When Papua New Guinea’s LNG project starts bringing in revenue in 2014, it’s expected to generate a windfall of $50 billion for the country. To put this in perspective, that’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). So I think it’s fair to say that the destabilizing effects of an influx of cash of this level could be catastrophic if it’s not managed well.
But, not to worry dear readers, Papua New Guinea’s Finance Minister, Don Polye, has a plan. He is finalizing legislation that will underpin the country’s resource revenue management and is getting ready to launch a new sovereign fund. That’s good news! Let’s see some of the details from Mr. Polye:
Objective: “The key role is to manage the massive fluctuations in our minerals revenues, which have moved from only 3% to 20% of non-mineral GDP.” That’s a very good objective, as resource revenue volatility is one of the main drivers of the resource curse. So far so good.
Structure: The state will retain full ownership and control over the fund’s assets, and the fund will be fully integrated into the budget and fiscal framework: “This is to ensure that all revenues (including dividends) from the PNG LNG project as well as from other mineral and petroleum projects and the timing of all expenditures could be most effectively used to advance PNG’s social and economic development.” This is similar to the Norwegian and Chilean approach to running SWFs, and it has clearly worked well in those regions. However, making this structure work in PNG will require a very sophisticated governance structure. For example, I worry about keeping the new SWF independent from the short-term whims of politicians and bureaucrats. That’s not to say that PNG won’t be successful. It just means we’ll have to wait to see the formal governance framework to know if it has mitigated this risk factor appropriately.
Frontier Finance: The SWF will provide the government with an opportunity to help build capacity and capability in the domain of finance. “We need to develop our intellectual capital, our technical expertise and skills, our entrepreneurial strengths and corporate abilities.” As such, the new SWF will be “onshore managed, offshore invested and onshore spent…We will develop ourselves to run and operate with a corporate or private sector mindset but on democratic principles.” Running a SWF is very hard. Running a SWF outside of a traditional financial center is even harder. So PNG will face the same problems as its peers operating on the frontiers of finance (e.g., human resources, governance, operational expertise, risk management, access to deals, etc.).
Stakeholder Relations: The government will soon launch an education and awareness program to foster understanding of the SWF. I think this is crucial, as getting buy-in from the local communities will be essential to the sustainability of this new fund.
Anyway, I’m really looking forward to seeing some of the more detailed information on this fund. In my view, PNG’s future depends on getting the design and governance of this sovereign fund right! However, as readers of this blog know, Papua New Guinea has the dubious distinction of having sponsored a failed SWF: The Mineral Resource Stabilisation Fund. Originally designed 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.
Let’s hope PNG gets it right this time. I think they will.