Economy in good head of steam but 2009 Budget has lost focus

PAUL BARKER from the Institute of National Affairs concludes his commentary with the positive economic and budgetary aspects that have buoyed the economy over the past three years. economy has a good head of steam, partly driven by new externally-funded investment (for example, mines) but substantially self-generating (including new construction) using domestic finance (from banks little exposed to the international crisis, through a strong deposit base, at least while the trust funds remain substantial, despite negative real interest rates!)

improved financing (equalisation) is provided for provinces from 2009 to meet basic infrastructure and service needs, using NEFC recommendations of minimum costs, but there’s limited capacity building to implement, including the DSIP

while lower oil prices weaken PNG’s revenue and trade balance, they clearly benefit households and most businesses (other than producers, including, part substitute producers, for example vegetable oils/biofuels). As a main driver of inflation, lower prices help restore international demand and recovery (combined with greater transparency in the financial markets and clearing out the backlog of bad debt)

Government has (tentatively) awoken to the need to embrace the private sector to generate more sustainable growth, hence:-

competition in mobile phones, has been directly impacting investment and economic activity, and indirectly improving opportunities for trade and economic activity right into rural areas (where transport infrastructure exists).

In Feb 2009 under phase 2, competition needs to be extended to all ICT (internet, international gateways, VSAT etc, dropping continued impediments)

PPP policy introduced to improve service delivery (through long term investment and contractual arrangements), though privatisation remains frozen

improved foreign employment legislation applicable from January 2009 , while the department has improved operations (although other critical business impediments, including migration, DPM etc, remain entrenched, with little effort to address most of them)

the Lands Act amendment could improve land administration, but only really if organisational changes occur

Bad aspects:

little progress pursued in recent years with public sector reform (notably the right sizing committee recommendations), needed to make service delivery better focused and sustainable; far too much goes to national departments and administration, regardless of priorities or capacity, with little progress with retrenchments, safeguarding operational funding, and incessant growth in public service costs.

The latest salary increase is meant to be performance linked…is this for real, considering current generally low performance?

In recent years conservative prices have been used in the Budget, but this year some (for example agriculture) may prove optimistic. We’re in uncharted water. It’s very difficult to predict trends, except that they’re likely to return to longer term averages, but already prices of oil and some agricultural crops are below the 2009. The Budget is optimistic over agriculture’s potential, but new mine development and construction and other ongoing projects should maintain the momentum

cash crop agriculture maybe hard pressed to meet Budget forecasts (although there are some good prospects there if the kina can remain competitive (that is, restrained), but it requires focused attention on addressing wide ranging sector constraints, especially infrastructure and access to markets and law and order problems, but also threats on our doorstep now, such as cocoa pod borer which could devastate production if left to sweep through without adequate attention to upgrading farming standards; there will invariably be winners and losers (and, hopefully, even in a global downturn everyone will want their cup of coffee and chocolate!)

the risks include banks (largely overseas) not issuing Letters of Credit (notably to importers) in a declining or volatile market and buyers trying to renege on existing contracts when prices have slumped, since contracts were signed. This is already happening overseas with oil palm and other crops, and could undermine trade and shipping;

NADP has largely been a wasted opportunity, so far. Grants have been made to individuals and businesses without clearly applied criteria or quality checks. Why should one group secure a large subsidy and not another, undermining a level playing field, those borrowing, while encouraging corruption; for example, K17 million for 6000 head of cattle indeed, or nearly K3000 per head of unremarkable cattle! We need to be much more prudent with (limited) investment funds.

large sums are allocated to recognised non-performing mechanisms, for example, to administer district grants. Critical funding is required for restoring district infrastructure and services, more realistically effective mechanisms should be used.

There’s been little progress addressing corruption and accountability issues, so wastage is little restrained, although DSIP safeguards are markedly tighter.

IPBC has mortgaged and probably lost publicly-owned Oil Search shares in a deal to acquire an equity stake in LNG.

IPBC’s function is caretaking and divesting State equity, through transparent mechanisms, not being a vehicle for acquisitions. Revenue to the State from dividends through IPBC, and from fisheries licences through FIA, requires tighter rules and transparency.

opportunities are being missed for divesting equity, while simultaneously improving competitive services. Instead, the State continues committing additional public funds to investing in SOEs, like Telikom and Air Niugini (K70 million for new aircraft and K30 mill capital injection), and undermining viability of Singapore flights by also servicing nearby Kuala Lumpur. The SOEs no doubt need additional capital but that should entail private equity investment and more commercially experienced boards, driven by commercial opportunities and stimuli

The 2009 Budget has lost focus, unduly sidestepping MTDS priorities, and funding a mishmash of low priority, or ill-considered projects; for example it would be better to invest in upgrading NBC radio stations to reach across the nation, rather than a new TV station; It is appealing to improve choice and (programme quality) through competition and a State service-provider, but will NBC have the resources to either achieve quality and sustain it, or just run another service of limited quality, spreading limited capacity and diminishing funds further?

