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2018 MYEFO – Targets or Truth?

Executive Summary

PNG’s mid-year economic and budget update was released on 31 July. The summary snapshot presented by PNG Treasurer Charles Abel is “What this MYEFO is telling us is that the policies of the Government are working, the budget is back in control and the economy is improving.” (last line of Executive Summary p3). Unfortunately, the MYEFO reveals more a re-iteration of government targets rather than a true up-dated forecast of what is happening.

The key claims of the MYEFO are:

  • the deficit will be exactly the 2018 budget level of K1,987.2 million;
  • a small increase in expected revenues of K213.2 million driven by even further forecast increases in net GST collections (K112m) and mining and petroleum taxes (K142m – including K71m moneys directed through the Sovereign Wealth Fund);
  • this windfall revenue is then spent largely on increased wages for public servants and teachers (K233m);
  • public debt falls as a percent of GDP to 31.2% relative to the 2018 budget forecast of 32.2% (mainly as a result of a forecast increase in nominal GDP);
  • expectations of $US500m received from the Sovereign Bond in 2018 (up from $US200m as a first tranche in the 2018 Budget);
  • 2018 inflation forecasts have been reduced from 6.9% to 5.9% in 2018.
  • non-resource GDP growth being revised downwards in 2017 from 1.9% to only 0.2%, and in 2018 from 3.5% to 2.8%;
  • overall GDP growth rates are expected to increase from an average of 1.4% from 2019-22 to 3.5% (based on a change in forecasting methodology rather than better prospects) and relevant graphs do not include updated National Statistics Office figures for much lower growth than previously predicted by Treasury.

The good news from the MYEFO is that Treasurer Abel is clearly committed to the medium-term fiscal policies set out in 2018 – and on paper these look pretty good. The fact that the MYEFO is produced, and on time, is a positive indication of this element of economic governance structure remains in place. There is some acknowledgement that the PNG economy is performing poorly – there is more openness about this than revealed by Prime Minister O’Neill’s constantly up-beat comments.

However, there are also serious problems with this document. Details are provided below. In summary, revenue figures appear to be overstated significantly in key areas such as the GST by at least K200m even before considering GST refund games. No information is provided about the K800m assumed to be received from the National Fisheries Agency for 2018. There are repeated examples of where it seems IRC and Customs have been instructed to simply state a revenue target will be achieved, even when the underlying economic fundamentals have changed. On the expenditure side, the spending controls have focused almost entirely in the areas of the capital budget and concessional loan financing. PNG appears to be aiming for an expenditure target even when this will hurt its longer-term growth rate best illustrated by the poor take up of concessional financing (only 27% by 30 June). There is no transparency on expenditure arrears. There is confusion on the level of interest payments, with indications this may total over K2 billion in 2018. Domestic borrowing in the first 6 months of 2018 totalled K6,367.1 million, well above expected levels (so 61.3% of the total 2018 appropriation). Reliance on a Sovereign Bond to fix rollover risk appears to be a high risk strategy in the light of recent credit downgrades. Indications are that PNG borrowed some K480m extra in 2018 to pay expenditure arrears from 2017, casting even more doubt about the reliability of the 2017 Final Budget Outcome figures released in March.

There is no doubt that the new Treasurer is trying to improve PNG’s economic credibility. One way to do this is to continue claiming that the targets of the 100 Day Plan and the Alotau II accord are all on track. A better way is to be more transparent and truthful with what is going on and acknowledging that PNG needs some serious financial assistance to start turning around its poor economic performance. A deep hole has been dug by the O’Neill governments over the last six years and the path out is going to require more honesty and transparency than contained in this MYEFO.

Details

Revenue

Despite recent assurances from the IRC that revenues are on track, throughout the document there are clear indications that the revenue generating agencies are simply being obliged to meet 2018 revenue targets despite the PNG economy doing worse than expected. For example, despite an acknowledgement that dividend payments from the LNG project and mines will be lower in 2018, the MYEFO states “the Government is still requiring the full payment of budget dividends to the State in 2018” (p17). So Kumul Petroleum may need to borrow or draw on other reserves to match the 2018 dividend forecast despite the inevitable consequences of the massive earthquake in February. Another example is that the lifting of tax rates on over 900 tariff items in the 2018 budget was built into increased import tax forecasts for 2018. However, the impact of increased prices has had a much more dramatic impact on reducing imports than expected – which must be a real delight to domestic producers although not domestic consumers. Specifically, there has been a fall in import volumes of tobacco products by 44%, alcohol by 47% and refined petroleum by 61% between the first six months of 2017 and 2018 (p38). However, despite these extraordinary falls which would usually affect revenue forecasts, the MYEFO simply states “collections are expected to meet the annual projections” (p37).

The big revenue mover is claimed net GST collections. However, as argued in an earlier blog, it is a simple game available to IRC to delay valid GST refunds to PNG businesses to get a bigger number. By lifting the expected net GST figure by another K112.5m, the following graph indicates that GST collections are now expected to be 3.6% of non-resource GDP in 2018, a remarkable increase relative to the 2017 Budget predictions of 2.7% and earlier performance.

The government argues this is because of better resourcing etc to IRC. However, there is nothing that has changed that significantly in terms of IRC resourcing or commitment to compliance to justify such a large increase over the last 18 months. IRC has received better funding, a more flexible staffing structure and other support since 2012. It continues with its excellent leadership team that has always been committed to compliance and fairness and avoiding corruption – simply separating out the revenue components of the previous medium-term fiscal strategy does not make for such extraordinary turn-arounds. The figure on net GST collections would be much more credible if information was provided on levels of total GST collections as well as GST refunds – a very major item affecting budget bottom lines. Even then, for a flow tax such as GST (so its not lumpy like only a few payments a year such as company tax), it is reasonable to double the collections in the first six months to get a twelve month figure. Collections of net GST collections for the first six months of 2018 totalled K907.7m (Table 6 page 33). Total annual collections would reasonably be forecast to be double this or around K1,815.4m. This is some K160m below the budget forecast of K1,974.2m. However, this MYEFO, lifts this figure another K112.5m to K2,086.6m (all in Table 6). In addition to any GST refund games, based on collections by mid-year this estimate would seem to be high by around K270m.

The really big unknown on the revenue side is the over K2 billion in “Other revenue”. The MYEFO gives very little information on the implications of “sweep” – the collection of funds in accounts from various state entities. The key component are an extraordinary K800m in funds expected to be collected from the National Fisheries Agency – K400m in 2018 dividends and K400m in “Transfers not elsewhere classified” (details are provided on p 45 of the 2018 Budget Volume 1 – there are not similar details in the MYEFO). The press indicates K60m was paid in August 2017 but this is a very long way short of the K800m still in the MYEFO budget document. There is just silence on this major revenue item – and this seriously damages the credibility of the revenue forecasts.

The story about an increase in mining and petroleum taxes seems broadly plausible given lag effects (so much of the increase relates to high production in 2017). However, the increase of K142m is a long way below the absurd claims of a possible K1,500m windfall reportedly stated by Treasurer Abel in the press on July 19. The claimed increases in production levels following the earthquake are also considerably more optimistic than currently stated by private sector partners.

Expenditure

Expenditure control is being imposed on the capital budget while wage spending continues at above expected levels.

Overall expenditure levels are 41.4% of budget levels by 30 June. While this appears promising in keeping expenditure within the overall budget, the breakdown of where spending is being held back indicates PNG may be meeting a short-term target by cutting longer-term programs vital for lifting its growth rate and future revenues. Within this overall expenditure figure, the operational budget has spent 44.9% of appropriations, with Compensation of Employees (wages) running at 51.7%. In part this reflects a decision to make the 3% per annum wage increases for public servants and teachers in 2017 and 2018 which were not included in the 2018 budget. When the operational budget is out of control, it is questionable whether such payments should receive priority over other expenditure items.

Capital investment programs are running at only 21.4% of the budget. When going through the one list of projects that have received little funding (Table 22), one can better understand PNG’s budget pain and the challenges of fiscal adjustment. However, the table reveals that almost all projects were to receive K20m, K15m or K10m. Such rounded figures suggest that project identification processes are still weak with little accurate project forecasting.

At a high level, a similar disappointment is that concessional loan funding at 27.4% is at only about half the expected level. This is the cheap way to bring concessional loans into PNG. However, these require some counterpart funding, and the MYEFO acknowledges the “difficulties in providing project counterpart funding by Government that triggers loan disbursements”. This would seem a foolish way to cut expenditure.

In the expenditure detail, there are some extraordinary stories. The MYEFO Overview indicates the largest item of the K78.6m transfer between the operational and capital budgets is “District Support Grant program to specific 22 Districts in the Country totalling K55.0 million” p6. However, there is no further information made about this transfer, or how 22 Districts were chosen out of the 89 Districts in the country.

Payments from the Secretary’s Advance (Table 20 p60) once again makes for interesting reading.

A major expenditure issue is that of expenditure arrears – also discussed in this blog. No information has been given on the level of expenditure arrears, and how they have changed during the first six months of 2018. This is once again an area where not paying bills can make the budget look much better than it is. More transparency is required to improve credibility.

Interest costs have grown significantly in recent years. The 2018 budget started moving the overheads from loan borrowings (so fees for banks and agents) out of “interest” costs and into “goods and services”. This hides the full costs of PNG’s on-going annual loan borrowing. These additional costs appear to be very significant at over K200m – more than a full term of the tuition-fee free education policy. This is inferred from the difference between the interest expenses shown in some of the MYEFO tables of K1,864.7m and others indicating interest costs are now K2,092.1m (Table 19).

