The new Treasurer, Charles Abel, presented the promised 2017 Supplementary Budget to Parliament on 27 September.

This is a very mixed document.

Good news

There are some very positive messages about medium-term paths for getting fiscal policy back on track. There has been a worthy attempt to target a more reasonable budget deficit of 2.5% of GDP in 2017 relative to the excessively high 4.6% of GDP in 2016. Some key expenditure priorities are being protected and there are some sensible cash-flow fix-ups (such as pharmaceutical drugs, office rentals and interest costs) and small initiatives (such as funding for the Coffee Berry Borer Disease response).

On the face of it, it appears that the government has started doing some of the hard yards required to get the budget back on track. There will be an expenditure reallocation of K800m to pay for cost over-runs, and a further cut in expenditure of K494m – a total of K1,294m. Given the original 2017 budget had total expenditure at K12,008m (excluding donor grants), this is a domestic expenditure saving effort late in the year of 10.8%. This is an extraordinary effort.

A worrying silence on claimed savings

However, there is actually significant doubts about the true nature of the “savings”. The Supplementary Budget includes massive cash reductions to the various Support Improvement Programs (SIPs) of 75% to 100% (with savings of K692.8m from DISP, K168m from PSIP and K64.42m from the WSIP – a total of K925.22m).

So 71.5% of the total “savings” in this budget (K925m divided by K1,294m) are for the various Support Improvement Programs. There is no mention of this anywhere in the Treasurer’s 14 page speech. This is deeply disturbing.

The silence on these major cuts is particularly problematic given that the Prime Minister declared from New York that these programs would not be cut. What is actually happening?

One thing that was discussed in Parliament the day before the Supplementary Budget was a statement from the Prime Minister that DSIP funds would only be paid to new Parliamentarians. There are over 50 new Parliamentarians. This would imply a need for at least K500m – but the funding available has been reduced to only K173.2m. This is a long way from the understanding (see below) that the deferrals would be spread evenly across all politicians.

The reduction in the DSIP and PSIP funds, ironically, provides an enormously powerful lever for the Prime Minister to build the numbers in the government. He can now argue that there are not enough funds to pay all of the DSIP or PSIP allocations and be extremely selective who gets paid.

One way for the Parliament to limit the Prime Minister’s power (at least in the law) would be for Parliament to amend the suggested revised budget appropriations to provide SIP appropriations by each electorate and province. This would remove the discretion of political gaming and help protect all the people of PNG.

With such a major game being played on something supposed to deliver over 70% of the so-called savings, the Supplementary Budget inevitability loses some credibility.

Possible additional revenue shortfalls

There is a likelihood that the deficit will be significantly larger due to revenue shortfalls. While expected revenues have been reduced by K494m, there is still the unrealistic expectation of K850m in dividends.

Kumul Petroleum is still expected to pay a dividend of K350m – not very likely after the large losses it suffered on the foolish Oil Search transaction. Statutory Authorities, many of which are facing cash flow problems including from non-payment of government utility bills, are also still expected to pay dividends of K375m. These numbers just don’t seem credible.

On average over the last 3 years, revenues have fallen some K1,800m each year short of the budget prediction for that year. Based on past experience of excess optimism on revenue collections, the excessive level of dividends still in the budget, and probably some remaining excess optimism on company tax collections, I’d expect actual revenue outcomes to be down by well over another K500m on MYEFO forecasts.

Deferred Budget Pressures

This Supplementary Budget has actually just delayed some necessary hard decisions.

The discussions with Provincial Governors had indicated that the reductions in the various Support Improvement Programs were really just deferrals of expenditure – the balances from the original amounts would be paid in equal instalments from 2018 to 2021. The Treasurer’s proposal was that a DISP allocation may be reduced from K10m to K2m in 2017, but from 2018 to 2012 district parliamentarians would receive K12m (K10m base level each year plus K2m deferred in Supplementary Budget). Clearly, this creates cash savings in 2017 but just pushes the problem out to future budgets.

The deferral makes the task of returning to a balanced budget more difficult as expenditure cuts or revenue increases have to be found in other areas.

This is not actually a fundamental savings measure (certainly from an accrual budget perspective). Rather, it is just a way to handle a cash crisis. Probably better than alternatives such as not paying private contractors for work completed, but it does nothing to deal with PNG’s underlying budget crisis.

The deferral of the DSIP/PSIP payments has built up forward expenditures by around K231m per year (the K925m deferral over 4 years).

The K925m deferral of the SIPs also just comes back into the 2018 base and these savings must be found somewhere else (unless the SIPs are deferred yet again, further building up future year budget pressures).

The expected greater revenue shortfall of at least K500m also would build back into the base.

Overall, there have only been on-going savings of K369m in this Supplementary Budget (K1,294 less K925m in SIP deferrals). There are budget pressures of K1,656m that roll into all future years (see graph below).

This highlights the level of challenges still ahead of PNG in getting its budget back into order. Changes of such magnitude would only seem possible with the help of friends – see here.

Conclusion

There are some real strengths in the 2017 Supplementary Budget. It demonstrates the declared intent to improve PNG’s budget crisis. As things are so bad, this cannot be a short-term fix. The medium-term planning for adjustment is welcome. Updates on the 100 day plan are welcome.

However, after going through the figures, the 2.5% deficit figure just does not seem credible. Even the IMF thought the best possible outcome was a bit over 3% for the deficit. This would certainly seem to be the case after allowing for likely significant additional revenue shortfalls.

However, the greatest hit to credibility in this budget is the total silence in the Treasurer’s speech on the actual treatment of the various Support Improvement Programs. These represent 71% of proposed savings, there appears to be a major disagreement with the Prime Minister on the programs, and clearly political power games are underway by the Prime Minister to get new members onto the government benches. However, the Supplementary Budget indicates that the cupboard is too bare for even these promises to be met (at least in 2017).

This moves the burden of proof of the government’s economic credibility to the 2018 budget. The people of PNG and international investors will look to the new Treasurer for better explanations and actions.

There is an easier and wiser course for PNG. If there is a chance that the new Treasurer can demonstrate to the international community that the government as a whole is willing to make the necessary adjustments, then there are prospects for many billions in additional funding to help ease the pain of adjustment.

 

PNG’s Supplementary Budget is due out this week.

