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Analysis - IMF pushes for PNG fund

14 Apr 2010 18:28 (+01:00 GMT)
Analysis - IMF pushes for PNG fund

London, 14 April (Argus) — The IMF says Papua New Guinea (PNG) should set up a sovereign wealth fund (SWF) to manage the estimated $50bn in taxes and dividends that the Pacific island nation will receive from the ExxonMobil-operated 6.6mn t/yr PNG LNG venture.

PNG government public enterprises minister Arthur Somare said last year that it is considering setting up an SWF, but so far no decision has been made. Analysts are concerned that PNG may follow other developing countries and mismanage funds that flow from the sale of its natural resources.

The $15bn PNG LNG project has the potential to double the size of the country's economy once shipments start in 2014, which are expected to generate about $3bn/yr in export revenues. PNG exported $4.2bn worth of goods last year, of which minerals and petroleum accounted for four-fifths. The PNG LNG project will extract gas from the onshore Hides field in the southern highlands.

Independent researcher PNG Institute of National Affairs (INA) says the country has entered a new era with the project, which will present many challenges. “It is certainly a double-edged sword, with the potential to provide substantial benefits but [it could] also impose considerable distortion, economic and social costs,” INA director Paul Barker writes in a paper, Dawn of a New Economy — For Better or Worse?

PNG has had a mixed economic record since independence in 1975, with about 40pc of its 6mn population living below the poverty line. Fiscal management has improved in the past decade, with 2009 the seventh consecutive year of economic growth. This is the longest period of economic expansion since independence. The government has reduced debt to about 30pc last year, from more than 70pc of GDP in 2002, using increasing revenues from minerals exports to pay off debts.

Debt payment
The debt reduction plan is part of the government's medium-term fiscal strategy (MTFS), which stipulates that any revenues exceeding budget forecasts or GDP by 30pc be used to pay off debt. But the PNG government intends to use all additional mineral revenues for investment projects and none for debt repayments this year.

“The LNG projects will launch Papua New Guinea onto the world stage and, consequently, international scrutiny will increase. Adherence to sound policy frameworks will be essential for the country to build the international credibility that will allow it to fully reap the benefits,” the IMF said in a report dated 22 February.

“In particular, strict adherence to the rules embodied in the MTFS, close co-ordination of monetary and fiscal policy, and the integration of a sovereign wealth fund into the macro framework will help maintain macroeconomic stability and ensure that development objectives are achieved.”

The PNG government intends to take up its entitlement of a 21.5pc stake in the upstream assets of the PNG LNG project. But the government's stake may fall to 16.5pc if landowners exercise an option to increase their stake to 7pc from 2pc. The inclusion of landowners is important in any resource project in PNG because they own 97pc of the land, with the remaining 3pc in private-sector hands. Landowners are made up of PNG's diverse range of villages and tribes. Some 900 languages are spoken across the country.

Land issue
The land ownership system varies from one culture to another, and identifying the members of customary land-owning groups is problematic. This in turn can affect the outcome of resource projects and ultimately lead to disputes between resource companies and landowners.

Conflict over resource projects is not new to PNG. The Bougainville copper mine on the island of Bougainville on the north coast of PNG was closed in 1990 after a conflict between the islanders and the mine operator, UK-Australian resources firm Rio Tinto, over revenue sharing. The mine remains closed.

Australian independent research group the Lowy Institute's Melanesia programme director Jenny Hayward-Jones wrote in a note, published on 19 March, that serious incidents of tribal violence in early 2010 in the southern highlands and in villages near the capital Port Moresby, where the project's liquefaction plant will be built, could have been caused by disputes over land ownership related to the LNG project. But there is no clear evidence that PNG LNG is directly responsible for this violence, Hayward-Jones adds.

It is also unclear whether the construction jobs — promised at up to 7,500 — will be available to PNG citizens or mostly taken up by skilled foreign workers. “Previous influxes of foreign labour, particularly from China, have provoked violent reactions in PNG, so the government will need to manage the employment expectations of its people carefully,” Hayward-Jones says.

The majority of PNG's working population are subsistence farmers and do not possess the necessary skills required for PNG LNG, although there will be a programme to train local people so that they will be able to find employment on the project. PNG's economy was almost entirely agriculture based until 1970, after which mining started and mineral exports became the dominant export revenue earner from the mid-1980s.

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