Papua New Guinea’s disappearing resource revenues

Foreign owned mining companies are raping PNG – in 2017 the government received just K400m from exports worth K25 billion.

 Glenn Banks, Martyn Namorong | Devpolicy Blog | August 15, 2018

Government revenues from Papua New Guinea’s mining, oil and gas sector have essentially dried up. With the ongoing effects of the devastating earthquake in Hela province, the eruption of election-related violence in the Southern Highlands, a significant budget shortfall, and a foreign exchange crisis driving business confidence down, the resources of the government are severely stretched… and the massively expensive APEC meeting looms in November.

In this context, the drop in government revenue from the resource sector is staggering, and accounts in significant part for the growing fiscal stress. Figure 1 shows the extent of the issue: in 2006-2008, according to BPNG figures, the government collected more than K2 billion annually from the sector by way of taxes and dividends, on mineral exports that had just topped K10 billion for the first time. In 2017, the figure is just K400 million on exports of K25 billion – a revenue reduction of more than 80% in the same time that exports have increase by 150%! Government dividends and corporate taxes made up just 1.6% of the value of exports in 2017 (and that was a significant increase over 2015 and 2016). If we take the long-term average share of the value of exports that the government has received (at a little over ten percent), this points to a potential ‘hole’ of at least K8 billion over the past four years, an amount that would go a long way to covering the current fiscal deficit.

Figure 1

Source: BPNG. Resource revenues are defined as “MRSF receipts,” that is, the receipts that used to go into the Mineral Resource Stabilisation fund. Even though the MRSF no longer exists, BPNG still records resource revenues, which include corporate tax and dividend payments from resource companies.

There are some precedents for the rapid drop in government revenues from the sector, as Figure 1 show. In 1990 and 1991 – just as the ‘resources boom’ triggered by the Porgera gold mine and oil production at the Kutubu oilfield began – revenues collapsed, largely due to the closure of the Bougainville copper mine in 1989; and again, briefly in 2009 due to the onset of the global financial crisis in 2008. But neither of these has been as deep or as sustained as the current hole.

A full explanation of the precipitous decline in resource revenues is beyond the scope of this analysis. Clearly, a number of factors are involved, including a fall in commodity prices, major construction and expansion costs (which attract accelerated depreciation provisions) and generous tax deals. The revenue dry-up of the past four years also reveals that the State bears a disproportionate share of the risks associated with resource projects and investments. If we go back to the original intent of the post-Independence mineral policy, it was to translate mineral wealth into broad-based development across the whole country:

‘…known mineral resources should be developed for the revenue they can provide to the Government’ (PNG Department of Finance 1977: 2).

This clearly has not happened in the last four years. And certainly the Treasurer can’t be critiqued for commissioning yet another fiscal review: this seems appropriate, although whether it effectively addresses broader issues of a ‘fair share’ of mineral wealth remaining in PNG remains to be seen.

While there is much less money coming from the resources sector, there is at least better data than there used to be. The Extractive Industries Transparency Initiative (EITI) is a global initiative begun in 2002 to give transparency to what were regarded as often opaque flows of resource revenues from multinational companies in the extractives sector (especially oil) to the state in the countries in which they were operating. It is a voluntary initiative in which countries (and companies) can elect to become a ‘candidate’ country, and so long as they are able to be compliant with EITI standards, they can be admitted as a full member of EITI. The key requirement is to be able to report in a reliable way (through third party audits) on the revenues paid by companies, and reconcile these with payments received by the different arms of the state. The involvement of all parties – companies, governments and civil society – and public communication around the event and its products is also seen as central to both transparency and raising awareness of the nature of resource revenues and their destination.

PNG initiated its involvement in EITI in 2012. Four annual EITI reports have so far been produced (for the years 2013 to 2016). These reports provide an increasingly rigorous and transparent set of data on flows from the sector to the government, and identify additional revenue streams to the government than what BPNG use (and have used for the past 40 years). When all the additional revenue streams that EITI identify are included, the total share of the value of mineral exports rises to around 6.5% for 2017, up from the 1.6% based on the BPNG data. EITI is not without its problems and the most recent PNG country report identifies areas where it needs to be strengthened in PNG, and a focus on companies rather than operations can lead to the obfuscation of total flows and payments from each mine, oil and gasfield. In the PNG context, an examination of the sub-national flows and audit trails is also significant, and an initial study into this is underway.

One surprising revelation from EITI is that the single largest revenue stream from the mining, oil and gas sector to the government for at least the last two years has been so-called “group taxes”: the taxes paid on the wages and salaries earned by employees in the sector (Figure 2). These were worth more than K500 million in both 2016 and 2017, and in 2016 represented 34% of the revenue streams from the sector to the government, as identified by EITI. This is significantly more than the K46-88 million in corporate income taxes, K200 million in dividends paid to the State, or the almost K200 million paid in royalties in 2017. These group taxes are likely to be a more stable revenue stream than taxes or dividends – the workforce is unlikely to expand and contract to the extent that it impacts on the taxes they pay (leaving aside construction phases), or at least not as much as global commodity prices and profitability. But – and here we come back to the issue of PNG securing a fair share of its mineral endowment – this is a tax on the labour used to extract the resource, not a means of necessarily securing a direct share of the value of the resource itself.

Figure 2

The second area where EITI has revealed some interesting questions is around the operation of the Infrastructure Tax Credits (ITC). ITC originated in the sector in 1992 when the Porgera Joint Venture negotiated with the state to use a portion of their taxable income to directly provide infrastructure for surrounding local and provincial governments in exchange for a tax credit on this spend. Over the years the value and the uses of the ITC have varied, including at times supporting various national projects, and has been the subject of debates in various reviews as to its value. In 2016, four companies reported expenditures of K135 million in tax credit projects to DNPM[i], a significant amount that could well have contributed significantly to local and provincial development aspirations… but we don’t really know given the relatively poor reporting of the outcomes of these expenditures. More significantly, though, it is difficult to reconcile the size of these expenditures with the actual taxes paid by the four companies, which come in at well under K100m in total. That tax credits have come to exceed tax payments should ring alarm bells, and would explain why the government has in fact put a temporary stop on them.

Going forward, we would suggest two additional areas of focus, based on the above analysis. This first is local procurement. What is clear from the EITI reports (and earlier work by Banks (1990) on BCL) is that extraction of minerals is an expensive process, and a significant amount of the value of the mineral resource is spent by the companies on the labour, machinery, fuel, food, and the multitude of other costs needed to extract and export the mineral resource. An analysis from the last year of the Bougainville Copper Ltd mine at Panguna revealed that an estimated two thirds of the value of the mine accumulated directly outside Papua New Guinea, and indirect or second round spending would increase this (Banks 1990: 108). Imported materials and services made up 23% of the total value of the gross revenue of the minerals exported, cost of sales (all spent offshore) another 13%, depreciation 8% and dividends to non-PNG shareholders 12%. Local content spend on materials and services sat at just 5.5%, less than a quarter of the equivalent imported costs, while in total local wages and salaries were around two-thirds of the expatriate salary costs, despite the much greater numbers of local employees.

