In July, the government released an unhappy report about the state of public finances. Poor or heavily politicised budgeting was expected to result in a budget deficit considerably larger than planned. The report said that on top of overoptimistic revenue projections, the better part of 1 billion Kina was at risk, expressing fears about LNG revenues being directed away from the budget, uncertainty concerning scheduled equity sales and questionable state-owned enterprise revenue projections.

Since then, the government has been working behind the scenes to pull things back into line. In an apparent effort to buy itself some time, the government quietly avoided publishing their regular Budget Strategy Paper in September, an obligation set out in the Fiscal Responsibility Act.

Now the projected 2014 budget deficit has reportedly moved to a much more respectable level of about 5.9% of GDP (K2.5 billon), more or less in line with projections laid out in the 2013 and 2014 budgets. Some serious work was needed to rectify the problems in the original 2014 budget. By this measure at least, the 2015 budget could be called a success.

But acute financial stresses are being felt. A recently leaked government circular illustrates the pressures arising from such a prolonged period of deficit spending. The document announced that the Secretary to Treasury was to ‘cease all warrant releases (except for personal emoluments), effective immediately’. The government is effectively asking departments not to commit to anything and give back unspent cash, well over a month before the end of the year. Behind the scenes, officials are looking for short-term solutions to cash flow challenges.

Longer-term solutions must rely on sustained political commitment to fiscal consolidation.

2014 Budget: Eleventh hour revenues and a spending jigsaw

Despite concerns expressed in June, 2014 revenues have managed to meet their original estimate in the 2014 budget, dragged over the line by an eleventh hour increase in some revenue sources. This looks to have been the result of hard work mixed with a dose of luck.

The Treasury’s concerns about a risky K600 million-asset sale were justified. It didn’t happen in 2014, nor has it been penciled for 2015. Given the risks involved, it’s hard to imagine why such as large revenue figure was earmarked for 2014–except to provide greater latitude for spending.

Less worrisome was the fear that all LNG dividends would be diverted from the budget. It appears that dividends are reaching the budget. Revenue in 2014 will be supported by LNG dividends worth over PGK 400 million. However, it is not clear, whether resource revenues are being diverted away from the budget., The lack of transparency around the UBS agreement still continues to cause a lot of uncertainty. To give faith in the good management of resource revenues require a much greater degree of transparency and dialogue.

Personal and company tax revenues were both doing well by mid-year –in part due to compliance efforts– but not well enough to counter shortfalls elsewhere. The Treasury was also concerned about the reliability of State Owned Enterprise revenues. Over the last few months the situation has changed for the better. Improved tax and SOE revenues reportedly added PGK 320 million more than anticipated, and have helped fill the hole.

Government spending is also expected to come in at a similar amount to original budget estimates. To achieve this, the government has done some serious rearranging to accommodate new items: PGK 204.3 million in increased interest costs, PGK 250 million for the South Pacific Games, PGK 60 million for Lae City Roads, PGK 75 million for National Capital District Roads and PGK 40 million for PNG power. This reportedly has been paid for by a savings drive. We know from the 2014 Supplementary Appropriation Bill that money was moved from various departments, capital and trust accounts, giving the government another PGK 1 billion to play with. Whether this is a savings drive or collecting money that has been unspent is unclear, but it has allowed the government to deal with overspend without deepening the deficit.

2015 Budget: looking ahead

In the budget books, Treasury has laid down the challenge ahead, noting that the budget situation is central to macroeconomic stability:

Recognizing that continues large deficits are not sustainable, the government has adopted to ease growth in expenditure to more sustainable levels…This will involve controlling expenditure and be assisted by increased revenues flows…reducing the deficits to sustainable levels will also enable the government to better respond to future external shocks

In 2015, the government plans to reduce the deficit to 4.4% of GDP. This is a larger deficit than previously planned, but it would put the PNG government on track towards a balanced budget over coming years. This will bring the debt to GDP ratio down to below 30% as required in fiscal plans. This is vital to avoid exacerbating borrowing problems and driving borrowing rates upwards.

