Businesses need stable conditions

The Covid-19 pandemic has affected global economies around the world. PNG is no exception. Business reporter PETER ESILA discussed with the Institute of National Affairs director PAUL BARKER on how the government can assist the private sector

AROUND the world, the Covid-19 pandemic and it’s control measures have caused major impacts on business turnover, and in some cases the capacity to even operate. Many governments have provided extensive programmes to assist businesses most affected and to safeguard jobs and incomes. Institute of National Affairs director Paul Barker discusses the economy and how best the Government can assist the private sector. Business reporter PETER ESILA reports.

Q: The Covid-19 pandemic has negatively impacted large and small businesses alike this year. How best can the Government assist the private sector in the 2021 National Budget?
Barker: It’s the private sector, comprising large and small investors, that drives the economy.
In terms of investment and job creation, in close coordination with Government that needs to provide assured stable conditions for business and investment, and consumers that play a big part in determining demand for goods and services provided by the private sector.
Government needs to provide critical public goods, which are funded from taxes, as well as donor grants and borrowings. Government can also play a role in stimulating economic activity, when the economy is down, by generating economic activity that also create jobs and the payroll and hence also generates demand for goods provided by the private sector. Some level of public borrowing (and quantitative easing) is widely used for this role of stimulating the economy, but with borrowing it’s critical that the State is not squeezing out and driving up the cost of borrowing for private investment, driving debt up to unsustainable levels or spending funds ineffectively.
So this process requires cooperation and balance. Creating the best conditions for investment and investment confidence requires suitable and stable investment conditions for large and small domestic and foreign investors; it requires competitive and not unduly burdensome taxes and other government charges; it requires transparent processes, so that land, licences and contracts are available or awarded in an open process, rather than through back room deals; it requires that the state performs its own regulatory functions and delivers essential public goods and services efficiently and affordably; it requires essentials such as ready access to foreign exchange and that government pays its own bills promptly.
The Covid-19 has made the situation much harder for many businesses, with lower prices for most commodities, except gold (which appreciated strongly) and demand was disrupted by the global and local measures designed to control the outbreak.
In developed countries, which more institutional capacity and a greater portion of the economy in the formal sector, and with greater national savings and access to affordable credit, extensive mechanisms have been put in place to assist businesses, and sustain incomes for employees affected by the virus or the virus control measures.
Much of that is simply impractical in PNG, as much of the economy and the workforce is in the informal sector, most still don’t have bank accounts, and there is no established system of social welfare, such as State unemployment benefit, or pension or child or disability support.
The nearest thing is the superannuation funds, which are intended to provide pensions for those in the formal sector, but which have been used, or rather intended to be accessible to employees affected by the current crisis, laid off work and needing funds for their interim family sustenance.
Clearly, this disrupts their savings for future retirement, but immediate needs are clearly critical. In the absence of any capacity to provide assistance to others in the economy, the most important thing is to minimise the disruption imposed by the virus and associated control measures, to enable households to continue to go about their activities, earning money, as well as enabling their children to attend school and access other services.
Some countries, have provided novel approaches to stimulate key industries and employment, such as the tourism and hospitality industry, even while global tourism remains restrained, for example the UK’s subsidisation of restaurant meals to encourage a return to these, even while physical distancing must still apply. PNG has neither the capacity nor the funds for such direct interventions, but it can do much more to bring down the costs of key infrastructure and services, such as the internet, to encourage the belated growth of e-commerce, as well as e-education.
So, PNG needs to be balanced in its approach, and work much harder on creating a calm, encouraging and stable investment environment, but not driving up taxes, by taxing fairly and equitably, and recognising that during the pandemic many businesses have been hard hit, so don’t drive them into the ground with punitive rates or penalties (usually those businesses will make better use of funds for generating economic activity than the State itself does), and don’t impose investor anxiety or panic with lots of new and unreasonably restrictive or punitive rules on foreign investors, as foreign investment plays a big part in the PNG economy and job creation, and those foreign businesses that are committed and follow the country’s labour, environmental and other rules fairly should not be jeopardised with undue restrictions on the activities in which they can participate, or with upfront bonds and charges.

Q: Do you think the private sector can afford to have tax increased in the upcoming 2021 National Budget in November?
No, not at this stage, except those operating in parts of the resource sector that maybe have by-passed their tax obligations, or that have done well out of unduly concessional investment conditions, as well as those businesses in the seemingly ‘unregulated sector’ (but often significant SMEs), often operating in retails and trading and often overseas-owned, or partnered and which widely by-pass official taxes, (even if they do pay other charges to government officials and sponsors, to support them or turn a blind eye).

Q: Which sectors should have no tax increases in order to survive the Covid-19’s economic impact?
Generally, tax rates are relatively high in PNG by world standards.
The large informal economy includes people with very little money, as well as some with significant business operations, but which pay no taxes; efforts should be made to encourage them to formalise, although there’s little inducement for them to do so right now.
In the meantime the only way to sweep in some tax from the informal sector (apparent from via some levies for commodity extension or research, etc…) is through GST (goods and services tax), which could see a modest increase, even though this can raise the cost of living and can be widely unpopular. The unregulated sector should be paying corporate tax and a range of other charges, but this really relates to enforcement, rather than the tax rates themselves.
Clearly, parts of the resource sector could pay a bigger contribution, including firms given unduly generous tax exemptions and other concessions with new mining projects (e.g. Ramu Nickel mine) and with the gold price being really high, it is critical that the State secures its fair share, but again that’s largely about applying current tax rules and avoiding arrangements designed to minimise or defer payments, where possible. Of course this is all restrained by agreed project investment conditions.
Of course, getting the Porgera mine operational again as promptly as possible is critical for securing corporate tax and other charges (royalties, etc…) and restoring jobs and therefore also income tax on those.
With the current high gold prices (recently over US$2,000/oz (K6,859.36/ oz, although it’s slipped back a bit since then), having the Porgera mine closed leaves a large gap in needed revenue national and locally, which shouldbe addressed through practical and sensible measures, rather unrealistic rhetoric.