITEDWe have audited the accompanying financial statements of PNG Sustainable Development Program Limited(the “Company”) and its subsidiaries (the “Group”) set out on pages 47 to 89 for the financial year ended 31December 2007, which comprise the income statement, the balance sheets of the Company and of the Groupas at 31 December 2007, the statement of changes in equity of the Company and of the Group, and theconsolidated income statement and consolidated cash flow statement of the Group for the financial year thenended, and a summary of significant accounting policies and other explanatory notes.

Management's Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements inaccordance with the provisions of the Singapore Companies Act (Cap. 50) (the “Act”) and Singapore FinancialReporting Standards. This responsibility includes:

a) devising and maintaining a system of internal accounting controls sufficient to provide a reasonableassurance that assets are safeguarded against loss from unauthorised use or disposition; and transactionsare properly authorised and that they are recorded as necessary to permit the preparation of true and fairprofit and loss accounts and balance sheets and to maintain accountability of assets;

b) selecting and applying appropriate accounting policies; and

c) making accounting estimates that are reasonable in the circumstances.

Auditor's ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted ouraudit in accordance with Singapore Standards on Auditing. Those Standards require that we comply withethical requirements and plan and perform the audit to obtain reasonable assurance as to whether thefinancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor's judgement, including the assessmentof the risks of material misstatement of the financial statements, whether due to fraud or error. In making thoserisk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentationof the financial statements in order to design audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness of accountingestimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.



INDEPENDENTAUDITOR'S REPORTTOTHEMEMBERSOF PNG SUSTAINABLE DEVELOPMENTPROGRAM LIMITED (CONTINUED)OpinionIn our opinion,

(a) the income statement, the balance sheet and the statement of changes in equity of the Company and theconsolidated financial statements of the Group are properly drawn up in accordance with the provisionsof the Act and Singapore Financial Reporting Standards so as to give a true and fair view of the state ofaffairs of the Company and of the Group as at 31 December 2007, the results, changes in equity and cashflows of the Group and the results and changes in equity of the Company for the financial year ended onthat date; and

(b) the accounting and other records required by the Act to be kept by the Company have been properly keptin accordance with the provisions of the Act.

PRICEWATERHOUSECOOPERSPublic Accountants and Certified Public Accountants

Singapore




INCOME STATEMENTSThe Group The Company

Note 2007 2006 2007 2006US$ US$ US$US$

RevenueDividends from investment in ajointly controlled entity 3 - - 260,000,000 312,000,000Sale of goods 1,225,505 - - -Other investment income 3 74,110,352 23,278,221 71,935,573 22,681,379

ExpensesGovernance 4 (1,350,532) (1,093,401) (1,219,821) (1,072,707)Administration 4 (10,404,783) (5,620,932) (904,421) (2,971,187)Contractual obligation 4 (470,623) (465,546) (470,623) (465,546)Investment program costs 4 (743,812) (796,488) (743,812) (796,488)Development program costs 4 (10,697,603) (12,323,750) (21,667,421) (16,038,771)

Operating surplus from operations 51,668,504 2,978,104 306,929,475 313,336,680Share of results of jointlycontrolled entities 10 361,334,905 318,499,016 - -

Surplus before tax 413,003,409 321,477,120 306,929,475 313,336,680

Income tax 6 (26,541,795) (31,099,315) (26,271,755) (31,264,874)

Net surplus 386,461,614 290,377,805 280,657,720 282,071,806

Attributable to:The Company 388,237,346 290,566,720 280,657,720 282,071,806Minority interests (1,775,732) (188,915) - -

386,461,614 290,377,805 280,657,720 282,071,806



BALANCE SHEETSThe Group The Company

Note 2007 2006 2007 2006US$ US$ US$US$

ASSETSCurrent assetsCash and cash equivalents 7 404,027,447 358,483,563 394,750,073 351,314,382Financial assets at fair value throughprofit or loss 8 101,697,073 12,634,705 101,697,073 12,634,705Trade and other receivables 9 4,180,569 2,183,444 50,521 12,470Inventory 1,116,761 - - -

511,021,850 373,301,712 496,497,667 363,961,557Non-current assetsFinancial assets at fair valuethrough profit or loss 8 313,473,700 172,978,899 313,473,700 172,978,899Investment in jointly controlled entities 10 273,011,250 150,601,892 2,903,581 4,933,494Investments in subsidiaries 11 - - 16,930,640 1,904,888Investment in associated companies 12 - - - -Property, plant and equipment 13 12,193,407 425,222 255,269 95,095Intangible asset 14 12,291,096 - - -Deferred income tax 15 - 537,494 - -Goodwill on consolidation 19 119,795 - - -

611,089,248 324,543,507 333,563,190 179,912,376Total assets 1,122,111,098 697,845,219 830,060,857 543,873,933

LIABILITIESCurrent liabilitiesSundry creditors and accruals 16 19,909,884 7,500,153 6,936,786 1,481,035Provisions for employee benefit costs 254,389 196,280 178,314 104,861Total liabilities 20,164,273 7,696,433 7,115,100 1,585,896

NET ASSETS 1,101,946,825 690,148,786 822,945,757 542,288,037

CAPITAL EMPLOYED AND RESERVESMembers' subscriptions 17 17 17 17 17Funds, comprises of: 1,064,550,157 676,312,811 - -

- General Fund 18 - - 2,903,581 2,903,581- Long Term Fund 18 - - 594,167,011 376,655,983- Development Fund 18 - - 225,875,148 162,728,456

Share of hedge reserve of a jointlycontrolled entity- Ok Tedi Mining Limited (12,549,335) (12,527,925) - -Foreign currency translation reserve 46,602,891 25,638,709 - -

1,098,603,730 689,423,612 822,945,757 542,288,037Minority interest 3,343,095 725,174 - -Total equity 1,101,946,825 690,148,786 822,945,757 542,288,037




CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Attributable to the CompanyThe Group

Share of hedgereserve ofjointly

controlled Foreignentity - Ok Currency

Members Total Tedi Mining Translation Minority TotalSubscriptions Funds Limited Reserve interest Equity

US$ US$ US$ US$ US$ US$

2007Beginning of financial year 17 676,312,811 (12,527,925) 25,638,709 725,174 690,148,786

Currency translation differenceson investment in jointlycontrolled entities - - (5,002) 19,340,861 - 19,335,859Currency translation differences oninvestment in a subsidiary - - - 1,623,321 1,195,302 2,818,623Share of hedge reserve of a jointlycontrolled entity - - (16,408) - - (16,408)

Net gains recognised directly in equity - - (21,410) 20,964,182 1,195,302 22,138,074Net surplus - 388,237,346 - - (1,775,732) 386,461,614

Total recognised gains - 388,237,346 (21,410) 20,964,182 (580,430) 408,599,688

Acquisition of a subsidiary - - - - 3,198,351 3,198,351

End of financial year 17 1,064,550,157 (12,549,335) 46,602,891 3,343,095 1,101,946,825

2006Beginning of financial year 17 385,746,091 (10,944,521) 23,117,897 963,312 398,882,796

Currency translation differences oninvestment in jointly controlled entities - - - 2,594,001 - 2,594,001Currency translation differenceson investment in a subsidiary - - - (73,189) (49,223) (122,412)Share of hedge reserve of ajointly controlled entity - - (1,583,404) - - (1,583,404)

Net gains recognised directly in equity - - (1,583,404) 2,520,812 (49,223) 888,185Net surplus - 290,566,720 - - (188,915) 290,377,805

Total recognised gains - 290,566,720 (1,583,404) 2,520,812 (238,138) 291,265,990

End of financial year 17 676,312,811 (12,527,925) 25,638,709 725,174 690,148,786

The allocation of revenues and expenses and transfers from the General Fund to the Long Term Fund and theDevelopment Fund are determined in accordance with the rules of the Company [refer note 2.1.15].No transfers are made on a Group level as dividend income is eliminated for consolidation purposes.