Since the deficit has been left for longer that initially envisaged, greater cuts to spending are now needed to bring things back into line. The government is planning huge cuts in spending in 2016 and 2017. Planning two consecutive years of sizeable cuts and relying on notoriously volatile resource revenues is optimistic, to say the least. To implement this, the government must build political consensus around these plans. It will be hard to convince political actors to buy in to the ‘end of the expenditure boom’ as elections loom.

Pencilling in equity sales as revenues, as happened in 2014, was a mistake. In 2015, a huge PGK 2.5 billion from the sale of landowner equity in LNG is delegated to pay down debt. The government plans on financing the deficit through this sale to landowners. This will not be easy. Neither should it be rushed due to financial pressures. Yet if it is not possible to make this transaction, interest rates must increase and borrowing will become even harder, perhaps causing even more cash-flow problems. It is not clear how much the government can realistically pin its hopes on external borrowing. But they certainly cannot rely on the central bank printing press without storing risks for the economy.

Plans to cut the budget deficit hinge on decisions around the Sovereign Wealth Fund and the flows of resource revenues. The budget offers a good start with a brief update on the sovereign wealth fund, however, the veil of silence must be lifted to allow these issues openly to be discussed. In the four years running from 2016 until end of 2019 only about 4% of the resource revenues will be saved. The rest will be used to support the government budget and help the government to reel in the deficit.

The amount earmarked for saving may be too small, not only because little is saved for future generations but also because it doesn’t leave an adequate buffer for price fluctuations. The risk of wastage or misappropriation should be hedged against as well. In this budget, LNG revenues seem to have allowed an expansion in district programmes –likely controlled by MPs. This risks wasting resource revenues. More concrete plans for protecting resource revenues and earmarking specific amounts for investment are will be necessary if long-term stability is to be achieved. But the government has stifled these discussions through its silence.

PNG has made great strides in bringing the headline figures back into line. Cash-flow and financing challenges are likely to continue, however. More credible plans and safeguards are needed to protect natural resource revenues from financing waste. Presenting agreeable numbers is not enough; there must be sufficient political buy-in to deliver these plans.

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.

As expected, it’s not a pretty one.

What we see is a government struggling to play by its own fiscal rules or to deliver on its own budget plans. It’s not obvious how long the country can safely continue down this path.

Missed targets high and low

The report confirms that low commodity prices have caused revenues to undershoot expectations. Dwindling mining and petroleum tax revenues are the main cause. By the end of the year, Treasury expects to receive close to PGK 400 million less than it had forecast in the budget.

With spending reportedly proceeding as planned, they now believe the government will be left with a deficit just under PGK 400 million larger than planned –and roughly PGK 50 million more than last year.

The upshot of these revisions is that targets for the debt to GDP ratio, as set out in the Fiscal Responsibility Act, will be broken for a second year running. At the end of 2013, the legal debt limit was 30% of GDP; by the end of this year, parliament will be asked to revise the target up to 40%. The government is struggling to stick to its rules. Clearly, they realise that the Fiscal Responsibility Act is only as strong as the will to defend it. In practice, amendments like this go through with little discussion or pushback.

Rules such as these are enshrined in law to avoid the risks associated with over-borrowing. In this latest report, the Treasury admits that ‘interest rate and refinancing risks’ are building. This road can lead to a place where the government is unable to pay its bills, where it’s forced to default on its debt or even to suffer externally imposed austerity.

PNG might not get to this point, but the longer it takes to correct the deficit, the more painful it will be. Previous plans for 2015 suggested the need to hold spending increases at less than the rate of inflation – that is, a ‘real’ cut in spending. To put the country back on the track set last year, nominal cuts would now be required. This is likely to be distasteful to cabinet.

Missing from the report is a discussion of LNG revenues. No insight is given into the AUD 1.2 billion UBS loan agreement used to purchase the government’s shareholding in Oil Search.

Treasury does offer a hint: ‘the challenge for the government going forward… is the possibility of the initial LNG exports having minimal impact on Government Budgets in 2014 to 2023 if LNG dividends are diverted away from the budget’. From this, one might read that the Treasury is also concerned that unclear processes and closed-door dealings have overridden sensible management of LNG revenues.