A long-standing objective and challenge for the State has been to find ways to ensure a larger proportion of these capital and operating costs are spent on PNG-based labour and other inputs. Plans at most of the major operations have been successful in localising the workforce significantly, hence reducing imported labour (and costs) at operations over time, although foreign labour continues to be important during construction. In terms of the goods, services and materials used to construct and operate a mine though, there appears to be scope to increase the proportion that is spent and retained locally. In large part this is tied to corporate and state support for a stronger local small business sector that can effectively service these mines (and potentially service the growing extractives industry across the Pacific).

The second area to which attention needs to return is the Sovereign Wealth Fund (SWF). This Fund, which would serve the dual function of saving a component of the resource revenues and having a portion committed to developmental needs through the budget, is in place (in terms of the legislation for it) but has not yet been implemented by the government. This well-proven mechanism for translating immediate resource revenue into a long-term sustainable fund can play a critical role in reducing the volatility of flows to the government. Ironically it may be that the factor holding back the government from moving on its implementation is the dire need for all the resource revenues right now. But neither is it sensible to wait for revenues to return to high levels before initiating the SWF: it will almost be certain that political and bureaucratic processes would delay the first flow of revenue to such an extent that several years’ worth of revenues that could kick start the fund would be lost. In other words, in many ways this period of low revenue is an excellent time for the Fund to begin.

So, the answer to the question of where have all the resource revenues gone, is not a simple one. The EITI reports show that a range of factors at the different operations (accelerated depreciation, tax holidays, ITC and re-capitalisation in plant expansions etc), have impacted on the revenue flows to government. To this we can add global commodity price drops, a compromised fiscal regime and some less-than-transparent governance structures and processes. The fact remains though, that over the past four critical years in its development, Papua New Guinea has missed out on a ‘fair share’ of the value of its mineral resources that have been extracted.

[1] Although confusingly there are different figures recorded as tax credits claimed by the companies from IRC – where the total credit offset against tax from three of the four companies come to K54million.

References:

PNG Department of Finance (1977), Financial Policies Relating to Mining and Mining Tax Legislation: Statement of Intent. Waigani: October.

Banks, G. (1990), Minerals and Development in Papua New Guinea. Unpublished MSc Thesis, Department of Geography, University of Canterbury.

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Abel: SWF vital for PNG

More promises that we have heard time and time before…

Salome Vincent | Loop PNG | 29 November 2017

The government has placed considerable importance in establishing the Sovereign Wealth Fund.

Today, Deputy Prime Minister and National Treasurer, Charles Abel, addressed the Mining & Petroleum conference, saying the Fund is a critical part of PNG’s medium term strategy in building the country’s economic resilience and saving for future generations.

The National Treasurer addressed a packed conference room, of the government’s observations on the mining and petroleum sector.

The notion to set up a Sovereign Wealth Fund stems from four key characteristics that shape how the government should think in driving the sector.

1. The extractive resources are nite;
   
2. The exploitation of the extractive resources represent a Liquidation of natural capital that is a conversion
   to nancial assets;
   
3. It is a volatile sector;
   
4. It generates rents.
   

The Minister said that there is surplus income beyond normal pro ts, adding that the rst two characteristics invoke considerations of equity both intergenerational and intra-generational.

He added that these attributes suggest the need to establish institutions that ensure the country does not waste wealth from natural resources.

And so to establish the Sovereign Wealth Fund, a work program for 2018 will involve the drafting and passage of various secondary legislations, the appointment of an inaugural board and establishment.

The board will guide the detailed design of operational systems and processes.
The other key institution is to design a scal regime to save and invest in ows from extractive resources.

“During the 2017 Supplementary Budget Government recognized that our nominal scal anchor – that is the headline target that guides the formulation of the National Budget needed to be augmented.

“I introduced an amendment to the PNG Fiscal Responsibility Act so it not only targets an eventual debt to G-D- P ratio of 30% but also aims to achieve a non-resource primary balance that averages zero over the medium term.”

Meantime, the extractive industry remains important to the economy with a direct contribution of 20 per cent GDP.

Sovereign Wealth Fund Is Our Security

Barney Orere | Post Courier | August 22, 2017

Concepts such as Dutch Disease are risks that threaten macroeconomic stability and consequently the long term development of the economy. This requires a forceful and comprehensive response from Government at all levels.

Given the fact that there is heavy dependence on the non-renewable sector; that is, petroleum and minerals, the current generation arguably has clear obligations to ensure that the benefits from their exploitation is available to generations that will come later.

Of importance will be the manner in which the State manages the increase in economic activity and resulting fiscal flows. The implementation of large scale projects such as the PNG LNG in a small economy such as PNG poses considerable challenge in terms of macroeconomic management also.

To minimize the potential negative impact of the considerable increase in financial flows and economic activity on the national economy, the Government policy was to ensure that a Sovereign Wealth Fund structure was implemented in the lead-up to increase in fiscal flows.

A Government submission says that whilst PNG LNG Project forms the backdrop of the implementation of Sovereign Wealth Fund (SWF) in PNG, it was to be expected that the SWF, upon establishment, was likely to be the recipient of financial flows from a range of projects or sources.

The submission which had its cover page removed was found in a warehouse quite by chance. Although some progress could have been made on the SWF, the lack of conversation has prompted the matter to be brought out into the open and there are insights which, hopefully, will get the conversation going.

The idea behind a Sovereign Wealth Fund (SWF) was to secure PNG’s future by putting away savings from major resource projects. Parliament passed the enabling law and five years later conversation on SWF needs to come out stronger.

Time has become of profound essence because earnings from PNG LNG will be flowing in a less than three years from now and without a SWF in place, where will we put the money?

The country is at a critical crossroad because without a management mechanism in place, the synergy effects of vast earnings in a small economy will be the cocktail for the dreaded Dutch disease.

What is more troubling than ever is the lucrative nature of SWF; the nation’s future security will need to be conducted at the most highest level of integrity and that means transparency and accountability. Hopefully this isn’t one of our greatest obstacles because we mess it up now and there’s nothing for future generations.

On February 22, 2012, Parliament passed the Organic Law on the Sovereign Wealth Fund; a high profile initiative that has the potential to be a significant contributor to the welfare of the people, stability and growth of the Independent State of Papua New Guinea for generations to come.

The statutory objectives of Sovereign Wealth Fund are:-

• TO support macroeconomic stabilization,
• TO support the development objectives of the Government, including long-term economic and social development, and,
• TO support asset management in relation to assets accrued from natural resource revenue.

