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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.
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