Looking ahead

A mid-year report is based on forecasts for the end of the year. A lot can happen in 6 months. But even after these latest revisions, the government is still banking on quite rapid increases in revenue that will in all likelihood prove just as unrealistic as the ones that in the 2014 budget.

The report offers a much more comprehensive summary of the compliance efforts of the government and suggest they have already raised an extra PGK 200 million. This figure is highly uncertain, but if true, is very impressive. Nonetheless, it is unclear whether they will reach the budget target of PGK 600 million by the end of the year.

The report further notes continued uncertainty around revenues from State Own Enterprise dividends (PGK 287 million) and assets sales (PGK 600 million). A lot hinges on not much – in their absence, the budget deficit would be fully a third larger than the deficit in 2013.

It increasingly clear that had the government used its revenue forecasts presented in September’s 2014 Budget Strategy Paper it would be much better placed. However, this is less a forecasting problem than a reflection of the divergence in outcomes of the technocrat-driven Budget Strategy Paper process and the politically driven budget. This is by no means a challenge unique to Papua New Guinea.

Questions will (or should) be asked about the faith placed in some of the more uncertain revenue sources that were not discussed only three month’s before in the Budget Strategy Paper. This was either a mistake in the budget’s formulation, or these revenue sources were merely stuffing, used to lend legitimacy to the high spending levels. Papua New Guinea would not be the first to pull revenues out of the ether to maintain respectability, nor will it be the last.

Revenue worries notwithstanding, there are still plenty of risks on the spending side that may yet emerge before year end. The report points to some challenges:

Risks have emerged from political commitments and National Executive Council decisions which were made outside of the 2014 Budget process and from overspends for projects agreed in the 2014 Budget which did not have robust business plans and costing at the time of the 2014 Budget.

This suggests that we would be foolish to take the government’s new spending projections as given. In an unstable political environment, keeping a lid on spending pressures is no mean feat.

Overall it is now clear that the government overstretched itself in its last budget. Central bank financing of the deficit continues to provide the government life support- hopefully not at the expense of the Bank of Papua New Guinea’s own objectives of financial stability and low inflation. Unfortunately, those who hope to see LNG revenues come charging in at the eleventh hour are likely to be disappointed.

Inap long tumbuna stori nau

Back in 2012, with the construction phase of the PNG LNG project nearing completion, economic activity tailing off, and pots of gold still far off on the horizon, the government stepped on the accelerator and rapidly expanded spending. Admittedly, there was a certain logic to this: it provided needed economic stimulus, and fed efforts to drive change in Papua New Guinea’s ailing public services.

Yet here we find a lesson for future advocates of fiscal stimulus: if a government presses the accelerator, it better make sure the brakes are functioning. In Papua New Guinea, we have seen time and time again that, although necessary, unwinding such a stimulus is politically nearly impossible.

The government knows that it has to reel in the budget deficit before financing challenges become too large to manage. It is for this reason that September’s 2015 Budget Strategy Paper will tell the same story as last year and plan a clear-headed effort at reducing the budget deficit.

PNG’s new Minister for Treasury, Patrick Pruaitch, has demonstrated his ability to identify and deal with similar challenges. However, he will be weighing his actions against a desire to maintain National Alliance’s standing within the coalition government. This will partly be a balancing act, partly a test of resolve.

The first test will come in the careful formation of the next budget and second in sticking to it. Six months into 2014, the government appears to have fallen short in both.

This LNG production will soon launch PNG to the list of the top producers in the world. Yet it was more than two years ago that the O’Neill government began enthusiastically driving funds towards ‘development enablers’ such as fee-free education and free primary healthcare.  While this milestone should be a time for celebration, excitement has fallen away to concerns over debt burdens and unclear behind-the-scenes financial agreements. Port Moresby is flush with speculation about the risks of rapidly unwinding ten years of fiscal prudence.

Details of PNG’s public finances only trickle out during the year but signs are of a government storing up problems for itself. With concerns about the state of the economy heightened, vague reassurances are unlikely to assuage fears. It is in government’s own interest to begin communicating the evidence.

Once burnt

For many it is no surprise that an air of skepticism hangs over the start of PNG’s largest ever resource project.

