(Below and the following blog posts are parts of a paper written by Sharp Talk creator Douveri Henao and was published in Sharp Talk (Facebook) in November 2013.
By Douveri Henao
Since gaining office in July 2012, Prime Minister Peter
O’Neill has embarked on an ambitious campaign to propel Papua New Guinea from a
“fence sitting” poverish developing country to a rising emerging pacific tiger.
Having tremendous confidence in windfalls from natural resource receipts, he
has spent and borrowed loans to fund 4 deficit budgets to develop mostly
infrastructure projects, free education and sub national activities that are envisioned
to be drivers of growth. If 2013 is any indication of the size of the budget,
we may expect a total value of 50 billion kina budgets in the next 5 years.
Like any leader, he is insistent that his people must benefit from the
exploitation of the wealth in this country. Not surprisingly a flurry of
economic policies on nationalism, protectionism, and capitalization of current
and new State Owned Enterprises have taken the seemingly liberal landscape.
The success and justification of this “binge spree” hinges
on 2 propositions. First, natural resource revenues will produce windfalls that
will offset the large foreign borrowings. Second, major investments in
infrastructure and social programmes will compliment and further enhance non
mining sectors expected rebound.
The underlying message is that the binge spree approach,
although as careful and sensible in its implementation, poses high risks. In
this 4 Part Article, I intend to convey why this is the case and how a
redirection is required for a balanced budget. Therefore the following themes
in each of the parts intends to highlight these issues. Part 1 ‐ The Gamble; is
the Gas our Ace Of Spades or the Joker. Part 2 ‐ Recalibration; a balanced
budget needs to be the focus where development priorities are delivered in a
realistic sequence. Part 3 ‐ Growing the Tiger; while investments in
infrastructure are progressive, equal attention is required on improving
business literacy skills as well as access to affordable capital to fully
utilize the improved roads, ports, power and communication lines. Part 4 ‐
Which Pack: building trade and investment relations is critical and more than
ever, PNG needs to choose who they should spend more time with.
PART 1 – THE GAMBLE
The Speakers Wing is situated on the opposite end of the
national parliamentary chamber. Its cylindrical design is influenced by the
Round Hut commonly found in the Highlands. There are 3 floors of meeting rooms,
restaurant, entertainment areas and other amenities members of parliament use
to consult their constituents.
The center piece is the Speakers Conference Room,
appropriately located on the upper floor. Able to house 200 souls, its old
woody internal décor resonates a Stately presence. However it’s the photographs
of our colorful history that speaks to the visitor. A rare insight into the
life of our forefathers, one cannot avoid not long ago majority of us lived in
a vibrant Stone Age society and in a short space of time, transposed into the
age of the internet. It is perhaps this reason; past and current Treasurers
have used this grand venue to inform the people of Papua New Guinea its
national budget and development aspirations.
Departing from the usual conservative fiscal architecture,
Don Polye (Treasurer), Charles Abel (Planning Minister) and James Marape
(Finance Minister) introduced last year a multiyear deficit budget cycle for
the next 3 years. They have followed it up for 2014 in which revenue receipts
are projected to increase significantly from gas receipts and rebounding in
other comedies that would provide the basis of funding multibillion kina public
investment projects. Mostly infrastructure. While at the same time apply
prudential expenditure disciplines. Another unique feature is to shift money
from Waigani to where the bulk of our people, rural communities.
Their passion and collegiality is admirable and indeed a
testament of a collective vision. Does the strategy have merit or is it a
gamble.
Ace of Spades Ain’t
the Gas
It is a gamble because of the reliance of a strong revenue
surge from LNG sales. Treasury estimates in the 2014 budget a whopping 354.8%
increase (1.2 billion kina). This is highly ambitious when considering several
factors. The Economist, a newspaper, observed that although there is
significant demand of gas in the decades to come, a recent wave of
technological improvements with relatively low operational and capital
expenditure spending then LNG plants, will put pressure on a competitive price
of PNG gas that may shave off Treasury’s bullish outlook.
With these issues in mind, the focus on future gas
investments should look at unitizing assets rather than building new plants.
The far North Queensland’s Gladstone dual LNG facilitates is a testament of
wrongful investments where the operational expenditures are extremely high and
therefore not yielding sizable returns. Therefore the negotiations of InterOil
and Talisman to consider utilizing their gas fields to the PNG LNG facility is
sensible.
Another cause of concern is the slowing down of emerging
economies growth rates, where most of our gas will be sold, price readjustments
similar to what has transpired in India may occur in PNG. Another important
point to note is the developers intend to usemost of the proceedings to repay
loans used to construct the project. Therefore, revenue collections may not be
as anticipated and this has a knock on effect on the delivery of large public
investment commitments as well as repaying loans on the borrowings to finance
these commitments.
Having a conservative estimate on the gas receipts is
critical. This in turn must trigger a reconsideration of phasing public
investment projects for the coming years. A sensible option will be to balance
immediate social and economic infrastructure investments that will yield growth
and stability. Lumping the current front load of these projects is not
financially sound.
Avoiding the Joker:
Slack Public Service
What remains problematic is the capacity of the government
to deliver the budget. Significant capacity deficiencies in both the revenue
raising and expenditure spectrums have proven once again the major setback.
National Economic Fiscal Commission, a government authority monitoring sub
national government revenue inflows, indicated in its 2013 Budget report almost
all provinces have not received all resources to effectively carryout their
duties. Institute National Affairs, a PNG private think tank, remarked that
only 50% of the national budget has been spent in October.
Marape is aware of these challenges and has cited that it is
not money the issue but capacity. He issued strong warnings on “section 32
officers” to lift their game so as to ensure proper accounts are in place for
disbursements. If not, monies will not be released. A welcoming warning for the
public but also a demanding challenge for them. With limited human resources
across the public sector, implementing the budget will still be a tremendous
challenge in 2014.
While efforts are underway to have effective collection points
in Internal Revenue Commission and
Customs as well as filling up the countryside with finance
officers, more boots on the ground with technical knowledge is required.
Queen Of Hearts
Transforming poverish landscapes are always riddled with
skepticism. One cannot dismiss however the opportunities the budget brings.
With improved road networks, larger ports, efficient communications, reliable
power generation and SME agricultural support provides our rural wantoks to
source markets and have access to financial products to further grow their
produce. With functional hospitals, resourced police constabulary, and free
education, our mothers may survive child delivery, sisters walk in the streets
and our children advance their knowledge.
The challenge for everyone is making Peter, Don, Charles and
James dream our dream.
Next week I’ll discuss
in Part 2 ‐ Recalibration. Maintaining the multiyear single line budget but
should be balanced and not a deficit. Phase impact projects should be the
focus.
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