Financing

The 2018 budget financing strategy is increasingly reliant on the Sovereign Bond. There is now an expectation that the bond will generate $US500 million as a once-off financing mechanism in 2018 (rather than only $US200m in 2018). Given the recent downgrading of PNG’s credit standing by Moody’s and S&P in March, this would appear a high risk strategy. The Sovereign Bond has been a key claim in budgets for over five years now – and it just keeps being put off. Serious financing from an IMF structural loan package is a better and cheaper path for PNG, and would help provide some political coverage for the economic policy adjustments required on areas such as the exchange rate.

Domestic borrowing in the first 6 months of 2018 totalled 61.3% of the total 2018 appropriation of 10,388.5 million (so K6,367.1 million). This highlights the difficulties of getting non-domestic funding and the short-term nature of much of PNG’s debt. As Treasurer Abel has acknowledged, there is a serious issue is the structure of PNG’s debt portfolio.

Indications are that PNG borrowed some K488m extra in 2018 to pay expenditure arrears from 2017, casting even more doubt about the reliability of the 2017 Final Budget Outcome figures released in March. Specifically, total net borrowing totalled K812.9 million, although the deficit to 30 June was K324.9 million. As stated by MYEFO, “the difference (K488.0 million) attributed to the repayment of outstanding arrears from 2017, changes in the float at end year, as well as changes in cash balances”. No information was provided on the last two items – an area which also would benefit from improved transparency.

 

PNG’s 2017 Budget – Deficit at least K1 billion greater

Deputy Prime Minister and Treasurer Charles Abel’s credibility was on the line. Did he actually deliver on the 100 Day Plan promised reduction in PNG’s 2017 budget deficit from unsustainable levels?

The answer is almost certainly “no”. The actual 2017 budget deficit is conservatively estimated at over K1 billion larger than claimed – largely due to not paying bills or GST refunds. The conservative estimate would lift the size of the 2017 Budget deficit from 2.4% to just under 4% of GDP. However, the upper bound deficit estimate is K2 billion larger – or more than double – the K1.8 billion budget deficit reported in the 2017 FBO.

Even a 4% outcome would have better than the budget deficits of 2014 to 2016. However, the reductions were made in the wrong way. Expenditure was cut entirely in areas key for PNG’s future growth and concessional loan projects were delayed. Even using FBO figures, the blow-out in operating expenditures entirely consumed the claimed increase in revenues. This would have been bad enough. However, expenditure was likely K700m greater than revealed, and revenues likely K350m lower, meaning the operational side of the budget is not under control.

The following table summarises my best judgements on the likely impact of certain questionable elements of the FBO. There is a lot of detail in the previous two blogs which informs these judgements. Sometimes, the story is quite complex. The first column of numbers represents either figures derived from the FBO (4 items) as well as best estimates of expenditure arrears build-up and dividend shortfalls (2 items). However, given uncertainties and the lack of transparent information, I have also included a second column with a conservative estimate on likely impacts on the bottom line. Once again, this is based on judgements after having worked on budget documents over many years, and having some insights on what is possible. If I was just being suspicious about the figures in the FBO, I would be worried that the deficit would have blown out by over K2 billion. I am being conservative, and allowing for some administrative errors, it is almost certain that the deficit is at least K1 billion greater – so more likely K2.8 billion rather than K1.8 billion. Readers can make up their own minds, after hopefully being informed by the detailed analysis of the previous three blogs, of what numbers they consider should be in the right hand column. Of course, any increase in the deficit will eventually appear as higher debt levels and interest costs, assuming the government meets its legal obligations in contracts and legislation.

Summary of likely sources for understating the 2017 budget deficit

There is a legislative requirement to have a Final Budget Outcome (FBO) of the previous year by 31 March. This should be the authoritative statement of actual government revenues and expenditures. Having closely examined all the FBOs from 2010 to 2017 (and being involved in the preparation of the early ones), the 2017 FBO is the worst one yet.

One is left with a sense of unease. Some claimed cuts are just not believable such as the K535 million cut to education. The cut of K229 million to superannuation is also not credible. Games seem to have been made with trust accounts such as likely deferred payments of GST to Provinces of at least K200m. The large jump in GST collections is not credible – and can be explained by deferring GST refunds by at least K250m. There are clearly large expenditure arrears – the issue is acknowledged in the FBO but one needs to go to Parliamentary statements to get an idea of their magnitude (for example, the Public Works Minister has acknowledged arrears of K700m).

Ultimately, the final outcome is just too convenient. The Treasurer wanted a result no more than the promised 2.5% budget deficit in the 100 Day Plan and in his Supplementary Budget, and preferably something better. His Secretary delivered a deficit of 2.4%. The political convenience of the outcome combined with the games in under-reporting exporting and over-reporting revenues shown in the FBO indicate the deficit was adjusted downwards to hide the likely truth.

The Treasurer should have accepted the budget did not turn around as quickly as he had hoped, allowed a bit more time for correcting likely errors in a rushed report, and thereby maintained the previous levels of trust in a genuine, even if frank, Final Budget Outcome. However, it is still not clear that he understands the difficulty of turning around five years of poor fiscal management. The budget itself is not sufficiently transparent to deal with some key issues, especially around the level of expenditure arrears and GST refund delays. Including more information on these two critical areas in the forthcoming mid-year update (the MYEFO) would help restore some trust.

An implication of this analysis is that budget pressures will be greater in 2018. In the same way as a household which does not pay its bills on time, deferring expenditures and revenues simply builds pressure up the next year. The 2018 budget was already built on some dubious numbers – with expenditures and revenues well above the optimistic scenario by the IMF in its latest assessment. Adding at least another K1 billion to these pressures from expenditure and GST refund arrears highlights the challenge of PNG’s on-going high deficit levels.

Unfortunately, given the political situation, I do not expect the mid-year budget update due by the end of July (the MYEFO) to provide a more transparent or honest statement of the government’s actual fiscal position. One can no longer trust the government’s budget documents. PNG will likely go into APEC with many questions hanging over its true economic situation.

PNG’s 2017 Budget – Revenues – GST refund games and questionable dividends

Revenue Summary

This is the third blog examining the 2017 Final Budget Outcome (FBO) report released by Treasurer Abel. This blog examines the claimed revenue side of the 2017 budget. Overall, there is a likely overestimate of revenue in 2017 of K350m – and possibly up to K550m.

The 2017 Final Budget Outcome (FBO) claims domestic revenue has increased by K1bn relative to the 2016 budget, and matched the expectations of the 2017 Supplementary Budget. The big change was an increase in taxes on goods and services of K0.7bn, especially GST collections with a claimed increase of K0.4bn.

Unpacking these figures leads to some significant questions about the honesty of the FBO, especially on the GST side.

The best estimate of the underpayment of GST refunds is K350m – and such underpayments leads to the budget deficit being artificially lowered. A conservative estimate would be K250m. This is in addition to the K200m to K270m not transferred to the Provinces and likely held in the GST trust account until at least 1 January 2018 (mentioned in the previous blog).

The dividends figure is still subject to the concerns of previous dividend payments, especially from Kumul Petroleum from the PNG LNG equity. In 2016, the last available independent verification of these payments, the actual dividend was K100m not the K300m claimed in budget documents. This is because most of the dividends from Kumul Petroleum were simply “advances” according to the 2016 Extractive Industries Transparency Initiative report and confirmed by PNG Treasury. It is unclear when the previous “advances” will be repaid. Until there is a release of updated financial accounts (which were promised to be released by June 2018 under the 100 Day Plan), such dividend payments will hang under a trust cloud – so a likely false claim of K200m (in line with 2016 known data) and a conservative estimate of K100m.

GST Refund Games

First, why are there doubts about the large increase in GST revenues? GST is strongly connected to the health of the economy – especially sales. Reports from the business sector is that sales were flat in 2017, although there was an increase in imports. So does the jump in GST collections of K0.4 billion make economic sense?

The best figure for the GST tax base in PNG is non-resource GDP (as the resource sector is export-focused, it is generally exempt from GST). The following graph shows GST taxes (both to the national and provincial governments after refunds) as a share of non-resource GDP.

The green line indicates expected collections according to the 2017 budget. The expectation was that 2017 GST taxes would remain the same as a share of non-resource GDP at 2.6%, and then start increasing slowly over the next five years due to better administration, to reach 3% by 2022. The 2018 Budget included much more ambitious targets for GST collections – essentially expecting a 25% jump above the estimates from just a year before – shown by the blue line. This 25% jump was expected from 2018 –  a very short time-frame for lifting the whole process of better enforcement including business registrations. This was always going to be an unlikely jump as such changes usually build-up over years (still vital to do, but sequencing and timing matters). However, according to the 2017 FBO, this extraordinary 25% jump was able to occur between the 2018 budget delivered in November 2017 and 31 December 2017. This is shown by the red dot, with GST collections jumping from the 2017 2.6% figure included in the 2018 Budget to 3.3% included in the 2017 FBO.

Realistically, the only way for such a very large change to be possible in the last two months of the year is to play the game of deferring GST refunds. Tax compliance is possibly improving, but this is a slow process and had already received increased funding in previous years. Underlying economic health also did not suddenly improve – indeed, indications are that the economy was not doing well in 2017 such as the 3.4% fall in private sector credit.

The GST refunds game in 2017 requires working through a real puzzle. The complexity reflects the several components of GST and what appears to be a potentially new arrangement in 2017 that companies could reduce their company tax payments by directly claiming overdue GST refunds (an important cash management issue for many businesses). So patience is required in understanding the following detailed analysis!

The level of GST refunds is very large, so even minor games and delays can have significant impacts on budget bottom lines. Specifically, a large portion of GST collections need to be refunded – about 68% of net collections according to the Sir Nagora Bogan tax review (page 23 of its GST discussion paper at http://taxreview.gov.pg/wp-content/uploads/2015/09/15.09.17_issues.paper_.9_goods.services.tax_.pdf). 68% of net collections is just another way of saying refunds total some 40% of gross GST collections (so 1 – 1/1.68).

