Regulatory uncertainty has the potential to deter investors just when Papua New Guinea needs them most, argues Paul Barker, Executive Director of the Institute of National Affairs.
Papua New Guinea’s economy is currently in dire straits, and the Government’s own public finances face a severe predicament.
The economy, which had already experienced very low growth, investment and employment generation over the past five years, has suffered a severe hit in 2020. It has been affected by a combination of major external forces affecting global markets, including commodity prices, notably driven by the impact of the Covid-19, and ongoing surpluses of supply of certain major traded commodities like oil and gas, but also from some untimely actions of the Government.
With revenue severely undermined in 2020, and years of budget deficit already accumulating, the Government’s flexibility to sustain and stimulate the economy has been severely restrained. And its public financing measures require an increase in public debt to unprecedented levels.
While diversification of PNG’s economy is critical, the economy, investor confidence and public finances have also really needed (and been expecting) the stimulus of a few major resource projects. That was not to be in 2019, with differences between the developers and the incoming government over the planned new LNG resource projects, P’nyang and Papua LNG.
With the current global energy surplus and severe fall in LNG prices and prospects this year (prices are currently at a 25-year low), potential market access has likely been closed, with interest by investors and financiers in these major projects severely diminished.
Trying to get a better share
The Government’s objective to obtain a better share of the proceeds from resource extraction for the State and traditional landowners is sound and overdue.
Enhancing the State’s right to determine how, whether and when major resource projects proceed is also entirely reasonable.
In 2007, mining and petroleum taxes accounted for 40 per cent of government revenue, but by 2016-17 they had plummeted to just over 1 per cent, in the face of low commodity prices, production disruption to some projects and with two major projects being in early production phases.
Yet, while oil and gas prices had fallen substantially, some major resources, notably gold, had held up relatively well, resurging in 2020 to around USD 1,700/oz. Even with mining/oil taxes combined with dividend payments to the State, in 2011 these fell from 23 per cent of revenue, down to 3.8 per cent in 2016 (recovering to around 13 per cent in 2019).
These figures severely understate the importance of the oil/gas and mining sector to PNG’s economy and to revenue, as employee tax substantially raises the total revenue flow from the sector, as well as providing a valuable contribution to formal sector employment and wider economic activity.
In addition, the economic activity delivered through contractors, in transport, catering and other fields adds substantially to the impact and revenue flow, especially during the major, if brief, construction phase for large projects, notably in LNG. Indeed, the tax on personal emoluments makes up the largest single portion of the revenue provided by the sector to the State.
‘While a better deal from the resources sector for PNG is a sound objective, and is achievable, it needs to be realistic.’
Nevertheless, the Government and people of PNG could certainly have expected a better and more consistent benefit flow from its combined resource sector projects over this period.
Owing to the combination of weak market demand, low energy prices and an unrealistically rigid Government position on resource project ownership and control, it seems that all planned new resource projects are likely to remain on hold for the foreseeable future, including the major existing gold project at Porgera, which was required to close down in April following the expiry of its operating license.
This imposes a further blow to PNG’s export earnings and government revenue, at a time when the economy has already been hit with the impacts of COVID-19, and is already saddled with high, and growing, debt and debt-servicing costs.
‘Now is the time to apply favourable business and investment policies and measures to encourage and sustain business, jobs and enable an early recovery.’
So, while seeking a better deal from the resources sector for PNG is a sound objective, and is achievable, it needs to be realistic.
The whole world is crying out for investment capital, both from domestic and external sources. With COVID-19, it’s become a whole lot harder, with global capital withdrawing to safer havens, notably developed economies, and safer investments and markets.
PNG has been able to secure very concessional funding from the IMF and World Bank, under special COVID-19 support arrangements. But, with the shortfall of revenue, major demands on government expenditure to sustain budget commitments, salaries, and support the economy, business and employment during the severe downturn, the State has been pushed into a tight situation.
It has been able to borrow from the domestic market using COVID-19 bonds, and has undertaken some quantitative easing (effectively printing money). But there are firm limits to borrowing, unless early and sustained revenue is assured and wise policies pursued to restore and build up the economy, manage fiscal operations and debt levels. The Government will be hard-pressed to boost revenue with the economy and business activity substantially restrained by COVID-19 for the foreseeable future.
Now is the time to apply favourable business and investment policies and measures to encourage and sustain business, jobs and enable an early recovery. That requires both domestic and Foreign Direct Investment (FDI). Attracting FDI is doubly tough right now, but it remains needed particularly for the major projects requiring substantial capital.
Getting PNG back to business and generating new investment and employment opportunities, stimulating revenue, securing public and private finance and managing debt all require competitive and stable investment conditions. Resource and other investment policies and conditions need to be reviewed periodically, but where the rules are changed substantially, or incessantly, it imposes undue uncertainty, disrupts and frightens away investment, favours speculation and currency runs and does the country and its workforce – but also the Government and the wider public – no favours.
PNG seems to be in that situation right now.
Paul Barker is Executive Director of the Papua New Guinea Institute of National Affairs. This piece first appeared in The National and is re-published here with permission in an edited form.
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