The SWF was to consist of:-

(a) A Stabilisation Fund, to manage the impact of fluctuation of mineral and petroleum revenues on the economy and on the national budget, and,

(b) A Development Fund, to provide definite and ongoing funding for economic and social development in accordance with the development plans of the Government.

The author/s of the submission noted that the organic Law on Sovereign Wealth Fund creates the following stakeholders to be involved in running the SWF:-

• SWF Board to oversee the SWF (Section 16 of the Organic Law on SWF)
• Minister responsible for Treasury matters to determine the investment mandate for the SWF board and receive and consider reports from the board (section 6),
• SWF Appointment Committee to appoint members of the SWF board (section 22)
• Independent Probity Auditor to consider probity issues associated with the operation of the SWF (section 39), and ,
• Secretariat to assist with the operational aspects of the SWF (section 31).

Certain matters regarding the composition, functions and governance of each of these stakeholders are set out in the Organic Law. However, details of how these stakeholders will manage the SWF and interact with each other have not been fully provided for in the Organic Law.

Section 42 of the Organic law provides for regulations to be passed in future which are necessary to give effect to the Organic Law on SWF.

The submission recommended that in advance of the start of revenues being ready for deposit, the National Executive Council should take action to implement the Organic Law on SWF with the view to ensuring that it was fully operational prior to operations starting at the PNG LNG Project. To this end a working committee was suggested to take charge of implementing the Organic Law.

PNG has already made dozens of LNG shipments.

When the Post-Courier raised the dangers of Dutch disease in a feature, Treasury Secretary, Dairy Vele made a statement a day or two later, that tax revenue from the PNG LNG Project would not be seen until 2020 (or thereabouts). He took the trouble of explaining how complicated the project was and made no mention of proceeds from any shares that might be held in the project; only the tax component.

PNG borrowed about K14 billion to get the PNG LNG Project off the ground.

When Prime Minister Peter O’Neill took office after the 2012 General Election, he spoke of starting the Sovereign Wealth Fund but the conversation gradually faded as he got embroiled in the tussle over the Independent Commission Against Corruption and other legal squabbles that confronted him.

The aim of the Organic Law on SWF was the establishment of the appropriate structures for the management of PNG’s increased resource wealth.

We see now from the submission that we’re dealing with a very lucrative organization. But it is the decisions that will be made that will protect the future of PNG.

With the earnings from the PNG LNG coming up, as indicated by the Treasury, work on SWF must begin because there are still some outstanding bits and pieces to attend to. Time is of essence because this is the entry point for Dutch Disease to set in. We will have so much money to throw around we will wreak havoc in our small economy; that is the danger.

Opposition questions PM on benefits from LNG shipments

Delays in royalty payments are frustrating landowners

Post Courier | March 05, 2017

PRIME Minister Peter O’Neill has come under fire again from the Opposition on the benefits from LNG’s more than 200 shipments.

Mr O’Neill said bigger benefits were looming for the country in the next LNG projects at Port Moresby’s inaugural petroleum and energy summit.

Opposition Leader Don Polye said the Department of Treasury projected that annual proceeds from the first LNG would be up to K4 billion.

“Our alternative government’s question is who will benefit the most? We know these benefits looming in the petroleum and energy sector.

“This is not the first time we will see them coming in from such an international project.

“Our resource owners have missed out on benefits which are rightfully theirs in the first LNG project,” he said.

Mr Polye said the government had betrayed the people.

“Talking about projects after projects will not solve the real problems. There is nothing from the LNG project reflected in national budgets.

“Budget books show nothing. With such disarray in the management of the resources, pushing for another LNG project is unheard of,” he warned.

Sovereign wealth fund, he said, was established outside of the international best practice Santiago principle.

Mr Polye added that the Extractive Industry Transparency Initiative was not fully established within the standard frameworks as well.

“We cannot justify discussing another second or third LNG project. We are afraid their proceeds will also go down the same trend.

“I must boldly tell the nation that Prime Minister Peter O’Neill has mismanaged the country’s proceeds from the first LNG project.

The country is in the red. I would like to advice the forum to address these issues,” Mr Polye said.

He warns Total, ExxonMobil and other players that whilst bidding to increase their profitability to serve the interest of shareholders, they have a moral and legal obligation to PNG as well.

“We would like to see responsibility on the part of the developers to create a sustainable economy for PNG.

“When we are in government, we will not only bid for maximum benefits for our resource owners, we will fix SWF and EITI, minimise law and order, restore rule of law and alleviate corruption to make PNG become an attractive investment destination,” Mr Polye said.

Papua New Guinea’s oil and gas boom – blessing or curse?

Resource extraction projects in Papua New Guinea have a decidedly mixed history. Will things be different this time around?

• A deadly conflict is currently raging in Hela Province, home to the country’s largest gas project – the conflict does not directly relate to the gas plant there, but some fear the facility could be targeted.
• After a bidding war between multinationals, plans are moving forward to begin exploration of additional offshore gas fields.
• Despite its wealth of natural resources, Papua New Guinea remains one of the poorest countries in the world. Analysts say it is a classic example of the “resource curse” – a country where rich resources are associated with low levels of democracy and overall economic development.

David Hutt | Mongabay | 22 December 2016

Papua New Guinea announced last week that it is deploying its military to quell violence in Hela Province, home to the country’s largest oil and gas project.  Tribal conflict in the area has turned deadly this month, raising concerns about human rights and public safety as well as the potential impact on the operations of the PNG LNG (liquefied natural gas) project, operated by ExxonMobil.

The company is not directly implicated in the conflict. However, Prime Minister Peter O’Neill told Australia’s ABC news service the government would ask ExxonMobil and Australia’s Oil Search, a partner in the PNG LNG project, to provide logistical support to boost the security operation. The plant has also been a recent target of anger in the highlands. In August, local landowners blockaded roads leading to a natural gas facility in Central Province, demanding delayed royalty payments. This month, with tension mounting in the area, landowners reportedly threatened violence against the plant if a promised equity deal falls through.

Papua New Guinea is a country in transition. Perhaps best known for lost tribes and uncharted land, today PNG is hurtling into the 21st century – a shift that is clearly causing more than a few growing pains. While its past remains an integral part of its present, many of the country’s leaders are hopeful its abundant natural resources will provide the funds necessary for PNG to become a modern and prosperous state. The conflict currently raging in the highlands demonstrates the pitfalls of this process.

Customary landowner Auwagi Sekapiya of the Ubei Clan, Kosuo tribe. Photographed here in 2003 in front of a bulldozer, he was angry that a logging road destroyed his sago swamp. Photo courtesy of Sandy Scheltema/Greenpeace.

For decades, the mining of gold, copper and other minerals has been the mainstay of PNG’s extractive economy. More recently, oil and gas have become some of country’s most important exports.