Late last year, one of Papua New Guinea’s founding fathers, Sir Julius Chan, boldly stated that all of the major resource extraction efforts of the last 40 years had ‘failed’. This was not because the resources had failed to be extracted, he said, but because they created no improvement in the lives of the people. In fact, the 1990s economic crisis and Bougainville conflict (both resulting directly from resource extraction), suggest that he was understating the situation.

In this latest instalment in PNG’s natural resource saga, there has been ample advice from development partners, academics and international financial institutions to ensure this time was different: that revenues are carefully managed and help to foster broad-based development.

Yet, this week we saw the Ombudsman step in to block the first interest payment of the controversial (and perhaps illegal) $1.2 billion UBS loan agreement used to finance the government’s shareholdings in Oil Search. Two days later,  PNG’s foreign exchange dealers began discussing rumours of foreign exchange shortages and the Bank of Papua New Guinea once more intervened to support a weakening Kina.

There is a genuine fear that clear-headed thinking may have been lost in the scramble surrounding natural resource extraction. Economists are increasingly concerned that an overly excited government has loosened its grip on the purse strings, borrowed too much and inadvertently left the country vulnerable to economic instability.

This would not be a first for PNG. If we cast our eyes back to the early 1990s to a time when the country was eagerly awaiting revenues from Kutubu Oil project and Porgera Gold Mine, we see a government, drunk on the anticipation of this windfall, that ran its public finances off the road. Ill-equipped to deal with an economic shock, PNG fell into a currency crisis and was forced to manage the distress of an IMF Structural Adjustment Programme whose legacy lasted for the better part of ten years.

Unfortunately the government is all too tempted to dismiss worries and quash expressions of concern. The removal of high-profile officials and Ministers, failure to adhere to parliamentary and judicial processes, and threats of deportation for dissenting voices, have served merely to inflame these worries and fuel speculation about incipient signs of the resource curse.

The growing list of concerns

The situation is finely balanced. The government, in their recent spree of deficit spending, has ignored advice from the IMF as well as their own previously announced strategies, and taken the government finances beyond the legal benchmarks of responsibility. This is only likely to get worse in 2014.

In the formation of a government budget it is often said that wars on public waste are the last refuge of politicians who can’t make their sums add up. In PNG’s 2014 budget refuge was also found in uncertain compliance measures and assets sales.

More recently we heard news of poorly performing mining and petroleum taxes to add to this list of revenue sources likely to fall short. Given this, it seems increasingly likely that the required revenue growth of 30% in 2014 – ten times faster than growth in revenue seen over 2013 – will be missed. Even before March all indications pointed toward the likelihood that the budget deficit will open up further and the limits in the Fiscal Responsibility Act breached again.

Then in March came the mammoth UBS loan agreement that led to the ousting of the Treasury Minister Don Polye and Petroleum and Energy Minster William Duma – the former continues to dispute the agreement’s legality. But whether or not this loan agreement is legal, it means that in two years we have seen the country committed to two multi-billion Kina loans without serious oversight.

While the Ombudsman and lawyers pore over the legislation, analysts should be debating the implications of adding to the debt pile. The government has prevented this conversation. While willing to fight the legality of this deal, the economic logic remains a discussion that only a few are privy. We do not know the implications for government revenues or for official foreign exchange reserves, which are already heading southward with the Kina. Neither do we know the implications for the Sovereign Wealth Fund.

Unfortunately the ‘wait and see if we were right’ response to critics of the UBS loan agreement that financed the government’s interests in Oil Search is unlikely to ease the discontent. Recent Oil Search share price increases are unrealised paper gains and not, as reported, a ‘windfall’ for the government. More importantly these gains do not tell us whether the decision was in the public interest or value for money. We know that this was a good deal for Oil Search, who used the capital to expand interests in the Elk and Antelope gas fields, but the public interest is less clear.

The tide coming in

In between budgets, the PNG treasury only provides limited information on the state of public finances. This makes it a challenge to understand whether an already large deficit will get larger or whether huge loan agreements are likely to become too difficult to manage. Yet, the indicators available already suggest that the consequences of deficit spending may be creeping up behind the government.

With commercial banks edging closer to the limit of their ability to lend to government, the rollover risk alarm bells have begun to ring. The government is finding it harder to borrow to cover repayments, increasingly eating into those vital cash reserves necessary to pay bills and salaries.

