Generations will have to pay

 By Dr Charles Yala, Dr Osborne Sanida and Andrew Mako

THE recent decision by the executive government to borrow K3 billion from the international banker UBS to buy a 10.1 per cent stake for the State in Oil Search Ltd continues to generate public debate, mainly against it, including by learned com­mentators via various media outlets, despite the Prime Minister’s defence that the loan and purchase is good for the country.
The significant implications of this deal for the national economy with the associated welfare implications have compelled us to make our own assessment in this commentary. From the outset, we want to state categorically that this deal will have momentous implications for the national economy which will be felt by millions of people across many generations in the ensuing years in Papua New Guinea.
Further, we draw on information which is in the public domain for this analysis. We particularly draw on the past experiences to inform us in our analysis. Lessons from the past are too significant for one to ignore, especially the present Government which seems to be committed to this deal.We focus on only five key issues: Sound fiscal management and governance laws, Sovereign Wealth Fund, fore-spending of LNG revenue, national institutions, and PNG ownership.

1: UBS loan sought outside of sound fiscal management laws and legal governance
The K3 billion loan to fund the State’s stake in Oil Search Ltd was sought and approved by the executive government, outside of the country’s prudent fiscal management laws and the 2014 National Budget. Given the large sums of money involved and the implications it will have on the 2014 budget (and subsequent annual budgets via loan repayments), Parliament remains the sole authority to approve this transaction.
Using Petromin, a technically bank­rupt State-owned company as the vehicle for channelling this loan is inappropriate. Further, it needs to be noted that it is not Petromin’s revenue that will be used to repay this huge loan. It is the LNG revenues that are being mortgaged in this deal. Increasingly, it is becoming obvious that the securing of the loan did not follow prudent fiscal management processes. 
It is outside of the ambit of the national Constitution, the Public Financial Management Act, and other legislations which promote prudential public financial management, including the Sovereign Wealth Fund legislations approved by the National Parliament in 2012.
The Parliament of PNG remains the legitimate authority on all expenditures outside of the annual budgetary appropriations. This deal is legally flawed therefore illegal.

2: Direct State commitments are against the spirit of the Sovereign Wealth Fund
The up-spending and financial commitment of the LNG revenue by the executive government undermines key legislations and mechanisms that are in place to promote fiscal discipline and ensure prudential management of public finances, namely, the LNG revenue.
In particular, the fore-spent and financial commitments by the executive government of large revenues, including, in the case of the K3 billion UBS loan, as collateral is in anticipation of the LNG revenue.
This seriously contravenes the principles governing the use of the LNG revenues under the auspices of the Sovereign Wealth Fund (SWF) legislations approved by the National Parliament in 2012.
Such behaviour undermines the credibility of national institutions es­tablished to ensure prudential pub­lic financial management. More importantly, this provides for opportunistic behaviour in the looting of revenues. The structural setup resembles the looting of the Mineral Resources Stabilisation Fund during the late 1980s, the Coffee and Cocoa Stabilistation Funds et cetera.
The Organic Law on SWF was proposed basically to prevent the executive government to access such funds and subject the executive government to seek approval of Parliament. This has not happened now and that history may repeat itself.  This trend will render the SWF an empty shell.

3: Large amount of LNG revenue fore-spent
An estimated K4 billion – K6 billion is being fore-spent in anticipation of the LNG revenue flows. This amount includes the previous IPIC and the current UBS loans, both of which have similar structures. This is money-spent upfront in anticipation of the LNG revenues. 
The executive government has to be very careful on such ambitious public spending because the consequential implications are significant.
History may repeat itself again given our experience of the early 1990s, as such spending behaviour by the executive government created the country’s financial crisis of the 1990s. Expected revenues from the Por­gera, Kutubu, Misima and Lihir mines, which were forward spent in an expansionary fiscal policy framework, dried up the coffers of the government, which triggered the financial crisis. This crisis had a significant dent on public finance, and crippled the national economy, having serious negative impacts on the welfare of the people.
Commentators to this day describe this as the ‘self-inflicted wound’. We spent upfront in anticipation of the petrodollars which eventually disappeared into thin air. Are we self-inflicting again?

4: Lack of PNG institutional involvement and heavy reliance on consultant-led dealings undermine national institutions
It is obvious that, in this deal, private consultants were heavily relied upon to secure the K3 billion UBS loan. Continued reliance on highly paid consultants whose interests differ with national institutions undermines and erodes the development and growth of national institutions, skills and capacity. This undermines nation-building because these national institutions and their credibility which will stand the test of time to promote and protect the country’s interest are being undermined. 
In this deal, the Bank of PNG (central bank) appears to have been conveniently used to legitimise the deal. In particular, the media reports that the central bank for instance was used to justify the K3 billion loan, although private consultants seem to have been heavily used to perform substantive tasks to secure the loan compromises the independence of the central bank.
The NEC appears to have failed to undertake due diligence, especially taking advise from the State Solicitor. Parliament was completely ignored. Petromin was conveniently used despite it being a technically bankrupt State-owned company. The Organic Law on the Sovereign Wealth Fund was completely ignored. Overall, domestic institutions were either ignored or used as rubber stamps to cement this deal.

5: State should refrain from direct involvement in business enterprise
Finally, and more importantly, the State should focus on its core business of providing public goods and services, providing overall management and regulation of the economy, and facilitation of PNG business ownership and not State-Ownership. State ownership of business has proven to be a failure in this country. The State-Owned Enterprises or SOEs are in fact a drain on the national economy. They are collectively like leeches, sucking resources out of the public coffers both directly by continually obtaining state funds and indirectly by their inefficient delivery of their core services. It is argued that the K3 billion loan sought was essential for the State to participate in the gas and oil business in the country.
The State’s involvement in business undermines its important role as a facilitator and regulator of the economy. The State should engage in and/or focus on activities that will enhance the economy through pursuing structural reforms in the economy. For example, reforms to make SOEs to be more efficient and profitable, introduction of competition in key sectors of the economy by promoting Small to Medium Enterprises development (which it has commenced), and reforms and further efforts to unlock land for development.
The real winners will be the Oil Search Ltd shareholders, the UBS  and the consultants and middlemen who took cuts in facilitating the deals. Papua New Guineans will wait for their bonanza from the LNG, which may not be delivered in this life for many. May be in the next life.

Conclusion
It is our view that the K3 billion UBS loan deal to buy a stake in Oil Search Ltd is not good for the country. We have highlighted key reasons and our knowledge of the past experiences lends us strong support.   This deal will have serious fiscal and ongoing economic repercussions for the country.
We do not support this initiative nor do we think the State’s direct involvement in business in the economy is a good idea if PNG is to become a low-cost, efficient, business friendly, and realise broad-based economic growth that will create jobs and incomes for individuals and families. The State should look at innovative ways for increased PNG ownership directly by the people in companies such as Oil Search Ltd, and not indirectly via the State’s involvement in business.  It is important that we build up PNG business men and women, but not highly inefficient and unprofitable SOEs which will continue to drag the country’s economic growth prospects. Finally, the State’s involvement should be limited to the provision of public goods and services, creation and facilitation of a private-sector led-growth, investment in key public infrastructure, reforms to make the economy business friendly, pursue key structural reforms, and provide overall economic regulation.

• Dr. Charles Yala is Associate Professorial Fellow, Dr Osborne Sanida is Senior Research Fellow, and Andrew Mako is Research Fellow, within the Property Sector and Economic Policy Research Programs, respectively, at The National Research Institute