I noted back in November 2009 that Papua New Guinea was considering a new SWF to help manage looming resource revenues. The country has an enormous liquefied natural gas project that could bring in something in the range of $50 billion. For a small, developing country, that’s a lot of money. Think of it this way, it’s five times the country’s GDP and translates into roughly $10,000 per person (in a country with a GDP per capita of just over $2,000). The hope is that a SWF will help to avoid the resource curse and turn that cash into widespread socio-economic benefits.
Despite the fact that the revenues aren’t coming on line until 2014, PNG appears to have already started its SWF due diligence; the Treasury has just released a “Sovereign Wealth Fund Discussion Paper” that outlines various factors that the government should take into consideration in setting up their new fund. It’s actually an interesting read, as the paper provides some insight into the thought process that underpins the creation of a SWF. As the report says,
“…it is possible that the emergence of LNG as a major revenue source may give rise to major macroeconomic pressures such as Dutch disease, which are more likely to be prevalent when a country relies heavily on revenues from commodity exports.”
Yeah, no kidding. We’ve seen plenty of examples where resource wealth has not translated into improvements in socio-economic indicators. Ironically, PNG itself has failed in this regard. Its Mineral Resource Stabilization Fund (MRSF), which operated from 1974 to 2001, had a very mixed record:
“A key limitation of the MRSF was that its funds were invested onshore rather than offshore. There was a high opportunity cost associated with this approach – through low domestic interest earned and limited scope of growing the value of the fund in a small financial market. Other deficiencies included weak governance arrangements and the poor integration with the Budget and operation of fiscal policy…
…The country is still recovering from the adverse economic effects of the last mineral boom on the tradeable sectors.”
Encouragingly, PNG has come to recognize the importance of organizational and institutional design in ensuring the success of its new SWF. In fact, the paper has an entire section entitled “Design Issues” (…which, I have to admit, warms the cockles of my heart…). For example, the paper notes:
“..the governance and design issues are also likely to come under more pressure…As experienced with the MRSF, governance issues came under a lot of pressure which partly reflected the structure and composition of the Fund‟s Board. As observed by the World Bank, the board was dominated by government officials, and as a result, found it difficult to resist government pressure for large withdrawals.”
The report goes on to highlight many ways to avoid these design problems, and, more generally, how to ensure that the fund is successful. I won’t go into all of the factors here–the paper is sufficiently concise and clear for any reader.
But I have to say, PNG seems to be on top of it this go around. And it’s also clear from the paper that the Santiago Principles have been a very important design influence. Say what you will about the IWG, GAPP and the Santiago Principles–and many have said some pretty harsh things–it is clear that GAPP is at least having some effect. While it may not be the effect originally intended (i.e. forcing existing funds to be more transparent) it is creating positive externalities in PNG.