COMPANY STATEMENT OF CHANGES IN EQUITY

Members’ General Long term DevelopmentSubscriptions Fund Fund Fund Total

US$ US$ US$ US$ US$

2007Beginning of financial year 17 2,903,581 376,655,983 162,728,456 542,288,037

Net surplus - totalrecognised gains - 231,404,946 63,241,064 (13,988,290) 280,657,720

Transfer from General Fund - (231,404,946) 154,269,964 77,134,982 -End of financial year 17 2,903,581 594,167,011 225,875,148 822,945,757

2006Beginning of financial year 17 2,903,581 175,528,655 81,783,978 260,216,231

Net surplus - totalrecognised gains 276,290,560 16,933,621 (11,152,375) 282,071,806

Transfer from General Fund - (276,290,560) 184,193,707 92,096,853 -End of financial year 17 2,903,581 376,655,983 162,728,456 542,288,037

The allocation of revenues and expenses and transfers from the General Fund to the Long Term Fund and theDevelopment Fund are determined in accordance with the rules of the Company [refer note 2.1.15].




CONSOLIDATED CASH FLOW STATEMENT

Note 2007 2006US$US$

Cash flows from operating activitiesNet Surplus 386,461,614 290,377,805Adjustments for:

Income tax expense 26,541,795 31,099,315Depreciation 2,910,016 338,792Amortisation 263,404 -Bad debts 306,695 84,095Fair value gains on financial assets at fair value through profit or loss (44,684,442) (10,758,579)Interest income (28,117,665) (12,054,842)Share of results of jointly controlled entities (361,334,905) (318,499,016)Other dividend income (1,308,245) (464,800)

Operating cash flow before working capital changes (18,961,733) (19,877,230)

Change in working capitalTrade and other receivables (1,828,479) (1,306,276)Sundry creditors and accruals 13,864,980 4,353,784Inventory (397,937) -Cash used in operations (7,323,169) (16,829,722)Interest received 14,418,612 3,758,680Dividends received 260,000,000 312,000,000Withholding tax paid on dividends received (26,000,000) (31,200,000)

Net cash from operating activities 241,095,443 267,728,958

Cash flows from investing activitiesPurchases of financial asset at fair value through profit and loss (378,044,384) (115,420,252)Acquisition of interest in subsidiary (net of cash acquired) 7 (12,908,382) -Interest received 6,394,380 8,602,898Other dividend received 1,308,245 464,800Withholding tax paid on dividends received (271,755) (64,874)Proceeds from sale of financial asset at fair value through

profit and loss 190,000,000 101,725,106Payments for property, plant and equipment (2,029,663) (336,740)Net cash used in investing activities (195,551,559) (5,029,062)

Net increase in cash and cash equivalents 45,543,884 262,699,896Cash and cash equivalents at the beginning of the financial year 7 358,483,563 95,783,667Cash and cash equivalents at the end of the financial year 7 404,027,447 358,483,563



NOTES TO THE FINANCIAL STATEMENTSThese notes form an integral part of and should be read in conjunction with the accompanying financialstatements.

1. GeneralThe Company is incorporated and domiciled in Singapore. The address of its principal place ofbusiness is as follows: Level 7, Pacific Place, Champion Parade, PO Box 1786, Port Moresby, Papua NewGuinea. The address of its registered office is 20 Raffles Place, #09-01 Ocean Towers, Singapore 048620.

The principal activity of the Company is to promote sustainable development within Papua NewGuinea, and advance the general welfare of the people of Papua New Guinea, particularly those of theWestern Province of Papua New Guinea, through supporting programs and projects in the areas ofcapacity building, health, education, economic development, infrastructure, community self-reliance,local community leadership and institutional capacity and other social and environmental purposesfor the benefit of those people.

The principal activities of the subsidiaries are stated in Note 11.

2.1 Significant accounting policies2.1.1 Basis of preparation

The financial statements have been prepared in accordance with Singapore Financial ReportingStandards (“FRS”). The financial statements have been prepared under the historical cost convention,except as disclosed in the accounting policies below.

The preparation of financial statements in conformity with FRS requires management to exercise itsjudgement in the process of applying the Group's accounting policies. It also requires the use ofcertain critical accounting estimates and assumptions. The area involving a higher degree ofjudgement or complexity, or area where assumptions and estimates are significant to the financialstatements is disclosed in Note 2.2.

There are no new or amended Standards and Interpretations effective in 2007 which are relevant tothe Company.

2.1.2 Revenue recognitionRevenue comprises the fair value of the consideration received or receivable for the sale of goods andrendering of services in the ordinary course of the Group's activities. Revenue is presented, net ofvalue-added tax, rebates and discounts, and after eliminating sales within the Group.

The Group recognises revenue when the amount of revenue and related cost can be reliablymeasured, it is probable that future economic benefits will flow to the entity and when specific criteriafor each of the Group's activities are met.

(a) Dividend incomeDividends are recognised when the right to receive payment is established.

(b) Interest incomeInterest income is recognised on a time proportion basis using the effective interest method.

(c) Surplus on sale of a financial assetOn sale of a financial asset, the difference between the net sale proceeds and its carryingamount is taken to the income statement. Gains or losses arising from changes in fair value of




2.1 Significant accounting policies (continued)2.1.2 Revenue recognition (continued)

(c) Surplus on sale of a financial asset (continued)investment in securities [Note 2.1.7] that have been designated as “Financial assets at fair valuethrough profit and loss” are included in revenue as other income from investments in thefinancial year in which the changes in fair value arises.

(d) Sale of timber productsThe Group harvests mill and sell timber products. Sales of goods are recognised when a Groupentity has delivered the products to the customers, the customers have accepted the productsand the collectibility of the related receivables is reasonably assured.

2.1.3 Group accounting(a) Subsidiaries

Subsidiaries are entities over which the Group has power to govern the financial and operatingpolicies, generally accompanied by a shareholding giving rise to a majority of the voting rights.The existence and effect of potential voting rights that are currently exercisable or convertibleare considered when assessing whether the Group controls another entity.

The purchase method of accounting is used to account for the acquisition of subsidiaries. Thecost of an acquisition is measured as the fair value of the assets given, equity instruments issuedor liabilities incurred or assumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets acquired and liabilities assumed in a business combination aremeasured initially at their fair values on the date of acquisition, irrespective of the extent of anyminority interest.

Subsidiaries are consolidated from the date on which control is transferred to the Group. Theyare de-consolidated from the date on which control ceases.

In preparing the consolidated financial statements, inter-company transactions, balances andunrealised gains on transactions between group companies are eliminated. Unrealised lossesare also eliminated but are considered an impairment indicator of the asset transferred.Accounting policies of subsidiaries have been changed where necessary to ensure consistencywith the policies adopted by the Group.

Minority interests are that part of the net results of operations and of net assets of a subsidiaryattributable to interests which are not owned directly or indirectly by the Group. They aremeasured at the minorities' share of fair value of the subsidiaries' identifiable assets andliabilities at the date of acquisition by the Group and the minorities' share of changes in equitysince the date of acquisition, except when the minorities' share of losses in a subsidiary exceedsits interests in the equity of that subsidiary. In such cases, the excess and further lossesapplicable to the minorities are attributed to the equity holders of the Company, unless theminorities have a binding obligation to, and are able to, make good the losses. When thatsubsidiary subsequently reports profits, the profits applicable to the minority interests areattributed to the equity holders of the Company until the minorities' share of losses previouslyabsorbed by the equity holders of the Company are fully recovered.

Refer to Note 2.1.7 (a) for the accounting policy on investments in subsidiaries..



2.1 Significant accounting policies (continued)2.1.3 Group accounting (continued)

(b) Jointly controlled entitiesJointly controlled entities are entities over which the Group has contractual arrangements tojointly share the control over the economic activity of the entities with one or more parties. TheGroup's interest in jointly controlled entities is accounted for in the consolidated financialstatements by using the equity method of accounting.

Equity accounting involves recording investments in jointly controlled entities initially at cost,and recognising the Group's share of its jointly controlled entities' post-acquisition results andits share of post-acquisition movements in reserves against the carrying amount of theinvestments. When the Group's share of losses in a joint controlled entity equals or exceeds itsinvestment in the jointly controlled entity, the Group does not recognise further losses, unlessit has incurred obligations or made payments on behalf of the jointly controlled entities.

