GRAEME SMITH | The Interpreter | Lowy Institute
WHEN I PENNED Are Chinese Soft Loans Always a Bad Thing? for The Interpreter in March there seemed little prospect that my query would have immediate relevance.
Papua New Guinea Treasury officials were adamant that there was a freeze on further loans.
Gripped by fiscal rectitude, they were set on paying back an interest-free loan made by the People's Bank of China in the 1990s, even though no one had asked for it back.
To Treasury's consternation, during the course of the PNG election campaign Peter O'Neill announced he was negotiating a soft loan with China Exim Bank.
It is worth in the region of K6 billion ($2.7 billion), with the potential for up to K10 billion to be drawn upon. It dwarfs the 2006 Soft Loan Facility of $375 million made to the Pacific as a whole.
Pro-opposition blogs have denounced the loan as 'sinister' and suggested that Treasury will be bypassed altogether. In the absence of any concrete details of the loan, which is currently being finalised, PNG's lively blogosphere has filled the vacuum.
A thoughtful anonymous post on Keith Jackson's blog rightly points to the effect the loan will have on the ever appreciating exchange rate, which is set to face enormous upward pressure when Exxon Mobil's LNG project comes online.
Perhaps the greatest concern is that the loan appears to be fragmenting (even before it is agreed) into a set of smaller projects around diverse actors and local political interests, as noted in The Garamut.
Initially, the loan was specifically for a much-needed upgrade to the Highlands Highway. Projects now mentioned in association with the loan include a hydropower scheme, the infrastructure needs of Port Moresby and Lae, and even the upgrading of PNG's state-owned enterprises. One minister's 'shopping list' is said to be more than double the value of the loan facility.
To an extent, such balkanisation is a result of the Alotau Accord, an agreement reached between political groupings in the provincial capital of Milne Bay province that led to the formation of the O'Neill-Dion Government. Ironically, Milne Bay appears to be one part of Papua New Guinea that will not benefit from expenditure on 'high priority infrastructure projects'.
It will be interesting to see which dance partners appear on the Chinese side of the ballroom. Chinese aid officials privately concede that Chinese construction companies largely drive China Exim's concessional loans, the majority of which go towards infrastructure development.
In a recent Wall St Journal article, which curiously described PNG as 'an impoverished southeast Asian nation', Peter O'Neill maintained that the Chinese partners for the new loan would be 'Fortune 500 companies'.
Success in accessing the 2006 Soft Loan facility came down to the political clout of Chinese contractors within China, and the political savvy of their PNG partners in lobbying the PNG legislature.
The outlier was the choice of contractor for the $235 million PMIZ project, which involves the construction of a free trade zone and up to ten tuna canneries in Madang. The project is currently stalled in the courts.
The Chinese contractor, Shenyang International Economic and Technical Cooperation Company, is a city-level state-owned enterprise (SOE) with no established presence in PNG. With less than 100 employees in China, it's unlikely to appear in the Fortune 500 anytime soon.
The choice of an inexperienced company for a complex project seems odd, but is in line with the practice of concessional loans being used to provide selected SOEs with overseas experience.
With the majority of the top 20 Chinese companies in PNG listing their business as 'construction' (linked article is in Chinese), it's to be hoped that China Exim Bank calls on companies with experience in PNG, or similar countries. Papua New Guinea is no place for training wheels.
Graeme Smith is a postdoctoral fellow at the China Studies Centre, University of Sydney and a visiting fellow with the State, Society and Governance Program in Melanesia Program at the Australian National University