Let us run through a simplified example of how the GST system could have worked in 2017 based on ballpark figures contained in the FBO. On balance, the judgement is that this is the likely way the 2017 GST story unfolded.

Total GST collections could have amounted to K2.5bn – K1.25bn in collections from imported goods and services (ports collections are usually a bit over half of GST collections) and K1.25bn from sales within PNG (in-land collections). GST refunds would be expected of about K1 bn (40% of gross collections), leaving GST of K1.5bn (so K350m less than the FBO reported outcome). Of this total, the national government would receive all the ports collection share (so about K0.75bn). The provinces are due to receive 60% of land collections but this is lagged by two years so their 2017 payments are actually based on 2015 figures. Earlier budget papers indicate they are entitled to around K0.4bn in 2017, leaving the remainder of K0.35bn to the National Government. The national government would then receive a net K1.1bn (K0.75bn+K0.35bn).

The easiest way to increase GST receipts, especially at the national level, is to delay GST refunds. For example, a delay of GST refunds of K0.3 bn would flow entirely to the National Government in 2017, with some of this gain paid two years later to the provinces. In this context, some of the language of the 2018 budget is interesting – “up to end-October 2017 ….. actual refunds continued to remain low at below K200 million …. ” (page 28). Looking at relevant tables, the actual figure for refunds was K148m. This is a very low level relative to usual refund levels identified by the Bogan Tax Review – on 2016 collection levels, refunds of around K0.8 billion would have been expected by end-October – so about K0.65 billion less in GST refunds than expected.

Adding further complexity to this analysis is that companies could start claiming over-due GST refunds in 2017 – presumably an action by PNG’s Internal Revenue Commission to help with the cash flows of certain companies owed significant and over-due GST refunds. The 2018 budget stated “However, subsequent to the Supplementary Budget, revenue trends have continued to deteriorate particularly with further falls in company tax collections of around K351.4 million are now anticipated, although the GST offset impact is likely to mean that GST receipts will be higher by around K249.0 million.” (page 28).

This implies some K249m in GST refunds were being realised through the reductions in company taxes (and this should be offset through an increase in net GST collections as the GST refunds now appear as reduced company tax rather than reduced GST revenue). However, this does not clarify the level of previously outstanding GST refunds (possibly from 2016) or how much of the earlier K290m reduction in the Supplementary Budget estimate for company taxes was explained by GST refunds.

What does this all mean? The 2018 Budget figure of GST refunds being K0.65bn lower by end-October 2017 is a massive variation from the usual expected level of refunds. As company tax did fall by the K350m expected in the 2018 budget, it is reasonable to accept the PNG Treasury estimate that K250m of this was due to GST refunds (so 70%). In addition, the fall in company tax revenues between the 2017 Budget and the 2017 Supplementary Budget of K290m could also be 70% due to GST refunds – so say a further K200m (probably a very conservative assumption in the context of determining GST refund deferrals – it is not clear when GST offsets started being allowed in 2017 and most company tax revenues are later in the year). In total, allowing the K148m in refunds by mid-October to grow to K200m by the end of the year, and allowing a very high estimate of K450m in GST refund offsets through company tax, then total GST refunds in 2017 could have totalled around K650m. This is about K350m less than the usual pattern of GST refunds of K1bn mentioned by the Sir Nagora Tax Review.

Conveniently, if this was indeed the case, and K350m in GST refunds have been deferred until 2018 or later, then the level of GST collections increases from K1.5bn in the above example to K1.85bn – in line with the FBO outcome. This would explain most of the sudden jump in the above graph.

GST refund deferrals of K350m in 2017 fit very conveniently with the actual outcome. Being conservative, possibly these deferrals were only K250m. If gross GST collections were not doing well, reflecting continuing problems in the underlying economy, then the GST refund deferrals could have been considerably larger.

Future budget documents should be explicit about the level of GST refunds paid each year, as well as outstanding amounts. Such under-payments are almost identical to an expenditure arrear – a legally required payment that is deferred largely to suit the government’s cash flow position and rosy coloured budget reporting. Prior to introducing a more complete accrual budget reporting system, the budget should include explicit figures around GST refund levels and expenditure arrear levels to improve budget transparency.

Dividends or Advances? – K100m?

A feature of recent budgets has been the significant increase in expected dividends from statutory authorities. In previous years, there is growing evidence that some previously claimed “dividends” were not paid from profits and some payments were essentially loans. The clearest example is from Kumul Petroleum. In 2016, the last available independent verification of these payments, the actual dividend was K100m not the K300m (still) claimed in budget documents. This is because most of the dividends from Kumul Petroleum were simply “advances” according to the Extractive Industries Transparency Initiative report and confirmed by PNG Treasury. It is unclear when the previous “advances” will be repaid. Until there is a release of updated accounts, such dividend payments will hang under a trust cloud. In addition, the pressure on dividend payments from SOEs has been quite unrealistic in recent years, with reports that some SOEs are simply having to borrow funds to pay dividends. There is an urgent need to improve such transparency.

Point 19 of the government’s “100 Day Plan” states “Audited accounts for SOEs and Statutory Authorities for the last financial year to be produced and tabled in Parliament by June 2018”. Clearly, this timetable was not met, and raises further doubts about whether figures in budget documents can be trusted. Having these audited reports for 2017 could have removed this final element of doubt about the 2017 FBO. The O’Neill government is punishing itself with a lack of transparency.

The next article will bring together the analysis covering the “aggregate” view, as well as expenditure and revenue, to assess the likely real bottom line in the 2017 budget.

PNG’s 2017 Budget -Expenditure – Public servant’s missed superannuation payments, Provinces’ delayed GST, Education delays and increasing unpaid invoices

This is the second blog examining the very worrying 2017 Final Budget Outcome (FBO) report released by Treasurer Abel. This blog examines the claimed expenditure side of the 2017 budget. Overall, there is a likely underestimate of expenditures in 2017 of K700m.

  • • Superannuation underpayments of up to K229m – conservative estimate of K150m;
    • A likely non-payment of GST revenues to the provinces of up to K270m – conservative estimate of K200m;
    • A claimed but unlikely cut in education spending of up to K534.9m – conservative estimate of K100m;
    • An unknown level of expenditure arrears – the Public Works Minister told Parliament there were some K700m in unpaid bills in his portfolio alone (presumably built up over a couple of years). A broad estimate is made of a possible overall build-up in expenditure arrears of up to K500m in 2017 – a conservative estimate of K250m;
    • The two largest areas of expenditure increase between the 2017 Budget and the 2017 FBO are in undesirable areas – an increase in debt service costs of K251m and in administrative expenses of K316m;
    • Analysing expenditure trends was complicated as the FBO uses four different measures of government expenditure instead of the usual two. Its sectoral analysis is also inconsistent with the 2018 Budget.

Details for each of these items are provided below.

Superannuation payments – a K229m deferral or error?

Table 11 indicates that Employer’s Social Security Contributions were K441.8m in 2016 (and K330.8m in 2015 from Table 13A of the 2018 Budget). The 2017 Supplementary Budget indicated the outcome was expected to be K404.2m in 2017 – so a cut of 10% relative t o2016. However, the FBO indicates superannuation payments were only K175.2m, a cut of K229m from the 2017 Supplementary Budget. This represents one of the major areas of “expenditure saving” in the 2017 FBO. Clearly, it is at best just a cash deferral of a legal obligation to make payments, and will simply build up superannuation arrears.

Just to check the likely deferral of superannuation funding for public servants, it is noted that the 2018 budget provides K387.1m for such payments – so the K175.2m is either a definite underpayment or an error in the tables. Indeed, the FBO figure is even less than the claimed “automation payment” of K180m in 2017. The text of the FBO (page 22) claims “In 2017, the Government budgeted K90.0 million for exit payments owed to NSL. This enabled the Government to complete the reimbursements it owed to NSL for payments it made on behalf of the State to exiting members. It was also used to make payments directly to exiting members through NSL.” However, the FBO indicates these exit payments were not made.

One would have expected a stronger public reaction if this was the case. The most likely explanation is that at least some of these payments have been made, but they have not been recorded as expenditure in the FBO. Once again, this would understate expenditure and the actual size of the deficit. A conservative estimate is that there has been a deferral of superannuation payments of K150m.

GST Payments to the Provinces – under-funding by K200 to K270 million.

This one took some detective work and reflects the lack of clarity from using different expenditure figures.

Table 5 in the FBO provides revenue figures inclusive of GST and Bookmaker’s Turnover Tax revenues which are then transferred to the Provinces. The footnote to Table 5 indicates the GST gross collections figure includes K294m held in trust. It also indicates that GST transfers to the Provinces should total K450m.

Bookmaker’s Turnover Tax is relatively small at K36m in 2017 – so it is a relatively minor issue relative to GST.

Table 9 in the FBO also shows expenditure inclusive of these GST and Turnover Tax transfers. However, Table 20 shows expenditure exclusive of these GST and Turnover Tax Transfers. The difference in totals between Table 9 and Table 20 should thus indicate the level of GST and Bookmaker’s Turnover Tax to Provinces. Sounds simple.

The difference in expenditures in these two tables were close to the expected GST transfers for the 2017 Budget and the 2017 Supplementary Budget (K380m). So this was the expected level of transfers of GST to the Province.

But the 2017 FBO outcome shows a difference of only K180m. So what does this mean? As the only difference between these two expenditure results is supposed to be GST and Bookmaker’s Turnover Tax transfers to the Provinces, there appears to be K200m not transferred and not recorded as actual expenditure.