In applying the equity method of accounting, unrealised gains on transactions between theGroup and its jointly controlled entities are eliminated to the extent of the Group's interest inthe jointly controlled entities. Unrealised losses are also eliminated unless the transactionprovides evidence of an impairment of the asset transferred. Where necessary, adjustments aremade to the financial statements of jointly controlled entities to ensure consistency ofaccounting policies with those of the Group.

Refer to Note 2.1.7 (a) for the accounting policy on investments in jointly controlled entities.

(c) Associated companiesAssociated companies are entities over which the Group has significant influence, but notcontrol, generally accompanied by a shareholding giving rise to between and including 20% to50% of the voting rights. Investments in associated companies are accounted for in theconsolidated financial statements using the equity method of accounting.

Investments in associated companies are initially recognised at cost. The cost of an acquisitionis measured at the fair value of the assets given, equity instruments issued or liabilities incurredor assumed at the date of exchange, plus costs directly attributable to the acquisition.

In applying the equity method, the Group's share of its associated companies, post-acquisitionresults is recognised in the income statement and its share of post-acquisition movements inreserves is recognised directly in equity. These post-acquisitionmovements are adjusted againstthe carrying amount of the investment. When the Group's share of losses in an associatedcompany equals or exceeds its interest in the associated company, the Group does notrecognise further losses, unless it has incurred obligations or made payments on behalf of theassociated company.

Unrealised gains on transactions between the Group and its associated companies areeliminated to the extent of the Group's interest in the associated companies. Unrealised lossesare also eliminated unless the transaction provides evidence of an impairment of the assettransferred. Accounting policies of associated companies have been changed where necessaryto ensure consistency of accounting policies with those of the Group.




2.1 Significant accounting policies (continued)2.1.3 Group accounting (continued)

(c) Associated companies (continued)Refer to Note 2.1.7 (a) for the accounting policy on investments in associated companies.

(d) Transaction costsCosts directly attributable to an acquisition are included as part of the cost of acquisition.

2.1.4 Property, plant and equipment(a) Measurement

Plant and equipment are stated at historical cost less accumulated depreciation andaccumulated impairment losses [Note 2.1.8].

(b) DepreciationLand, except leasehold land, is not depreciated. Depreciation on plant and equipment iscalculated using a straight line method to allocate their depreciable amounts of plant andequipment over their estimated useful lives. The annual rates used for this purpose are asfollows:

%Computers and computer software 331/3 - 100

Motor vehicles 20

Fixtures and fittings 331/3

Plant and equipment 331/3

Leasehold improvements 20

Buildings 2

Leasehold land 2

The residual values, estimated useful lives and depreciation method of property, plant andequipment are reviewed, and adjusted as appropriate, at each balance sheet date. The effectsof any revision are recognised in the income statement when the changes arise.

(c) Subsequent expenditureSubsequent expenditure relating to property, plant and equipment that has already beenrecognised is added to the carrying amount of the asset only when it is probable that futureeconomic benefits associated with the item will flow to the Group and the cost of the item canbe measured reliably. All other repair and maintenance expense is recognised in the incomestatement when incurred.

(d) DisposalOn disposal of a plant and equipment, the difference between the net disposal proceeds andits carrying amount is taken to the income statement.



2.1 Significant accounting policies (continued)2.1.5 Intangible assets

(a) Goodwill on acquisitionsGoodwill represents the excess of the cost of an acquisition over the fair value of the Group'sshare of the net identifiable net assets and contingent liabilities of the acquired subsidiaries orjointly controlled entities at the date of acquisition.

Where the cost of an acquisition is less than the fair value of the Group's share of the netidentifiable assets and contingent liabilities of the subsidiary or jointly controlled entityacquired, the difference (“negative goodwill”) is recognised directly in the income statement.Such negative goodwill was adjusted to retained earnings in the year of acquisitions and it isnot recognised in the income statement on disposal.

Goodwill on subsidiaries is recognised separately as goodwill on acquisition and carried at costless accumulated impairment losses.

Gains and losses on the disposal of subsidiaries include the carrying amount of goodwillrelating to the entity sold.

(b) LicensesLicenses acquired are initially recognised at cost and are subsequently carried at cost lessaccumulated amortisation and accumulated impairment losses. These costs are amortised tothe income statement using the straight-line method over 30, which is the shorter of theestimated useful lives or period of contractual rights.

2.1.6 DividendsInterim dividends are recorded during the financial year in which they are declared payable. Finaldividends are recorded during the financial year in which the dividends are approved by theshareholders.

2.1.7 Investments(a) Investments in subsidiaries, jointly controlled entities and associatedcompanies

Investments in subsidiaries, jointly controlled entities and associated companies are carried atcost, less accumulated impairment losses in the Company's balance sheet. On disposal ofinvestments in subsidiaries, jointly controlled entities and associated companies, the differencebetween disposal proceeds and the carrying amounts of the investments are recognised in theincome statement.

(b) Investments in debt and equity securitiesInvestments in debt and equity securities are designated by management as 'financial assets atfair value through profit or loss' upon initial recognition. They are included in non-current assetsunless management has the expressed intention of holding the investment for less than 12months from the balance sheet date or unless they will mature within that period, in which casethey are included in current assets.

Purchases and sales of investments are recognised on the trade date, which is the date that theCompany commits to purchase or sell the asset. Investments are recognised at fair value andtransaction costs are recognised in the income statement. They are subsequently carried at fairvalue, with independent revaluations performed by the Company's appointed investmentmanager on a monthly basis. Unrealised gain and losses arising from changes in




2.1 Significant accounting policies (continued)2.1.7 Investments (continued)

(b) Investments in debt and equity securities (continued)the fair value of securities are recognised in the income statement in the period in which theyarise.

Interest on investment, calculated using the effective interest method, is recognised in theincome statement.

On sale of an investment in debt and equity securities, the difference between the net saleproceeds and its carrying amount is taken to the income statement.

Securities listed on an exchange are valued at the latest traded price reported by the principalsecurities exchange on which the issue is traded or, lacking any sales, at the closing bid prices.

Securities which are dealt on the alternative investment market of the London Stock Exchange('AIM') are valued by reference to the closing middle market price based on the stock exchangedaily official list on the relevant date.

Securities which are not listed on a stock exchange are valued as at the relevant date using themost recent and reliable valuations available.

Units in collective investment schemes are valued at the mid market price.

2.1.8 Impairment of non-financial assets

Intangible assets

Plant and equipment

Investments in subsidiaries, jointly controlled entities and associated companies

Intangible assets, plant and equipment and investments in subsidiaries, jointly controlled entities andsubsidiaries are reviewed for impairment whenever there is any indication that these assets may beimpaired. If any such indication exists, the recoverable amount (i.e. the higher of the fair value less costto sell and value in use) of the asset is estimated to determine the amount of impairment loss.

For the purpose of impairment testing of these assets, recoverable amount is determined on anindividual asset basis unless the asset does not generate cash flows that are largely independent ofthose from other assets. If this is the case, recoverable amount is determined for the Cash GeneratingUnit (“CGU”) to which the asset belongs.

If the recoverable amount of the asset (or CGU) is estimated to be less than its carrying amount, thecarrying amount of the asset (or CGU) is reduced to its recoverable amount. The impairment loss isrecognised in the income statement.

An impairment loss for an asset other than goodwill is reversed if, and only if, there has been a changein the estimates used to determine the assets' recoverable amount since the last impairment loss wasrecognised. The carrying amount of an asset other than goodwill is increased to its revised recoverableamount, provided that this amount does not exceed the carrying amount that would have beendetermined (net of amortisation or depreciation) had no impairment loss been recognised for theasset in prior years.



2.1 Significant accounting policies (continued)2.1.8 Impairment of non-financial assets (continued)

A reversal of impairment loss for an asset other than goodwill is recognised in the income statement.However, to the extent that an impairment loss on the same re-valued asset was previouslyrecognised in profit or loss, a reversal of that impairment is also recognised in profit or loss.

2.1.9 LeasesOperating leasesLeases where a significant portion of the risks and rewards of ownership are retained by the lessor areclassified as operating leases. Payments made under operating leases (net of any incentives receivedfrom the lessor) are taken to the income statement on a straight-line basis over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment required tobe made to the lessor by way of penalty is recognised as an expense in the period in whichtermination takes place.

