The Infrastructure Tax Credit Scheme has seen the funding of many projects.
Business reporter PETER ESILA talks to PAUL BARKER, the director of the Institute of National Affairs, about it.
THE infrastructure tax credit scheme (ITCS) must not unduly undermine orderly management of the annual Government budget process, notably timely revenue collection and availability of funds for approved expenditure, says Institute of National Affairs.
Director Paul Barker said the scheme, introduced in 1992, had been useful both to Government and participating companies.
“It is critical that the rules are clear-cut,” he said.
“Such ITCS funds should not continue to be diverted to ad hoc, particularly status urban projects, but provide needed public goods in rural areas, notably in affected provinces, and that provincial governments approve the projects as being consistent with their agreed priorities.”
Barker said through the budget process, Treasury tried to manage the whole fiscal envelope and ensure that revenue from tax, duties and rentals were all collected and go to consolidated revenue.
This is so that they can forecast accurately how much is likely to come in their revenue forecasts to allocate out to different activities in the budget appropriation: notably medium-term development plan III, medium-term fiscal strategy as well as limiting and managing debt under the debt strategy.
“The Government introduced the Fiscal Responsibility Act in 2006 to better manage the budget process and debt ceilings, and more recently the Regularisation Act to bring revenue from the different statutory authorities back to general revenue,” Barker said.
“This is in view of inadequate revenue that State has been gaining to meet its expenditure requirements, but also as a result of poor accountability by some of the authorities.”
He said in the 2018 Budget the Government stated, in Volume 1, it has noted the “view of the tax review committee that there is not enough administrative capacity to monitor the quality of the infrastructure built though the credit scheme and, so far, funds spent towards such infrastructure are thought to have fallen short of providing benefits at a coverage that would have been possible had the funds been spent as part of the national priorities through the Budget”.
“Hence they introduced a moratorium on new projects in the 2018 Budget and decided to do a review of the scheme under the Medium Term Revenue Strategy,” Barker said.
“It is not known whether that review has been conducted, but certainly, there was pressure to maintain the mechanism, as it responds to urgent needs on the ground.
“For example, for urgent road or bridge repairs in a timely manner, and in the absence of capacity by Government, in terms of available plant and equipment or contracting capacity.
“The tax review might well have been correct that by undermining revenue and allocating expenditure in a relatively ad hoc manner, it might well be an inefficient delivery mechanism, and as observed in recent years, open to some level of abuse.”
Barker said ITCS was meant to be based upon income tax.
A company may get away with failing to fulfil tax obligations as a result of the weak oversight of this scheme.
“Many of the participating companies are administering it in a totally-credible and transparent manner, but some maybe providing overpriced or over-invoiced infrastructure,” Barker said.
“Generally, the scheme has been useful both to Government and participating companies, but, as stated, the guidelines need to be sound and clear.
“The whole process must be efficiently overseen in a transparent manner.
“It is meant to be based upon income tax.
“The logging industry, over the decades, has not been declaring profits and therefore been largely avoiding tax, paying only log export tax plus royalties to landowners, etc.”
Barker said strict care should be taken to avoid allowing further loopholes for companies to further avoid tax obligations.
This is by building infrastructure which is not genuinely a public good, so rigorous guidelines must be provided and overseen by an independent and timely audit and oversight process, with reporting provided nationally and locally.
Department of National Planning and Monitoring launched the ITCS revised guideline in Port Moresby last week with an increase from 0.75 per cent to 2 per cent.
“Increasing the portion of tax that can be used under the infrastructure tax credit scheme, and extending the industries that can participate, has the advantage that funds might be more readily available for local priorities, such as maintaining critical roads and bridges in the vicinity of mining, gas, agricultural or tourism and other projects,” Barker said.
He said ITCS was introduced in the early 1992 as a result of an urgent need for providing sound infrastructure in the vicinity of major resource projects, particularly for communities not deemed to be directly mine-affected communities, or at least those which may already be beneficiaries of support programs.
“It was a recognition of the weak capacity of authorities, notably the provincial governments, to be able to fund and implement such projects,” Barker said.
“The resource companies were often better placed to promptly manage the process of funding and contracting, and therefore delivering, in a more-timely manner to meet local needs and in some cases to restore or upgrade existing transport infrastructure, damaged by wear or possibly from major events, such as floods or earthquakes.”
Barker said over the years the scheme had worked reasonably well, providing critical transport and other infrastructure needed by farmers and communities in rural areas, although there had been some complaints over certain projects considered to be unduly beneficial to certain companies or schools, health facilities built but not incorporated in local plans and unstaffed.
Barker said generally, there was more praise for the scheme than negative feedback, in view of its relative promptness in response and delivery, general value for money and weakness of Government to deliver such essential services in a timely manner.
“The danger, of course, was to avoid unduly undermining the overall fiscal system,” he said.
“This needs to function in a coherent manner, providing steady and adequate revenue to the State, for the State to reallocate annually to priorities set out in its plans, with the approval of the Parliament, through the annual budget process.”
Barker said that ITCS started coming under increasing public criticism when public funds under this scheme were being allocated to major grand, and often ad hoc construction projects, often unlisted in national plans or budgets, far away from the resource project that generated the revenue and the rural population crying out
for public goods which were lacking.
“The Agiru Haus in Mendi was perhaps the first of these status projects which seemed to divert from the purpose of the tax credit scheme, and a succession of major constructions in NCD, some of which didn’t appear to go through proper procurement processes, added to public concern that the scheme was being abused,” he said.
“It also invariably frustrated communities in resource projects.
“This invariably implicated the respective resource companies, which were subjected to criticism by the public, including those from the originating province, that they were being used or misusing the funds under the scheme, albeit under direction from some authorities.”
Barker said the scheme was intended to benefit local communities, but be approved through a process of including endorsement from the affected provincial government, which would need to ensure that it was consistent with its plans and priorities.
“The scheme entailed the companies from selected businesses, notably the extractive industries, but subsequently extended also to agriculture, funding approved projects instead of paying that equivalent amount of company tax,” he said.
“In other words it was money owed to the Government as tax, and agreed to as priority expenditure by the National Planning Department and the relevant provincial government, with the process overseen by the tax office.
“Normally, the project would be in the vicinity of the resource project, but in some cases possibly outside the province.
“For example, restoring a section of the Highlands Highway, but indirectly thereby assisting the people of the ‘home’ province.”
“The projects should not be specifically for the benefit of the company funding them in return for the tax credit.”