This will be a key document for re-building investor confidence in PNG. Can it demonstrate the resilience of the great SP PNG Hunters win on Sunday?

There has been some encouraging news over the last few weeks from the new Treasurer Charles Abel.  This has included a commitment to better processes of consultation (including with Opposition Governors), better transparency (release of the preliminary IMF Article IV assessment), the sale of the Oil Search shares (what an awful initial mistake) and an indication of a willingness to cut electoral funds (the PSIP and DSIP).

The PNG Business Advantage Investment Conference in Sydney on 7-8 September was also an opportunity to build investor confidence in PNG.  How did it do?

In an earlier article – see here – I suggested three key questions for potential investors.  Following the conference, here are my impressions of the answers for at least some attendees (taken in reverse order to the initial questions).

PNG’s Business Stance

First, there was a strong sense that the new government was taking a much more pro-business stance than its predecessor. This was clearly more inclusive of the non-resource sector including agriculture, tourism and other investment options.

Frankly, I was very pleasantly surprised by Planning Minister Maru’s presentation. He stated the new government’s first priority was economic growth, and that the government recognised that it needed the private sector to help generate this growth. Probably too much emphasis on import replacement relative to export opportunities but overall the messaging was very good. However, there is a need for better information to be provided to such leaders as current figures being quoted are simply inaccurate (such as a greatly exaggerated  level of rice imports).

The Governor of the central bank was less impressive – the objectives of higher and more diversified growth are commendable.  However, there was no indication of any action to address a major barrier to growth caused by fixing the exchange rate at too high a level. The central bank has the simplest lever to help rebuild confidence in the economy but it is failing to use it. Rebuilding confidence and helping growth would be greatly assisted by moving to a more competitive exchange rate and freeing foreign exchange restrictions – see here. And the Governor’s focus was on import replacement rather than an export orientation. PNG’s long-term potential needs more of an outward orientation to the possibilities of the Indo-Pacific region.  And this means thinking about exports even more than import replacement.

The panels from businesses operating in PNG were generally reassuring especially over the medium-term. There is nothing to match the views of those with skin in the game. There were also practical panels on the legal obligations for investors as well as pragmatic issues such as dealing with health challenges.

Money in, money out?

Second, there is no doubt that a very major challenge facing existing businesses in PNG is that they cannot get their money out.

This is a major concern for any new investors.  Why invest and create jobs if they cannot actually get a fair share of their  returns? Indeed, they probably feel like many landowner groups around the PNG LNG project!

The inability for businesses to get their money out is leading to many distortions in the economy.  Ironically, this has some bonuses for the government as it encourages businesses to park their money in government securities while waiting.

So what are my peers doing?

This was probably the most depressing element of the conference.  Not so much in what was said, but in actions on the ground.  There were only about 200 people at the conference.  Even though attendance was at senior levels, one would have hoped for many more.

My last article highlighted that Australian foreign investment was actually flowing out of PNG (see graph below and the downwards dip in recent years).

When looking at government portals to encourage investment in PNG, such as the Investment Promotion Authority, it is a concern that economic and investment information hasn’t been updated over the last few years and that the once commendable on-line registration processes are currently off-line (apparently related to power shortages).

There would seem to be possible easy fixes to improve the way PNG presents itself to investor peers.  It is still not clear to me why there was a second PNG investment conference held in Brisbane in August.  A more unified approach would be helpful, along with some additional assistance to the Investment Promotion Authority.

There was a fascinating session on other investment possibilities in the Pacific. The Fiji presentation was particularly notable in that it seemed to have very few of the major challenges facing PNG.  However, as noted by businesses that were operating in both PNG and Fiji, the advantage of PNG were the potential upsides of a much, much larger market (some eight million people in PNG vs just under one million in Fiji).

Conclusion

Overall, the new government still has some way to convince new investors that the medium to longer-term opportunities in PNG are worth the risks demonstrated over the last few years.

There are some very positive noises from the new government including from the new Treasurer and the new Planning Minister. But the central bank could be doing much more to promote investment and growth by correcting the current foolish exchange rate policy.

The 2017 Supplementary Budget, and more importantly the 2018 Budget itself due in November, will more clearly demonstrate whether investors can be confident that PNG has a credible path out of the current mess.

Consistent messaging between the Treasurer and PM will be important, as will be transparency on the real state of government finances (including SOEs such as Kumul Petroleum and the real costs of the Oil Search share purchase).

May economic policy over the next few months do as well as the SP PNG Hunters.

 

The press release from the latest mission of the world’s International Monetary Fund (IMF) – see here – highlights the difficult road ahead for PNG in dealing with recent years of bad luck and economic mismanagement.

Challenges

On the fiscal front, the IMF considers that the government will fail in the Supplementary Budget to bring the 2017 budget deficit back to the target of 2.5% of GDP. Rather, it estimates the deficit will be “a little over 3%” – so a gap of some K370 million relative to the 100 day target.

The goal to reduce the debt to GDP ratio back to the legislated level of 30% as part of the 2017 Supplementary Budget is also recognised as infeasible. Instead, the suggestion is a medium-term objective of moving to a balanced budget by 2020 (and GDP growth will work to reduce the ratio).

So the first two targets in new Treasurer Abel’s 100 day plan are likely to fail.

Expected growth is also wound back from the 2.7% estimate in 2017 down to 2.4%.

Positive processes

Despite these negatives, my overall reaction to the IMF report is a very positive one.

First, as the government would have had to approve the IMF post-mission press release, it indicates a very different attitude than the attempts to suppress the 2016 report – see here and here.  PNG’s behaviour ten months ago placed PNG towards the bottom of all countries and ensured it had little chance of issuing a Sovereign Bond. The release is a very positive step towards transparency.

Second, the IMF Article IV report comes out at a very similar time to another report from an IMF tax reform mission. PNG appears to be engaging positively with the international community.

Third, indications are that the consultation process in these missions were positive and wide-ranging. There is feedback that Treasurer Abel also worked to ensure a very broad-based approach towards the preparation of the 100 day plan. Broad and constructive engagement makes for better decision-making.

Tough Road Ahead

The IMF report highlights the tough road ahead for PNG to start crawling back up from itslippery slope of economic mismanagement in recent years.

