By FRANK KOLMA
ON March 16, Prime Minister Sir Michael Somare first broached the subject of sovereign wealth funds while announcing to parliament the finalisation of financial closure for the PNG LNG project.
The prime minister told the house that the government was considering three such funds in anticipation of warnings that excessive inflow of funds from one sector into a small economy, such as PNG, can be damaging to other sectors of the economy in what is globally referred to as the “Dutch disease”.
Sir Michael said the government was exploring options to set up a stabilisation fund, an infrastructure fund and a future fund.
While the idea of a sovereign fund is not new, and PNG has itself operated similar funds in the past, the idea, along with other concepts such as the Dutch disease, has fazed many Papua New Guineans.
We begin here a number of articles to explain some of the concepts of such a fund and its relevance and how it might possibly be operated.
The prime minister said the stabilisation fund would focus on the management of the 30% corporate tax and additional profits tax revenue streams with the aim of minimising any potential Dutch disease impacts.
The stabilisation fund would be set up by the Department of Treasury, Bank of Papua New Guinea and Department of National Planning. It will be geared towards the prudent management of these two revenue streams to responsibly finance the annual budgets within the confines of our development, fiscal and debt management strategies.
The infrastructure fund would use the dividends from the state’s equity in the LNG project to mobilise financing for critical nation-building infrastructure such as power, aviation, ports, water, roads and others. The dividends will be held by Kroton No.2 Ltd, the state’s nominee in the project.
The Department of Public Enterprises and the Independent Public Business Corporation (IPBC) were to design and set up this fund.
A portion of revenues from corporate tax, additional profits tax and dividends in the PNG LNG project would be dedicated towards the third fund, the future fund, the prime minister said.
He said: “Papua New Guinea has adequate lessons based on which to manage our future revenue. Our experience from the mineral resources stabilisation funds, our management of trust accounts and, most importantly, our political, macroeconomic and financial management experiences.
“My government will develop a robust framework for effective and transparent governance of future revenues from the PNG LNG project.
“This will be in place well in advance of the first flow of revenue to PNG, which is anticipated to take place in 2014.”
Following the prime minister’s statement, the National Executive Council (NEC) established a joint Department of Treasury-Bank of PNG working group.
The group was tasked to:
*Assess the appropriateness of the current framework;
*Seek feedback from international institutions (including the IMF, World Bank and ADB) and other appropriate governments;
*Canvass possible options for government consideration, including the possible creation of an offshore fund to manage windfall revenues arising from the PNG LNG project; and
*Report back to NEC by June 30, 2010.
After seeking input from government agencies, international stakeholders and gleaning literature on experiences around the world, the group put out a discussion paper recommending only one sovereign wealth fund, which would take into account all of the prime minister’s concerns.
The working group also recommended that this fund be held off-shore, which has prompted talks now reaching finalisation with the Australian government for assistance to establish the fund.
The IPBC is understood to be preparing a position on sovereign wealth funds which is expected to be published soon.
Whatever forms the fund or funds take, the idea, although not entirely new, has most people bewildered.
They wonder whether there is something untoward here and whether there are sinister plans to siphon off the country’s wealth.
No doubt, as with all things, there are risks involved but sovereign wealth funds are a tested and tried from of diverting excess funds.
PNG’s own coffee stabilisation fund and the mineral stabilisation fund are examples of such funds.
The working group discussion paper, posted on the Treasury Department website, dispels some of the mysteries of funds of this nature and presents options which, for the inquiring mind, are quite educational.