In September, both the American oil giant Exxon Mobil and  Oil Search bought 40 percent shares in two separate offshore explorations permits in the Gulf of Papua. Peter Botten, managing director of Oil Search, said the maritime area, almost 150 kilometers (93 miles) off the capital Port Moresby, has “significant gas potential.” The purchase followed a bidding war between Exxon Mobil and Oil Search for shares in InterOil, a Singapore-Papua New Guinea company that offers investors a way into the Elk-Antelope gas field, believed to be one of the largest untapped gas deposits in Asia. The bidding war, which included France’s Total part-funding Oil Search’s bid, was credited by analysts as a sign of companies’ faith in improving international oil and gas prices and Papua New Guinea’s importance for the industry.

The potential profits from oil and gas extraction are enormous, but extracting it poses risks to the environment. “Like other forms of resource [extraction] in Papua New Guinea, oil and gas extraction is promoted as a model of development,” said Natalie Lowrey, Communications Coordinator for the Deep  Sea Mining Campaign. “But, as has been seen with large scale mining, logging and palm oil, there is the ongoing concern that it provides very little financial benefit for ordinary people as well as environmental destruction.”

River in the rainforest near Mt. Bosavi. New Guinea’s rainforests are the third-largest in the world. Photo courtesy of Markus Mauthe/Greenpeace.

According to conservation biologist Richard Steiner, the risks could be “very high,” particularly for offshore extraction. “Oil is a very toxic substance, and if or when it is spilled, it can cause long-term, even permanent ecological harm, as with the 1989 Exxon Valdez spill in Alaska,” he told Mongabay.  A number of spills have already occurred in waters of Papua New Guinea. In August 1993, Oil Search, a major player in oil and gas in PNG, caused a spill, although it initially denied such an event took place; it was only the work of local media that forced the company to admit to the spill three months later. Then, in 2012, Oil Search once again announced that a spill had taken place, though described it to the press as only a “minor incident” of a “small number of oil droplets.”

Even if nothing goes wrong, developing PNG’s petroleum industry will inevitably have a huge environmental impact. “Exploration and extraction of oil and gas will bring mass amounts of infrastructure, like pipelines and shipping, potentially resulting in land clearing,” Lowrey says. Take, for example, ExxonMobil’s PNG LNG Project, which began production in 2014.  The project sources gas from seven fields across the country, most onshore. Gas is transferred by a 407-kilometer-long (253 miles) subsea pipeline and a 292 kilometer (181 mile) onshore pipeline to two production facilities, where the gas is liquefied before being loaded onto ocean-going tankers that are then shipped across the region. As part of this project, the following had to be built: nine new wells in one onshore field; a new airstrip for the delivery of heavy duty machinery; more than 700 kilometers (435 miles) of pipeline; and the expansion of the docks for transport. And this was only a fraction of the infrastructure needed for the project.

Others are more concerned about the potential social impacts of such projects. “There is comparatively minimal environmental impacts, mainly due to the innovative construction of underground pipelines by Chevron in the early 1990s. Compared to mining, the footprint is small,” Emma Gilberthorpe, a Senior Lecturer at the University of East Anglia’s School of International Development, told Mongabay. “However, the social impacts are enormous, mainly initiated by the influence of cash royalties and conflicts over ownership.”

Women crossing a river on the way to Mt. Bosavi in Southern Highlands Province. Photo courtesy of Markus Mauthe/Greenpeace.

In a 2007, essay titled Fasu Solidarity: A Case Study of Kin Networks, Land Tenure, and Oil Extraction in Kutubu, Papua New Guinea Gilberthorpe explored the impacts of the country’s first commercial oil field development, located in the southern highlands. The use of cash royalties and “the imposition of centralized judicial constructs of corporate landholding groups” radically altered the traditional, social interactions between kin groups and communities. “Males are becoming isolated from pre-oil exchange networks, and females are becoming isolated within villages,” she wrote. More recently, the protests in Central Province show the potential for social unrest when expectations about cash royalties go unmet.

The extraction the country’s abundant resources, especially oil and gas, was supposed to transform the country and its economy. But it hasn’t, writes Charles Yala, Director of the National Research Institute, a local think tank: “The petro-oil-gas dollars [are] disappearing into thin air, leaving behind an impoverished nation,” he wrote in Business Advantage PNG. Despite the wealth the industry has created, Yala says the economic situation remains dire: getting to and from the country remains difficult and costly; accommodation can be more expensive than in most Southeast Asian capitals; internet access is poor; electricity supply is scant; and the government does not do enough to allow smaller businesses to prosper.

Even people in government admit that oil and gas revenue won’t solve all of the country’s problems. In June 2015, Finance Minister James Marape announced that the importance of Liquefied natural gas (LNG) to the economy was a “myth.” He added: “We are clouding our vision thinking that LNG is a waterfall of money. It is how we maximize use of all the resources in this country that will unlock our development potential.”

A tree kangaroo, one of the many incredibly rare species living in PNG’s lowland forests. Pictured here at the Melbourne zoo. Photo courtesy of Tom Jefferson/Greenpeace.

In October, an analysis by Development Policy Center, a  think tank ran out of the Australian National University, estimated that while PNG’s mineral exports in the first quarter of 2015 were worth $1.6 billion,  government revenue for this sector amounted to just $8 million, or roughly 0.5 percent of the total value. Some of this, the article noted, was likely due to a lag in between exports being made and taxes on them being paid, as well as changes in how the state receives its share of the sector’s profits.  Nevertheless, it concluded that “what the numbers illustrate most clearly are the effects of price volatility in the sector, and the subsequent, highly uneven returns to the government.” This volatility make it “extremely difficult for governments to manage these flows effectively, and makes strategic development planning difficult,” the report noted.

“In this regard, and others, Papua New Guinea certainly exhibits many of the classic markers of the ‘curse’,” the paper noted – referring to the theory that countries possessing an abundance of natural resources tend to have less democracy, less economic growth and worse overall development than countries without such resources. While not universal, the paradox of the “resource curse” has been found in countries across the world, particularly those without a history of good governance.

In an effort to sustainably manage the money derived from oil and gas, the prospect of creating a sovereign wealth fund has been on the table since 2011. It finally came into law in July 2015, was scheduled to come into operation this year – reports now point to a 2017 launch date. Many oil-rich countries have developed such ways of re-investing oil and gas profits for long-term profit, with Norway leading the way with a fund worth almost $890 billion, making every Norwegian a millionaire, in theory. (Norway has also helped other countries develop their own funds, including Papua New Guinea’s neighbor, Timor-Leste.)

Papua New Guinea’s fund will be split into three sections, according to an interview with the High Commissioner of Papua New Guinea to Australia, Charles Lepani. The Future Generation Fund is intended to put aside money for the decades to come; the Infrastructure Fund to revitalize what is needed today; and the Budget Stabilization Fund to support the country’s growing budget.