There are large arbitrary allocations to selective authorities, for example, Motu-Koita (K10 million) and provinces which have burnt their HQs (K13 million rewards apiece?) and projects like Madang marine park (which, if needed, should entail private investment, — K15 million in Trust and now another K10 million), community colleges (surely better used to support existing rundown schools/technical and vocational schools). We should dump the extravagant Central City (a field day for unproductive consultants, like that housing project Mr Conrad induced POSF into!), a new executive jet (K40 mill), Konebada petroleum park (K50mil — should entail private capital), and ICT policy shouldn’t cost K20 million to formulate! … these expenditures invariably prove excessive or a complete waste, like the past industrial centres.

What are “national investments” (K43 million), and why always such large extra allocations, for example, Defence increase (K13.6 mill), K20 million for the long term plan, K20 million for LNG support office? Is there no recognition of tighter future revenue?

Why then the failure to honour superannuation commitments from 2009?

Continued excessive out of court settlements are budgeted; let’s minimise these ill-judged or hastily made decisions (for example, on dismissals) exposing the State to challenges. Sometimes this has involved appointing unsuitable persons to top position, realising this but then skipping processes in the dash to remove them; all at great cost to the State (that is, the public)!

MWB — the cost of living has certainly increased substantially (especially for low income and informal sector earners) although some costs should level off and even decline now. An adjustment to the minimum wage is needed but the process should be more dynamic, through negotiation between the players using the National Tripartite Council, rather than the unwieldy periodic Minimum Wages Board process.

It must recognise capacity to pay, and that most formal sector employers are currently paying well above the minimum, while parts of the rural sector have limited capacity when prices are low (although generally providing housing and some other benefits).

Attention should be focused towards various local and foreign-owned businesses currently ignoring even the current minimum (and IPA rules) but have the capacity to pay. Proper/impartial enforcement is necessary, as with tax application, where many significant businesses never contribute.

Many jobs, however, will be lost if an arbitrary and unrealistic minimum wage determination is set, and it’s better to give people the option of formal employment even on a basic, but affordable wage, than no job and dependency upon marginal IS employment.

Flexibility is required as some companies and businesses can afford to pay more, whilst other productive industries (NOT extractive industries), especially in remote locations cannot.

In conclusion

The 2009 Budget was hastily prepared, during rapidly changing global economic and market conditions, with an inevitable but unpredictable impact on PNG’s economy and fiscal scenario.

during the period of high commodity prices, PNG is fortunate to have accumulated substantial reserves and savings (partly resulting from its own implementation incapacity), which should sustain steady public expenditure for the next two years, when credit and investment conditions should also remain sound, so long as the macro-economic conditions do not deteriorate, or exchange rate appreciate.

many realised that these were windfall revenues, but hoped they would last, but this bonus encouraged loss of focus (living in dreamland), overlooking priorities whilst still throwing tens of millions on low priority extravagant projects.

Government has largely failed, therefore, to take advantage of the opportunity and strive for needed reform of the public sector, whilst progressing wider economic reforms at a snail’s pace.

These reforms are essential for the economy to be diversified, growth to be sustainable and priority objectives to be achieved right out in rural areas (notably Millennium Development goals and MTDS priorities).

The biggest reform has been the first step in 2007 toward ICT competition, which has highlighted wide economic (and some social) benefits, replicable in other industries (including through potential full competition in all ICT from February 2009).

the needed reforms include seriously addressing poor governance and corruption, which currently undermine service delivery severely and waste tens of millions of kina annually

the overruns in 2008 include public sector emoluments (demonstrating the failure of years of botched public sector reform) and over-expenditure outside MTDS priorities

LNG is the central focus of government, and a market stimulus (including for real estate and rentals). It is perceived as the panacea for PNG’s future economy (which it isn’t) and revenue (which it maybe), but it could be a major liability if adequate safeguards from the Dutch Disease are not applied early.

If it proceeds, it will have a big impact, though not nearly as big as some envisage, as most components and employment are sourced overseas, and transfers return overseas.

Treasury estimates it could raise GDP by 25-30% in peak years (well below the ACIL-Tasman figures) or average 9% of GNI till 2047 (that is, excluding transfers overseas).

If proceeding the project(s) should export LNG from 2013, although making a significant impact on economic activity (and the balance of payments) hitherto. In the meantime new mine developments and ongoing (largely domestically-financed) construction will sustain economic activity, although mineral and agricultural prices and hence earnings and (agricultural) production may remain depressed.

We simply cannot depend unduly upon LNG benefits, to the detriment of the wider economy. The 2009 Budget focus is upon rural development.

That is reflected in some actions, including the changes to provincial and local government financing, but, unless sound and transparent planning, implementation and monitoring of the DSIP, NADP and other rural infrastructure development (and improved law an order conditions) occur the benefits to the rural areas will be limited and sporadic, if at all.

4 thoughts on “Economy in good head of steam but 2009 Budget has lost focus

  1. Well,

    Now that my virgin fingers have once again touched a keyboard after a month of living in the village, I do believe that congratulations are in order. Why?

    For cracking the 100,000 hits stage.

    Great job E. Keep it up.

    Hope Christmas and New Years treated you well.


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