THE Government’s proposal to introduce Super Profits tax on dominant industry players in the Budget 2022 is of great public concern. It will affect BSP in the financial sector and Digicel in telecommunications. The concern is on the implications of the tax on domestic shareholders, particularly BSP, a PNG listed company.
However, the wider implications for investment decisions by both domestic enterprises, such as BSP, and for foreign investors, such as Digicel, are also important considerations. BSP was created from the key financial reforms undertaken by the late Sir Mekere Morata’s term as prime minster (2000-02).
The wholly Government-owned nearly bankrupt PNG Banking Corporation was sold to Bank South Pacific, one of the smaller banks operating in PNG, under a merger arrangement. It was then capitalised through a share offering on the Port Moresby stock exchange in 2003, enabling institutions and individuals to buy shares. BSP, as per its 2020 annual report, operates 78 branches and sub branches nationwide, providing retail services in some of the most difficult rural areas of PNG.
These are most likely cross subsidised by the profitable branches in the main commercial hubs of PNG.
The largest operations are in PNG, but BSP also provides a large segment of the banking services across the Pacific – the Solomon Islands, Vanuatu, Fiji, Samoa, Tonga, the Cook Island and a BSP Finance branch in Cambodia. It has worked hard to be the largest bank in the South Pacific and represents PNG well in the region.
BSP has led the transformation of the banking services in PNG, introducing innovative technology services in 2012 that has lifted customer services and plays an important role in the sustained growth of PNG’s economy.
BSP has achieved a dominant position through the hard work of the directors, management and staff. Their efforts have lifted BSP’s performance and challenged others in the financial sector to also lift their performance, improving general financial services across the country. BSP loan market share in PNG is 65 per cent, much of it with the corporate sector.
BSP, using its dominant position, is also able to put together loan packages with other financial institutions for a share of the loans needed by large investors, thus, supporting growth and investments as well as to retain in country, some of the profits generated from their operations. BSP also provides critical services, cross subsiding and supporting the Governments housing and small-to-medium enterprise policy nationwide.
Will BSP continue to be innovative and aggressive in investing in new technologies, opening up of critical customer services to mostly trouble-ridden rural regions of our country following the imposition of this tax?
With the introduction of this super profits tax, is the Government promoting “mediocracy” forcing good private enterprises to be just as inefficient as the National Development Bank” or for that matter “Telikom” and Bmobile, institutions that the Government owns? In other words, is the super-profits tax, a tax on success?
An entrepreneurial and profitable BSP is good for its shareholders and the nation. A profitable BSP provides a model for other businesses to emulate. BSP is leading the way in the region, challenging other PNG-based enterprises to be more competitive providing quality services to citizens.
We need to promote competitive, efficient enterprises that can compete in the global market, not curtailing efficiency and productivity of our national business enterprises.
There have been many false and misleading statements in the social media about BSP being owned by foreigners and big businesses.
The table below from the 2020 BSP Annual Report of major shareholders, indicates the contrary.
The Government and other PNG institutions representing a wide cross-section of ordinary citizens own about 85.75 per cent of BSP. Non-PNG entities own the rest, about 14.25 per cent of BSP. The Government holds about 24.84 per cent through Kumul Consolidated Holdings (18.15 per cent) and Motor Vehicles Insurance Ltd (6.69 per cent). Workers and others in PNG through the Super Funds hold 25.27 per cent; through Nambawan Super (12.09 per cent), Nasfund (9.7 per cent) and Comrade Trustee Services (2.67 per cent).
Workers and others also own BSP shares through the Teachers Savings and Loans Society (3.28 per cent) and also through shares held by the Super Funds through holdings in Credit Corporation PNG Ltd (7.13 per cent) and Credit Corporation Finance Ltd (0.64 per cent). (See chart for details)
Several million-kina worth of BSP shares were traded on the Port Moresby Stock Exchange in the last couple of weeks (November) and these may change the shareholder list. I suspect it may be one of the smaller institutions holding less than one per cent of shares as there was no information provided to the stock exchange on who was trading that would have a significant change in BSP shareholding.