A mountain hut in the highlands of Papua New Guinea. Photo courtesy of Markus Mauthe/Greenpeace.

Again, there is a concern that its sovereign wealth fund might itself become another curse. In Timor-Leste, analysts have spoken of the government’s overuse of the fund to boost the state budget, which could lead to it being empty within a decade. Experts have warned that politicians in Papua New Guinea must provide accountability and expertise when managing the fund, so money for future generations is not wasted. The biggest task for future governments will be tackle corruption in the face of a slosh of new petrodollars. Transparency International’s latest index on corruption perception, in 2015, put Papua New Guinea 139th out of 168 countries. Without effectively tackling this endemic practice, the money available for necessary social projects and infrastructure development could slip away from the state’s coffers.

Another concern is that politicians look to the oil and gas industry, as the sovereign wealth fund, as a silver-bullet, and fails to plan for a future of less dependency on natural resources. When asked if the oil and gas sector could sustain the economy of Papua New Guinea, Gilberthorpe responded that it couldn’t on its own. “And not sustainably. Without a diversified economy Papua New Guinea is putting itself in the firing line of the resource curse,” she said. “The country needs to develop beyond natural resource extraction to more sustainable forms of economic development if it is to have a sustained economic growth.”

PNG people poorer despite big mines: NRI

PNG people are poorer but is that despite the big mines – or because of the big mines?

Perhaps a Sovereign Wealth Fund is NOT the answer.

What we need is a new model of development – one that actual respects and follows our National Goals and Development Principles rather than completely ignoring them as we do now… 

Freddy Mou | PNG Loop

Revenues from past extraction of PNG’s natural resources have failed to impact the lives of the average citizen, the country’s think thank and leading researcher in the Pacific, National Research Institute has revealed.

Director Dr Thomas Webster when launching the Sovereign Wealth Fund Report today in Port Moresby says the average citizen has become poorer as a result of poor management and accountability in the previous SWF projects.

“This experience is instructive for the present debate and the emphasis must be on ensuring that the LNG income stream and revenues from other similar projects transforms positively the lives of the average citizen, both now and into the future.

“The magnitude of the projected revenue from the current PNG LNG project is such that its impact on the macroeconomic stability is critical. Prudent strate-gies aimed at stabilising the plausible macroeconomic consequences from the current and future projects must be packaged into the SWF structure.

He said protecting the purpose and intent of the SWF through the approved management structure is critical.

It has been speculated that the final structure of the SWF Bill is scheduled to be tabled in the coming (October) Parliament session.

Dr Webster said missing from the design of a SWF has been a transparent and wide-ranging debate on its aims and a structure most likely to deliver the intended benefits.

“We are well aware that the PNG LNG has started exporting and proceeds from these sales accruing to PNG need to be deposited responsibly.

“We therefore continue the series of NRI discussions with the view to ensuring that the SWF is properly structured, established and managed,” he said.

Cobalt in Cooks awaits exploitation

Could supply 10% of global supply

Dionisia Tabureguci | Islands Business

This year could be a defining year for seabed minerals in Cook Islands.

There are plans by its government to move a step closer to exploration of its massive cobalt resource, following the completion of consultation work with the International Monetary Fund (IMF) on how to maximise this potential national wealth.

In an interview with ISLANDS BUSINESS last year, Cook Islands’ Minister for Finance Mark Brown revealed his government’s intention to ensure that critical groundwork is laid before any advancement in this area, given that undersea mineral exploitation is still a new frontier globally.

“Our legislations have been in place for a number of years now and they came into force in March (last year), so we’ve been setting in place a legal framework for the exploitation of our minerals resources,” Brown told ISLANDS BUSINESS.

“We are also in the process with the IMF of working out a taxation and royalties legislation to determine how we will maximise the returns on those resources. And we also had a study done on the establishment of a sovereign wealth fund so that revenues collected from this particular resource will go into a dedicated sovereign wealth fund,” Brown added.

Cook Islands is said to be sitting on a significant field of manganese nodules, which are known to host mineralisation in the seafloor. According to a study done there in the 1990s, its manganese nodules are so rich in cobalt that they’re enough to supply global demand for the next 500 years.

Known data at the time estimated that even if a small portion of Cook Islands’ manganese nodules is mined, it would be enough to supply 10 percent of the world’s annual cobalt consumption.

Although interest in exploration work there has been expressed and carried out by a number of parties in the past, among them a U.S engineering firm, they have not translated to any progress in actual mining as economic viability was always questioned.

Globally, technological advances in undersea mining equipment have been slow while in the country, specific legislations to regulate the relatively unknown industry were also slow to take form.

Recently however, interest in seabed mining especially in the Pacific was rekindled following substantial interest and progress by Canadian-listed mining company Nautilus Inc. to launch the world’s first commercial seabed mine in Papua New Guinea waters.

It’s an interest that has continually been the subject of much criticism because of fears it will severely damage the ocean’s ecosystems but this hasn’t stopped Pacific Islands countries with seabed mineral prospects—Cook Islands among them—to revisit their opportunities in that area.

They are being assisted by the Applied Geoscience and Technology division of SPC (SOPAC), especially in the drafting of relevant national laws.

In PNG, the arrival of Nautilus became the catalyst to the drafting of national policies and legislation on seabed mining but Cook Islands had decided it will not allow exploration or mining until all relevant legal and policy work are in place.

Its Seabed Minerals Act was passed in 2009, establishing the Cook Islands Minerals Authority and a regulatory framework for seabed mining in the country.

It has also gone a step further to explore the concept of having a sovereign wealth fund for seabed minerals proceeds, a model used by many countries to manage national wealth from their mineral resources, oil predominantly.

“It’s been estimated that the value of our minerals below the sea is in the billions of dollars, which will make us one of the wealthiest countries in the world if we can get down there and exploit the value of these minerals,” said Brown.

“So by the end of (last) year, we would have completed our work on the exploratory licences regime and we will be putting out expressions of interests to companies or countries that wish to take out exploratory licences to determine whether full exploitation is actually feasible,” he added.

In its initial analysis on Cook Islands’ proposed sovereign wealth fund for its undersea minerals resources, the IMF said the Pacific region had produced cases of both successes and failures, which underscored the importance of having well structured and well managed funds.

“Kiribati, Timor-Leste, Papua New Guinea and Nauru have SWFs established for non-renewable resources. Tonga and Tuvalu have funds established from revenue windfalls and Tuvalu, Marshall Islands, Micronesia and Palau from donor contributions. An IMF study on sovereign wealth funds in the Pacific islands provides insights into the successes and failures of these funds. The failures of the funds in Kiribati and PNG provide some lessons on how important the design of the investment strategy can be. The Timor-Leste Petroleum Fund provides a model for effective design,” the IMF said.