2.1.10 Income taxesCurrent income tax liabilities (and assets) for current and prior periods are recognised at the amountsexpected to be paid to (or recovered from) the tax authorities, using the tax rates (and tax laws) thathave been enacted or substantially enacted by the balance sheet date.

Deferred income tax is recognised for all temporary differences arising between the tax bases of assetsand liabilities and their carrying amounts in the financial statements except when the deferredincome tax arises from the initial recognition of goodwill or an asset or liability in a transaction that isnot a business combination and affects neither accounting nor taxable profit or loss at the time of thetransaction.

Deferred income tax liability is recognised on temporary differences arising on investments insubsidiary and jointly controlled entities, except where the Group is able to control the timing of thereversal of the temporary difference and it is probable that the temporary difference will not reversein the foreseeable future.

Deferred income tax asset is recognised to the extent that it is probable that future taxable profit willbe available against which the temporary differences can be utilised.

Deferred income tax is measured at:

(i) the tax rates that are expected to apply when the related deferred tax asset is realised or thedeferred income tax liability is settled, based on tax rates (and tax laws) that have been enactedor substantially enacted by the balance sheet date: and

(ii) the tax consequence that would follow from the manner in which the Group expects, at thebalance sheet date, to recover or settle the carrying amounts of its assets and liabilities.

Current and deferred income taxes are recognised as income or expenses in the income statementfor the period, except to the extent that the tax arises from a business combination or a transactionwhich is recognised directly in equity. Deferred tax arising from business combination is adjustedagainst goodwill on acquisition.




2.1 Significant accounting policies (continued)2.1.11 Provisions for other liabilities and charges

Provisions for other liabilities and charges are recognised when the Company has a present legal orconstructive obligation as a result of past events, it is more likely than not that an outflow of resourceswill be required to settle the obligation and the amount has been reliably estimated.

2.1.12 Employee benefits(a) Defined contribution plans

Defined contribution plans are post-employment benefit plans under which the Group paysfixed contributions into separate entities such as Nasfund and will have no legal or constructiveobligation to pay further contributions if any of the funds does not hold sufficient assets to payall employee benefits relating to employee service in the current and preceding financial years.The Group's contribution to defined contribution plans are recognised as employee benefitexpense when they are due.

(b) Employee leave entitlementsEmployee entitlements to annual leave and long service leave are recognised when they accrueto employees. A provision is made for the estimated liability for annual leave and long serviceleave as a result of services rendered by employees up to the balance sheet date at the futureexpected cost.

2.1.13 Currency translation(a) Functional and presentation currency

Items included in the financial statements of each entity in the Group are measured using thecurrency of the primary economic environment in which the entity operates (“the functionalcurrency”). The consolidated financial statements are presented in United State Dollars (“US$”).

(b) Transactions and balancesTransactions in a currency other than the functional currency (“foreign currency”) are translatedinto the functional currency using the exchange rates at the dates of the transactions. Currencytranslation differences from the settlement of such transactions and from the translation ofmonetary assets and liabilities denominated in foreign currencies at the closing rates at thebalance sheet date are recognised in the income statement, unless they arise from borrowingsin foreign currencies, other currency instruments designated and qualifying as net investmenthedges and net investment in foreign operations. Those currency translation differences arerecognised in the currency translation reserve in the consolidated financial statements andtransferred to the income statement as part of the gain or loss on disposal of the foreignoperation.

Non-monetary items measured at fair values in foreign currencies are translated using theexchange rates at the date when the fair values are determined.

(c) Translation of Group entities' financial statementsThe results and financial position of all the group entities (none of which has the currency of ahyperinflationary economy) that have a functional currency different from the presentationcurrency are translated into the presentation currency as follows:



2.1 Significant accounting policies (continued)2.1.13 Currency translation (continued)

(c) Translation of Group entities' financial statements (continued)(i) Assets and liabilities for each balance sheet presented are translated at the closing rate at

the date of that balance sheet;

(ii) Income and expenses for each income statement are translated at average exchangerates; and

(iii) All resulting exchange differences are recognised as a separate component of equity.

2.1.14 Cash and cash equivalentsFor the purposes of the cash flow statement, cash and cash equivalents comprise balances with lessthan ninety days to maturity from the date of acquisition including: cash and bank balances, treasurybills, commercial papers, certificates of deposit and other eligible bills.

2.1.15 Long term fund, development fund and general fundThe Company is required by its rules to apply its income from Ok Tedi Mining Limited (“OTML”) andother sources to a Long Term Fund, the Development Fund and General Fund attributable to theoperations of the Company.

In pursuing its object, the Company is able to invest and utilise its available resources from the LongTerm Fund, the Development Fund and General Fund in accordance with the Rules of the Company.

Long Term FundThe Long Term Fund represents 2/3 of net income received from OTML after deducting operatingexpenses and all other legal contractual obligations as specified in the rules of the program relatingto the application of the income received.

Funds from the Long Term Fund must be invested in low risk investments.

Before the mine closure date, the funds will be used in the following order of priority:

(a) To the extent the amounts under Rules clauses 9.2 (b) and 9.3 (b) and that part of thecommitment which is undrawn are insufficient, to meet contractual obligations.

(b) To the extent the amount under clause 9.2 (c) is insufficient, if determined by the Board, to meeta call by OTML in accordance with clause 12 (further capital requirements by OTML).

After mine closure the funds will be applied in the following order of priority:

(a) Operating expenses for next 6 months in accordance with the budget approved by the Boardfrom time to time.

(b) To the extent that distributions and investment income received after the mine closure date areinsufficient to meet contractual obligations as they fall due for payment.

(c) Calls from OTML (on Shareholders).




2.1 Significant accounting policies (continued)2.1.15 Long term fund, development fund and general fund (continued)

Long Term Fund (continued)(d) To fund Sustainable Development Purposes in proportions to be determined by the Board ofDirectors in accordance with Rules clause 10.4.

Development FundThe fund is to be used to support and fund programs and projects which promote sustainabledevelopment in accordance with the “Rules for the PNG Sustainable Development Program”scheduled to and forming part of the Articles of Association of the Company.

The Development Fund represents 1/3 of income received from OTML after deducting operatingexpenses and all other contractual obligations as specified in the rules relating to the application ofincome received.

In accordance with Rules clause 9.2 (e), the funds are to be applied as follows:

(a) 1/3 of these funds to be used in accordance with the Objects of the Articles of Association ofthe Company and at the discretion of the Board for the benefit of the people of WesternProvince; and

(b) 2/3 of these funds to be used in accordance with the Objects of the Articles of Association ofthe Company and at the discretion of the Board for the benefit of the people of Papua NewGuinea.

These funds will be used mainly to fund projects covering core areas in health, education, capacitybuilding, economic development, infrastructure community self-reliance, local community leadershipand institutional capacity and other social and environmental purposes for the benefit of the peopleof Papua New Guinea, in particular, the people of the Western Province.

General FundIn accordance with clause 14 of the “Rules for the PNG Sustainable Development Program”, a yearlybudget of administration costs must be prepared and approved by the Board of Directors.

The company budget prepared for each year after the third year of the Program must reflect that theportion of the operating expenses attributable to the operation of the Company (but not to therunning of the Program) should not exceed 15% of the average annual income of the Program duringthe immediate preceding 3 accounting years.

The administration costs cover the normal operating expenses of the Company and of the Programincluding (without limitation) establishment costs, directors' fees, the cost of directors' and officers'liability insurance, expenditure of the program manager and the program manager's remuneration,and any tax payable by the Company.

2.1.16 GrantsGrants provided to subsidiaries, jointly controlled entities and third parties are expensed in the periodin which the grants are released.



2.2 Critical accounting estimates, assumptions and judgement(a) Financial asset at fair value through profit or loss

The group uses market or quoted price to fair value its financial assets. In cases where marketor quoted prices are not used, fair value is determined by using valuation techniques and a setof key assumptions that are subject to change depending on the market conditions prevailingat the time in which fair value is determined. Furthermore, the group follows guidance of FRS39 to classify financial assets as financial assets at fair value through profit or loss. The currentclassification is based on the premise that these financial assets are managed on a portfoliobasis and traded accordingly. Prevailing market conditions could change resulting inreassessment of the current classification.




