WHAT is a Sovereign Wealth Fund (SWF)? Do Papua New Guineans know or understand the works of such a state fund? Do they know how a SWF can impact their lives and the future of PNG? In the first part of this special news reports, The National’s senior reporter MALUM NALU takes an in-depth look into this for the benefit of our readers.
Did you know that everyone in Norway became a theoretical crown millionaire in January 2014? And Norway is also the first and only country in the world to date to achieve such a status.
In simple terms, the total wealth of Norway divided by its population equals every Norwegian becoming a millionaire.
And, it is all due to its oil-based Sovereign Wealth Fund (SWF). This is also why healthcare and medical treatment are almost free for Norwegians, and education is free at all its 40 public institutions of higher learning.
While Norway’s US$1 trillion SWF is the world’s biggest, the zero-resources island republic Singapore has two SWFs listed in the world’s Top 10.
Singapore’s Government of Singapore Investment Corporation with an estimated wealth of US$390 billion is at No.8 and Temasek Holdings is at No.9 with US$375 billion.
Last month, Deputy Prime Minister and Treasurer Charles Abel, announced that the legislative framework was in place to establish a SWF for Papua New Guineans and their country.
He said the Government would appoint a board in the middle of this year.
Abel also told the Petroleum and Energy Summit that properly managed resources, through the SWF, would enable a sustainable economy (and stable economic growth).
“Responsible management of natural resources (or country’s wealth) will ensure sustainable socio-economic growth for the people,” he added.
At the April 9 historic US$13 billion (K44 billion) Papua LNG project gas agreement signing, both Abel and secretary Dairi Vele told The National that the wheels had been set in motion for the SWF.
There is, however, no confirmed date for the SWF and no money to start it, though the government is looking at a double digit billion injection to kick-start the SWF.
However, Kumul Petroleum Holdings Ltd managing-director Wapu Sonk, says the financial status quo of the country does not allow for the establishment of the SWF right now.
A SWF, according to the SWF Institute, is a state-owned investment fund or entity that is commonly established from:
- BALANCE of payments surpluses;
- OFFICIAL foreign currency operations;
- PROCEEDS of privatisations;
- GOVERNMENTALtransfer payments;
- FISCAL surpluses; and/or
- RECEIPTS resulting from resource exports.
The idea of the SWF was mooted in Papua New Guinea as early as 2011, amidst much optimism, as the PNG LNG project in Hela was about to begin.
The government then started working on the Organic Law on the Sovereign Wealth Fund (OLSWF) Organic Law, and in August 2012, the PNG government set up the SWF Implementation Secretariat, located in the Treasury and staffed with officials from the Treasury, the Bank of PNG, the Department of National Planning and Monitoring, and the Department of Justice and Attorney-General.
The secretariat’s work stalled in late 2012 after questions were raised regarding the legal validity of the OLSWF.
Institute of National Affairs (INA) executive-director Paul Barker says the secretariat’s work stalled in 2012 because of political interference.
“There was a lot of work that was done before LNG, even during the time of the gas to Queensland pipeline and before,” he told The National.
Barker said: “There were discussions about the SWF. The International Monetary Fund (IMF) and other parties came in, there were a lot of discussions on what it will be like.
“The central bank was very much taking a lead role in steering some of those consultations, together with the Treasury and some other agencies like us in the think-tank, particularly the INA and NRI (National Research Institute).
“The design work was done and the first draft of the legislation was prepared.”
He added: “Then came the crunch. In fact, the legislation was passed in the first instance, but then it was all put on hold. There were discussions going on between the Treasury and politicians over the balance that they wanted: whether it should be more emphasis on stabilisation, or should it be a fund for investment into other domestic industries.
“It came from almost a cargo-cultish concept. The purpose of the SWF around the world is really to stabilise, to sanitise some of the revenue and to provide smooth revenue and expenditure, and to save for the future.
“But, at the same time, you had a number of politicians who had that almost cargo cult perspective of big revenues, so they can spend in different ways.
“That exactly runs counter to the concept of the stabilisation fund.”
Managing a SWF is akin to managing a corporate investment company. In this case, the Government is the “manager”.
And, whether a SWF can grow successfully, it depends on the efficiency and competency of the Government.
A fine example to look at is the young and tiny nation of Timor-Leste (East Timor) that gained Independence from the Portuguese on Nov 28, 1975, and from Indonesia on May 20, 2002.
The new sovereign state, with a population of only 1.4 million today, set up its SWF named Timor-Leste Petroleum Fund (TLPF) into which surplus petroleum and gas income is deposited by the government of the day.
The TLPF, kicked off with an opening balance of US$205 million. In just five years, as at Dec 31, 2010, TLPF’s capital ballooned to US$6.9 billion for the benefit of the people and country of Timor-Leste.
TLPF’s earnings were about 4 per cent for the five years, as of July 2011. And a key milestone was achieved in June 2014 when the equity allocation reached 40 per cent.
TLPF returned 3.3 per cent in 2014, or 2.5 per cent after inflation, and its end-of-year balance in 2015 was US$16.9 billion!
TLPF is today ranked No. 35 in Sovereign Wealth Fund Institute’s Top 81 largest SWF by total assets
Like all SWFs worldwide, TLPF signed up to the Santiago Principles on best practices for managing SWFs and joined the International Forum of Sovereign Wealth Funds. As a member, it publishes how it adopts and implements the principles within its governance procedures.
Governance TLPF focuses on transparency and disclosure of pertinent information that can foster public support for the sustainable management of the nation’s petroleum revenues. It also focuses on strategies to reduce the risk of poor governance and to continually assess the fund’s methodologies.
The Ministry of Finance is responsible for overall management of the fund; it is the ministry’s responsibility to act on behalf of the people of Timor-Leste.
Various reporting requirements, outlined under the Petroleum Fund Law, make the government accountable to Parliament.
Operational management is the responsibility of the Central Bank of Timor-Leste, which invests the fund’s capital according to guidelines established by the Ministry of Finance and mandates developed by the Investment Advisory Board.
The ministry must consult with the board before making decisions on any matter relating to the investment strategy or fund management.
PNG is also taking the same road and guidelines in setting up its resource-based SWF to help fast track the country’s socio-economic development. And there is no reason for the SWF to fail if management competency and transparency are strictly adhered to benefit people and country.