This K200m difference is actually close to the level of funds included in the GST Trust account mentioned above of K294m. It is even closer to the Table 5 footnote reference that K450m should be transferred to the Provinces, but only K180m actually was transferred – so a difference of some K270m.

It would seem that GST gross tax collections have been recorded on the revenue side, but only part of the required transfers recorded on the expenditure side. These funds were still held in the GST Trust account (there was no mention of such a balance in the 2016 FBO), thereby understating expenditure and the actual size of the deficit by between K200m and K270m.

Education – unlikely claimed cut of K534.9m?

Table 20 of the FBO provides Government of PNG funded expenditure by sectors (so it excludes donor funding). The movements for each sector between the 2017 Budget and the FBO are shown in the following graph.

The cut in Provincial funding largely reflects the decision to only around 20% of the various Service Improvement Programs to districts and provinces. This was the major saving item in the 2017 Supplementary Budget. Of course, it was politically sensitive, and the Prime Minister objected, so it actually wasn’t even mentioned in Treasurer Abel’s 2017 Supplementary Budget speech.

However, the cut of K534.9 million shown in Table 20 of the FBO between the 2017 Budget and the 2017 FBO is extremely confusing. Such a large cut seems unlikely but it is necessary to get to the bottom expenditure line of Table 20 – and thus the claims and credibility of the FBO. Possibly, some education expenditure was placed in the “Miscellaneous” category, but this does not match the movements in this category (ie it didn’t go up by an off-setting K522m as part of the Supplementary Budget).

The more likely explanation is that the Tuition Fee Free Education payments are made through a trust account. Whenever you see “trust account”, there is great scope to vary the timing of cash payments. The original budget for such payments was K602m. There were many reports well into 2018 that schools had not been paid all their TFF payments for 2017, although there were also reports that most schools had received at least two of their four payments.

One is left uncertain as to what is going on here. This is a very major indicated cut – nearly 5% of the entire budget. Almost certainly, a significant portion of TTF payments were made, but a significant proportion were not paid. There is scope for cutting back on other education payments (universities seemed unhappy with the gap between the promised budget and fund received in 2017). However, it is impossible to tell how much of this represents an actual cut in 2017 expenditure.

Given the widespread reports of delays in payments of the TTF, as well as underfunding for universities, a conservative estimate is that K100m of this K522m saving represents a deferral of education expenditure until 2018.

On the positive side, there were increases in areas such as health, as well as law and justice. At least this represents a small claw-back from the massive cuts since 2014.

On the negative side, the biggest areas of increase are in debt services and administration – undesirable areas of growth. There are some signs that the government is taking some action on the administrative costs blow-out. Experience with reform efforts in the mid-2000s, such as rationalising the size and number of public service agencies, indicates how difficult it is to deal with entrenched bureaucratic interests. The expansion of teaching salaries seems inevitable, both in terms of the number of teachers required to deal with increased school enrolments, as well as delivering some long-overdue pay rises. Rationalising the number of government agencies is potentially complicated by the linked interests of Ministers in having a separate department and the political pressure to have lots of Ministers.

Expenditure arrears – K250m to K500m

Budget documents make it very clear that there are large expenditure arrears by the PNG government. However, there is little information on the actual level of these arrears.

The simplest way to reduce expenditure is not pay bills, even when services have been provided. These arrears are unquestionably very substantial. For example, the Minister for Public Works recently told parliament that his agency had K700m in unpaid bills. The Port Moresby Chamber of Commerce and Industry recently lobbied the Treasurer about the documented over K290m unpaid bills owed to its members. This is a very significant level of arrears.  Growing frustration with this issue suggests these arrears continued to build during 2017.

Even the 2018 Budget states on p94 “Subsequent to the 2017 Supplementary Budget, revenue trends have continued to weaken and, although expenditures have been contained somewhat, arrears have continued to mount”. Given even the two examples provided total some K1 billion in arrears, it is possible the figure is double that. Assuming a 25% increase in the level of arrears in 2017, the implied figure is around an increase of K500m in 2017. Being conservative, this figure is halved to estimate an increase in expenditure arrears of K250m.

Overall, the expenditure side of the 2017 FBO underestimates actual expenditure liabilities by K700m based on a conservative estimate. The upper range is the 2017 FBO underestimates expenditure by slightly over K1.5 billion.

Such expenditure under-reporting seriously damages the credibility of the 2017 FBO by Treasurer Abel. PNG’s budgetary position is likely to be significantly worse than officially reported.

The next blog will explore the revenue side of the budget before a final blog making an overall assessment.

PNG’s 2017 Budget – delaying cheap loans from ADB and World Bank

The O’Neill/Abel government continues to refer how new loans from the ADB and World Bank will help with PNG’s budget and foreign exchange problems. But why did they let K418 million in cheap loans slip through their fingers, especially on good projects already approved under PNG’s planning processes?

This is one of many questions raised by Treasurer Abel’s 2017 Final Budget Outcome (FBO) report. The 2017 FBO is a fascinating and worrying report – one that was clearly rushed given the number of errors in the document. This is the first of four blogs that will closely examine the document, its strengths and its weaknesses.

For those not wanting to wait to read through to the end of the four blogs, the conservative estimate is that the 2017 deficit is at least K1 billion greater than claimed by the 2017 FBO.

This blog will look at the “aggregate” view of the FBO, the second will focus on expenditure, the third on revenue, and fourth will make an overall assessment.

Aggregate Perspective

When looking at claimed total levels of government expenditure and revenue, it is interesting that the 2017 Budget outcomes matched that of Abel’s predecessor, now Opposition Leader Patrick Pruaitch, rather than the figures contained in the 2017 Supplementary Budget much trumpeted by the new Treasurer.

Specifically, total revenue estimates were K11.5bn in the Pruaitch 2017 Budget, 11.0bn in the Abel Supplementary Budget and the 2017 FBO outcome was K11.5bn.

On expenditure, total expenditure estimates were K13.3bn in the Pruaitch 2017 Budget, K12.9bn in the Abel Supplementary Budget and the 2017 FBO outcome was K13.3bn.

At an aggregate level, former Treasurer and now Opposition Leader Patrick Pruaitch was more accurate than the current Treasurer Charles Abel.

However, the movement in these aggregate figures mask a significant shift between domestic and donor funding. Increased donor funding was K471.8m between the Supplementary Budget and the 2017 FBO. Some would say this reflected a shift to increased aid dependency. Possibly it just reflected a more accurate prediction of donor flows.

On domestic revenues and expenditures, the Supplementary Budget was close to FBO figures.

Aggregate Perspective – Changes from 2016 to 2017

The 2017 FBO provides some interesting information on what happened in the budget between 2016 and the claimed results for 2017.

At an aggregate level, comparing 2016 outcomes to claimed 2017 outcomes, revenues have increased by about K1 billion. All of this has been absorbed by an increase in operational expenditure of K1 billion. However, there have been reductions of K908 million in capital expenditure and K418 million in the use of concessional loan projects – both undesirable but “easy” ways to cut a budget.

These cuts in longer-term investments are K263 million greater than the operational expenditure blowout, and when combined with revenue increases, the budget deficit is claimed to fall by K1.3 billion.

The following graph provides a break-down of key movements in budget aggregates between the claims of the 2017 FBO and 2016 outcomes.

Between 2016 and 2017, ‘Tax Revenue’ increased by a claimed K720m, ‘Other Revenue’ by K310m and Donor Grants by K10m for a total increase of K1,040m.

All of this revenue increase has been absorbed by an increase in operational expenditure of K1,053m.

However, there have been reductions of K908m in capital expenditure and K418m in the use of concessional loan projects. These are both undesirable but “easy” ways to cut a budget.

These cuts in longer-term investments total K1,326m and fully explain the claimed fall in the budget deficit  by K1,302m.

Frankly, this is not the type of structural improvement one is looking for when lowering the deficit. Having all of the reduction based around capital expenditure is of concern as it lowers (assuming the funds where well spent on roads etc) PNG’s future growth potential.

Of particular concern is the cut in concessional loan expenditures of K418m. This is likely to be funding from sources such as the World Bank and Asian Development Bank. Such programs are cheap – interest rates of 2 to 4 per cent are much lower than the costs of borrowing on from PNG’s domestic finance markets (where rates are 8 per cent for one year Government Bonds and around 12 per cent for longer-term Treasury Inscribed Stock) or any possible Sovereign Bond. They are also programs that have generally gone through strong and transparent project design and contracting methods.

This appears a sub-optimal policy. This is the type of financing sources that PNG should be seeking to increase rather than cut as they did in 2017. It was important to reduce the historically high budget deficits of recent years. However, doing this by slashing infrastructure programs and giving up concessional loans is difficult to explain.

The next blog will examine in closer detail why government expenditure (or at least build-up in liabilities) is likely to be considerably greater than claimed by the FBO. The following blog will then examine why revenues are also likely to be lower. The fourth and final blog examining the FBO will then assess the likely actual outcome for budget policy in 2017. For those not wanting to wait to read through to the end of the book, the conservative estimate is that the 2017 deficit is at least K1 billion greater than claimed by the 2017 FBO, with an upper estimate of a K2 billion understatement of the size of the budget deficit.

PNG LNG Technical Analysis of “Underlying Growth” Sensitivity

The “Double or Nothing” Jubilee Australia report on the PNG LNG project generated considerable interest and comment. Included within that was a request for more detailed information on the sensitivity analysis of the report (this analysis was mentioned on page 17 of the report, with 2 key alternative assumptions covered in Footnote 22). This information is provided below.

Consistent with the professional standards of “Jubilee Australia”, linked to the think tank of the “Australia Institute”, the draft report had to go through a peer review process. This earlier peer review process was concerned the analysis of nine alternative growth scenarios across two time periods was too long and technical for the key audiences for the report – and that was not economic research professors!