3. RevenueThe Group The Company

2007 2006 2007 2006US$ US$ US$ US$

Dividends from investment in ajointly controlled entity - - 260,000,000 312,000,000

Sale of goods 1,225,505 - - -

Other investment income:

Other dividends 1,308,245 464,800 1,308,245 464,800

Fair value gains on financial assetsthrough profit and loss 44,684,442 10,758,579 44,684,442 10,731,166

Interest income from commercialpapers, certificates of deposits,bonds and cash balances 28,117,665 12,054,842 25,942,886 11,485,413

74,110,352 23,278,221 71,935,573 22,681,379

Total revenue 75,335,857 23,278,221 331,935,573 334,681,379

The Company received gross dividend income of US$260,000,000 (2006: $312,000,000) from its investmentin a jointly controlled entity, OK Tedi Mining Limited, during the financial year. A 10% dividend withholdingtax of US$26,000,000,(2006: $31,200,000) was deducted in respect of this dividend income and paid to thePNG Internal Revenue Commission during the financial year (see note 6).



4. ExpensesThe Group The Company

2007 2006 2007 2006US$ US$ US$ US$

GovernanceBoard of Director Fees 698,759 518,262 621,048 502,133Board Administration 272,021 168,326 272,021 163,761Advisory Council 43,779 37,264 43,779 37,264Annual Report 76,826 61,213 76,826 61,213Annual Report MeetingExpenses 21,546 152,093 21,546 152,093Audit 188,867 116,966 135,867 116,966Company Secretary 48,734 39,277 48,734 39,277

1,350,532 1,093,401 1,219,821 1,072,707

AdministrationProfessional Services 982,436 459,805 544,085 314,978Staff Costs 3,842,283 2,041,853 1,467,652 808,214Depreciation 3,173,421 338,792 160,021 246,343Information Services 453,332 201,543 253,472 140,187Office Rent 84,522 76,727 84,522 64,387Insurance 373,260 163,306 179,074 163,306Travel 335,798 547,342 169,461 528,956Net foreign exchangeloss/(gain) (2,005,492) 553,979 (2,332,962) 522,178Amortisation - Premium onInscribed Stock - - - -Grants - 4,371 - 3,684Motor Vehicle Expenses 116,273 87,632 116,273 83,495Advertising & Promotion 94,080 52,307 36,960 46,095Bad debts 306,695 84,095 - -Others 2,648,175 1,009,180 225,863 49,364

10,404,783 5,620,932 904,421 2,971,187

Contractual Obligation 470,623 465,546 470,623 465,546

Investment Program Costs 743,812 796,488 743,812 796,488

Development Program Costs*Western Province* 7,877,403 3,080,937 7,877,403 3,679,701National* 2,820,200 9,242,813 13,790,018 12,359,070

10,697,603 12,323,750 21,667,421 16,038,771

Total Expenses 23,667,353 20,300,117 25,006,098 21,344,699

* Expenses at consolidated level is lower because (a) grants provided to subsidiaries are not utilised and(b) cost of impairment to PNGMF and PNGSEL were eliminated on consolidation. At the Company level,the impairment charge for investment in subsidiary of US$1,904,887 and investment in jointly controlledentity of US$3,779,913 are included as National Development Program Costs consistent with theProgram Rules.




5. Employee's compensationThe Group The Company

2007 2006 2007 2006US$ US$ US$ US$

Wages and salaries 2,647,763 1,663,702 972,073 657,682

Other employee benefits and costs 1,049,799 277,284 449,135 115,892

Employer's contribution to defined

contribution plans 144,721 100,867 46,444 34,640

3,842,283 2,041,853 1,467,652 808,214

Key management remuneration is disclosed in Note 23.

6. Income taxes

Income tax expenseThe Group The Company

2007 2006 2007 2006US$ US$ US$ US$

Tax expense attributable to the operatingsurplus is made up of:

Current income tax - Foreign 26,541,795 31,099,315 26,271,755 31,264,874

The foreign tax is comprised of US$26,000,000 (2006: US$31,200,000) dividend withholding tax deductedfrom the dividend income that the Company received from its jointly controlled entity, Ok Tedi MiningLimited, and dividend withholding tax of $271,755 on New Britain Palm Oil and Bank South Pacific.

The dividend withholding taxes have been paid to the Papua New Guinea Internal Revenue Commissionduring the financial year.

No Singapore income tax is payable on the basis that the dividend and interest income is not remitted toSingapore.



6. Income taxes (continued)The tax expense on results differs from the amount that would have arisen using the Singapore standardrate of income tax due to the following:

The Group The Company

2007 2006 2007 2006US$ US$ US$ US$

Surplus before tax 413,003,409 321,477,120 306,929,286 313,412,994

Tax calculated at Singapore ratesapplicable to surplus in Papua NewGuinea at 18% (2006: 20%) 74,340,614 64,295,424 55,247,271 62,682,599

Effect of different tax rates in othercountries 28,920,125 31,264,874 (21,017,404) (31,264,874)

Income not subject to tax (13,104,379) (4,986,953) (12,712,919) (4,684,678)

Tax benefits of deductible expensesnot recognised 1,425,718 4,225,773 4,754,807 4,531,827

Tax calculated on share of results ofjointly controlled entities (65,040,283) (63,699,803) - -

Tax charge 26,541,795 31,099,315 26,271,755 31,264,874

Comprising of:

Dividend withholding tax paid to theInternal Revenue Commission(Papua New Guinea) 26,271,755 31,264,874 26,271,755 31,264,874

Deferred tax benefits derecognised/(recognised) for tax losses of subsidiary 270,040 (165,559) - -

26,541,795 31,099,315 26,271,755 31,264,874




7. Cash and cash equivalentsThe Group The Company

2007 2006 2007 2006US$ US$ US$ US$

Cash and bank balances 249,434,240 244,529,087 246,951,191 239,334,650

Cash held in treasury bills 6,794,325 1,974,744 - -

256,228,565 246,503,831 246,951,191 239,334,650

Funds under management:

Cash held in investment funds 99,650,955 77,519,661 99,650,955 77,519,661

Commercial papers and certificatesof deposit 48,147,927 34,460,071 48,147,927 34,460,071

147,798,882 111,979,732 147,798,882 111,979,732

404,027,447 358,483,563 394,750,073 351,314,382

Cash and cash equivalents are denominated in the following currencies:

Currency profile

US Dollar 336,704,797 352,374,938 336,704,797 352,374,938

EUR Dollar 23,366,440 - 23,366,440 -

AUD Dollar 33,582,432 - 33,582,432 -

PNG Kina 10,373,778 6,108,625 1,096,404 (1,060,556)

404,027,447 358,483,563 394,750,073 351,314,382

Funds under management

The financial assets that are externally-managed comprised funds placed with the various professionalfund managers pursuant to investment management agreements. The Group can, pursuant to the terms,terminate the agreements by giving the requisite prior notice in writing to the fund managers. These fundmanagers are given discretionary powers within certain guidelines to invest the funds and these financialassets are managed on a portfolio basis and their performance evaluated on a fair value basis.



7. Cash and cash equivalents (continued)Acquisition of a subsidiaryOn 30th June 2007, the group acquired 80% of the share capital of Cloudy Bay Sustainable ForestryLimited, a forestry company operating in the Central province of Papua New Guinea. The principal activityof this subsidiary is to harvest, mill and sell timber products and also promote sustainable forestrypractices. The acquired business contributed revenue of US$1,225,505 and a net loss of US$4,043,520, tothe group for the period from 1st July 2007 to 31st December 2007.