This is the stuff that keeps treasury officials up at night.

A glance at the recent string of hugely undersubscribed government bond auctions and the rapidly increasing cost of short-term credit reminds us of a mounting pressure that the government must carefully manage. Over the past year interest rates on one-year Treasury Bills have rocketed from 2% to 6%. At the same time commercial banks desire to lend is waning- the government’s 30^th May request for K200 million is a good example of this pressure, it took just K44 million in accepted bids.

Storing up troubles: the government’s rapidly increasing short-term debt costs

Source: Bank of Papua New Guinea

The government has one more card to play if commercial banks lose interests. It can go cap-in-hand to the only institution that has the ability to ‘create Kina’, the Bank of Papua New Guinea (BPNG). A glance at BPNG’s balance sheet and data on recent stock auctions shows that the government is increasingly doing this – over the past two years, lending to government has more than doubled, reaching historically high levels and worryingly they have also stepped in to the short-term bond market. This is also a sign of the tightening environment for the government.

Government’s increasing reliance on the central bank printing press: BPNG holding of government debt

Source: Bank of Papua New Guinea

For the better part of a year the BPNG has been concerned with a rapidly falling Kina, whose depreciation has been worse than expected. While there is no doubt that this is partly driven by the gap between the construction and production phase of the LNG project, injecting liquidity into the banking system to fund the government’s deficit at best could be considered out of line with their policy, at worst could have contributed to the Kina’s weakening.

Leaning on a central bank can quickly undermine the goal of maintaining financial stability with low and stable inflation. In an ideal world a central bank governor in this situation would be making firm statements that the currency printing press should not become politically captured. Instead, the BPNG avoids discussing its own policies and limits around government lending in its latest policy statement, while reversing their advice from six months prior by telling the government ‘it should not be constrained by the limits on its total debt’. Not a line heard often from an independent central bank governor.

Finding a route out

Since the 2013 budget the government has been accused of spending LNG revenues before they arrive. There is some truth to this, but given the slump caused by the conclusion of the LNG construction phase, controlled deficit spending can be justified by economic logic.

Yet, as is all too often the case in the formation of government budgets, economic logic is used retrospectively. The increase in MP’s funds (through the District Services Improvement Program) that helped open up the hole in the budget was driven more by politics  than a thought-out stimulus package. Nevertheless, the litmus test of interventionist fiscal policy will come when government needs to cut back.

Foreseeing this challenge, in the 2014 budget government officials made commitments for stringent real spending cuts for 2015 to pull the deficit back to manageable levels. Longer-term fiscal projections tend to be light on political buy-in, but they can shape discussions as we move closer to the end of the year. But while we might hope that O’Neill’s government has given itself some breathing space behind the integrity laws to heed this advice, they are more than aware that a 30-month grace period is only as strong as their ability to hold enough members on side.

Spending promises are still integral to holding together the government. But with debt financing challenges nipping at the government’s heels, there may be little choice left.

Down the line nobody wants to be looking back at another missed opportunity. With the stakes so high, the government would benefit from fronting up and engaging these issues rather than relying on reassurances or closing down discussion. As the sustainability of deficit spending comes into question and strains on the economy take their toll, the desire to know the government’s direction only increases.

For the government of Papua New Guinea, credibility has become the most important commodity of all.

An interesting and well-communicated piece of research on household vulnerability has come out of a joint effort by researchers from RMIT University, Deakin University and Oxfam Australia. It offers up insights from extensive surveys of households across Vanuatu and Solomon Islands, looking at the shocks they face, how they are managed, and what government can actually do to build resilience.

These videos nicely sum up their findings:

Solomons Pidgin:

Bislama:

English:

The findings are also written up in PDF format here.

What we learn is that households do find ways to cope. In an environment where shocks are so regular and the state offers so little support, communities across Vanuatu and Solomon Islands have actually become adept at coping. However, as the paper indicates, coping is just that; it leaves little space for improving living conditions.

Public policy has an important a role to play in supporting rural communities.