However, I considered enough detail was provided on page 17 of the “Double or Nothing” report to make clear for any technically minded reader (along with the transparent detail of Table 5) that on any reasonable assumptions of underlying growth rates, ACIL-Tasman’s muddled model lacked credibility and the conclusions from the Jubilee Australia (JA) were vastly more robust, transparent and clear.

The information included in the draft report (as ‘Appendix 2’) is below. In addition, looking at all the macro-economic indicators (rather than just GDP), the ACIL-Tasman analysis would have required negative growth every year for nearly a decade to support its claims of massive benefits.  This is just not credible – the model was seriously muddled.

Looking through the final version of the report, there was a proof-reading error. As part of the peer review process, it was considered the term “baseline” was not clear enough. So through-out the 45 pages of the report the term was removed and more detailed language around “actual relative to underlying growth path” was included, with very clear indications of how that underlying growth path was determined. However, this update was not included in the relevant column heading in Table 1 (it was in Table 4 and the detailed Table 5) as well as one of the graphs. Apologies for not picking that up.

“Appendix 2: Sensitivity analysis for GDP

A key element of the PNG LNG economic model was comparing predicted outcomes relative to a “baseline”. Specific information is not provided on that baseline – it is the level of the economy expected at a particular point in time without the project compared with the same point in time with the project.

The basis for determining the baseline was discussed in Box 1 [a simplified version is now Appendix 2 of the Jubilee Australia report], especially for the most publicised “doubling of GDP” prediction.

The impacts of choosing different growth rates or different starting levels is explored in this sensitivity analysis. Different growth rates, from minus 10 per cent per annum through to a positive 9 per cent per annum, were used. The 2008 starting year was also compared to having 2012 used as the starting year. The results of this analysis are summarised in the Graph xx below. To get a figure close to the PNG LNG “doubling of GDP” claim which was frequently used by project proponents, the model would have had to assume the real growth rate was minus three per cent for every year from 2008 forward. This would have involved a decade of deep recessions. If 2012 was the base year, a negative growth rate of minus ten per cent per year would have been required. Clearly, this assumption did not match with the reality PNG or of almost any economy in the modern world. Even if a growth rate equivalent to just the population growth rate of 3 per cent was chosen, this still would have produced an outcome of only 26% above baseline from a 2008 base year, or 17% above baseline for a 2012 base year – still only a small fraction of the PNG LNG prediction of 97%. Even using a much more conservative growth figure (and one considered unrealistically low as explained below based on evidence from the time) this does not have a significant impact on the key theme that the PNG LNG model wildly over-stated the actual gains from the PNG LNG project.

The following table examines the issue of the appropriateness of using a figure of 4.8% for the GDP growth rate – the average of the three years 2007 to 2009. Using the available data of all three-year weighted averages, it is only the years 2011 to 2013 which produces a lower real growth figure – the other six years are higher. Indeed, over these eight time periods, the average real growth rate was 6.1%. Comparisons are also made with three year average growth rates assumed from budget estimates at the time of the PNG LNG report. Once again, only one three-year average figure is less than 4.8% used in this report – the other five are higher and the overall average is 5.1%. In summary, the PNG economy was growing at around 5% in real terms during most of the 2000s. This was consistent with budget estimates at the time. It also implies a real per capita growth rate of just 2% per annum – presumably an absolutely minimum rate to improve PNG’s prospects and a rate that has been exceeded by PNG’s Asian neighbours. Using the 4.8% real growth assumption is considered robust, if not conservative, and using even lower growth rates would not change the fundamental story that the PNG LNG economic analysis of impacts is a very, very long way from what actually happened.

PNG LNG project – detailed sectoral impacts

Executive Summary

The PNG LNG project is having a very negative impact on the PNG economy during its current production phase (2014 to 2035?). The most likely explanation for this is the poor “resource curse” economic policies  by the O’Neill government induced by the project.

These negative impacts will continue to grow and by 2020 will swamp the initial GDP boost from beginning gas exports in 2014.

The project had a positive impact on the non-resource economy in the construction phase (2010 to 2014) – slightly greater than the level predicted by project partners of 5%. The boost to the LNG sector was almost exactly as expected. In 2016, its direct impact on GDP is a gain of some 14.4% – more than off-setting falls in the mining sector.

However, the policy implications of the project have been poorly handled by the O’Neill government. There was both a failure to capture the gains during the construction phase, as well as the introduction of policies than run directly opposite to recommendations on how to handle the potential “resource curse”.

Budget policy fell into the “presource curse” of spending before revenues were received and PNG has experienced its worst budget performance since Independence.

The exchange rate was locked in at an unsustainable level leading for foreign exchange shortages that are crippling the economy – reversing lessons from the 1990s.

Poor investment choices were made such as buying into Oil Search.

In a self-defeating attempt to support the agriculture and manufacturing sectors, PNG is moving back down a path of protectionist policies that will damage growth prospects.

Examining PNG’s policy responses over the last six years, these adverse policy choices are clearly linked to the PNG LNG project and inflated hopes of its potential.

The PNG economy should be able to sustain an underlying growth rate of 5% per annum. It did so with better economic policies, as well as some luck, in the period after the structural adjustment programs in the early 2000s. PNG’s people need better policies to return to at least a 5% growth path. Growing at 5% per annum for the next 15 years will simply return PNG to the level of economic welfare (real non-resource GDP per capita) that it had 35 years ago.

The easy path for hitting a big overall GDP figure by 2024 is to focus on more big resource projects – the potential resource “super-cycle”. A more sustainable and inclusive way forward is to focus policy attention on the non-resource elements parts of the economy. This is harder, and more indirect, but a much better option than the current boom/bust experiences of PNG’s resource curse. New resource projects could be promoted if they sustain-ably increase PNG’s non-resource potential. If the benefits mainly go overseas, then other options should be actively explored.

Key Results

The following graph shows the comparisons between  PNG Treasury estimates of resource and non-resource GDP and a 5% trend line from 2008 (which is a conservative base as it was a recession year in PNG according to the PNG National Statistics Office with a negative change in GDP – reflecting the Global Financial Crisis).

The gap between actuals and the underlying trend indicate how the PNG LNG project, and the poor “resource curse” policies that it helped induce, have impacted on the overall economy. These differences are summarised in the graph below.

Overall, the important non-resource sector of the economy grew above an underlying trend growth path of the economy by K3 billion in 2013 – a gain of 8%. This suggests the ACIL-Tasman analysis estimates of a 5% flow-through to the remainder of the economy were slightly under-estimated.

At the end of the construction phase,  the non-resource economy had moved below its underlying trend growth path by K1 billion in 2016 – so a fall of some 2%.

However, the turning on of the gas taps means that the way economists measure GDP (which has many limits) saw a jump in the resource sector of K7 billion higher than trend growth.

By 2021, using PNG Treasury GDP forecasts from the 2018 Budget, the non-resource economy would be some K6 billion lower than the underlying growth path, more than off-setting the still positive contribution from the resource sector (including PNG LNG) of K4 billion.

Key Sectoral Results

As expected for a new major resource project, the likely major indirect winner was the construction sector which has and continues to do well –  an overall gain of some K1.5 billion per annum during the construction phase and still an estimated K1 billion by 2021. Other service sectors closely linked to the resource sector did well, although the gains are slowly receding.

Also as expected, losers were other parts of the economy involved in international trade – especially agriculture and manufacturing. These sectors have been particularly hard hit and have fallen to well below underlying growth trends.

More surprisingly, based on PNG Treasury figures, the project is having negative impacts also on the wholesale and retail trade sector, the real estate sector and (after the construction phase) even the finance and insurance sectors. These adverse impacts are likely driven by the resource curse policy responses induced by the project, especially the foreign exchange restrictions limiting imports and foreign investment.

Within the resource sector itself, the petroleum and LNG sector has done very well while the mining and quarrying sector has declined. This is an expected impact from a major new project (competition for scarce skilled labour, higher exchange rate costs) but given the relatively small size and concentration of the sector in just a few mines, it largely reflects the general decline in productivity of old mines (especially Ok Tedi) not being offset by new mines (such as Ramu Nickel).

These changes highlight how differently the PNG LNG project has impacted different parts of the economy.

PNG’s peoples would have  been better off without the O’Neill government “resource curse” policies. Sections 5.4 to 5.7 of the Jubilee Australia report goes into considerable detail on how these poor policies were induced by the PNG LNG project.

These poor policies are keeping PNG below its growth potential conservatively estimated at 5% per annum. By 2016, and probably by 2015 based on new NSO GDP figures, the non-resource sectors were doing worse than if there had been no PNG LNG project and poor associated policies. For GDP as a whole, these negative policy effects are swamping the actual boost from LNG exports by 2020.

Overall, this analysis supports the earlier conclusion from the Jubilee Australia analysis that “There were larger indirect benefits during the construction phase, and some individuals and companies have done well, but overall the economy is in a worse situation than if
there was no PNG LNG project.”

Broad Methodology (details in technical appendices below)

This analysis builds on an earlier analysis of the PNG LNG project by Jubilee Australia (JA) which I co-authored with Luke Fletcher – see “Double or Nothing” report here. The focus was on a 2008 ACIL-Tasman economic analysis commissioned by ExxonMobil. In particular, it examined the predictions of expected gains relative to an underlying growth path in 2016 (the short-run predictions).  These included predictions that GDP would be double the underlying growth path in 2016 – this analysis confirms the gain was actually about one-tenth that prediction – so about 10% rather than the absurd 100% predicted.