PNG seeks IMF advice on how to manage mineral wealth

Radio New Zealand

The Papua New Guinea government is reported to be working with the International Monetary Fund on how to manage the country’s mineral wealth.

EMTV reports that PNG’s Minister for Treasury, Don Polye, has met with IMF consultants to discuss the best practices PNG can adopt in the creation of the sovereign wealth fund.

They also discussed PNG’s new Kumul Holdings Limited structure for managing mining and petroleum assets and other state-owned enterprises.

PNG Government Information on it’s Sovereign Wealth Fund

Via Masalai blog

Download pdf copy of the SWF Information Paper (350kb).

Introduction

This Public Information Paper was produced to educate the general public on the establishment of the Sovereign Wealth Fund (SWF) of PNG. This need arose because based on various presentations on the SWF, it became apparent the general public has limited knowledge and understanding of it.

The Paper is intended to be simple as much as possible for the purpose of educating the general public. Detailed information, including technical information on the SWF, can be obtained from the respective website of the Department of Treasury or the Bank of Papua New Guinea.

Purpose

Active stakeholder participation is needed to enhance the visibility, governance and transparency and accountability of the SWF. Educating the public on the Fund will not only improve their understanding of this important government initiative but would assist them becoming active stakeholders in the management of the fund, when the fund is fully established.

This Public Information Paper provides information useful for educating the public on the SWF, which is new to PNG. It starts with a private or public Kina savings account, as an example, because many people are familiar with bank accounts. The Paper draws on the familiar features and uses of a Kina savings account to help educate the general public on what the SWF is, as it has many features of a Kina savings account. The main difference is the currency of the account; the SWF is denominated in foreign currency whereas a private or public savings account is held in Kina.

The Paper uses the private or public savings account to describe the SWF of Papua New Guinea, its purpose, how it will operate and the reasons for investing moneys in the Fund. It also provides other general information on the government institutions, committees, donors, work plans and processes being followed at present to fully establish the SWF.

1. A Kina Savings Account and Sovereign Wealth Fund

a. Personal Kina Savings Account

If you have a personal Kina account with a bank, you can make deposits into the account from sales (say, copra), fortnightly salary, bonus, and gifts from friends. You then make withdrawals from that account to pay for food, drinks, school fees, PMV fare, and so forth. If your total withdrawal is less then total deposits, then you have a positive savings in your account. If your expenses are more than deposits, you end up spending all the deposits in the account.

b. Public Kina Savings Account

The government also operates a Kina account (Waigani Public Account) with the Bank of Papua New Guinea (Central Bank). Company income tax revenues, duties, personal income tax, goods and services tax (GST), and other tax revenues are deposited into the account. It makes withdrawals from the account to pay public servants, buy medicines and supplies for hospitals and clinics, build infrastructure (roads, airports, wharves, and bridges) and undertake many other public expenses. If withdrawals for public expenses are less than deposits, then the government has positive savings in its account. If, however, expenses are more than the deposits, the government ends up spending all the deposits in the account.

c. Sovereign Wealth Fund

The SWF is simply another government savings account established outside Papua New Guinea (PNG) in foreign currency. The government will deposit incomes from mineral taxes and dividends from profits into that account in foreign currency. The reasons for depositing public moneys into the account are to reduce exchange rate losses (from converting foreign currency into Kina and back into foreign currency) and reconcile
and account for all taxes and dividends.

When Kina deposits in the account with the Central Bank are more than withdrawals for Kina expenses, the government does not make any withdrawals from the SWF. In this case, foreign currency deposits into the SWF will increase. These accumulated funds in the SWF will then be invested outside PNG to earn additional income for PNG.

If the withdrawals for Kina expenses are more than the deposits in the Kina account with the Central Bank, the government will withdraw funds from SWF to cover the shortfall. In other words, withdrawals from SWF would help the government fund additional public expenditures.

The SWF operates in the same or similar way as a private or a public savings account. The only difference is that SWF account is located in another country and held in a foreign currency, whereas a personal or a public savings account is located in PNG in Kina.

2. Purpose of Sovereign Wealth Fund

The SWF serves three purposes: (a) it helps the government to smooth out large or wide variations in revenue inflows to the national government budget that are associated with PNG’s exports (b) provide funding to support the social and economic development objectives of the government, including long-term social and economic development programmes; and (c) it helps the government save and invest surplus public moneys outside PNG for later use when it is needed.

3. Sovereign Wealth Fund Design

a. Ownership, Administration and Spending

The offshore foreign currency account will be owned by the government of PNG. The management of the account and overseas investments will be from PNG. All withdrawals from the account will be spent on the provision of infrastructure development and maintenance and delivery of socioeconomic services vital for the economic and social advancement of PNG.

b. National Budget

The government will establish in law the rules for both deposits into the account and withdrawals from the foreign currency account. Withdrawals from SWF must be accounted for in the National Budget and approved by Parliament for spending by the government. Rules do not allow the government to spend SWF withdrawals outside of the national budget.

c. Investments Outside Papua New Guinea

Any surplus funds in the foreign currency account must be invested outside PNG. The government will issue a set of guidelines (Investment Mandate) that will govern all investments abroad.

The government will not control or interfere with the management of investments abroad. The extent of its involvement is limited to issuance of an Investment Mandate.

4. Management of Sovereign Wealth Fund Investments Abroad

a. Government

The government, through the Minister for the Department of Treasury (DoT), will issue an Investment Mandate setting out the general investment parameters for SWF Board to comply with. The Board will use the Investment Mandate to guide it to develop its investment policies (strategies) for the asset portfolio (collection of assets) to invest in. The Investment Mandate and investment policies and instructions will be implemented through the Administrative Secretariat of the Board.

b. SWF Board

The SWF will be managed by an independent SWF Board for-and-on behalf of the government. An independent board will be appointed through a bipartisan appointment process. The Board will comprise members with relevant experience in financial and and economic matters and governance and be persons of integrity, sound mind and good reputation. The Board’s key function is to oversee the investment and management of the SWF assets, on the Government’s behalf and with consideration to the Investment Mandate.

c. Role of Department of Treasury and the Minister

The Department of Treasury will ensure that the investment and SWF asset management and withdrawals from SWF for spending in PNG comply with the rules approved by the government. It will also ensure that SWF withdrawals follow the normal national budget process and approved by the government for spending.

Once the Sovereign Wealth Fund is established the Treasurer will be the Minister responsible for the policy matters for the Fund. The Treasurer has legislated responsibility for issuing the Investment Mandate, in consultation with the SWF Board, as well as reviewing and considering Fund reports from the Board. The Treasurer is also the Minister responsible for establishing the SWF.

d. Secretariat to the SWF Board

The Secretariat will oversee the daily operations of the SWF for the Board. Its three main roles are to:

• provide information on investment markets to the SWF board;
• give effect to the Board’s investment policies (strategies) guidelines and instructions; and
• provide information to the board on the appointment of external fund managers and custodian.

e. Fund Managers

The SWF Board will appoint reputable Fund Managers through an open, competitive and transparent process to make investments abroad on its behalf. The Fund Managers will be appointed to invest funds as instructed by the SWF Board.

f. Custodian

The SWF Board will need to appoint a reputable Custodian for the safe keeping of the SWF assets.

