PNG’s Sovereign Wealth Fund: still too many loose ends

Since August, government ministers have hinted that we might soon see an update on the state of Papua New Guinea’s Sovereign Wealth Fund (SWF). Despite the recent parliament sitting, the government’s plans remain unclear. We wait for the answers to two important questions:

1. When will the Sovereign Wealth Fund be finalised and implemented?
2. Will the operational rules and responsibilities, and the overall role of the Sovereign Wealth Fund, actually be what they said it would be at the outset?

With PNG’s LNG exports now regularly reaching Japan’s shores, the government should be ready to answer these questions.

To adapt the words of the economist Professor Paul Collier, Papua New Guinea’s history of natural resource extraction has been of plunder. The challenge facing prime minister Peter O’Neill and treasurer Patrick Pruaitch is to stop history repeating itself. The people of PNG do not want to sell their children’s Melanesian birthright –only to become poorer for it.

Policy makers in PNG recognised the necessity of institution building in order to make the best use of the sale of the country’s LNG assets. The results show how far their understanding has developed from the days of the PNG Mineral Resources Stabilization Fund.

The plans for natural resource governance were ambitious: reform the budget system to better align development and recurrent spending priorities; lock in spending patterns that favour ‘development enablers’; and develop medium-term fiscal strategies. All of these were designed to strengthen public financial management in preparation for this latest round of mineral resource extraction.

More specifically, the SWF was to be the anchor for management of volatile and short-lived natural resource revenue streams. Many governments lack the capacity to manage rapid increases in revenues. Weak public administration systems are susceptible to waste and corruption. For the economy, the influx of money can quickly be eaten away by increasing prices, and the competitiveness of productive sectors can be damaged by higher prices, wages and a stronger exchange rate.

A Sovereign Wealth Fund is a tool used to ease some of these pressures.

Regulated limits to the government’s use of resource revenues are set according to government’s capacity to spend effectively and the need to save for future generations. Savings are typically invested abroad to prevent those economic pressures often referred to as ‘Dutch disease’.

The proposed SWF framework, according to the IMF, ‘has generally followed sound principles’. There are few exact rules for the SWF, though, and under the current plan, the formula that determines the amount that can be withdrawn has been subject to criticism. Some say that insufficient funds will be saved.

Yet, before this discussion was complete, talk of the Sovereign Wealth Fund dwindled, and promised national consultations never happened. Some fear that the silence coincided with the government’s Oil Search share purchase, reportedly committing future LNG revenues to a large external loan repayment.

Will policy makers be able to turn lessons learned into action? We can only wait for these processes to be concluded and hope that the rules of the game are set for the future: transparency commitments, fund deposit and withdrawal rules, and the specific roles and responsibilities of its staff and board. The 2011 Organic Law on the Sovereign Wealth Fund provides the government’s framework for much of this.

The current plans, along with information pamphlets, can still be found here. It is unclear, however, how much of these initial plans the government wishes to maintain.

Another lesson from the past is that the management of LNG revenues is not purely a technical challenge. It is also a political one. It requires a widely shared understanding of the importance of a well-defined and well-regulated fund. Significant consensus building will be needed to create the foundations for accountability.

Even after we have ironed out those technical and operational issues of the creation of a sovereign wealth fund, Papua New Guineans need to see that all those responsible are acting in their best interests all the time. It is for this reason we see the Extractive Industries Transparency Initiative (EITI) placing obligations on companies and governments to publish information. Transparency is a necessary condition for accountability.

The wheels are reportedly in motion for PNG to move from an EITI ‘candidate’ country to a ‘compliant’ one. But the current lack of transparency around the resource management process tells a somewhat different story.

As with the SWF, policy makers in Papua New Guinea have made a start on planning certain aspects of the EITI. On March 2013, the National Executive Council signed up to the EITI and endorsed the Treasurer to lead its implementation.  In the process, a Memorandum of Understanding was agreed to for the creation of PNGMSG, a multi-stakeholder group including government, civil society and mining and petroleum companies with the aim ‘to promote revenue transparency and accountability in the extractive sector’ and ‘to provide a balanced forum for dialogue, debate, and consensus on EITI-specific issues relating to the extractive sector’.

In comparison with other efforts at natural resource governance, the PNG government has made good headway in creating a foundation for use of the LNG revenue. However, having done this hard work, public conversation has died – from the outside, the process of putting the SWF into operation appears to have halted.

The government offers some reassurances of the sensible use of LNG revenues and the ‘prudent manner’ in which Oil Search shares were purchased. Yet, if the SWF is put into operation on the basis of previous commitments to engagement and transparency, we should not need to rely on reassurances from political leaders – instead we should have access to the details of agreements and the data.

If it’s going to proceed with it, the government would do well to announce specific plans for the Sovereign Wealth Fund before the year is out. There are many loose ends still to be tied up.