The JA report received considerable coverage – for example, it is the largest Business News story on PNG Loop in  2018. It was misunderstood by some, possibly deliberately in an attempt to discredit the analysis. There have been some subsequent clarifications (see here and here) such as the fall in oil prices does not explain the broken promises of the project, and a lack of understanding that the analysis did not deny there were some benefits for many, but the helicopter view of the whole economy indicated that there were net adverse impacts due to induced poor policies.

This analysis also includes a different but related approach. Rather than assessing the ACIL-Tasman predictions (which were outrageously optimistic and flawed), the focus is on how the PNG LNG project has affected PNG’s sectors through time, with a particular focus on 2013, and current PNG Treasury predictions for 2016 and 2021. These are compared with a reasonable underlying policy growth policy goal of 5%. The earlier ACIL-Tasman analysis was based on a model of the PNG economy that was outdated and did not directly link to current measures in the PNG National Accounts. This analysis is based on current PNG Treasury and PNG National Statistics Office views of the sectors of PNG’s economy – including details omitted in the ACIL-Tasman analysis.

In making an assessment of the impact of a major new project such as PNG LNG, there is a need to form a view on how the economy would have gone without the project. This is why the ACIL-Tasman also used an “underlying growth trend”. No economy stands still – if there were no more resource projects in prospect, the PNG government would focus on other areas to get the economy going. If a government didn’t look for other ways to get the economy growing, they would have little chance of being re-elected (unless they undermined election integrity). The focus would move to other potentials of the PNG economy – its people and its physical characteristics.  Relative to other countries, PNG actually has greater absolute advantage in areas such as cultural richness, biodiversity and soils than it has in mineral, petroleum and LNG riches.

This analysis assumes PNG has an underlying growth rate of 5%. This is in line with trends over 2007 to 2009 – immediately prior to the large ramp-up in PNG LNG construction activities (there were activities prior to this but they were small in terms of the economy). 5% is in line with PNG Treasury expectations in 2007 and 2008 based on there being no PNG LNG project (see technical appendix below).  Even with a 5% growth rate, it will take 15 years simply to get back to the real non-resource per capita level in 1980. A 5% growth rate is also the target set by PNG’s Opposition in its response to the 2018 Budget.

Following on from the Jubilee Australia analysis, this blog is an overall, “helicopter” view of impacts of the project based on economic sectors. There have clearly been a range of direct benefits from the project ranging from employment opportunities, local contracts, some revenues (although much less than expected), and provision of local community facilities including health provided by project partners such as Oil Search in the Tari hospital. At an economy-wide level, these direct benefits need to be measured also with other indirect benefits and direct and indirect costs (including those highlighted by the JA report “On Shaky Ground“).

This helicopter view examines how each sector of the economy has performed since 2008 relative to an assumed underlying growth rate trend of 5%. Differences above or below this 5% underlying growth trend provide insights into the direct and indirect impacts of the PNG LNG project. Some sectors have done well but most have not, especially as the project moved from its construction phase to its production phase.

Technical Appendix

  1. Basis for 5% growth rate

The following table examines the issue of the appropriateness of using a figure of 5% for the GDP growth rate.  The table is based on an earlier appendix in the Jubilee Australia (JA) report but was omitted for reasons of length. The JA report used a figure of 4.8% for GDP as a whole and 5.3% for non-resource GDP. These figures were derived from the average of the three year real growth rate prior to the start of the construction phase of the PNG LNG project ie 2007 to 2009.

Using  available data of all three-year weighted averages, it is only the years 2011 to 2013 which produces a real GDP growth figure lower than 5% – the other six years are higher. Indeed, over these eight time periods, the average real growth rate was 6.1%. Comparisons are also made with three year average growth rates assumed from budget estimates at the time of the PNG LNG report. Once again, only two three-year average figure are less than 5% used in this report – the other four are higher and the overall average is 5.1%.

The Governor of PNG’s central bank recently indicated that he considered PNG’s sustainable annual growth potential was 6 to 7%  – see here.  On the other hand, the most recent IMF analysis of the economy (2017 IMF Article IV) dropped the long-run potential growth estimate from 3.4% to 3.1% – presumably  reflecting what is possible on current poor policy settings.  PNG’s development plans and aspirations are based on growth rates in the 7 to 8% range (and even higher if the Vision 2050 aspirations are still in place). PNG’s Shadow Treasurer, in his response to the 2018 Budget, indicates that the PNG Opposition has an economic target of a 5% growth rate for the non-resource elements of the economy within three years of gaining office.

A 5% growth target is a key choice in analysis. Does one base growth projections on a period of good growth in the PNG economy relative to its historic averages? 5% has been achieved. Such a level is the minimum required for at least 15 years to bring PNG back to its level of economic welfare per capita in 1980.

In summary, the PNG economy was growing at around 5% in real terms during most of the 2000s. This was consistent with budget estimates at the time. It also implies a real per capita growth rate of just 2% per annum (so 5% growth less 3.1% population growth) – presumably an absolutely minimum rate to improve PNG’s prospects and a rate that has been exceeded by PNG’s Asian neighbours. Using the 5% real growth assumption is considered robust, if not conservative, and using even lower growth rates would not change the fundamental story that the PNG LNG economic analysis of impacts by ACIL-Tasman is a very, very long way from what actually happened.

2. Implications of different trend growth rates and GDP estimates

This section examines the implications of using different underlying growth rates as well as different GDP estimates.  In the following graph, four possible growth rate trends are examined – 3%, 4%, 5% and 6%. These are shown in the dotted and dashed lines.  The focus is on implications for the important non-resource elements of the economy.

As can be seen from the graph, and as expected, if the underlying growth trend is higher at 6% (the top dotted green line) then there is even a larger gap in lost opportunities. With lower trend estimates, the measured impact of the PNG LNG project and current policy settings are considered more positively.

Another factor in making the above assessments is the actual size of GDP. The figures in this paper use the PNG Treasury estimates from the 2018 Budget (Table 1, Appendix 3, Volume 1). However, the NSO has indicated that the estimate for 2015 overstated nominal GDP by around 10% or K5.1 billion.  This is a massive variation, and confirms earlier suggestions that the PNG economy was actually in a recession in 2015. In addition, following a gain in 2016, recent data from BPNG indicates the economy could have slid again into a recession in 2017 based on falling employment, sales and private sector investment – although tax revenue growth and import growth suggest at least some positive growth. Putting these together, with the NSO figures built into non-resource GDP and a further K2bn reduced from the 2017 Treasury estimate, we get “updated GDP” estimates as shown by the solid green line.  In this case, the PNG economy has fallen even further behind the 5% underlying growth line, significantly below the 4% underlying growth line (purple dot dash) and only just above the 3% growth line (which is less than PNG’s population growth rate).

This analysis has applied a consistent growth trend of 5% across both the resource and non-resource components of the economy, as well as for each sector. In the JA report, each sector had its own trend growth rate based on the period 2007 to 2009 but many sectors were not covered by the ACIL-Tasman analysis – largely because information for many sectors was only released by the NSO in 2016. Using the new NSO sectoral information (which is now used by the PNG Treasury GDP estimates for the first time in the 2018 budget), the average annual sectoral growth rates from 2007 to 2009 are shown in the table below.

When using some of these figures, especially when projecting out for thirteen years from 2008 to 2021, it was unlikely that some sectors would continue growing so strongly. This is especially the case for the 26% real annual growth figure for the “Information and Communication” sector (a sector not covered in the ACIL-Tasman report). Doing so would imply the  sector would grow 20 times larger over the course of 13 years. The Treasury Budget figures indicate the average growth rate from 2010 to 2021 is exactly 5% per annum for this sector. The over 10% real growth per annum figure for the construction sector was also unlikely to be sustained for such a long period considered by this analysis (13 years). On the other hand, the low growth figure for the agriculture sector would hopefully have been improved upon (the ACIL-Tasman report only looked at agricultural export figures – not the national account figures for agriculture). There is also the inevitable mathematical issue that growing sectoral components at very different growth rates means that they do not add to the aggregate figure as the composition of GDP moves further away from measured actuals.  This was less of an issue when examining the ACIL-Tasman analysis as it did not cover all sectors – so there was no opportunity to examine the sectoral information with key aggregate information. Using a consistent 5% growth path does impact some of the JA analysis for particular sectors, especially those with sectoral growth rates significantly different to 5%. In particular, the construction sector is estimated to be above a 5% growth trend by a significant amount, with small gains to government, health and education services. However, the overall story that the non-resource sector has fallen below its growth potential by 2016 remains the same.

The analysis has also used 2008 as the base year, rather than using the average of the years 2007 to 2009 for simplicity. All values are in 2013 constant prices rather than 2016 prices so that it is easier to compare with the PNG Treasury figures (Table 1 Appendix 3 of the 2018 Budget Volume 1 is all in 2013 prices). The latter changes have no impacts on the earlier results.

 

 

 

 

 

 

 

PNG’s K100bn GDP Deceptions

PNG’s Post Courier on 4 June carried an article indicating the Prime Minister considered the PNG economy could reach K100 billion by 2018.

Hopefully, this was mis-reporting. As an accountant, one would hope that the Prime Minister of PNG would understand numbers well enough to know that there is no prospect at all of GDP reaching this figure by 2018, or even 2020. Stating otherwise would be deceptive and massively contrary to all previous official estimates from his government and the IMF. One would be reminded of the problems created for Greece with their use of fake statistics.

Official statistics

So how does this claim of K100 billion compare to other official estimates?

The PNG Treasury in its 2018 Budget statements indicated its estimate for the economy in 2018 was K80 billion (Table 1 of Appendix 3 of Statement 1).  Unfortunately, this figure was estimated before PNG’s National Statistical Office down-graded the size of PNG’s economy by K5.1 billion in 2015 (bulletin of 9 March 2018). Such a reduction is likely to flow through into future year figures also – so the PNG Treasury/NSO number is more likely to be around K75 billion in 2018.  The IMF’s estimate for 2018 is still slightly lower at K73 billion. None of these figures have included the latest very worrying economic figures from the Bank of PNG – a fall in employment, retail sales and negative growth in private sector investment which suggest a distinct possibility that PNG returned to a recession in 2017 – see here. A comparison between the various numbers is shown in the following graph:

Is the economy doing well?

