Oxford SWF Project

Ashby Monk

Papua New Guinea has the dubious distinction of having been the sponsor of a failed SWF: the Mineral Resource Stabilisation Fund. Originated in 1974 to hold the proceeds of a the Panguna Copper Mine – and later expanded to include all tax, royalty and dividend payments from major mining and oil projects in the country – the MRSF proved to be poorly designed and governed for its mission and, ultimately, it was shut down in 1999 due to excess draw-downs.

Today, this failure offers PNG some unique insights as it contemplates its looming LNG bounty and will clearly affect its new plans for LNG revenues. And, perhaps surprisingly, PNG has once again decided that a SWF is the way to go with its new resource strategy.

On cue, the country’s National Research Institute has just published  a new report by Peter Johnson that lays out how the country can overcome the resource curse (and its past SWF failure) by setting up a well-designed SWF. (There is also a nice interview available on Radio Australia that details some of the report’s findings.)  Specifically, Johnson examines the cases where SWFs have (and have not) worked in order to tease out lessons for PNG. As he says in his radio interview, his intention was to take some of the best international examples and adapt them to PNG’s unique “flavor and focus”, all the while avoiding the mistakes made by countries (including his own) that have had SWF flops. So, for example, he writes about the failure of the MRSF, describing its main problem as follows:

“A lack of sound governance and poor service delivery ultimately led to the fund being mismanaged and wasted.”

In addition, Johnson examined the Timor Leste Wealth Fund, the Kiribati Revenue Equalisation Fund, and the Alaska Permanent Fund for insights on developing a new fund specifically for PNG.

On a broader note, it’s become standard practice for potential SWF sponsors, such as PNG, to reach out to other countries that already have SWFs in order to learn from their experience. For example, Natsuko Waki of Reuters has a nice article this morning that describes how Angola, Ghana and Nigeria have looked to Asia and the ME for SWF inspiration:

“…they are also increasingly looking at developing Asian and Gulf nations, where funds are often managed in an opaque but strategically efficient manner, which may suit Africa better.”

But, as Natsuko notes, there is no simple “cut and paste” model for these funds. And, in the case of PNG, Johnson seems to get it, which is why he has come up with a list of specific objectives and constraints that any new PNG SWF will need to achieve:

• “broadening PNGs economic base to avoid the destabilising effects of future commodity price shocks;
• stabilising the macro-economic environment through investing revenues offshore;
• creating a political will for institutional reforms to substantially improve policy development, monitoring and auditing of government expenditure;
• integrating resource revenues into the Budget framework;
• creating a sense of ownership by the people of PNG;
• following the design of the Sovereign Wealth Fund on the SWF Generally Accepted Principles and Practices (Santiago Principles);
• creating a clear purpose and objective for how the revenue is to be used; and
• maximising the financial returns subject to appropriate risk.”

That all seems pretty straightforward and sensible (if ambitious). So, the real question then is how a new SWF can achieve all this. And this is where things get interesting: apparently Johnson doesn’t think that a single SWF can do all of the above – which is why he thinks PNG will need two separate SWFs. Here’s his logic:

“The first fund (the Future Fund) will have a long-term savings objective and the second fund (a stabilisation fund) will have a macro-economic stabilisation objective. The first fund imposes a great degree of restraint on expenditure, while the second fund allows for a high degree of expenditure flexibility. The funds can be used for development expenditure while at the same time contributing to macro-economic stabilisation.”

Johnson suggests that SWFs shouldn’t try to do too much, lest they fail at all of it. Instead, he argues that SWFs should have well-defined mandates that don’t allow for too much flexibility in decision-making. And, I have to say, I agree. And before you throw up your hands at the idea of two SWFs in one country, consider that the State of Oklahoma has managed to justify to its voters having two SWFs. So why not PNG? Perhaps two SWFs will succeed where one has already failed…