5. Reasons for Investing Outside Papua New Guinea

a. Inflation and Value of the Kina

When large sums of money from the PNG LNG project flow into the domestic banking system, it would likely stimulate demand for bank loans which would be spent on purchasing goods and services in PNG and from abroad. The increase in demand would drive up the prices of goods and serves and reduce the value of the Kina. It could create livelihood hardships for families and affect investments and operations of businesses and the government. Investing outside of PNG therefore reduces the amount of money in the country which will assist to reduce inflation.

b. Exchange Rate
When large sums of foreign currency flow into the economy, it would make the Kina increase in value, or appreciate, against other currencies. The increase in the value of the Kina would make our exports more expensive for purchasing countries, which could lead to a fall in the demand for our exports abroad. This could lower household incomes for those who depend of cash crop production to sustain their livelihood and to pay for services such as school fees for children, medical services and transportation.

c. Domestic Investment Opportunities

PNG economy does not offer a variety of investment opportunities than those which are normally available in developed countries; Unites States, for example. By investing in financial markets overseas, the surplus funds which are not immediately required by the government for spending in PNG are able to earn interest. This will over time provide the Government with more funds with which to provide public goods and services

d. Better Public Funds Management

The creation of a SWF will provide an opportunity for PNG to better manage public funds than it has done in the past. The SWF will improve transparency and accountability around the use by the Government of mining and petroleum revenues and dividends. The use of an independent SWF Board will ensure that the assets in the SWF are invested overseas without bias

e. Transparency and Accountability of Public Funds

Transparency in reporting and accounting of public funds had been a particularly sensitive issue in PNG. Loss of public funds and the lack of responsibility to account for those funds had left a great deal of public distrust for public finance management.

As a start, to address this problem, the SWF is subject to its own rules based on international best practice on transparency and accountability.        

6. Government Agencies

a. Key Government Agencies

The key government agencies that are involved in the work on establishing the SWF are the Department of Treasury, the Bank of Papua New Guinea, the Ministry of Public Enterprise and State Investments, the Department of National Planning and Monitoring, the Department of Prime Minister and National Executive Council and the Department of Justice and Attorney General. The heads of these agencies meet at regular meetings to discuss and make decisions on the SWF work and policy and other issues arising.

b. Co-Opt Members

The co-opt government members involved in the work on establishing the SWF are the Internal Revenue Commission, the National Roads Authority, the Department of Transport, the Office of Higher Education and the Department of Works. Co-opt members attend meetings with the key government agencies on as-and-when required, to discuss issues relevant to their area of responsibilities.

7. International Donors

a. Technical Assistance

Technical assistance for work on SWF is being provided by various international donors. The donors provide advice on policy and governance development, administrative processes and public awareness programs on SWF.

b. Capacity Building

Local capacity building is an important element of work process underway to establish and operate the SWF. In the period prior to the establishment of SWF, donor technical assistance is part of local capacity building. In the period after the SWF establishment, donor assistance will also be sought for both shortterm (secondment and on-the-job training) and longterm training (post-graduate education) to build local capacity on SWF investments and assets management.

8. Decision-Making Process

a. Inter-departmental Sovereign Wealth Fund Working Group (Technical Committee) and Composition

This is the main technical group that convenes at regular meetings to discuss policy, legislative and administrative matters affecting work on SWF.

Its membership is comprised of the Department of Treasury, the Bank of Papua New Guinea, the Ministry of Public Enterprise and State Investments, the Department of National Planning and Monitoring, the Department of Prime Minister and National Executive Council and the Department of Justice and Attorney General.

b. Modelling Team and Composition

This is a sub-group of the Technical Committee which is responsible for all the economic modelling work and discusses its finding at Technical Committee meetings. The group comprises members from the Department of Treasury, the Bank of PNG and the Department of National Planning and Monitoring.

c. Implementation Secretariat and Composition

This is a sub-group of the Technical Committee. Its role is to develop policy, legislative and administrative papers for review and discussions at the Technical Committee meetings. It has officers from the Department of Treasury the Bank of Papua New Guinea, the Department of National Planning and Monitoring and the Department of Justice and Attorney General.

d. Secretaries Committee and Composition

This is a decision-making committee. It comprises the department secretaries and heads of Department of Treasury, Bank of Papua New Guinea, Department of National Planning and Monitoring, Department of Justice and Attorney General, Department of Prime Minister and National Executive Council and Ministry of Public Enterprise and State Investments. It convenes at regular meetings to review and make decisions on matters of policy, legal and administration submitted by the Technical Committee. This committee also updates the Minister for Department of Treasury (Treasurer), Ministerial Sectoral Economic Committee and the National Executive Council on SWF work progress.

e. Minister

The Minister for Treasury (DoT), as per the ministerial determination, is responsible for making policy submissions and obtaining NEC decisions on them for implementation by the Secretaries Committee and Technical Committee.

f. Ministerial Sectoral Economic Committee

This is a sub-committee of Ministerial Economic Committee which is chaired by the Treasurer. It convenes to review and approves policy submissions relating to SWF, before they submitted by the Treasurer to National Executive Council.

g. National Executive Council

The National Executive Council is chaired by the Prime Minster as chairman. It convenes to review and makes decisions on policy submissions made by the Treasurer. Its decisions are returned to the Treasurer for implementation through the Secretaries Committee.

9. SWF Work Progress Updates

a. National Executive Council

The National Executive Council (NEC) is provided with updates on the progress on SWF work on a quarterly basis.

b. Public Information Disclosure

In addition to the National Executive Council update, the general public will be informed on the progress on SWF work by way of a written update from time to time. It will be released when work progress has reached a sufficient stage for release to the general public. Some of the disclosure is being done at various
seminars or forums.

10. Sovereign Wealth Fund Work

a. Phase 1

In March 2010, the National Executive Council established a joint Department of Treasury and Bank of Papua New Guinea Working Group (Joint Working Group) to:

(i) assess the appropriateness of the current framework;
(ii) seek feedback from international donor institutions and other appropriate Governments;
(iii) canvass possible options for Government consideration, including the possible creation of an offshore fund to manage windfall revenues arising from the PNG LNG project; and
(iv) report back to the National Executive Council by 30 June 2010.