The effect of acquisition of a subsidiary on the cash flows of the Group was as follows:

Carryingamounts inacquiree’sbooks as of30 June 2007

US$

Identifiable assets and liabilitiesCash and cash equivalents 4,818Trade and other receivables 443,246Inventories 718,824Property, plant and equipment 12,648,538Intangible assets 12,554,500Other current assets 18,827Total assets 26,388,753

Trade and other payables 786,139Borrowings 9,610,858Total liabilities 10,396,997

Identifiable net assets acquired 15,991,756Less: Minority interests 3,198,351Identifiable net assets acquired 12,793,405Goodwill on consolidation (Note 17) 119,795Purchase consideration paid* 12,913,200Less: Cash and cash equivalents in subsidiary acquired 4,818Net cash outflow on acquisition 12,908,382

* The accounting for the above business combination is determined provisionally. Preliminary purchaseprice allocation of the acquisition and the allocation of goodwill of the cash generating units arecurrently being assessed and is expected to be finalised within 12 months from the date of acquisition.The provisional goodwill was attributable to the future profits expected to be derived after theacquisition.




8. Financial assets at fair value through profit or loss


2007 2006 2007 2006US$ US$ US$ US$

CurrentFunds under management:Commercial papers and certificatesof deposit 101,351,242 12,589,566 101,351,242 12,589,566Accrued interest 345,831 45,139 345,831 45,139

101,697,073 12,634,705 101,697,073 12,634,705

Non-currentFunds under management:Bonds (quoted) 92,640,763 73,430,280 92,640,763 73,430,280Equity securities (quoted) 44,397,114 20,913,722 44,397,114 20,913,722Fund of Hedge funds 91,099,193 45,785,522 91,099,193 45,785,522Accrued interest 736,387 1,258,734 736,387 1,258,734

228,873,457 141,388,258 228,873,457 141,388,258

Inhouse Managed Funds:Equity securities (quoted)* 84,600,243 31,590,641 84,600,243 31,590,641

313,473,700 172,978,899 313,473,700 172,978,899

Total 415,170,773 185,613,604 415,170,773 185,613,604


2007 2006 2007 2006US$ US$ US$ US$

US Dollar 310,995,587 146,292,094 310,995,587 146,292,094Euro 1,772,305 833,841 1,772,305 833,841Canadian Dollar 557,558 318,271 557,558 318,271Sterling 2,673,465 1,121,301 2,673,465 1,121,301Yen 3,305,822 3,046,076 3,305,822 3,046,076PNG Kina 84,600,243 31,659,606 84,600,243 31,659,606Others 11,265,793 2,342,415 11,265,793 2,342,415

415,170,773 185,613,604 415,170,773 185,613,604

Funds under managementThe financial assets that are externally-managed comprised funds placed with the various professionalfund managers pursuant to investment management agreements. The Group can, pursuant to the terms,terminate the agreements by giving the requisite prior notice in writing to the fund managers. These fundmanagers are given discretionary powers within certain guidelines to invest the funds and these financialassets are managed on a portfolio basis and their performance evaluated on a fair value basis.

* Investments in locally listed equity securities.



9. Trade and other receivables


2007 2006 2007 2006US$ US$ US$ US$

Trade receivables 160,932 - - -Prepayments - 182,876 - 1,237Interest receivable - - - -Deposits 12,139 6,561 12,139 6,561Other debtors 4,007,498 1,994,007 38,382 4,672

4,180,569 2,183,444 50,521 12,470

Trade receivables and other debtors (excluding prepayments and interest receivable) are denominatedin PNG Kina. Interest receivable is denominated in US dollars.

The carrying amounts of trade receivables, interest receivable, deposits and other debtors approximatedtheir fair values.

10. Investment in jointly controlled entities


2007 2006 2007 2006US$ US$ US$ US$

Investment in OTML at cost 2,903,581 2,903,581Investment in PNGSEL at cost 2,029,913 2,029,913Additional investment in PNGSEL 1,750,000 -Impairment of investments in PNGSEL* (3,779,913) -Total Investment 2,903,581 4,933,494At the beginning of the financial year 150,601,892 141,642,279Investment in PNGSEL at cost 1,750,000 1,450,000Share of results after tax 361,334,905 318,499,016Share of hedge reserve (16,408) (1,583,404)Dividends received (260,000,000) (312,000,000)Foreign currency translation differences 19,340,861 2,594,001At the end of the financial year 273,011,250 150,601,892

The summarised financial information of jointly controlled entities are as follows:

- Assets 848,794,083 680,688,365- Liabilities 307,831,051 382,712,082- Revenues 1,726,398,916 1,522,873,413- Net results 694,730,777 612,403,037

Share of contingent liabilities incurredjointly with other investors 161,530 19,352

* Impaired investment written off to income statement.




10. Investment in jointly controlled entities (continued)

Details of the jointly controlled entities are as follows:

Name of jointly Country of business Equitycontrolled entity Principal activities and incorporation holding

Ok Tedi Mining Limited Mining and processing ofcopper ore and gold ore Papua New Guinea 52%

PNG Sustainable Energy Develop, produce andLimited distribute electricity

and energy Papua New Guinea 50%

Ok Tedi Mining Limited

The investment in a jointly controlled entity is accounted for at cost in the Company's financial statements.The cost of US$2,903,581 represents stamp duty paid to the Papua New Guinea Government and legalfees incurred relating to the transfer of shares in the jointly controlled entity to the Company. Under theSingapore Companies Act, a company is a legal subsidiary of another company if the latter owns morethan 50% of the equity interest of the former. However, this legal subsidiary is not consolidated becauseit does not meet the definition of subsidiaries under FRS 27: “Consolidated Financial Statements andAccounting for Investments in Subsidiaries” as the Company does not have control in this legal subsidiaryindependent from other shareholders.

Accordingly, this legal subsidiary has been accounted for as an investment in a jointly controlled entity bythe Company in accordance with FRS 31: “Financial Reporting of Interests in Jointly controlled entities” asthis jointly controlled entity is jointly controlled by its shareholders.

In accordance with the Funding Facility Deed dated 22 November 2001 and the Equitable Mortgage ofShares dated 7 February 2002 between the Company and Insinger Trust (Singapore) Limited, there is anequitable charge over the OTML shares which creates an interest in the dividend stream from the sharesheld in OTML (but not the shares themselves).

The jointly controlled entity was transferred by BHP Minerals Holdings Proprietary Limited to the Companyfor nil consideration on 7 February 2002 and this gave rise to a discount on acquisition of $105,785,694.The discount on acquisition has been taken to revenue reserve.



10. Investment in jointly controlled entities (continued)

PNG Sustainable Energy Limited

Pursuant to a shareholders agreement, PNG Sustainable Energy Limited is to be equally owned by PNGSustainable Development Program Limited and SMEC Developments Power Pty Ltd, following asubscription of shares.

According to the shareholder agreement, all significant and key management decisions require theunanimous agreement of the shareholders. Furthermore, the two shareholders of PNG Sustainable EnergyLimited are equally represented on the Board.

PNG Sustainable Energy Limited has been established to implement and manage electricity and energyprojects in line with the overall goals and objectives of PNG Sustainable Development Program Limited.SMEC Developments Power Pty Ltd provides technical expertise whilst PNG Sustainable DevelopmentProgram Limited provides the funding for the projects. This jointly controlled entity has incurred operatinglosses since its incorporation and has been heavily reliant on funding from the joint shareholders. In theabsence of sustained financial support from the joint shareholders and a commercially viable businessplan, accumulated losses have been higher than the initial cost of investment resulting in 100%impairment. In 2007, management and board of PNGSDP took the decision to write-off the entireinvestment in this Company. At PNGSDP level, the write-offs were expensed as National Developmentprogram costs.

Contingent liabilities

The Company has incurred the following contingent liabilities in relation to its interests in jointly controlledentities:


2007 2006 2007 2006US$ US$ US$ US$

Bank guarantees 161,530 19,352 - -

Capital commitments

The Company has incurred the following capital commitments in relation to its interests in jointlycontrolled entities:


2007 2006 2007 2006US$ US$ US$ US$

Capital expenditure 29,061,558 5,545,280 - -




11. Investment in subsidiaries

The Company

2007 2006US$ US$

Investments (unquoted at cost )PNG Microfinance Limited - 1,904,887Cloudy Bay Sustainable Forestry Limited 16,930,639 -PNG Sustainable Infrastructure Limited 1 1

16,930,640 1,904,888

PNG Microfinance Limited was reclassified to investment in associated companies. Please see Note 12.

Cloudy Bay Sustainable Forestry Limited is an 80% owned subsidiary. The principal activity of thesubsidiary is to harvest, mill and sell timber products and also promote sustainable forestry practices (referNote 7).