The article also suggested that the Prime Minister considered such a high GDP figure indicates that the economy is doing very well. Only naysayers would be disagreeing.

Unfortunately, apart from the 2018 GDP reality being at least 20% lower than the figure quoted for the Prime Minister, economists consider issues other than just the nominal size of GDP when thinking about how an economy is going.

Nominal GDP is a very poor indicator of economic welfare, especially in a country  such as PNG where the resource sector is largely foreign owned. There is also a need to take into account changes in prices – prices are expected to increase by 56% over the decade, meaning less spending power for every Kina. Every year, there are also more mouths to feed – an additional 250,000 per year according to the NSO.

Putting these other elements together means a better way to judge how the economy has gone since, say 2010, is to look at real per capita elements of GDP as done in the following graph:

The green area is the best reflection of actual movements in living standards over the 2010s. It represents non-resource GDP, so it picks up the agriculture sector, construction, trade, utilities, services and government. Note that it is by far the largest part of the economy – averaging some 84% of the economy since Independence.  The decade started well, assisted by the construction phase of the PNG LNG project, with positive increases in non-resource GDP per capita totaling 7%. With the 2015 recession, these have quickly dropped away. Current growth projections of 3.5% in the non-resource economy, slightly above population growth rates, means that the Treasury is predicting very small improvements in the few years up to 2020.  But in recent years, PNG Treasury’s growth forecasts have been excessively optimistic – so this improvement is just a forecast.

The blue shaded area indicates the contribution from the mining sector. It has stayed fairly stable over the decade. The orange shaded area represents the impact of the PNG LNG project, especially the massive increases in 2014 and 2015. However, the benefits of this have largely gone overseas to date (there was more capture of benefits during the construction phase).

Altogether, the graph represents movements in total GPD per capita. So between 2010 and 2020, there has been an increase of 6% in total real GDP per capita – or 0.6% per year.  Not very much, and all that driven by the PNG LNG sector.  On the other hand, the real measure of economic welfare for the people of PNG has gone backwards by 5%, so negative 0.5% each year.

Conclusion

It is very positive that the Prime Minister attended the launch of a strategy for the development of statistics in PNG. PNG has suffered from a lack of good statistics. For instance, in the latest APEC regional economic report, PNG is mentioned nine times.  Unfortunately, on seven of those times, it was simply to note that PNG did not have the relevant statistics available.

One must not only collect numbers, one must understand them. Looking at PNG’s limited economic statistics over recent years are not at all encouraging. Saying there are very clearly severe problems and poor outcomes is simply being realistic – it is not being a naysayer. PNG’s two international credit ratings agencies have had a look at these available statistics and their response was an unprecedented down-grade by both within a month of PNG’s credit rating. Reported claims by the PNG Prime Minister that the economy is doing well and could reach K100 billion in 2018 simply undermines PNG’s economic credibility and damages the chances of securing an international sovereign bond.

 

 

 

 

PNG Monetary and Exchange Rate Policy update May 2018

Recent PNG Monetary Policy Developments

There has been some good, bad and confusing news from the Governor of PNG’s central bank, Loi Bakani in recent monetary policy statements (see here and here).

In summary, the good news is:

  • PNG’s central bank has committed to end its imprudent and risky practice of printing money to finance budget deficits;
  • The balance of payments has improved but there have been massive changes both up and down;
  • Possible moves towards a more flexible currency – but still a long way to go to fair value and political obstacles;
  • Inflation at 4.7% seems well under control.

The bad news is very worrying downward trends in key economic indicators:

  • A collapse in employment growth to a negative 4.8% in 2017, building on three years of negative growth – this is a sustained employment downturn and bad news for jobseekers in PNG’s already small formal employment wage sector;
  • Private sector lending collapsed by 3.4% in nominal terms (so closer to 8% after allowing for inflation) – this represents less domestic investment into businesses, houses, cars etc;
  • Foreign investment into PNG continues to decline, despite a few high profile, government-supported projects – unless PNG becomes a more attractive place for private sector investment then the possible gains of APEC will come to nought;
  • Sales figures are negative even in nominal terms – with an especially bad second half of 2017;
  • Key information continues to be hidden – where are even the 2015 National Accounts?

The “confusions” are as follows:

  • Little clarity on use of a K492.4 million cheque float in 2017 that was used to pay for government expenditure as well as much more reliance on private domestic purchases of government securities than expected;
  • New repo arrangements now require government security backing; and
  • Silence on the worst downgrade in PNG’s credit ratings in its history – possibly violating the Central Bank Act 2000.

Overall, this was a much more balanced set of monetary policy statements than we saw in 2017. There were no foolish attempts to try and defend the indefensible – such as the attempt to blame foreign exchange shortages on the banks and to claim all “printing money” actions were being fully offset (see here and here and here). In particular, the moves away from the “slack arrangement” and more flexibility on the exchange rate are very welcome, and there are some positive monetary macro-economic signs (athough still too much complacency on falling private sector credit).

However, the overwhelming message from these recent statements is that on most indicators of economic performance, 2017 has likely been a very bad year yet again for PNG. This would build on what was likely to have been a very severe recession in the non-resource sector in 2015, a likely modest recovery in 2016 post-drought, and a likely return to recession in 2017 (although tax collection figures are more promising if they can be believed – I fear they can’t). PNG needs to turn this around – and even more urgently than currently being done on the fiscal and monetary fronts. However, even if these macro-impediments are removed, PNG also needs much more concerted action on structural policy changes to improve the health, vibrancy and inclusiveness of the economy. Moves towards more protectionist policies (such as the tariff increases in the 2018 budget and targeted infant industry attempts which have failed so badly for PNG in the past) are still very worrying examples of policy positions that are strangling sustainable growth. Increased regulations in areas around foreign exchange management and foreshadowed legislation in other areas are also steps away from improving PNG’s poor ratings on creating a conducive atmosphere for business. And work is needed to try and reverse what seems like growing moves to punish anyone in government that dares suggest a contrary position – whether it be a well-respected manager in public works raising questions about road construction costs, or even a former vice-chancellor seeking greater financial accountability.

There are many parts to the complex puzzle of creating a successful state worthy of the people of PNG. The worried views of international credit ratings agencies, leading to the combined worst downgrades in PNG’s credit rating history, suggests the government still needs to be acting more urgently and on a wider front to un-do some of the damage it has done in recent years.

Details

Good news

1.       Possible end of printing money

The best news was contained in the March Monetary Policy Statement where the Governor indicated that from April the central bank was going to stop effectively printing money to finance the government’s deficit (known as the “slack arrangement”). Indeed, the central bank says it repaid K430 million in government securities in 2017 (although it did buy K51.3 million in the December 2017 quarter). This is an important development as it lowers potential inflationary risks and helps clarify that the role of the central bank is about monetary policy, not supporting government deficits. However, there are some announcements that may indicate some more back-door methods for supporting budget deficit financing (see “confusions” below).

2.       Balance of payments improvement

Another piece of good news is that there was an overall balance of payments surplus in 2017 of K350 million, up from K30 million in 2016. Within this figure were massive increases in the current account surplus (from K16 billion to K20 billion) nearly fully offset by massive increases in the capital and financial account deficit (also from K16 billion to K20 billion) – the increased surplus disappears in the rounding).

3.       Moves away from fixed exchange rate at unfair value

Another piece of good news is that there appears to be at least a very slow movement away from a de facto fixed exchange rate against the US dollar – although most of this occurred in the first few months of 2018. Of course, the move away from a freely convertible currency in PNG starting in mid-2014 has been a major reason for undermining non-resource sector growth and represents one of the poorest policy choices of BPNG in its history. Hopefully, the reform path will accelerate back to a fair exchange rate (recently estimated by ANZ as between 0.23 and 0.25 USD to Kina). However, this is not a popular move in PNG and politics may intervene – surprising as it would bring significant benefit to the vast majority of people in PNG. If a full move back to a competitive exchange rate is made, adjustment measures will be required – and these would be assisted if PNG reached out for a major structural adjustment policy package of closer to USD6 billion rather than the paltry USD0.6 billion being discussed.

4.       Inflation under control

The final piece of good news is that inflation appears to be well under control, with the headline inflation rate falling to just 4.7% in 2017. Apart from some very specific effects (such as the earlier spike in buai prices), this declining figure probably reflects the lack of demand in the economy due to poor business and household conditions.

Bad News

The worst news is that on almost all economic indicators, the non-resource parts of the economy are still really struggling. Indeed, there is growing evidence that the key non-resource sectors in PNG are probably in their most sustained recession since Independence, although probably not their deepest.

1.       Employment collapses

The drop in private sector employment in the non-mineral sector of 4.8 per cent in 2017 is catastrophic news. This would be the worst drop in employment since 2001 (a 5.5% fall) and slightly higher than the 4.6% fall in 1995. However, both of those previous examples were just bad years among years of employment growth. In PNG’s current recession, employment has dropped by 0.8% in 2014, 0.7% in 2015, 2.1% in 2016 and now 4.7% in 2017 – so an aggregate fall of 8.3% in non-resource sector private employment. Before the current recession, this employment index has never gone backwards for more than two years – although the two year drops in 1982/83 (although offset by a major increase in mineral employment) and 1990/91 were more severe.