The Joint Working Group completed its report (the Report) in June 2010. The Report recommended the creation of an offshore fund. It also recommended the establishment of a Secretaries Committee to oversee the development and establishment of an offshore
fund. The National Executive Council approved the Report and its recommendations in November 2010, and commenced the process of setting up an offshore fund. Subsequent work led to a change in the name from Offshore Fund to Sovereign Wealth Fund.

b. Phase 2

Work re-started in February 2011 to commence legislative drafting for the establishment of the Sovereign Wealth Fund of PNG. Legislative work was completed in October of the same year and a bill on SWF Organic Law and a Constitutional Amendment were submitted to NEC and Parliament for their approval. Parliament gave its final approval on the SWF Organic Law and Constitutional Amendment in February 2012.

c. Phase 3

The final phase in establising the SWF began in March 2012 to develop the enabling Acts of Parliament and Regulations for the SWF Organic Law and to setup the Administrative structures to fully establish and manage the SWF. In addition, policy work is progressing on:

• SWF Board Selection Process;
• Stabilisation Fund;
• Development Fund;
• Higher Education Endowment Fund (Account);
• policy responsibilities of the Department of Treasury;
• the SWF Board Secretariat; and
• Infrastructure Authority        

11. Engagement with the General Public and International Stakeholders

a. Public Consultations and Awareness

The SWF work involves engagement with the general public and international donors. This engagement is done through public consultations and public awareness forums. For public consultations, the Government will seek valuable comments and suggestions from the public on key government policies relating to the SWF. Comments and suggestions are incorporated and contribute to the Government’s final policy decision. Part of this process also involves consulting other countries that either have established or are establishing their SWFs.

Public awareness forums are organized to inform the general public on the progress of SWF work and decisions made. The objective of public awareness is to educate the public on SWF and to promote its transparency.

The discussions below provide information on public consultations and awareness forums that were held or are being planned for Phase 1, Phase 2 and Phase 3 of SWF work.

b. Phase 1

In 2010 public consultations were held in Port Moresby. The audience comprised the general public, key government agencies and institutions, international donors and the private sector. Their feedback was incorporated into the final Report of the Joint Working Group.

A presentation was made in London to an international audience in May 2010. It received positive and helpful comments which were incorporated into the final Report.

c. Phase 2

In 2011 the members of the Technical Committee, through a video conference, consulted the Mongolians on the progress on establishment of sovereign wealth funds in that country. The members also went to Chile in July 2011 and consulted various government institutions, government owned enterprises and the Central Bank of Chile (CBC) on how Chile has established and manages its sovereign wealth funds. Consultations with the Mongolians and Chile provided valuable inputs to the work on Constitutional Amendment and the bill on the SWF Organic Law. There were no public consultations held in PNG during phase 2 of the work on SWF.

A number of public awareness forums were held in Kokopo, Alotau, Lae and Mt. Hagen in the fourth quarter of 2011 to inform the general public on the Bill to establish the SWF.

d. Phase 3

There are plans to conduct public consultations on various components of SWF work set out under Phase 3 of 10 above. The general public will be informed on the venues and when the consultations will be held, when specific components of the SWF work reaches the public consultation stage.

The Implementation Secretariat is preparing a timetable on public awareness on the SWF work set out under phase 3 of 10 above. The general public will be advised on the mode and dates and venues on the various types of public awareness to disseminate information on SWF to the public.

12. Communication

For more information, please visit: Department of Treasury, or Bank of Papua New Guinea

Contact SWF Implementation Secretariat on phone 343 7152 / 343 7155 / 323 5600 or email swfforum@treasury.gov.pg on PNG SWF matters.

Papua New Guinea: Reforms planned for SOEs

Oxford Business Group

As Papua New Guinea’s top banks and financial services firms record healthy profits, citing overall strength of the economy, the government has pledged a broad and ambitious infrastructure development programme in hopes of further boosting growth.

However, concerns about the future distribution of an expected resource-driven boom continue to dampen long-term expectations.

On March 18, Bank South Pacific (BSP), the country’s largest bank, posted an operating profit before tax of PGK545.3m ($257m) for 2012, up 14.8% from the previous year’s figure of PGK475m ($223.9m). This followed the March 13 release of 2012 financial results from PNG-based general finance company Credit Corporation, which saw its profits rise some 250% year-on-year to reach PGK106.11m ($50m). The company also reported that its core business cash operating profit, which includes financing, property and dividend revenues, increased from PGK74.16m ($35m) in 2011 to PGK80.79m ($38.1m) in 2012.

PNG’s first listed investment company, Kina Asset Management [owned by those dirty loggers, Rinbunan Hijau], announced in March that it had recorded a net profit of PGK4.73m ($2.2m) in 2012, a significant improvement over the net loss of PGK9.43m ($4.4m) in 2011. In a further boost to confidence, Prime Minister Peter O’Neill said on March 13 that his government would continue to invest in improving the island’s infrastructure. Speaking at the groundbreaking ceremony for a PGK380m ($179m) real estate project, O’Neill noted that his administration would spend more than PGK3bn ($1.4bn) this year on infrastructure projects, including the Highlands Highway and the port development in Lae, the second-largest city in PNG.

Such announcements combined with rosy profit figures underscore the positive outlook for the future health of the economy. While GDP growth is projected to fall from 9.2% in 2012 to 4% this year, this figure is expected to jump to 20% in 2015, the year the LNG project will likely reach peak production.

The Exxon-backed scheme is expected to generate a windfall of some $50bn for the country, five times GDP and translating into roughly $10,000 per person.

However, the impact these funds will have on the economy will depend largely on the performance of a sovereign wealth fund (SWF) that has been established to ensure the LNG revenue is used to spur development and alleviate poverty.

“Having a high degree of transparency … is very important for the SWF,” Jonas Moberg, the head of the Extractive Industries Transparency Initiative, told reporters after meeting with O’Neill in March. He added that the premier had talked about “the importance of getting it right” with the SWF.

However, the Asian Development Bank (ABD) said earlier this year that the design of the fund was not sound, and that less should be spent “until the government undertakes necessary public financial management reforms”.

The ABD has also been critical of PNG’s debt-laden state-owned enterprises (SOEs), which include electricity, insurance, airline, telecoms and energy providers. Last September, a report from the bank said the country’s SOEs absorbed an estimated PGK700m ($329.9m) in direct government transfers during the financial years 2002-09, against which they generated a net profit of PGK500m ($235.7m) – of which only PGK23m ($10.8m) was paid to the treasury in the form of a dividend.

“By absorbing large amounts of scarce capital on which the SOEs provide very low returns, crowding out the private sector, and diverting public funds that could otherwise be invested in such high-yielding social sectors such as health and education, SOEs act as a drag on economic growth,” the bank wrote.

However, the government seems willing to embrace reform of this bloated system. Indeed, the ADB study was commissioned by the Independent Public Business Corporation (IPBC), which manages the SOEs, and Ben Micah, the public enterprises minister, has endorsed its findings. It is expected that improving the performance of these monoliths of the past will help PNG secure its economic future.