We must avoid Dutch Disease


By Frank Kolma

THE year 2009 closes with an agreement in place for PNG’s first liquefied natural gas project signed into existence.
With financial backing from the US Export Import Bank and Australia, with definite markets signed up and with Australia proposing to support with a sovereign fund to help put away super profits, PNG’s future portends well.
A second LNG project was agreed to by Cabinet last week, giving InterOil and PNG’s own Petromin the nod to develop their gas reserves in the Gulf province.
The Ramu nickel mine is under construction and exports are expected in 2010.
Other mines in Yandera in Bundi, Madang province, the Wafi copper mine in Morobe, the Frieda copper mine in Sandaun and expanded and extended life of the existing Lihir gold and Ok Tedi copper mines mean that the country will see an influx of revenue the likes of which it has never experienced before.
But plenty of cash does not translate into wealth or improved living standards.
Our own experience ought to instruct us.
The very first temptation we must resist is our own spendthrift culture.
With a relatively small population and with most of that population destitute and poverty stricken, the temptation facing public policy makers will be to pass on the cash straight out to the population in the hope that cash in the hands of the people would automatically improve their welfare.
It will not work and our experience of the immediate past ought to tell us better.
The windfall billions from the last seven boom years went straight into trust accounts and then went straight out into some one-off infrastructure projects but mostly through the politically expedient trust accounts under the district services improvement programme (DSIP), the RESI funds of the education sector, the national agriculture development programme and various other smaller sector funds.
All of these trust funds pay out checks which are picked up by the respective Members of Parliament.
Total amounts under the DSIP alone paid out in the last three years amount to K14 million per Open electorate or a whooping K1.246 billion.
Next year, Regional MPs or governors will join the fray with a certain provincial services improvement programme at K1 million apiece.
The DSIP to the Open electorates remains at K2 million per electorate so a further K298 million will be passed out through this process.
Together with the other sector trust funds, nearly K2 billion has been paid out to individual district treasuries.
Since few, if any, of these treasuries have any capacity to manage or maintain proper records, much of these public monies have not been accounted for.
Indeed, much of the money remains in urban centres in the hands of middle men and con-artists.
There is no capacity to maintain whatever projects are being put down in the rural areas because many of these projects are built outside of existing service department budgets so that maintenance of these projects does not even feature.
The last of the money in the trust accounts was paid out in the last two weeks so that there is no money left to fund next year’s budget, which by all accounts will be a difficult year as the full effects of the global recession hit.
Through the 1970s, 1980s and 1990s, PNG has received mega millions in external aid – some A$28 billion of it from Australia alone – and many more billions from Bougainville copper until its closure in 1987, from Ok Tedi, Porgera, Misima, Kainantu, Lihir and  from the oil fields of Kutubu, Gobe and Moran.
Benefits of mining and petroleum in the last decade alone represented 70 % of total PNG exports and contributed almost a third of Government revenues and about 25 % of GDP.
This means that out of every kina from export revenue in the last decade, 70 toea came from mining and petroleum.
To take just one example: From 1989 to 2004, the Porgera mine produced more than 13 million ounces of gold, worth more than K8.5 billion in export value.
In 2004, the gold and silver from Porgera made up 16.4 % of the total exports from PNG.
The National Government received K170.4 million in taxes and duties from Porgera in 2004 alone and, since production started in 1989, it has received more than K1.1 billion in taxes (corporate and income) and customs duties.
Since 1989, Porgera landowners and the Enga provincial government have received K157 million.
Between 1989 and 2004, Porgera spent more than K51 million on employee education.
Porgera also spent more than K10 million to sponsor more than 500 students (non-employees) to schools, colleges and universities during the period 1989-2004.
This excludes the substantial foreign exchange revenues brought in by agricultural crops in coffee, cocoa and increasingly oil palm and from forestry and fisheries and marine resources.
Had PNG converted these natural assets in a sustainable and responsible manner, the country ought to be economically buoyant and vibrant and improved living standards should be a matter of course.
Sadly, this has not been PNG’s experience.
While billions of kina have flowed into the economy, it does not show up in public and private sector growth and in social advancement.
Investment in social infrastructure has plunged.
So has PNG’s human development index on almost all fronts.
The cost of living has risen for most but a very small sector of society which has kept the lion’s share of the country’s riches.
Tragically, activity in the infantile manufacturing sector and in the once thriving agriculture sector is now stalled or stopped dead in the water.
There is no quantifiable conversion, so far that I can see, of mineral and hydrocarbon proceeds into sustainable improvements in people’s lives.
This is the onset of what economists have termed the resources curse or the Dutch Disease.
In the 1960s, natural gas was discovered in the Dutch exclusive economic zone of the North Sea.
The resulting gas resource boom saw the Dutch government concentrate all efforts on the extraction and marketing of its new found resource with the result that the rest of the Dutch economy suffered.
When the gas resource boom petered out, the Dutch traditional economy was in shambles.
PNG seems to be walking down the exact same path.
It is imperative that PNG’s economic think tanks and policy makers must look to the past at our squandered billions and our missed opportunities and design economic models and micro and macroeconomic policies that will cure us of the Dutch Disease.
If we fail to do that, then we will fail our people again.
Only this time we have been warned.