2.       Collapse in private sector credit

Lending to the private sector also fell by 3.4% in 2017 – once again even before allowing for inflation. This means that there was a general fall in bank lending for business investment, house purchases, cars and other items. Once again, this is another indicator of a recession – more severe than the small recession of 2008 (don’t believe all that government hype about 15 years of continuous growth – the NSO says the economy went backwards slightly in 2008) and possibly larger than the late 1990s recession.

3.       Declining foreign investment

The balance of payments figures also suggest a lack of confidence in the economy by foreign investors. When explaining the large deficit in the capital and financial accounts (the increase from K16 billion to K20 billion mentioned above), the report states the “outcome was due to outflows in direct, portfolio and other investments reflecting equity outflow from liquidation of investments ….”.  PNG should be looking for major foreign investment inflows not large net outflows. Setting up the occasional dairy factory misses the point that incentives need to change to make PNG a good investment destination. If the underlying issues are not addressed, then the possible gains from APEC will disappear due to poor policies. There was a recent reference that PNG could benefit from the APEC meeting in a similar way to Peru in 2008 – but in 2008 Peru had been going through more than 15 years of structural adjustment guided by the IMF and had a much more positive set of policies to encourage broad-based growth including foreign investment and trade than PNG’s current settings. Indeed, the January 2009 IMF Article IV consultation soon after Peru hosted the APEC meeting commented that the APEC meeting had a temporary adverse impact on Peru’s growth because of the reduction in working days!

4.       Negative sales figures

Sales figures also remain negative – even in nominal terms. Across 2017, non-resource sector sales fell by 0.9% – so by over 5% in real terms after allowing for inflation of 4.7% in 2017. However, the second half of 2017 was particularly tough, with non-resource sales figures falling 7.8% in the September quarter and a further 3.0% in the December quarter. Any hope for a turnaround early in 2017 was swamped by a very tough second half.

5.       Hiding key information

Understanding the extent of PNG’s on-going recession would be clarified if National Accounts figures were released. There are preliminary figures for 2015 – and these indicated the economy was about 10% smaller in nominal terms and 5% in real terms than previously estimated by the PNG Treasury. This is a massive correction. However, the detailed figures have not been released on the performance of the non-resource economy two months after the initial release. The NSO has indicated that it will release figures up to 2017 before APEC. As long as these are not tampered with, this will be a useful building block for transparency and helping guide policy choices.

Confusions

1.       Cheque balances opaque form of deficit financing

The latest December quarter report provides some interesting additional detail on financing of the claimed 2017 budget deficit (a future blog on the FBO will argue the deficit is probably significantly larger). Specifically, the report notes domestic financing of the deficit totalled K916.6 million. This consisted of increased purchases by the private financial sector of 1,870.9 million and reduced purchasers by the central bank of K430.3 million and SOEs of 30.9 million – so a net increase in government securities of K1,409 million. So where is the gap to net domestic financing of K916 million? The answer is “presented cheque floats from the previous year was K492.4 million”. Presumably, this was a reduction in government liquid assets with the central bank. The confusion is whether the drawdown of these cheques in 2017 have been added to the measured budget deficit in 2016 as they presumably reflect expenditure in 2016? The 2017 FBO indicates that combined with the use of K180.4 million from the drawdown in cash balances of government agencies, net domestic borrowing totalled K736.2 million. However, based on BPNG figures, there has been a distinct shift towards private financial sector financing of the deficit (an additional K1,870.9 million in 2017), much greater than I expected when I read through the FBO. The uptake is somewhat surprising given frequent comments about superannuation funds and banks reaching “caps” on the level of government securities that can be held in their portfolios. This mismatch is confusing.

2.       New repo arrangements

A second interesting component of the December quarterly statement was the announcement of new conditions around short term lending between the banks and the central bank. Such trades (called repos) now need to be secured by pledging a holding of government securities as collateral. Presumably, given the role of such trades of liquidity management by banks, this will increase the private demand for government securities, and help with even further financing of the budget deficit. The value of this change is not known – although the 2016 BPNG Annual Report indicates there was little use of repos in 2016 so it may have only a very marginal impact on demand.

3.       Silence on credit ratings agency downgrades

A third confusing element of the announcement is that no comment was made about the negative news of recent credit rating agency assessments. The downgrade of the credit rating of the PNG government flowed onto a downgrade in the credit rating of BSP – PNG’s largest bank – on 30 April. This potentially moved a significant share of BPNG’s domestic investments to a higher credit risk (in 2016, K1.8 billion or half of its domestic investments had a B+ rating – presumably most of these with BSP). The implications of such a downgrade deserved a comment – they are the worst combined downgrades in PNG’s history. Under the Central Bank Act 2000, the Governor is required to provide special reports to the Treasurer on “adverse conditions that threaten the country’s monetary stability, affect monetary policy or the economic and financial policies of the government.” If the worst credit downgrades in PNG’s history do not generate a special report or general comment, it is difficult to know what would.

PNG LNG failings not because of oil price falls

The yawning chasm between PNG LNG benefit predictions and its adverse impacts on the PNG economy  (see here and here) has little to do with the fall in oil prices. Claiming so is a poor and inaccurate defence.

The PNG LNG modelling  done in 2008 accurately predicted export sales revenues for 2015 and 2016. While oil prices were some 25% below the model’s mid-case scenario, this was fully offset by actual LNG production being some 25% higher than 2008 expectations. Price falls were matched by production increases – sales revenues were as predicted. As the marginal cost of production is low (most costs of LNG production relate to the high initial capital costs), sales revenue is the driver for expected benefits.

Export sales of petroleum products increased by almost exactly the predicted 440% – from K2 billion in 2013 to K11 billion in 2016. So the failure of the PNG LNG to deliver benefits as predicated has little to do with the fall in oil prices in 2014.

Of course oil prices did fall from over $US100 per barrel in 2013 to under $US30 per barrel (for a very short time early in 2016). And of course, it would have been really nice for the PNG LNG project and government revenues if the price stayed at $US100 per barrel – although less so for PNG motorists!

However, as stated by the Chair of Oil Search at the recent AGM, there is a need for a long-term perspective on projects such as PNG LNG which operate for decades.

This long-term perspective is that oil prices from 1980 to 2017 have averaged just over $US40 per barrel – considerably lower than the 2015 to 2017 average of $US50 per barrel. This is shown in the following graph. The blue line shows the yearly movement of oil prices from the IMF’s  commodity price database. The green line shows the average oil price from 1980 to 2017. The oil price was below this level for the vast majority of this period.  Oil prices jumped upwards strongly in the 2000s, but it was always going to be risky to assume such levels would persist. Commodity cycles see prices rise and fall.

Currently, the International Monetary Fund’s international commodity price forecast is that oil prices will drop below $US60 per barrel next year (shown by the red line in the graph above). The New York Futures market has the price dropping from current prices of over $70 per barrel to under $60 per barrel by 2020.

Anyone who was planning, even if only in their own mind, for oil prices to stay around $US100 per barrel was really betting against the odds and history.  This would not be the way to plan for a country’s growth and development or how to plan for budgets. To do so would be utter nonsense.

The mid-case analysis for the PNG LNG model was $US65 per barrel. Put in a long-term perspective, while possibly understandable in the 2007 bubble before the global financial crisis, it was a somewhat optimistic mid-case perspective.  It was well above the experience of the previous decade.  The PNG LNG analysis also used other scenarios. The low-case scenario was $US36 per barrel – and the project was still economically viable at that level.

The above is written to hopefully correct a mis-understanding of the recent “Double or Nothing” report by Jubilee Australia on which I was a co-author (see here). The lack of benefits relative to predictions is not due to the fall in oil prices. Extracts indicating this confusion are included at the end of this blog. Rather, as covered in the report, there are several gaps that need explanation.

The first relates to the poor modelling of benefits which led to wildly grandiose promises. The report focused on assessing the predicted benefits to the whole economy 2 years after PNG LNG exports commenced as this was modelled by PNG LNG partners – and there was 2016 data available to test these claims.  The long-run estimated impacts (which generally were almost identical to the short-run impacts) can be re-assessed in early 2020s – until then, we can only comment on the wildly inaccurate short-run predictions.

The second and more challenging element was to try and explain the actual measured adverse impacts on the economy as a whole. This was the “helicopter” view of the PNG LNG project. Local benefits were acknowledged – the  JA report stated “There were larger indirect benefits during the construction phase, and some individuals and companies have done well, but overall the economy is in a worse situation than if there was no PNG LNG project.”

There were and are some local benefits. As indicated in a subsequent Jubilee Report “On Shaky Ground” (see here), there have also been some adverse local impacts and broken promises at the local level (both lack of infrastructure and general non-payment of royalties).

But from the perspective of the economy as a whole, PNG is now doing worse than its performance prior to PNG LNG. It has fallen below trend on most economic welfare indicators such as overall employment growth, government expenditure growth, non-resource sector growth (the best available measure for PNG household incomes) and imports. This is surprising, because the potential benefits of PNG LNG (always much lower than the grandiose predictions of project partners) would still have been expected to have small positive spin-offs for most of the rest of the economy. This did not happen.

As the report analyses (see sections 5.4 to 5.7 for detail), the most likely explanation for this is that the PNG LNG project encouraged poor policy decisions.  The impacts of these poor policy decisions are swamping any local benefits. These decisions indicate PNG has fallen yet again into a resource curse.

PNG should learn from its own history and that of other resource rich countries. Pretending the problem was a fall in oil prices is both inaccurate and misses the point that PNG needs to change its policy settings towards more inclusive development and project partners need to stop over-stating potential benefits.

 

Extract from Chair of Oil Search at recent AGM – see page 13 of transcript here

Extract from Prime Minister O’Neill’s response to the PNG LNG report see here 

Another indication of the oil price slump as being the cause for the lack of benefits, when PNG LNG export sales revenues are almost exactly are predicted.