Investments in Cloudy Bay Sustainable Forestry Limited consists of $12,913,200 investment cost and$4,017,439 of unsecured loans which is interest-free and repayable on demand.

PNG Sustainable Infrastructure Limited, a wholly owned subsidiary of the company, was incorporated on3 January 2006. The subsidiary's principal activities are to develop and construct infrastructure projects inPapua New Guinea. The board of this company was dissolved in February 2008.



12. Investment in associated companies

The Company

2007 2006US$ US$

Investments (unquoted)PNG Microfinance Limited - Cost 1,904,887 -Impairment charge (1,904,887) -

- -

The Company

2007 2006US$ US$

At the beginning of the financial year 1,904,887 -Share of results after tax (1,904,887) -At the end of the financial year - -

The summarised financial information of associated companies are as follows:

- Assets 12,731,000 -- Liabilities 11,332,000 -- Revenues 2,175,000 -- Net loss 1,332,000 -

PNG Microfinance is a 48.6% associated company that was reclassified from Investment in subsidiariesduring the year. The shareholding has been diluted from 60% after International Finance Corporationsubscribed to the shares in accordance with the amended and restated shareholders agreement dated 22May 2006. The principal activity of the associated company is to provide financial services designed tomeet the needs of low income households and small business operators across Papua New Guinea. Theinvestment in the company was written down following an impairment review undertaken bymanagement and approved by the board.




13.P

rope

rty,plan

tand

equipm

ent

TheGroup

Compu

ter

and

compu

ter

Motor

Fixtures

&Plan

tand

Leaseh

old

Leaseh

old

software

vehicles

fittin

gseq

uipm

ent

Improv

emen

tsland

Build

ings

Total

US$

US$

US$

US$

US$

US$

US$

US$

2007

Cost

Beginningof

financialyear

602,600

126,621

354,567

-42,224

--

1,126,012

Additions

472,689

284,661

1,226,178

-46,135

--

2,029,663

Acquisitionof

subsidiary(Note7)

166,330

311,209

2,231,063

3,071,352

-2,943,134

3,925,450

12,648,538

Endoffinancialyear

1,241,619

722,491

3,811,808

3,071,352

88,359

2,943,134

3,925,450

15,804,213

Accumulated

depreciation

Beginningoffinancialyear

397,704

59,694

221,120

-22,272

--

700,790

Depreciationcharge

108,784

170,765

463,752

2,009,192

16,315

58,863

82,345

2,910,016

Endoffinancialyear

506,488

230,459

684,872

2,009,192

38,587

58,863

82,345

3,610,806

Netbookvalue

Endoffinancialyear

735,13

149

2,03

23,12

6,93

61,06

2,16

049

,772

2,88

4,27

13,84

3,10

512

,193

,407



13.P

rope

rty,plan

tand

equipm

ent(continue

d)

TheGroup

Compu

ter

and

compu

ter

Motor

Fixtures

&Plan

tand

Leaseh

old

Leaseh

old

software

vehicles

fittin

gseq

uipm

ent

Improv

emen

tsland

Build

ings

Total

US$

US$

US$

US$

US$

US$

US$

US$

2006

Cost

Beginningof

financialyear

466,119

37,956

247,901

-37,296

--

789,272

Additions

136,481

88,665

106,666

-4,928

--

336,740

Endoffinancialyear

602,600

126,621

354,567

-42,224

--

1,126,012

Accumulated

depreciation

Beginningof

financialyear

182,829

11,705

156,205

-11,259

--

361,998

Depreciationcharge

214,875

47,989

64,915

-11,013

--

338,792

Endoffinancialyear

397,704

59,694

221,120

-22,272

--

700,790

Netbookvalue

Endoffinancialyear

204,896

66,927

133,447

-19,952

--

425,222




13. Property, plant and equipment (continued)

Computers Officeand computer Motor furniture and Leasehold

software vehicles equipment Improvements TotalUS$ US$ US$ US$ US$

2007CostBeginning of financial year 368,753 53,522 200,375 29,299 651,949Additions 119,706 1,288 152,767 46,135 319,896End of financial year 488,459 54,810 353,142 75,434 971,845

Accumulated depreciationBeginning of financial year 352,943 4,460 180,377 19,074 556,854Depreciation charge 65,880 50,350 27,177 16,315 159,722End of financial year 418,823 54,810 207,554 35,389 716,576

Net book valueEnd of financial year 69,636 - 145,588 40,045 255,269

2006CostBeginning of financial year 344,800 - 200,375 29,299 574,474Additions 23,953 53,522 - - 77,475End of financial year 368,753 53,522 200,375 29,299 651,949

Accumulated depreciationBeginning of financial year 158,284 - 142,919 9,308 310,511Depreciation charge 194,659 4,460 37,458 9,766 246,343End of financial year 352,943 4,460 180,377 19,074 556,854

Net book valueEnd of financial year 15,810 49,062 19,998 10,225 95,095

14. Intangible assetsIntangible assets consist of licenses


2007 2006 2007 2006US$ US$ US$ US$

Beginning of financial year - - - -Acquisition of subsidiary 12,554,500 - - -Amortisation (263,404) - - -End of financial year 12,291,096 - - -

Cost 12,554,500 - - -Accumulated amortisation (263,404) - - -Net book value 12,291,096 - - -



15. Deferred income taxDeferred income tax assets and liabilities are offset when there is a legally enforceable right to set offcurrent income tax assets against current income tax liabilities and when the deferred income taxes relateto the same fiscal authority. The amounts, determined after appropriate offsetting, are shown on thebalance sheets as follows:


2007 2006 2007 2006US$ US$ US$ US$

Deferred income tax assets:- to be recovered within one year - - - -- to be recovered after one year - 537,494 - -

- 537,494 - -

The movement in the deferred income tax assets and liabilities (prior to offsetting of balances within thesame tax jurisdiction) during the period is as follows:

The Group

Deferred income tax assetsTax

lossesUS$

2007Balance at beginning of financial year 537,494Write off to income statement* (537,494)Balance at end of financial year -

2006Balance at beginning of financial year 362,880Credited to income statement 174,614Balance at end of financial year 537,494

* Derecognition of deferred tax is due to PNG Microfinance Limited operating at loss and that it has beenunable to demonstrate that there will be sufficient taxable income against which to utilise the tax losses.




16. Sundry creditors and accrualsThe Group The Company

2007 2006 2007 2006US$ US$ US$ US$

Other creditors and accruals 19,909,884 7,500,153 6,936,785 1,481,03519,909,884 7,500,153 6,936,785 1,481,035

Currency profile


2007 2006 2007 2006US$ US$ US$ US$

US Dollar - - - -PNG Kina 19,909,884 7,500,153 6,936,786 1,481,035

19,909,884 7,500,153 6,936,786 1,481,035

17. Members' subscriptionsAs a Company“limited by guarantee”, the Company does not have any issued shares or shareholders. At 31December 2007, there were 3 members of the Company (2006: 3).

18. General, long term and development fundsGeneral fundThe general fund is accounted for in accordance with the policy set out in note 2.1.15.

2007 2006US$ US$

At the beginning of the financial year 2,903,581 2,903,581Dividends from OTML 260,000,000 312,000,000Governance and administrative Expenses (2,595,054) (4,509,440)10%Withholding tax paid to IRC Papua New Guinea (26,000,000) (31,200,000)Transfer to long term and development funds (231,404,946) (276,290,560)At the end of the financial year 2,903,581 2,903,581



18. General, long term and development funds (continued)Long term fundThe long term fund is accounted for in accordance with the policy set out in note 2.1.15.

2007 2006US$ US$

At the beginning of the financial year 376,655,983 175,528,655Investment income for the year 64,086,957 17,617,601Investment expenses (845,893) (683,980)Transfer from General Fund 154,269,964 184,193,707At the end of the financial year 594,167,011 376,655,983

The weighted average rate of return on investment for the long term fund for the year was 14.08% (2006:7.80%).