Given the timing of these trades, the identity of the seller/s may be worthy of investigation as it could point to insider-trading.
In particular, did the seller have information on the impending Super Tax on BSP to be introduced in the budget and the effect on the stock market price to dump the stock? If so, then this is illegal and I hope the authorities will look into this. The additional super profit tax will apply after the normal corporate tax of 30 per cent of income is paid. This will result in less dividends paid to shareholders.
In 2020, BSP reports indicate tax paid of K295 million and declared profit after tax of K806,218,000. Shareholders were paid a dividend of K1.21 per share. In the case of Nambawan Super, it owns 56,499,584 shares, so will have received a dividend of K68,364,496.
Impact on super funds (focus on Nambawan Super)
Nambawan Super’s 2020 Annual Report indicates that apart from dividends from investments and unlisted entities, the fund also reported incomes from interest paid for bonds and loans, and income from property rentals. Nambawan Super then does a valuation of assets and declares a net gain, if net values increase.
In the case of BSP, the value of its shares can decrease if profits are going to be affected. Currently trading at K12.30 on the Port Moresby stock exchange and at AU$4.65 (about K11.79) on the ASX, investors might sell to invest in other opportunities, if the proposed windfall tax in the budget proceeds, and dividend income is likely to be reduced. Nambawan Super and other super funds as well, stand to lose in two ways if the super profit tax is applied to BSP.
First, there is less dividend paid by BSP to the Superfunds. Secondly, the reduced value of their holdings will reduce the asset value. Both these will now determine after expenses, that includes Government tax; the final return credited to each member.
In 2020, Nambawan Super credited members one per cent interest on the balance of their funds. This was much lower than previous years but due to the Coronavirus (Covid-19) and impact on business, this was a reasonable return. It looks likely that the Covid-19 is going to be with us in 2021 and 2022.
Property rentals are not at expected level and so property values have been reduced. Furthermore, the Government owes Nambawan Super rentals of more than K200 million .
If the super profit taxes are applied in 2022, and the economic conditions do not improve, Nambawan Super may not be able to credit even 1 per cent. Worse, member funds may be reduced by write-downs as a result of the losses. The values and balance of funds may pick up in subsequent years, but a worker who exits from the super fund during this period, will be paid a reduced level of monies.
Workers are currently unfairly overburdened by taxes. Workers pay income tax on the salary they receive. They pay a 10 per cent value added tax on goods and services they purchase. Other salient taxes such as fuel tax, airport charges are paid for when they want to travel.
They pay for health and education costs for their family members, and as we all know in PNG, that also of extended family and relatives. These are services that the Government should provide from the taxes that are paid.
Now, Government proposes to impose an additional tax that will reduce even the life savings that workers will need to retire and live comfortably in their old age. The worst affected are those without the time to recoup any immediate losses imposed by the proposed additional profits tax.
The super funds have also innovated and are offering opportunities to non-salaried Papua New Guineans to join the super funds through what they call “Choice Super”. Traders, SME owners and farmers can save away their extra earnings through savings with the superannuation funds.
They can then benefit from profits and earnings from listed companies such as BSP, Credit Corp etc and also from unlisted companies such as Brian Bell, Paradise Foods, Ela Motors, SP Brewery, Kumul Hotels etc where the super funds have investments.
This is an excellent initiative where the super funds are providing an investment vehicle for ordinary Papua New Guineans to invest in a diversified portfolio of assets now, for the future, when they are old and unable to work. The Government needs to support such initiatives in empowering financial independence of individuals.
Where did the idea of Super Profits Tax originate?
There was a proposal and recommendation for the tax to be charged for the non-renewable extractive industries sector, when the PNG NRI organised a series of research papers to inform the work of the Tax Review Committee headed by Sir Nagora Bogan in 2014.