On the budget side, the IMF targets public sector wage costs. As anyone with experience in the largely failed attempts to reform and reduce the size of the public service in the early 2000s, this is actually very difficult to achieve (see some details below as an example).

The second target for expenditure cuts in the DSIP and PSIP programs will also be a political hot potato.

On the revenue side, there is optimism for increasing tax collections on both the resource and non-resource sectors.  Given the precipitous drop in PNG’s tax revenues – most of it in the non-resource sector – it still seems very likely that new taxes will be required or rates increased. The early days of a new government are often seen as the best times for such difficult adjustments.

Loi Bakani’s shameful approach to monetary policy gets some stick – of course diplomatically worded between the lines. The rigidity of the foreign exchange rate controls are seen as both damaging current growth as well as undermining PNG’s international competitiveness (and thereby adversely affecting moves to strengthen other sectors such as agriculture and tourism).

On the exchange rate, it is interesting that the IMF is suggesting a gradual move towards a more competitive exchange rate given inflationary concerns (an alternative approach sometimes tried is the “short, sharp shock”). The IMF notes PNG’s core inflation rate is only 2-3%, suggesting the IMF considers there is scope to start moving to a more competitive currency immediately.

Conclusion

Overall, the IMF’s suggestions are sensible. The two-track approach of dealing with short-term challenges while building the base for longer-term inclusive and sustainable growth is appropriate.

The return to transparent and consultative processes by the new Treasurer is very welcome.

However, as highlighted in the discussion of the PERR below, similar sentiments and plans have been put forward in the past – in much greater detail than currently. PNG failed on much of this promised reform in the mid-2000s.

The challenge is credibility around on-going implementation.  There is some very tough politics ahead to get such reforms in place.  The Treasurer is only one voice in the NEC. He will need to galvanise his cabinet colleagues around the reform path and transform fine words into tough actions.

Details on the Public Expenditure Review and Rationalisation (PERR) Program

There are many lessons from PNG’s own economic history.  Following is an extract (available here) which outlines some of the background, plans and initial steps for the 2002 PERR program.

Much of this sounds very similar to discussions today  -disturbingly similar.

The key question now is the credibility for sustaining any similar reform path over many painful years.

 

“The PERR is a joint initiative of the Papua New Guinea government, World Bank, Asian Development Bank (ADB) and AusAID, initiated in 2002, aimed broadly at improving fiscal management. It is described in the MTDS 2005–2010 (57–58) as ‘a key vehicle for generating the savings and cost-efficiencies necessary for the successful implementation of the MTDS’. A PERR Implementing Committee is chaired by Treasury.

In 2003 the PERR produced six discussion papers: ‘Road map to fiscal sustainability’, ‘Civil service size and payroll’, ‘Restoring the integrity of budget institutions and systems’, ‘Expenditure adjustment and prioritization’, ‘Improving health spending’, and ‘Improving education spending’.

On the subject of fiscal sustainability, the authors of the PERR paper suggested in 2003 that:

Several areas were identified for attention in the subsequent papers.

With regard to civil service size and payroll, it was argued that ‘public sector employment in PNG is larger than the country needs or can afford’, and that ‘the payroll system is flush with waste, leakage and irregularities’. A DPM audit suggested that there were some 2000 unproductive public servants on the unattached list (1200 of them in provincial administrations) in 2002, and ‘a large number of ghosts on the payroll’. Departments were said to recruit and make payments with no regard to budget ceilings, and Treasury was accused of ‘unrealistic appropriations’.

On the topic of restoring the integrity of budget institutions and systems, it was argued that ‘poor governance over the years has allowed [budget systems and processes] to be ignored, neglected, misused and abused’ while ‘watchdog bodies have been rendered ineffective because of absence of follow-up action on the irregularities they uncover’, with cases ‘delayed, blocked or even abrogated because of political pressures and vested interests’. There was ‘no sense of collective responsibility for the overall budget strategy’. Decentralization was said to have ‘led to an erosion of budgetary control’.

In relation to expenditure adjustment and prioritization, the PERR authors proposed an agency-by-agency review of functions (apparently going beyond existing Functional Expenditure Reviews), expenditure patterns and staffing levels, outputs and results, and whether certain functions might be privatized. They also supported the development of a Medium-term Expenditure Framework.

Actions on several of these fronts were detailed by the Minister for Finance and Treasury in his 2004 budget speech. As part of improved management of public sector employment and control of personnel expenditure, measures had been taken to remove ghost names from the payroll, implement a Concept Payroll System, reduce the pool of unattached officers by reassigning them or scheduling their redundancy, reduce the number of casual employees, and improve budget estimates and expenditure controls. In 2003 the Public Service (Management) Act was amended to facilitate merit-based appointments at senior levels; this is to be complemented by measures to extend merit-based appointment procedures to statutory authorities, and supported by a system of performance-based contracts (the appointment of senior public servants has, however, remained a point of controversy^[6]). A review of government procurement was undertaken in 2001, and subsequently measures have been taken to strengthen the Central Supply and Tenders Board (CSTB), reduce discretionary powers to create lower-level supply and tenders boards, and improve information, reporting and disclosure systems (though not all departments have subscribed to the new measures). A Budget Screening Committee, comprising deputy secretaries of the central agencies, was created in 2003 to evaluate spending programs, assist prioritization of spending, and establish expenditure ceilings in the preparation of the 2004 budget. The government also announced its intention to develop a Medium-term Budget Framework within which to consider adjustments to public expenditure in the light of changes in available funding. And the Financial Management Improvement Program (FMIP), ‘an integrated reform program of financial management at all levels of the government’, was described as ‘the most significant single reform of financial management ever undertaken by the Government’. (Papua New Guinea 2003, 27. Also see FMIP 2003).

Following are three key questions which potential investors should be seeking answers for at the PNG Investment Conference being held in Sydney on 7 and 8 September.

First, what are my peers doing?

While a good business investor will be open to finding a niche market with great potential, it is relevant to know what their investment peers are doing.

There was a rather disingenuous Bloomberg article last week titled “Australia Would Rather Invest in Papua New Guinea Than in China” – see here. A more comprehensive set of figures, based on total Australian investment in these countries is shown in the graph below.

[Source: Australian Bureau of Statistics Catalogue 5320 Table 5 issued 10 May 2017.]