The report offers a number of recommendations, many seen before. These include infrastructure development, better access to overseas labour markets and to domestic credit. Unfortunately, for each of these policy recommendations, the institutional backdrop has been left out, perhaps intentionally. As with a lot of well-intentioned advice, policy makers are left asking, ‘Okay, but how do we actually do this?’

Over the last decade, numerous combinations and permutations of these proposals have been suggested, and few actual improvements made. The reality is that, at present, such advice is not falling on fertile ground.

Not to denigrate this specific work, it’s an unfortunate fact that, in too many policy areas, we appear to be caught in a cycle of re-diagnosis and policy prescription, with a glaring absence of actual policy delivery. This is why advice all too often feels lifted from a template. To break this cycle we need to reintroduce the institutional context and appreciate what ties the hands of even those most able and driven civil servants.

Resilience and agriculture

If we were to pick one area in this resilience story, agricultural policy would be an appropriate place to start, not least because this sector provides livelihoods for the majority of the population. In this work we find several recommendations from focus groups, including the need to ‘plant more, grow more and sell more’, to find new markets, to reduce dependence on imports, implementing price controls and for government to support farmers when faced by crop failure or natural disasters.

So, to reintroduce this institutional context, we are looking squarely at the ministries of agriculture, the agricultural extension services, and the marketing boards. It is here government policy can be shaped and where, importantly, the experiences of the Solomon Islands and Vanuatu start to diverge.

As happens so often, behind the policy failures we find institutions that are struggling to serve their purpose. This is most strikingly true in Vanuatu.

Agricultural extension services, an arm of ministry of agriculture, are designed to advise and provide support to farmers. Yet, when we stroll through the grounds of Malekula’s extension offices in Lakatoro, one of the copra producing[1] centres of Vanuatu, we are confronted by the realities facing the front line of agricultural policy. We find an almost empty, rundown outpost residing in significant acreage, where a much larger organisation once stood, with the remaining officers struggling to work on a skeleton budget and scant communication or monitoring from their parent ministry.  This is not unique to Lakatoro.

Likewise, government and public alike appear to have forgotten the original role of the Vanuatu Commodities Marketing Board (VCMB), an institution meant to provide support for prices, coordination and to find new opportunities for farmers. Copra subsidies are no longer based on good policy or planning, but instead have become entangled, perhaps inextricably, with politics. The VCMB appears to now see its role purely as collecting revenue from exporters and, perhaps more worryingly, has become a symbol of government failure and corruption.

This was not always the case. It was two shocks to the institutional capability of the government that put to bed the Ministry of Agriculture and agricultural extension services as effective institutions of policy delivery. The first was the fallout of the 1993 civil service strike and second was drastic downsizing in the wake of the ADB-sponsored Comprehensive Reform Program of the late 1990s.

Unfortunately for the Vanuatu government, this means it must first struggle to rekindle the embers of institutional life, driving reform and resources back into the sector, before it can hope to support these aspects of resilience in rural communities.

In contrast, institutional development in Solomon Islands took a somewhat different tack. Post-conflict Solomon Islands, with the institutional support of RAMSI and in line with a shift in the development policy thinking, fixed their gaze on the agricultural sector. As a result, detailed plans and assessments were published but, more importantly, resources were sent in this direction – including donor grants – to deliver on these plans.

The institutional fire appears to burn somewhat brighter in Solomon Islands. However, weaknesses within agricultural sector and policy making still exist. Given a sufficient level of attention, we potentially have a lot to learn from each other’s experience of delivering agricultural policy and building these institutions. A review of major donor interventions in agriculture supporting capacity is reportedly in the pipeline – we wait in eager anticipation.

This latest piece of work on vulnerability offers us some interesting insights into vulnerability in the region. But to make headway on their list of policy recommendations for building resilience, including those outside of agriculture, we must first shift our focus and resources to those institutions that are designed to deliver them.