It was proposed that this tax would be triggered by the market prices so that PNG would gain a fair share of the large profits being gained by mining companies when mineral prices reached certain pre-agreed levels.
This was similar to the controversial super profits tax on mining companies introduced by the Australian government, under former prime minister Kevin Rudd in 2010, that was eventually scuttled.
I now read from the Financial Review of April 22 that Rudd is calling for a reintroduction of the Super Profit Tax after the mining companies had announced astronomical profits.
This case has now been taken up by the Greens (political party) as reported in the Sydney Morning Herald on Sept 6, and that the Parliamentary Budget Office is working on proposals to apply not only a miner’s profit tax but also some of the successful large businesses, would also be charged extra profits tax. The Australian miners were successful in lobbying to remove the super profit tax.
It would be interesting to see if the proposal for the super profits for the broader business community will get endorsed by the Australian community and government.
It is interesting that the idea of a general successful business tax that is just being discussed and proposed for Australia is now being included in PNG Budget documents. The merits and demerits of such super profits charged by Government on successful businesses have not been debated and discussed fully.
What impact will it have on business productivity? Will it improve or reduce performance levels. The genesis of super tax seems to be coming from the US where a number of IT companies (Apple, Google, Facebook etc) and their owners and investors trading on the NYSE have reached astronomical worth valued at trillions of dollars.
The net worth of their owners and investors have reached billion-dollar levels, creating a super-super rich class of billionaires, the types never seen before. Democrats and other social justice advocates are pushing for super profit taxes on these American companies who use public assets to make lots of money, and it is only fair to redistribute the high profits they are earning now.
In the past, the US government had applied super profits tax during crisis and war periods where some businesses were making lots of money during an emergency, whilst others did not. But the current proposals and discussions suggest that a super profits tax would apply to these large US-based businesses that trade on the global market.
These are still at discussions stage as the G7 finance ministers agreed a few months ago to setting framework for tax rates ranging as low as 15 per cent to a high of 30 per cent on these multinational entities, making it fairer to all countries. The current system where some countries set lower tax rates, attract foreign investors to the disadvantage of other countries. Foreign investments are difficult to attract, especially in PNG, given the poor law and order image, and eroding public services. Corporate tax rates at 30 per cent in PNG is comparable to most other economies, including Australia, but access to public services lags far behind.
Some of us will recall that prior to Digicel’s entry into PNG in 2007, bmobile had a monopoly. Mobile services were not only poor but non-existent in most parts of the country.
Expensive hand sets and phone calls made mobile phone the privilege of the rich, including the politicians and top bureaucrats.
Digicel came in, rolled out over US$800mil (about K2,808mil) worth of infrastructure nationwide, and made calls cheap, thus making it more affordable for consumers. Additional profits tax on Digicel is likely to reverse some of these gains should the costs be passed on to consumers. We are now turning around and penalising Digicel for being aggressive, innovative and challenged the status quo investing more than one and a K500mil at that time.
Bmobile and Telikom, the State-owned entities, had the opportunity at that time but were unable to invest and deliver efficient, quality services. The Government needs to pay attention and fix their own business interests.
There is no natural monopoly.
It is a Government created monopoly and the Government must demonopolise by reorganising its business interests, attracting other investors to come in and challenge Digicel and bmobile and also in the supply of other essential utility services.
To conclude, the proposed super-profits tax on banking and telecommunications is bad for business, the consumers, and the nation at large.
Bad for business as it will dissuade investment. Bad for consumers as it will raise cost of banking and telecommunications – services that are desperately needed in the 21st Century and definitely so in a sprawling country where communities are separated by the rough terrain, the many languages, and the large distances. And bad for the nation since the super-profits tax will tax successful businesses, forcing their competitors to strive for mediocrity.
Is this what our leaders want?