Three key elements.  First, one should consider more than just direct investment.  This dominates the PNG picture, but is a much, much smaller element than in China where investment options are much more diversified. Second, investments in Hong Kong are also relevant to the comparison. Third, there are very strong patterns of continuing growth of Australian investment into China and Hong Kong from 2012 but little into PNG.

Unpacking the last element a bit more, following is a 25 year history of Australian investment in PNG.

[Source: Australian Bureau of Statistics Catalogue 5320 Table 5 issued 10 May 2017 and 5352 issued on 17 Feb 2003.]

The striking features of this graph are: how flat the investment pattern was from 1991 to 2008; then the extraordinary increase around the PNG LNG project; and then how flat it has been since.  Indeed, it was hoped the transformative PNG LNG project may encourage more on-going investment into PNG – but money has actually started flowing the other way. Australians are currently dis-investing in PNG.

This issue goes to the heart of investor/business confidence. It would be good for conference attendees to talk to some of the long-term operators in PNG as to why funds are being withdrawn and the possibilities for turning it around.

Second, if I put my money in, can I get it out?

This is a reasonable concern for possible business investors. The conference will make it clear that probably the major concern facing PNG businesses currently is foreign exchange restrictions.

These restrictions are creating immediate difficulties in getting enough foreign exchange to pay invoices. There are various arbitrage options for some types of business (especially those with a significant export element to their operations) but these restrictions have really hurt most businesses. Domestic growth has been squeezed as imports have dropped back to 2006 levels.

In addition to this short-term concern about paying invoices for businesses, it would be good to talk to local operators about their experiences in repatriating any capital (such as paying dividends, withdrawing superannuation or selling one’s business assets and withdrawing funds).

Frankly, these foreign exchange shortages reflect poor policy decision-making (formally by the central bank although there are reports of key inputs/directions through the Prime Minister’s Office advisors).

PNG has moved away from the market based exchange rate it adopted after an economic crisis in 1994. It has now effectively pegged its currency to the US dollar. Simply putting an extra $US100 million into the market (part of the government’s 100 day economic plan – see here) is a band-aid response that doesn’t deal with the underlying issues.

This question of repatriation of capital goes to the heart of PNG’s management of its foreign exchange arrangements. Estimates from the IMF and other source such as the ANU suggest the Kina should fall by at least 20%.  A move to a more competitive exchange rate would make foreign investment more attractive and thus could influence the timing of investment decisions.  Still, much can be done now to start exploring ideas and building relationships.

Third, is this new government pro-business other than in the resource sector?

PNG’s resource sector has grown strongly over the last 42 years.  The non-resource sector has not done nearly as well – indeed probably going backwards significantly in per capita terms – see here.

When considering business opportunities, it will be important to get a sense of the government’s priorities.  There are concerns that PNG is taking an even more state-based approach to development than the previous government.  As stated in my analysis of the government’s major new policy document, the Alotau 2 Accord – see here – “There is no clear political or economic philosophy for meetings its claimed objectives of more inclusive growth.  There are no assurances that the anti-growth, anti-business elements in planned policies such as agriculture, SMEs and land will be dropped. There is no mention of private-public partnerships. There is a worrying amount of state-based action in the accord and very little about facilitating the private sector with pro-market policies.”

The new Treasurer’s 100 day economic plan has at least suspended and put under review the worst planned anti-business proposals. But its discussion on “Strengthening Our Economic Base” starts with a list of well known resource prospects, then some Australian aid projects (!), then power project prospects that have been around for years followed by some previously announced “high impact projects” (submarine cable, PMIZ). There are no initiatives to try and reduce red tape and improve business regulation to provide a better environment for SMEs. The development path remains focused on resource projects and other ‘big project’ ideas that seem to do well for proponents but not for inclusive growth for other businesses and the people of PNG more broadly.

I hope the conference goes well. Some of the panels in particular look excellent and filled with local practical knowledge. The addition of the Pacific session is also a good initiative. I’ll be exploring views on answers to the above questions from old and hopefully new hands during the conference.

Mainly though, it will be great to have a chance to talk again to people living the wonderful PNG experience. As Prime Minister O’Neill banned me from the country for asking questions such as the above two years ago, I miss these opportunities to talk to local people including my many friends still in PNG.

 

 

 

Overview

PNG’s new Treasurer and DPM, Charles Abel, has released the promised 100 Day Economic Stimulus Plan (see here). Overall, there are some positives in the plan. But politics is already circumscribing necessary actions to get PNG back onto the right economic path.

Starting with the positives, even having a 25 point plan is a useful statement that the new government recognises PNG’s economic challenges. The five elements of the plan are appropriate: fiscal discipline; revenue growth; strengthening the economic base; improving governance; and acting strategically. There is a focus on raising revenues as well as fiscal discipline. Population policy is given priority.  The plan announces the suspension and review of some scary micro-economic policies in areas such as land, agriculture, bio-security and mining. Some politically brave action is foreshadowed to at least temporarily reduce politicians’ discretionary electorate spending (PSIPs and DSIPs). There seems a commitment to on-going sensible strategic budgetary and planning processes. There is no mention of the absurd “gold bullion bank” in the Alotau Accord 2.

Unfortunately, the plan does not appropriately address the challenges and opportunities facing PNG (see here). Fundamentally, there is no shift towards more broad-based development. The ‘economic base’ section is a disappointing mix of known resource and power project prospects and aid programs.

Even in assessing the Supplementary Budget, there is a missing K2.7 billion in public debt repair required that is not explained. PNG’s foreign exchange difficulties are misrepresented as rice and fuel are not the biggest drains on foreign exchange. More will need to be done on the revenue side than is currently being revealed by the government.

Conclusion

I want to stay positive and to give the new Treasurer a fair go. There are some positives in the plan. But there is a sense of a Sir Humphrey Appleby in the PMO thwarting the new Treasurer’s aspirations.  A one page sheet released 4 weeks into government dominated by a continuation of existing policies/projects/announcements and inaccurate spin in not a great plan. The Supplementary Budget, the 30 September Monetary Policy Statement and the 2018 Budget will hopefully provide a better benchmark for assessing whether the government has actually learnt from its economic mistakes of the last 5 years.

Details

Because the comments above about the missing K2.7 billion in debt repair and misrepresenting the foreign exchange situation are likely to attract greatest attention, I will deal with these two issues first before covering some other elements of the plan.

