SWF plan derailed by falling oil prices

ON the night of Aug 15, 2014, Prime Minister Peter O’Neill addressed guests at the PNG LNG Project dinner in Port Moresby. The event was to celebrate the completion of the construction phase and the commencement of production and exports of the project.
O’Neill assured that all wealth generated from the project would be well managed in a Sovereign Wealth Fund (SWF).
“Discussions for the establishment of the SWF is nearing conclusion and we will be able to take it to Parliament very soon. That will ensure that we are able to secure and stabilise our nation’s fiscal future and the future of our country,” he said.
In a special and exclusive interview with The National, Deputy Prime Minister and Treasurer Charles Abel said the collapse of world crude oil prices derailed the SWF plan.
“Part of the reason (for not setting up the SWF) is that we never got much revenue. We were short of revenue.
“The momentum behind the SWF weakened because both oil and gas prices dived significantly. There wasn’t (enough) revenue to (back a SWF) anyway, except into our budget.
“In fact, we found ourselves a little bit short of funds because of all the commitments to the landowners and equity rights to the project. We didn’t have the corresponding income (to continue with the SWF plan).”
Abel adds: “The biggest part of it was the oil price, and the other part was that the project was structured in a manner that didn’t float to the State.
“The Organic Law on the SWF 2016 was passed by Parliament on July 30, 2015 and gazetted on Jan 20, 2016.
“It will establish a SWF together with a board/corporate to manage it.
“The SWF will comprise two distinct sub-funds called the stabilisation fund and the savings fund. The SWF’s objectives are macro-economic stabilisation and inter-generational equity.
“The treasury minister determines the investment mandate, subject to the law. Investments are only to be in foreign assets, and the fund may not be used as collateral for borrowing or otherwise.”
Abel stressed that SWF board members are to be appointed by a committee comprising the prime minister, the opposition leader, the Governor of Bank of PNG, the auditor-general and the president of the PNG Chamber of Commerce and Industry.
He said withdrawals from the stabilisation fund could only be made through the National Budget.
Abel said: “We just need to operationalise it now with the establishment of a board. That’s the process we’re going through now.
“There is a bipartisan committee that we have to bring some names forward to, and then we’ll sit and appoint that board.
“I’ve always made a commitment that by the middle of this year, we’ll have a board in place.
“At the same time, I’m aware that we don’t want to create unnecessary structures and expenses, particularly when we’re not in a position yet to actually put any funds into the SWF.”
Abel said the most-important thing was to ensure that the funds were in place for the setting up of the SWF, comprising a stabilisation fund and a long-term fund.
He explained: “Money initially goes into the stabilisation fund, of up to US$1 billion (K3.3 billion), which is still accessible for budget purposes.
“Once the SWF grows beyond US$1 billion, it spills into the long-term fund. It is difficult to access the long-term fund, which goes into long-term investments, and we should only be drawing from the earnings.
“Those are the two basic mechanisms behind the SWF.”
Abel said he had even invited expressions of interest from countries like Chile, where the Santiago Principles were developed around how SWFs were run.
The Santiago Principles consist of 24 generally accepted principles and practices voluntarily endorsed by International Forum of Sovereign Wealth Fund members.
The Santiago Principles promote transparency, good governance, accountability and prudent investment practices whilst encouraging a more open dialogue and deeper understanding of SWF activities.

SWF benefits expected to flow to people, country
Treasury secretary Dairi Vele, pictured, says Papua New Guinea’s Sovereign Wealth Fund (SWF) board selection process is now underway.
“What’s been slow, of course, is there’s no money in the SWF as yet. Hopefully, if things turn around, we will be looking at putting in some money in (the SWF) over the next couple of years.
“We’re just careful about building a big organisation when there’s nothing to pay for it at this stage. I understand the treasurer’s view is that we should get a board in place, probably just after the third quarter, so that we go through the process,” he added.
Vele said: “We ran a process with KPMG professional auditors cum consultants, who conducted the interviews and selection process, and they’ve submitted a shortlist that the government is now processing.
“Because it’s been a while ago, some of those people have dropped out, including the late Sir Brown Bai, who was one of the candidates to be the chairman.
“We expect that in the third quarter of this year, hopefully, we can announce a small board to get things moving. Obviously, as the oil prices get better and we get a little bit more money, there’s some more momentum.
“Hopefully, we will then have the premier SWF in the Pacific, and in the southern hemisphere.”
State-owned Kumul Petroleum Holdings Ltd managing-director Wapu Sonk tells The National it is supposed to be contributing to the SWF, but oil prices are still low.
“The structure is there, the legislation was passed, it’s just ready to go. As soon as oil prices go up, and revenue to the State and Kumul improves, I think the Government will start to think about putting funds for the SWF. At the moment, there is not enough cash to do that.”
University of PNG’s school of business and public policy senior lecturer Panditha Bandara, pictured, says the SWF is crucial to the country’s future.
“It will be a huge asset for the country in foreign exchange,” he tells The National.
“Once the revenue of the investments flow into the fund, the fund will expand significantly. If you look at the other funds, the biggest SWF in the world is the Norway SWF. It invests heavily in the US market and earns good annual returns.
“PNG is listed among the countries with SWFs, however, it has no assets to its name,” he said.
But from the country’s point of view, Bandara said: “Although PNG is late (in setting up a SWF), we can’t say it is very late because there were only initial discussions in 2009/2010.
“There were many discussions and finally, the World Bank, IMF (International Monetary Fund), ADB (Asian Development Bank) also intervened in the process.
“In 2011, there were many legal criticisms. The laws were very strong, addressing wide issues but, maybe, because they consulted many other funds and also the Santiago Principles.
“It is not that easy to manage a SWF because it is mandatory to follow the generally-accepted principles outlined by the 31-member International Forum of SWFs.
“This is the organisation that came up with generally-accepted principles and practices for governing SWFs.
“I believe that PNG will be a member once this (SWF) is established.
“That means governance will improve, transparency will improve, bad investments will not be undertaken. The benefits will be flowing to the people, I think, in the long run.”
Bandara said: “The first thing is that the SWF must accumulate US$1 billion. It will take some time.
“The government is willing, and there are provisions to allocate some money from government annual budgets to this fund, so that’s also a possibility.”
Meanwhile, the SWFs of the global players continue to grow as PNG strives to kick-start its maiden fund for the future of Papua New Guineans and PNG.