Current development trends in Papua New Guinea have led to rampant deprivation. In order for the country to go forward, the economy must be transformed so that we find a...

A Sovereign Wealth Fund (SWF) is for government revenues to be set aside for investment purposes in order to benefit the nation.

The SWF is usually managed as a financial investment by fund managers on behalf of the State. Assets other than financial assets are also managed. Country practices differ in terms of the sources from which revenues are derived and the assets in the investment portfolio.

In anticipation of the huge government revenues accruing from the development of a Liquefied Natural Gas (LNG), the question in the minds of many people is how these revenues will be utilised.

In recent years, politicians, bureaucrats, academics, donors and development partners, commentators, and the general public have been discussing the creation of a SWF.

Varied opinions and concerns have been expressed on the use of the LNG revenues because of widespread concerns about the management of public money in Papua New Guinea.

Mainstream government thinking seems to be in favour of a SWF. A Joint Treasury and Bank of Papua New Guinea SWF Working Group will soon submit a report to the National Executive Council (NEC).

Other significant suggestions about the utilisation of the LNG revenues include:

• boosting spending on important government expenditure areas such as education and health;
• establishing economic corridors across the country in order to promote the creation of income and thereby reduce rampant poverty in most rural areas;
• distributing cash from the investment income of a managed fund to the citizens in order to spread wealth; and
• sterilising the revenues in order to avert its adverse impacts.

Questions on how the LNG revenues are going to be used, when, and for what purposes, requires policy decisions which must be based on informed knowledge of economics and PNG’s development experience.

The policy framework

LNG revenues collection and utilisation come under the domain of fiscal policy, which is about government revenues, expenditures, and budgetary balances. Any use of the revenues is a fiscal policy measure and it has monetary implications. A government decision to establish a SWF is therefore part and parcel of fiscal policy. However, managing a SWF is usually an off-budget process. Fiscal policy is one way of influencing a nation’s economic growth and development. Its ultimate goal is to promote the welfare of the citizens. Its measures play a role directly or indirectly in impacting the economic and social environment, which in turn affects economic growth and development.

What justifies SWF in PNG’s development context?

Growth and development challenges
Policy measures that are designed to utilise the LNG revenues must address the impediments to Papua New Guinea’s economic growth and development. The political economy faces myriad economic growth and development constraints.

An enclave growth has prevailed in Papua New Guinea since independence in 1975. Economic theory and practice support this growth approach, whereby a developing country exploits its competitive advantage in order to create income, which can subsequently be used to broaden growth and development. However, this has not happened yet.This country is richly endowed with mineral resources, large tracts of fertile agricultural land, pristine timber forests, tourism resources, and vibrant population. What have been scarce are financial and human capital, and the capacity to develop these resources. The mineral and LNG revenues provide the Government with the opportunity to open up the country’s economy and build on the inadequate capacity for broadening the growth base and development. The use of these revenues should be tailored to tackle the problems that impede growth and development.

Up to this time, current development trends in Papua New Guinea have only led to rampant deprivation. In order for the country to go forward, the economy must be transformed. This requires huge public investments, which have been strategised by the PNG Development Strategic Plan which is aligned to Papua New Guinea Vision 2050.

Why so much underdevelopment?

The development of extractive industries has driven a narrow based economic growth. Revenue sharing has perpetuated segregated development with a few provinces relatively better off than the rest.

Development has been urban biased. Over 80 percent of the population in rural areas lives a semi-subsistence life style. Inadequate transport connectivity inhibits access to niche market and deprives most rural dwellers from enhancing income creation. The law and order situation has undermined business spread and viability. Relatively low incomes in rural sectors have driven rapid rural migration to urban areas. The migrants seek jobs which do not exist. Huge urban unemployment and low income receipts have promoted ghettoes (urban settlements) and crimes (rascal activities). Lack of access to opportunities to enhance income creation has resulted in widespread poverty.

Escaping underdevelopment

It would be inexcusable not to use the huge LNG revenues and ‘additional mineral’ revenues to escape the trappings of underdevelopment. The Sovereign Wealth Fund should be part of the solution to this problem. It should not be emphasised at the expense of other fiscal measures that will broaden growth and development.

It makes economic sense to use LNG revenues to:

• overcome enclave growth in Papua New Guinea;
• promote broad-based growth and sustainable development; and
• focus policy on law and order, transport connectivity, and security for land development, which will open up the economy.

Sovereign Wealth Fund is just part of a solution

Decisions to utilise huge LNG revenues pose tough challenges to policy makers. Within the Papua New Guinean context, utilisation of these revenues should meet the following objectives:

• safeguard misappropriations;
• benefit PNG’s current and future generations;
• broaden the economic growth base and development; and
• maintain a macroeconomic policy stability.

The SWF cannot meaningfully promote all of the above objectives. Papua New Guinea will remain underdeveloped if policy attention for utilising the LNG revenues is focused on SWF at the expense of other policies that can open up the economy.
Meeting the four objectives listed above requires the design of the following policy mix:

• reforming the regulatory framework of operations with state funds and the enforcement of fiscal compliance in order to minimise misappropriations, misapplications, and theft of public money;
• determining an optimal growth path of the annual budget and setting the boundaries of the path which is consistent with fiscal stability; and
• establishing an ‘All Purpose Resources Fund’ (APRF), which should serve as a channel through which LNG revenues and additional mineral revenues, perhaps some other revenues can be transferred to:
• the annual budget to top up what is required to ensure fiscal stability;
• economic corridors’ development as proposed in the Papua New Guinea Development Strategic Plan which will address broad-based income creation and thereby reduce poverty; and
• SWF that will be managed independently for the benefit of the present and future generations.

Good models can be designed as follows:

• the APRF will act as a flow-in-flow-out fund, which simply serves as a cleaning house, and specifies a formula for the outflows of the fund;
• the economic corridors will be managed by investment authorities (independent body), taking a cue from the Papua New Guinea Sustainable Development Model; and
• the SWF’s investment incomes will partly flow back to the APRF.

Dr Agogo Mawuli was formerly the head of the economic studies division and professorial research fellow at the National Research Institute.

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