The fiscal challenge is impossibly presented in the first point of the plan concerning the Supplementary Budget. It states the 2017 Supplementary Budget will achieve the legislated 30% debt ratio target. This is just not possible given the deficit target. The maths, using the 2017 MYEFO as the benchmark – see here Tables 1, 2 and 18 –  is the government will try and reduce the size of the fiscal deficit by 1.3% of GDP (from 3.8% in the 2017 MYEFO forecast to 2.5%). This will reduce public debt levels by a similar amount as the government will no longer need to borrow to cover the reduced deficit.  So the expected 2017 public debt ratio will reduce by 1.3% of GDP from the MYEFO forecast of 34.9% to 33.6% of GDP. That is K2.7 billion higher than the claimed target in the opening point of the 100 day plan (3.6% of the K74.2bn MYEFO estimate for GDP).  The only ways to achieve the target would be for a massive unannounced K2.7 billion in asset sales, moving K2.7 billion in public debt off the books and into hiding, or having an explosion in the GDP growth rate in the next 4 months. There are better ways to build confidence in economic management than such an error.

Another example of inaccuracies is the Treasurer’s statement that “Imports of fuel and rice are the greatest consumers of foreign exchange”.  By mis-stating the nature of PNG’s foreign exchange challenges, there is little hope that the issue will actually be addressed. Releasing $US100m in foreign exchange reserves does not deal with the underlying problems. Specifically, according to BPNG (Table 8.6 of the Quarterly Economic Bulletin Statistics – see here), PNG’s total imports of food and live animals totaled K527.9m in 2016. This is already half the level of K1,119.1m in 2011. PNG’s imports of food and live animals is only a quarter of the largest good import category of “Miscellaneous manufactured articles” of K2,196m and half the second largest item of “Machinery and transport equipment” of K1,374m.  Possibly the issue is in the more detailed classification of particular sub-categories of goods – but this is starting to miss the big picture that the largest consumer of foreign exchange is actually related to imports of items such as cars and consumer goods. And checking on the more detailed information on Australian trade with PNG (see here for pdf), going through the list of PNG’s imports from Australia, the four large goods items are ‘Crude petroleum’, ‘meat (exc beef)’, ‘civil engineering equipment and parts’, and ‘wheat’.

Rice doesn’t even make the list.

And the fuel imports are a tricky issue of ins and outs, for although PNG imports lots of particular kinds of fuel, it also exports lots of particular kinds of fuel.  So in the case of Australia, PNG imports $A151m of crude petroleum products, but it also exports to Australia $A559m in crude petroleum products.  Diverting fuel exports into local consumption does nothing to improve the balance of payments – the reduction in imports exactly matches the reduction in exports.

I have long believed PNG’s agriculture sector is its real strength and have never understood why I couldn’t buy good local bananas in the local Port Moresby supermarkets but could find them not far out of town.  And meat from the Sogeri plateau is excellent.  More can be done.  But to simply focus on rice imports? If one was cynical, concerns could be expressed about the possible influence of a suspected Indonesian fugitive.  There is still too much politics (and possibly corrupt politics) in this document and not enough economic sense based on the facts.

Arguably, the greatest weakness of the plan is the failure to articulate a new, more inclusive economic vision for PNG. The section on “Strengthening Our Economic Base” starts with a list of well known resource prospects, then some Australian aid projects (!), then power project prospects that have been around for years followed by some previously announced “high impact projects” (submarine cable, PMIZ). There is no mention of cultural diversity, tourism or the forest sector (yet alone biodiversity) where PNG is in fact a world leader.  There are no initiatives to try and reduce red tape and improve business regulation to provide a better environment for SMEs. There is little for women’s economic empowerment or the rural poor. The development path remains focused on resource projects and other ‘big project’ ideas that seem to do well for proponents but not for inclusive growth.

As mentioned earlier, one of the strengths of this document is the attention being given to “Growing Our Revenues“.  There are some positive actions but implementation is a key. PNG Treasury documents have long stated that revenues collected by non-tax revenue agencies should flow into the Consolidated Revenue Fund.  However, this is largely ignored by agencies with little consequence for their budgets. The big issue here is Kumul Petroleum. There is simply not enough transparency to know how much of their dividend collections are actually committed to various loans and other ventures.

Another key issue is whether enough can be done through administrative action to lift PNG’s revenues to the levels required given the “big state” ambitions of PNG.  Action on tax compliance has been a feature over many budgets.  There are gains, but these tend to be incremental and relatively small relative to the challenge of PNG’s revenue collapse to its lowest levels ever as a share of GDP – see green line in graph below.

A future article will cover the inevitable need to raise tax levels (and possibly introduce new taxes) drawing on the Sir Nagora Bogan tax review previously commissioned by the government.

The elements of the “Improving Our Governance Record” are positive although it remains to be seen if some big donors such as China will untie their loans. SOE and Statutory Authority audited accounts would be good – but why do we have to wait nearly a year? There is information available that should be released to improve transparency.  However, overall this section seems to miss the big picture around corruption – so there is no mention of an ICAC.

 

PNG’s new government is proposing a 100 day plan. What should this consider?

A good plan begins by fully understanding the challenges and opportunities facing its people.

This understanding is improved by seeing how one is going relative to neighbours (comparative public policy analysis).

The list below from the ADB highlights that PNG still faces massive development challenges. It is saddening to see PNG’s poor rankings. PNG’s politicians have been failing their people.

On opportunities, PNG leads the world in key areas such as its cultural richness (1st), the extent of its tropical forests (3rd for the entire island), and its extraordinary biodiversity (PNG is one of 17 megadiverse countries in the world).

In terms of mineral and petroleum wealth, it actually does fairly poorly – even in LNG it ranks 47^th and petroleum 62^nd (details below).

Going forward, PNG needs to change its self-image of “mountains of gold in seas of oil”. This myth (at least in world terms) has delivered appalling development outcomes for PNG – see here and here . There are much better development paths.

A better self-image would be “mountains of culture in rich seas of diversity” – or something similar.  (Suggestions would be welcome – but about people not minerals).

I hope the 100 day plan takes a much more people-orientated approach to PNG’s development. This is a key lesson from its failed economic development to date.  May PNG’s new politicians do much better.

