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The background & implications of that Oil Search loan deal

Paul BarkerPAUL BARKER | Business Advantage PNG

THE proposed Sovereign Wealth Fund(SWF) is somewhat jokingly referred to by some as the Sovereign Wealth Vacuum, as we await the government to release its revised legislation setting up the fund.

The original idea was to put income from resource projects into the fund (held largely in safe offshore securities) and use those investments to stabilise the currency and provide some core development expenditure, whilst providing confidence for investors etc in PNG’s economic management.

But the government’s planto borrow K1.7 billion for a stake in Oil Search, and by extension invest in PNG’s potential second LNG project, means it is effectively pre-borrowing from the fund.

There are invariably some risks associated with a sovereign fund, including those associated with foreign exchange, investments and also the temptation a pot of money provides. But, in borrowing, the government is taking on the extra burden of interest payments too.

Effectively, that’s what PNG did a few years ago. We borrowedfrom the International Petroleum Investment Company (IPEC) to be able to participate in the ExxonMobil-led PNG LNG project, basically mortgaging the existing equity the state had in gas via its stake in Oil Search; a circuitous and costly arrangement.

During that process, the mortgaged shares in Oil Search appreciated to the point where it was going to cost a lot more money to retain or regain them.

The argument now is that the current Oil Search deal may be better deal than than trying to regain them from IPEC but it’s still a lot of money and it remains speculative. It also raises PNG’s debt levels and diverts public funds from the core functions of government.

Maybe it is a good deal if you’re a business investor, as Prime Minister Peter O’Neill claims, but if we pre-borrow everything in advance, what will be left?

It also raises the question of what the purpose of government is and the purpose of the SWF. And then how does this deal relate to the State’s equity entitlement in the proposed Elk-Antelope fields?

It also defers the day when the SWF could become substantially operable.

The PNG Government is pre-borrowing from expected LNG revenues to buy a stake in Oil Search. By borrowing, the government is taking on the extra burden of interest. The Oil Search deal raises PNG’s debt levels and diverts public funds from the core functions of government. By borrowing in advance from the PNG Mineral Resources Stabilisation Fund during the mid-1990s, the fund’s economic and currency stabilisation role was substantially undermined;

The PNG Ombudsman is inquiring into the probity of the Oil Search loan.

Before any funds go into the SWF, the government has to pay off the interest to UBS on this new Oil Search loan and, in due course, the principal too. The SWF was meant to accumulate funds first, and then invest.

We need to avoid repeatingwhat happened with the PNG Mineral Resources Stabilisation Fund, which was pre-committed during the minerals boom years of the mid-1990s. Its economic and currency stabilisation role was substantially undermined.

At least this loan deal is significantly more transparent that the original PNG LNG deal, which was struck behind closed doors, leaving out even the Department of Treasury. Treasury has been involved this time, to some degree, as has the central bank and other government institutions. And there was a tender arrangement, which involved UBS, Barclays and others participating in that process.

One of the longest-surviving and most successful funds in the world is the 1956 Kiribati Revenue Equalization Reserve Fund, which is valuedat about K1.44 billion. This has provided a future fund and stabilisation role for Kiribati over decades, as it has only started being drawn down recently.

When, and if, the SWF begins, its managers need to use the sorts of methodologies that the Norwegian Petroleum Fund (the world’s largest) has employed, in terms of selection of investments.

As with superannuation funds, there should be requirements to minimise the risk and spreading investment as widely as possible, including government securities.

Revelations this week that the PNG Ombudsman is using powers to check the probity of the Oil Search loan is not a move to stop the acquisition.

As the Chief Ombudsman has stated, they’re not trying to intervene in economic decision-making or the government’s developmental functions, they’re just checking the legality of the process, because there are a number of laws and processes in place to ensure sound debt and fiscal management, such as the Fiscal Responsibility Act, which sets ceilings and levels on borrowings to which the government is allowed to commit itself.

Those legal questions were raised by the former Treasurer, Don Polye, when he stated that the due process, notably referral to Parliament, was not followed.

The Ombudsman should also perhaps use his powers to inquire into the seemingly over-priced contracts for pharmaceutical acquisitions, certain road tenders and the Pacific Games Village, where K100 million more than the cheapest acceptable bid seems to have been accepted.

Paul Barker is Executive Director of Papua New Guinea’s Institute of National Affairs, an industry-funded think-tank

Comments

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Michael Dom

PNG people, we're all dumb fucks.

Instead of crying "corruption" we should be screaming "revolution".

Our current political leaders, with all their wily ways and bigheaded ideas, have no idea how to set this country back on course.

If they do - why aren't they doing it?

If they don't they wouldn't even recognise good advice if it walked right up and smacked them on their arses, never mind their faces.

The way he's carrying on, PM O'Neill is going to be the dearth of PNG.

Mrs Barbara Short

Yes, what is the purpose of government?

From reading Paul Barker's analysis of the K1.7 billion Oil Search loan deal I feel it would be correct to say that the PNG government is a big time gambler!

I'm glad there is a Fiscal Responsibility Act and but I fear the levels of borrowing may not show fiscal responsibility.

This is probably another good example of Gary Juffa's "Greed".

For a government that has not been able to look after it health centres, schools, roads etc to be involved in big time gambling sets off alarm bells in my mind.

At this very moment the NDOH is not supplying enough medicines to the Health Centres around the country, it is not giving enough money to the doctors to do their job, and people are dying when they shouldn't! Twenty Million kina has been wasted by giving the contract to BPP.

The PNG Tenders Board seems to be a farce! Fancy wasting another K100 million when developing the Pacific Games Village.

No wonder the educated people, the working class, are crying out "Corruption".

What is Peter O'Neill doing? Is he gambling with PNG's government income? Doesn't he see there is risk involved? Shouldn't a government just try to work within its income and do the best it can with it for the good of the people?

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