by
Brian Gomez
Saving part of budget
surplus for ‘rainy day’
Last week’s commentary on the use of
budget surpluses has not attracted much public comment, as far
as can be ascertained.
However, The National received and published a thought-provoking
and insightful comment from John Millett, a former head of the
Institute for National Affairs.
This was broadly in line with sentiments expressed in the
previous Bottom Line.
Mr Millett brought into sharper focus the view that it was wrong
to use windfall revenues in a manner of “putting the social cart
before the economic horse” because, clearly, rapid enlargement
of the economy provides a sustainable basis for bigger future
government expenditures on education, health and
other services.
There is another aspect of how these ‘windfall revenues’ are
utilised that I would like to discuss, not so much as a
criticism of what is going on but to acknowledge that many
complexities need to be considered to derive optimum responses.
Most people are familiar with the idea of ‘saving for a rainy
day’.
Indeed this was the purpose of some commodity funds designed so
that when the price, say of coffee falls, some of the money put
aside when prices were high could be returned to the farmer,
acting as a buffer for hard times.
This was the concept behind the mineral resources stabilisation
fund except in that case ‘windfall’ revenues could later be used
to iron out big falls in commodity export incomes.
Unfortunately, the PNG experience with the latter has not been
good, given a tendency to overspend in anticipation of coming
revenue windfalls.
Often, such spending is not well thought through, which is a
legitimate fear we may have about the way budget surpluses are
being used.
For example, there are capacity constraints within various
departments, eg, health or education.
When large amounts of money are suddenly made available and
there are not enough doctors or nurses (or teachers and schools
in the case of education), these funds generally will not be put
to effective use.
This brings me back to the question of ‘saving for a rainy day’,
an issue that doesn’t seem to have been considered in the
utilisation of budget surpluses.
Timor Leste, or East Timor, presents a classic example in this
regard.
This relatively new-born nation is investing all its revenues
from oil and gas developments in the Timor Sea in financial
markets in the United States and only using interest and
dividends from these deposits for ongoing government spending.
Some of PNG’s budget surpluses could have been used in this way,
providing an almost endless revenue flow for this and future
generations.
On a broad level, if the PNG Government had invested say K500
million from the K2.4 billion from previous supplementary
budgets, this could have generated an annual revenue stream of
around K30 million.
This would have been adequate to fund several thousand
scholarships for top performing tertiary students or, possibly,
it could be used every year to provide some essential materials
for the nation’s one million primary and secondary school
students.
Many people would be concerned that such funds would be open to
embezzlement and theft, but recent financial sector reforms make
it clear that reasonably watertight regulations can be put in
place as a safeguard.
The idea of ‘saving for a rainy day’ is certainly not a foreign
one in the PNG context where landowners are aware that
generally, even in tough times, they have access to kaukau and
other local produce.
For this reason NARI has done a lot of research on drought
resistant species.
A classic PNG example is provided by the Ok Tedi copper and gold
mine which, on current expectations, will end its life in 2013,
which is only six years away.
This outcome has occurred partly because of the environmental
devastation caused by mine tailings on the Ok Tedi and Fly River
systems and because of the important role it has played in
raising living standards within Western province.
When BHP Billiton quit ownership and management of the mine, it
transferred its 52% equity to PNG Sustainable Development
Program Ltd, currently under the management of former chief
secretary Robert Igara and a highly capable team of Papua New
Guineans.
Two thirds of PNGSDP’s income from Ok Tedi is invested in a
long-term fund which has the explicit goal of promoting economic
welfare and development, especially among people that will be
affected by closure of the mine.
In the four years to 2006, the long term fund has already exceed
K1 billion and it could amount to a sizeable K3-K4 billion by
the time the mine shuts down.
Although two thirds of the revenues from this fund will be
targeted to people in Western province, and the remainder to
development elsewhere in PNG, annual revenues flowing to Western
province at the time would be significantly more than current
annual expenditures by the provincial government.
This is indeed another possible model for the National
Government’s recent budget surpluses.
For example, the K500 million we mentioned earlier could be
invested in the manner that PNG Sustainable Development is
managing its long-term fund.
If that was done the K500 million can conservatively be expected
to double in a period of about seven to eight years.
By then, the country’s absorptive capacity would have increased
considerably and revenues from this fund, while leaving the
principle untouched, could be put to even more effective
long-term use.