Details

Challenges

The best comparative database source for PNG’s development progress, focused around internationally agreed sustainable development goals, is the ADB Basic Statistics publication – most recently updated in April 2017 – see here.

45 countries in the Asia-Pacific are included. For some indicators, information is not collected for every country. The following list provides some key comparative information – and it generally makes for some pretty sad reading:

• In PNG, an estimated 39.3% of the population live below the $US1.90 per day poverty line in 2014. This is by far the lowest of the 26 countries with information (the next lowest is 21.2% in India).
• The prevalence of stunting amount children under the age of 5 is 49.5%, ranking 29th of the 30 countries with only Timor-Leste having a slightly higher figure of 50.2%.
• The prevalence of malnutrition (wasting) among children under 5 is 14.3%, the highest rate for the 30 countries.
• The prevalence of malnutrition (overweight) among children under 5 is 13.8%, the 4th highest rate for the 30 countries.
• The maternal mortality ratio per 100,000 live births is 215, the equal 3rd highest of 40 countries with information.
• The under 5 mortality rate per 1,000 live births is 57, the 4th highest of 43 countries.
• The number of new HIV aids infections in 2015 is 0.36 per 1,000 of the uninfected population, the highest of 21 countries.
• The tuberculosis incidence per 100,000 population is 432, the 2nd highest of 44 countries.
• The incidence of malaria per 1,000 population is 185, nearly double the next highest country of 90 in Timor Leste.
• The death rate due to road traffic injuries per 100,000 of the population is 16.8, 18th of 44 countries.
• The Mortality Rate Attributed to Household and Ambient Air Pollution per 100,000 population is 46.3, 32nd of 43 countries.
• The Mortality Rate Attributed to Unsafe Water, Unsafe Sanitation, and Lack of Hygiene is 12.4, 7th of 40 countries.
• The Proportion of Population Using Improved Drinking Water Sources is 40%, by far the lowest of the 43 countries (the next highest rate is Afghanistan with 55.3%)
• The Proportion of Population Using Improved Sanitation Facilities is 18.9%, significantly below the next lowest ranking country of Afghanistan with 31.9%.
• The proportion of the population with access to electricity is 20.3%, once again significantly below the next lowest ranking country of Vanuatu with 34.5%. Interestingly in the energy context, renewable energy represents 50% of energy consumption, the 7th highest share of 41 countries.

Opportunities

PNG also has great opportunities.

PNG’s population of 8.48 million culturally diverse people is its greatest asset. PNG’s population is 21^st largest of the 45 countries in the Asia-Pacific region.

More significantly, PNG unambiguously leads the world with the rich cultural diverseness of this population. With 840 distinct language and cultural  groupings, PNG has an extraordinary resource in a globalising world.

Surely there are people smart enough in PNG to tap into this world leading resource both as an export market as well as a tourist destination. The latest display of PNG’s cultures being translated into gorgeous fashions (PNG’s Fashion Week is underway ) is a small example of this potential. The actual volume of exports might not be as large as an LNG project, but most LNG revenues go to overseas bankers and investors anyway.

PNG’s land mass is 464 million square kilometres – the 11^th largest in the region and larger than other countries such as Vietnam, Malaysia and the Philippines – and more than four times larger than countries such as South Korea.

PNG also has considerable mineral and oil resources, but these are usually over-stated in terms of world importance.  There is a well-known expression in PNG of it being a country with “mountains of gold in seas of oil”. However, in terms of world reserves, PNG is actually not that wealthy relative to others. For example, PNG’s natural gas reserves, the source of the PNG LNG boom and the prospective Papua LNG project are estimated in 2016 to be 151.3 billion cubic meters, ranking 47th in the world. In oil, PNG’s 200 million BBL of reserves ranks 62^nd in the world (The World Factbook – the CIA should know).

Contrast that with its extraordinary wealth when it comes to forests and biodiversity. After the Amazon and Congo, the island of New Guinea is the third largest rainforest in the world. These forests face threats from logging, mining, wildlife trade and agricultural plantations, particularly palm oil. These forest resources are being exploited with very poor returns to local communities. And most in PNG know the power behind why the SABLs where never examined under the last government (and won’t be under this one).

And PNG is honoured by being one of only 17 megadiverse countries in the world.

The business acumen of PNG’s people is frequently commented upon. However, PNG does not create a particularly friendly environment for building up these business skills – the graph below shows how far PNG is behind most other countries in the region. Much still needs to be done in this area – and proposed policies in areas such as SMEs, agriculture and land will undermine this enormous resource.

Conclusion

When looking over the last 42 years of PNG’s development since independence, there has been too much emphasis on a resource focus for development rather than a people focus.

But the facts above indicates that PNG’s mineral and petroleum wealth are actually quite modest. PNG’s real opportunities lie in other areas.  PNG of course needs to continue to use its natural resources – hopefully on better terms than in the past. But the real way forward is looking at new opportunities with greater potential for women, the rural poor and small businesses.

Let’s hope the 100 day plan does a better job that the Alotau II Accord (see here for a critique) in actually focusing on the development of the PNG people.

May PNG change its image from “mountains of gold in seas of oil” to something of greater benefit such as “mountains of culture in rich seas of diversity”. There is still lots of money, as well as better social development outcomes, in a new motto which re-focuses PNG’s development effort.

 

Alotau II (see here) fails as a vision for PNG’s future. It insults women, the rural poor, and business credibility.

It insults the majority of PNG’s population by placing women’s economic empowerment as only the 89th item of its list of 90 priorities – and it does so under the heading of “PNG Immigration and Customs Services”. It makes no mention at all of women’s social empowerment – so taking action to address issues such as domestic violence and killing “witches”.  And there is also no mention of women’s political empowerment. PNG’s 111 member all male parliament will have to do better.

It insults the majority of PNG’s population by having no path forward for agriculture, the source of livelihood for over 80 per cent of its population. Mentioning e-agriculture (priority 80), and only talking about reviving plantations (priority 15) is no way to deal with the malnutrition and stunting still facing too many in PNG. Much can be done to improve the productivity as well as drought and frost resistance of PNG’s subsistence crops. And there are many more agricultural export opportunities into the growing markets of the Indo-Pacific (see recent coverage of vanilla beans). PNG is missing the key opportunities of linking with the rapidly growing markets of the Indo-Pacific region.