Explore our first version of the visualisation. Click your way down from national budget elements to individual programmes. We will soon be adding new features and providing more information, and are also already in discussions with other governments to access their budget data as well. In the meantime, dive in, and feel free to send any comments or questions our way:

pipp@pacificpolicy.org

About the PNG budget

At the end of 2012 the government of Papua New Guinea presented an ambitious budget that offered rapid growth in spending and doubled contributions to their key ‘enablers’ for development – education, health, infrastructure, law & order, and land. As a result, 2013 saw resources directed toward subsidies for healthcare charges and school tuition fees, investment in infrastructure and devolved spending to districts and local level governments. These commitments opened up a sizeable budget deficit that was expected to spur economic activity and bridge the gap left between the winding down in LNG construction and the start of LNG production expected in 2014.

The 2014 Budget, passed in November, perhaps does not offer the same level of headline grabbing changes of last year, however it builds firmly on previous commitments and does offer a number of new spending pledges. As the government highlights, in 2014 further resources will be channeled towards such areas as road construction and maintenance, investment in tertiary education and hospital redevelopment. Other spending commitments can also be seen in our visualisation of the budget, such as the creation of a Special Economic Zone in the Sepik Plains and investment in the People’s Microbank, while spending obligations continue to come from the Alotau Accord – the agreement that fell out of the political settlement of 2012 – such as a significant contribution to Identity Cards and funding of the 2015 Pacific Games.

Although the government plans for a slightly smaller deficit in 2014, placing the government on the path towards reducing the budget shortfall, the PNG government has come close to the limits of its own rules for fiscal responsibility. Indeed, an amendment to the Fiscal Responsibility Act was required with Debt/GDP very close to breaching their 35 percent limit. Yet to walk this tightrope of responsibility, the government has been searching determinedly for revenues to fill the gap. This largely has not come in the form of new taxes or rapid increases in economic activity, instead the government has found as much as PGK 1 billion in efficiency savings and from compliance measures in 2014. To give scale to these adjustments, in their absence the deficit would be close to PGK 800 million more than in 2013 and debt/GDP would move closer to 38% – well above the government’s own limits.  This is not to say that these estimates are incorrect, more to say there is reason to be cautious.

In any case, in 2014 the PNG government looks to concessional financing to fund an increasing proportion of the budget shortfall. As PiPP has highlighted before such lending does not come without risks. At the same time, domestic opportunities for borrowing appear to be limited, given the extent that the central bank has stepped in to finance the 2013 deficit. If the deficit creeps higher than expected we may see more pressure on the central bank to pick up any shortfall, which is likely to be a cause of concern, particularly if it places further pressure on a weakening Kina.

As with previous years some of the most pressing challenges facing the PNG government are likely to revolve around ensuring the budget is implemented as planned:

Delivering the budget: similar to governments across the region, in some areas of spending is difficult to control, while in other areas, such as in delivering infrastructure projects, it can be equally difficult to get the money out the door. This is particularly true when spending is scaled up as rapidly as in PNG. Evidence for this has already been seen in 2013, however 2014 may be an even bigger test for the Treasury.

Finding improvements in public services: broadening the benefits of a resource boom requires improving public financial management systems and delivery of public services. At the lower levels of government weak capacity and governance arrangements means that extra resources may struggle to make their way to the right places and deliver the expected outcomes. This is an issue that the PNG government and partners continue to grapple with.

Looking ahead: from this budget onwards the PNG government has planned to hit hard on the spending brakes and will be looking for real cuts in spending from the next budget onwards. Yet the ability for the government to pull spending growth from an average of 17% in 2013 and 2014 to 3% over 2015 and 2016 in an environment where revenue is performing relatively well is a challenge for most countries, particularly as they move closer to elections.

Similar to last year, potential solutions to these challenges are likely to dominate the discussions around the PNG budget. The latest picture of the economy painted by the budget is of rapid economic growth driven by oil and gas extraction that transforms PNG into an exporting economy. However, the outlook for other important sectors, such as agricultural, fisheries and forestry remains worryingly flat. Here remains a central concern facing the PNG government – and governments across the region – of how to strengthen public service delivery and broaden the benefits of this economic growth.

The PNG 2014 Budget remains ambitious with the aim of transforming public services and offering up financial management reforms. However the ability to transform these into the outcomes they are searching for, while holding on to fiscal responsibility, will undoubtedly be the topic of much discussion over coming months.

Sources:
2014 Fiji Budget Strategy and Baseline Budget
2014 Fiji National Budget Announcement