Development fund

The development fund is accounted for in accordance with the policy set out in note 2.1.15, and isallocated between the Western Province Program Fund and the National Program Fund as follows:

WesternProvince NationalProgram Program Program ProgramFund Fund Total TotalUS$ US$ US$ US$

At the beginning of the financial year 56,484,571 106,243,885 162,728,456 81,783,978Investment income for the year 3,116,510 6,442,940 9,559,450 5,063,778Investment & Development expenses (7,908,811) (15,638,929) (23,547,740) (16,216,153)Transfer from General Fund 25,718,990 51,415,992 77,134,982 92,096,853At the end of the financial year 77,411,260 148,463,888 225,875,148 162,728,456

The weighted average rate of return on short term investments for the development fund for the year was5.85% (2006: 5.60%).




19. Goodwill on consolidationThe Group

2007 2006US$ US$

CostBeginning of financial year - -Acquisition of subsidiary 119,795 -Net Book Value 119,795 -

During the year PNGSDP acquired an 80% controlling interest in Cloudy Bay Timber Products PNG Limited(renamed Cloudy Bay Sustainable Forest Limited herein referred to as Cloudy Bay) for a cash considerationof K36 million (US$12.9 million). Carrying value of identifiable net assets, equal to its share of the net assetsacquired, amounted to K35.63 million ($12.79 million) resulting in provisional goodwill on acquisition ofUS$119,795. Details of net identifiable assets acquired are disclosed in Note 7. Preliminary purchase priceallocation of the acquisition and the allocation of goodwill of the cash generating units are currently beingassessed and is expected to be finalised within 12 months from the date of acquisition. The provisionalgoodwill was attributable to the future profits expected to be derived after the acquisition.

20. Commitments

(a) Operating lease commitments

The Group leases office space and motor vehicles from non-related parties under non-cancellableoperating lease agreements. The leases have varying terms, escalation clauses and renewal rights.

The future aggregate minimum lease payments under non-cancellable operating leases contractedfor at the reporting date but not recognised as liabilities, are as follows:


2007 2006 2007 2006US$ US$ US$ US$

Not later than 1 year 454,446 316,177 265,681 117,236Later than 1 year but not laterthan 5 years 601,921 387,990 532,362 243,603

1,056,367 704,167 798,043 360,839



20. Commitments (continued)

(b) Project commitments

The commitments for projects with signed funding agreements, excluding expenditures alreadymade for the projects, are as follows:


2007 2006 2007 2006US$ US$ US$ US$

Western Province 8,408,706 5,369,428 8,408,706 5,369,428National 3,751,958 146,200 3,751,958 146,200

12,160,664 5,515,628 12,160,664 5,515,628

21. Contingencies

Contingent liabilities

The Shareholder Agreement between PNGSDP, PNGMF and International Finance Corporation (IFC) wasamended and restated on 22 May 2006 to cater for a subscription agreement between PNGMF andInternational Finance Corporation (IFC) dated 24 June 2005. IFC has agreed on the terms and conditionsset out therein and subscribe for approximately 2,900,000 shares ("option shares") of PNGMF during theyear. As a condition for investing in PNGMF the IFC entered into a Put Option Agreement with PNGSDP on22 May 2006. The Put Option Agreement binds PNGSDP to acquire the option shares when IFC exercisesthe right to require PNGSDP to purchase any or all of the option shares. The Put Option Agreementspecifies that the put option can be exercised by IFC when a "Put Triggering Event" occurs, such as defaultor non-compliance by PNGSDP or PNGMF with any of its respective obligations, or any misrepresentationor breach of warranty by PNGSDP or PNGMF under the Shareholders Agreement.

22. Financial risk management

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, interestrate risk and price risk), credit risk and liquidity risk. The Group's overall risk management programmefocuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on theGroup's financial performance. The Group uses derivative financial instruments to hedge certain riskexposures.

The Group has appointed four professional investment managers to carry out the investment activities inaccordance with the investment policies and guidelines approved by the Board of Directors. AnInvestment and Finance Committee of the Board has been established to monitor investment and riskmanagement and the performance of the investment managers.




22. Financial risk management (continued)

(a) Market risk

(i) Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from variouscurrency exposures, primarily with respect to the PNG Kina, Australian dollar, Euro, UK pound,Japanese yen and Singapore dollar. Foreign exchange risk arises from future commercialtransactions, recognised assets and liabilities and net investments in foreign operations.

(ii) Price risk

The Group is exposed to equity securities price risk because of investments held by the Groupand classified on the consolidated balance sheet as at fair value through profit or loss. Tomanage its price risk arising from investments in equity securities, the Group diversifies itsportfolio. Diversification of the portfolio is done in accordance with the limits set by the Group.

(iii) Interest rate risk

As the Group has significant interest-bearing assets, the Group's income and cash flows areaffected by changes in market interest rates.

The Group's interest rate risk arises from commercial papers and bonds. The Group's riskmanagement policy is to limit investment in commercial papers to not more than 1% perinstitution and no more than 20% of the investment portfolio exposure to any single country.

(b) Credit risk

Credit risk arises from cash and cash equivalents, financial instruments and deposits with banks andfinancial institutions. For banks and financial institutions, only independently rated parties with aminimum rating of 'AAA' are accepted. For sovereign OECD parties, parties with a minimum ratingof 'AA' rating are accepted. Individual risk limits are set based on internal or external ratings inaccordance with limits set by the Board.

The investment in commercial papers and bonds are restricted to institutions in OECD membercountries.

(c) Liquidity risk

Prudent liquidity risk management includes maintaining sufficient cash and marketable securities,the availability of funding from an adequate amount of committed credit facilities and the ability toclose out market positions. The Group maintains sufficient funds in cash and cash equivalents tomeet its operating commitments.

The duration of the fixed return investment is relatively short.



23. Related party transactions

Other than disclosed elsewhere in the financial statements, the following transactions took place betweenthe Company and related parties during the financial year:

(a) Commitment fees paid

Commitment fees of US$373,683(2006: US$373,683) were paid to a jointly controlled entity inaccordance with Clause 2.2 of the Subsidy Deed between the Company and Ok Tedi Mining Limitedsigned on 11 December 2001 and are non-refundable.

(b) Key management personnel compensation

The key management personnel compensation is analysed as follows:


2007 2006 2007 2006US$ US$ US$ US$

Directors - fees 698,759 518,262 621,048 502,133Management salaries and othershort-term benefits 908,833 541,496 467,533 398,346

1,607,592 1,059,758 1,088,581 900,479

There has been a Consumer Price Index (CPI) adjustment in the amount of remuneration payable toindividual directors. In addition, a director received US$67,000 (2006: US$35,000) from the Company inrespect of his services provided to a jointly controlled entity, Ok Tedi Mining Limited, as a director of thatentity.

Directors are not entitled to other benefits.




24. New accounting standards and FRS interpretations

Certain new accounting standards, amendments and interpretations to existing standards have beenpublished that are mandatory for accounting periods beginning on or after 1 January 2008. TheCompany's assessment of the impact of adopting those standards, amendments and interpretations thatare relevant to the Company is set out below:

The Company has adopted FRS 107 Financial Instruments: Disclosures and Amendment to FRS 1Presentation of Financial Statements - Capital Disclosures on 1 January 2008.

FRS 107 introduces new disclosures to improve the information about financial instruments. It requires thedisclosure of qualitative and quantitative information about exposure to risks arising from financialinstruments, including minimum disclosures about credit risk, liquidity risk and market risk (includingsensitivity analysis to market risk). It replaces the disclosure requirements in FRS 32: Financial Instruments:Disclosure and Presentation. The amendment to FRS 1 introduces disclosures about the level of an entity'scapital and how it manages capital.

The Company has assessed the impact of FRS 107 and the amendments to FRS 1 and concluded that themain additional disclosures will be sensitivity analysis to market risk.

25. Authorisation of financial statements

These financial statements were authorised for issue in accordance with a resolution of the Board ofdirectors of PNG Sustainable Development Program Limited on 11th April 2008.


PAPUA NEW GU IN EA ( WE S T ERN PROV IN C E H I GH L I GH T ED )


PNGSDP WORK ING W I TH PARTNER S , D E V E LOP ING A BE T T ER FU TURE

H i gh l i g h t s o f P r o g r am Ac t i v i t i e s

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