It insults the intelligence of the local business community and international investors by having its 6th priority as “Establish a gold bullion bank to address exchange rate shortages”. Gold-miners in the country beware! This is a very scary – even looney – idea which will undermine confidence. And a “bullion bank” will not address foreign exchange shortages – at best it will make the excess (trapped) liquidity in PNG’s economy even worse.

And “revenue-led growth” as priority 4?!  A tax is a tax and generally harms growth.  Of course I understand that increased revenues are necessary to deal with current fiscal mismanagement and to fund key areas of expenditure but it is a worrisome mindset to portray tax increases as leading a growth path.

There is no clear political or economic philosophy for meetings its claimed objectives of more inclusive growth.  There are no assurances that the anti-growth, anti-business elements in planned policies such as agriculture, SMEs and land will be dropped. There is no mention of private-public partnerships. There is a worrying amount of state-based action in the accord and very little about facilitating the private sector with pro-market policies.

The best element of this document is placing the National Population Policy as the first objective. PNG needs to do more to deal with this challenge.  However, research indicates the best ways to achieve this “demographic transition” is through women’s empowerment – and a key element of this will be in the agriculture sector. So the objective is good, but Alotau II undermines the two key ways for making progress.

Commendably, there is more emphasis on improving the quality of education – arguably a lesson learnt by the government.

However, on the continuing spurious “free health” policy claims, the government continues to deceive itself that K20m delivers on such a program, yet alone whether it can both afford and administratively implement a true “free health” program. A decision to revise the medical supply contract awarded during the election campaign by the former Health Minister would have been a much more believable and appropriate objective.

PNG’s infrastructure budget has been slashed by the government. The Transport budget has been cut from K1,481m in 2015 to K897m in 2017 – a real cut of 52% after allowing for inflation – see here.  And major future cuts of around another 30% were foreshadowed in the 2017 budget (and that was before the most recent deficit blow-out). How is it credible to have such a long list of infrastructure activities in the Alotau II accord when the budget outlook (according to PNG Treasury) is so constrained?

There are very interesting references to changes in the federal structure of PNG. The proposed 60/30/10 central/provincial/landowners split in mining revenues (does this also include petroleum/gas?) would be a major change. Was this  the element that had Sir Julius Chan join the government – a way forward for much greater autonomy for New Ireland with its rich Newcrest mine? And also of interest for the 2019 Bougainville independence referendum.

The failure of the Accord to consider adequately women’s empowerment is also a sad indictment of the effectiveness of Australia’s aid program. This is a key priority for Australia reflecting the very strong and commendable views of Foreign Minister Julie Bishop.  Some in the Australian High Commission in Port Moresby will be trying to explain the manifest lack of real influence the aid program is having in the area of women’s empowerment (and simply saying it wasn’t mentioned in Alotau I is a poor glory claim as at least the latter mentioned issues such as maternal mortality). Of course there have been many programs, but ultimately the real policy test for evaluating the effectiveness of Australia’s gender programs rests on whether  it gets an adequate profile in the new government’s most important political document? On women’s empowerment, clearly the answer is “No!”.

It is interesting to compare Alotau II with Alotau I (see here for the latter – pdf).  Frankly, Alotau I is a better document.  Still clearly aspirational and wanting to do too much but at least there were time-frames and more holistic approaches. There is more recognition of economic challenges in Alotau II, but no sense the implications of these have been understood.

May the 100 Day plan promised by Charles Abel have a more credible approach to dealing with PNG’s considerable challenges.  I will provide a snapshot of these challenges (and how PNG ranks relative to its neighbours) in the next article. And then an outline of two very different development paths facing PNG.

The PNG Treasury released the 2017 Mid Year Economic and Fiscal Outlook (MYEFO) last night (31 July)- see here.

This is an extraordinary document .  Amongst the detail is a damning insight into O’Neill’s continuing mismanagement of the budget. There is little doubt that the original 2017 budget was fiscally fraudulent (see here and here).

The PNG Treasury document indicates, in summary:

• The budget deficit is over K1 billion larger than forecast only 7 months ago.  The PNG Treasury document states the deficit has increased from K1,9bn to K2.8bn.
  • This will continue the pattern of the O’Neill government having consistently the largest budget deficits of any government in PNG’s history – see here.
  • And the actual deficit forecast is actually over K3bn when including the blowout in interest costs for all the public debt from K1.3bn to K1.5bn. This is the 3rd highest item of government expenditure – a fact hidden by O’Neill when describing the budget during the election campaign (see here).
• Interest costs have jumped because public debt has exploded from an estimate of 2017 debt of  K21,623m to K25,939.4m.
  • An extra K4,316.1m in debt – all within the 2017 forecast.
  • Any head of a household would be sacked for getting the figures so wrong – the fall in commodity prices occurred back in 2014/15 – why are the 2017 figures so wrong?
• The debt to GDP ratio for 2017 blows out from 29% to 34.5%.

In the words of the PNG Treasury (p 30 of the PNG Treasury document), “One measure of debt sustainability is the debt to GDP ratio. According to the FRA [Fiscal Responsibility Act], the debt ratio limit is 30.0 per cent of GDP.  The updated MYEFO estimate is projected to be 34.9 per cent of GDP, which is 4.9 percentage points above the legislated limit.”

Major expenditure cuts are foreshadowed in a Supplementary Budget – “In the likely event that revenue falls, a reduction in expenditure through a Supplementary Budget is required of the Government to keep debt within legal limits and consistent with the MTDS [Medium-Term Debt Strategy]” p30.

Some of O’Neill’s promises during the election campaign are extraordinarily expensive, and these would make the outcomes even worse.

In an extremely worrying comment, with no details provided, the PNG Treasury states “Also captured in the Total Public Debt Stock Outstanding are the State-guaranteed loans now being serviced by the State.” (p29).

As the deficit is some K1.1bn higher, and the total increase in public debt is K4.3bn higher, the difference of K3.2bn is probably the costs of the Oil Search share purchase debacle. These costs are now being carried by all PNG taxpayers and not Kumul.  That was a shocking deal for the people of PNG -and its legality has still not been tested in the courts (although one Treasurer was sacked over the issue).

The growth forecast falls slightly – it is now indicating on per capita terms, the PNG economy will go backwards by 0.4% in 2017.  For too long, PNG’s economic performance has gone backwards – see here and here.

Conclusion

Overall, this is an extraordinarily frank document. My credit to the brave PNG Treasury authors. Still, it is written by professional public servants, so the punches have been pulled.

But between the lines, the only conclusion is one of extraordinary economic mismanagement.

It is a shame there was not more time for new members of Parliament to reflect on the document before the scheduled vote on PNG’s new Prime Minister – especially given the nature of a “closed” camp.  The 2017 budget was indeed fraudulent.

O’Neill has a track record that gives him an “E” for economic management.  That is a sad legacy for PNG’s future generations.

Hopefully, a new government can start the process of economic repair.

The Electoral Commissioner on Friday 21 issued a press release responding to claims about the 2017 voter roll.

He misrepresents seriously what my earlier analysis showed. What is more intriguing is that he seriously misrepresents what he himself has tried to show – he has scored some home goals.

First, on the ludicrous claim that one cannot compare the 2017 electoral roll with the 2011 census (claiming that they are apples and oranges), he made this same comparison on 9 April – “This (new electoral enrolment forms) may reach one million and over and may contribute to a highly inflated 2017 roll as the number of eligible voters on the roll may equal or exceed the PNG population figure which is 7.5 million as per the 2011 census figures.” see here and here. So why can he make the comparison but not others?

Second, doing a check on the ratio of the electoral roll to the expected voting age population is a very standard and fundamental check on roll integrity. This comparison is used in assessing electoral fairness throughout the world – including in PNG.  For example, in the DFAT assessment of its assistance to the PNG Electoral Commission from 2002 to 2012 – see here – it constantly uses the ratio of the roll to the population as the basis for assessing the quality of the electoral roll and Australia’s previous assistance in this area (see paras 3.9, 4.14, 4.16, 4.19, 4.29, 4.32, 4.34).

Third, he then indicates that I was trying to do a comparison between the quality of the 2012 electoral roll and the 2017 roll.  I would have liked to have done this comparison, but the Electoral Commission had not previously released the data which allowed a test of a bias towards PNC electorates.  So all I had previously been able to do was an examination of the 2017 roll. And all indications are that it is incredibly biased towards the PNC – see here and here.  The Electoral Commissioner should unquestionable release more information to the public – doing so would have helped stop the devastating blow to PNG’s election credibility when the Electoral Advisory Committee felt it had to resign as it wasn’t provided with such information.

Fourth, an unintended outcome of providing additional information is that a very broad comparison can now be made between electoral bias in the 2012 and 2017 electoral rolls.  Gamato has shot himself in the foot.

Although there is a commendable reduction in the total number of “excess” electors, or inflated rolls, or “ghost voters” on the roll,  the reduction has been concentrated in non-PNC areas. So while it is commendable that the average size of ghost voters has fallen from 7,500 per PNC electorate to 6,000 per electorate, it is extraordinary that the reduction in non-PNC areas has been so much greater (from around 4,000 per electorate to under 500 – and a negative number when statistical outliers excluded).

This ghost-busting effort is 23% for PNC areas – a pretty poor effort.  However, it is 89% for non-PNC areas – in some ways a noteworthy achievement. Details provided in tables below, and summarised in the following graph.  This is a very biased pattern of “ghost-busting” which helps O’Neill’s position.

If you were looking to get rid of a lot more “ghosts” in non-government electorates, it seems as if you know who you’d want to call.

Gamota should resign.  It is difficult to know how this can be handled in the current situation where he has so much power to shape the election’s outcome.

Despite all the abuse of the powers of incumbency by O’Neill, he appears to have underestimated the strength of the people’s desire for change.

May there be a unified front from those seeking a change, one needed to deal with the corruption, poor governance and disappointing economic and budgetary and exchange rate performance of the last five years.

 

 

 

Extract from 21 July Press Release from PNG Electoral Commission

 

4. Response to claims by Blogger Paul Flanagan about 2017 Voter Roll

At my last briefing, questions were raised by an article by a blogger Paul Flanagan.

 

We have looked into this. Mr Flanagan made comparisons between the 2017 voter roll and the 2011 census.

 

His claim is that the number of people on the 2017 voter roll in seats held by the PNC increased by a higher percentage than non-PNC seats.

 

But he was comparing the 2017 roll and the 2011 census. His argument is based on a false comparison.

 

The Electoral Commission has nothing to do with the 2011 census. We do not compile the census.

 

Furthermore, Electoral Roll and Census use a different methodology and have different requirements.

 

Therefore the comparison is not valid. He is comparing apples to oranges.

There is no ‘army of ghost voters’ as Mr Flanagan claims.

 

The Electoral Commission is concerned with the electoral roll. The overall growth in the roll from 2012 to 2017 was 7%, or 318,000 people.

 

For someone to claim there are 300,000 ‘ghost voters’ for one political coalition is nonsensical. It simply cannot be substantiated.

 

Between the 2012 roll and the 2017 roll, the increase in numbers in PNC and non-PNC seats is in fact marginally lower in non-PNC seats – by 1.1%.

 

In PNC held seats there was growth of 5.9%, and in non-PNC seats growth of 7% in numbers on the roll.

 

If we use Mr Flanagan’s comparison of 49 PNC and PNC-endorsed seats to 40 non-PNC seats, the growth figures are 7.9% and 5.2% respectively.

 

But I would point out that most PNC-endorsed seats are in the Highlands.

There was bigger than average roll growth across the board, in seats won by all parties.

 

Let me be clear: the Election Commission is an independent Constitutional Office. We do not work for the PNC or any other political party. I resent that inference and reject it outright and completely.

 

As I have said previously, there have been concerns with the voter roll. It is not perfect, and we are looking into it. We will conduct a full review. But such problems are not unique to the 2017 election.

 

The sheer logistical feats of staging an election here must not be ignored. We are a country of about 7.6-8 million people, with more than 800 different languages, high rates of illiteracy, poor infrastructure, areas without road access.

 

In parts of the country like the Highlands, there is a robust culture that adds its own complications to holding elections.

 

Papua New Guinea faces multiple challenges in staging an election.

 

We are not perfect, but we are making progress.

 

The Election Commission is committed to improvement, while at times operating with resources which were below expectations.