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Five Observations on a PMV from Gelegele to Kokopo

PNG govt liabilities could be K1.5 billion higher than admitted

Paul Flanagan
Paul Flanagan - scrutiny of accounts finds PNG's budget position significantly worse than reported

PAUL FLANAGAN | PNG Economics | Edited extracts

CANBERRA – When treasurer Charles Abel recently announced how his 2017 budget had worked out (known as the final budget outcome or FBO) it showed the Papua New Guinea government had spent K700 million more than it had estimated.

The two largest areas of expenditure increase were in highly undesirable areas – an increase in debt service costs of K251 million and administrative expenses of K316 million.

But there were also areas in which spending was committed to – and not made.

Let me take a closer look at some of the main areas where the government got its budget very wrong.

Superannuation payments for public servants

The budget stated that superannuation payments for public servants were expected to be K404 million but the FBO indicated they amounted to only K175 million, representing one of the major areas of expenditure ‘saving’.

But in my view, this was really a cash deferral of a legal obligation to make superannuation payments, and at some time in the future the government will have to fund these. Working my way through all the numbers, my conservative estimate is that there has been a deferral of superannuation payments of K150 million.

GST payments to the provinces

This one took some detective work as there was a lack of clarity in the expenditure figures but it does look as if the provinces have been underfunded by K200-K270 million.

My calculations showed that K450 million should have been transferred to the provinces but the actual transfer was K180 million – an underpayment of some K270 million which was possibly left in a “trust account”.

Education – unlikely claimed cut of over half a billion

The sectoral expenditure figures show a K710 million cut in provincial funding. This largely reflects the decision to only distribute around 20% of various service improvement programs - a major saving item in the budget. It was politically sensitive and the prime minister objected so it wasn’t mentioned in treasurer Abel’s 2017 supplementary budget speech.

However, the claimed K535 million reduction in allocations to education are extremely confusing. A large cut of over half a billion kina seems unlikely. Possibly some education expenditure was placed in the “miscellaneous” category but this created more accounting problems for me.

The more likely explanation is that ‘tuition fee free’ (TFF) education payments are made through a trust account and whenever you see “trust account” you should know there is great scope to vary the timing of payments.

The original budget for such payments was K602 million. There have been many reports that schools had not been paid all their TFF payments for 2017 and 2018 although there were also reports that most schools had received at least two of their four payments.

One is left uncertain about what is going on here. This is a very major indicated cut – nearly 5% of the entire budget. Almost certainly, a significant proportion of TTF payments have not been paid. However, it is impossible to tell how much of this represents an actual cut in 2017 expenditure.

My conservative estimate is that K100 million represents a deferral of education expenditure. But on the positive side, there were increases in health, law and justice. At least this represents a small clawback from massive cuts since 2014.

On the negative side, the biggest areas of increase were in debt services and administration – undesirable areas of growth.

There are some signs the government is taking some action on the administrative costs blow-out but experience with reform efforts in the mid-2000s, such as rationalising the size and number of public service agencies, indicates how difficult it is to deal with entrenched bureaucratic interests.

The expansion of teaching salaries seems inevitable, both in terms of the number of teachers required to deal with increased school enrolments, as well as delivering long-overdue pay rises. And rationalising the number of government agencies is potentially complicated by the political pressure to have lots of ministers.

Expenditure arrears – a legacy of unpaid bills

The budget documents make it clear that there are large expenditure arrears, but there is little information on the actual level of these arrears.

The simplest way to reduce expenditure is not pay bills, even when services have been provided. These arrears are unquestionably very substantial. For example, the Minister for Public Works recently told parliament that his agency had K700 million in unpaid bills. And the Port Moresby Chamber of Commerce recently lobbied Abel about the more than K290 million in unpaid bills owed to its members.

These are very significant arrears. Growing frustration with this issue suggests that this problem was continuing to grow in 2017. Assuming a 25% increase in the level of arrears in 2017, the implied figure of what the government owes in unpaid bills shows an increase of K500 million. Being conservative, let me halve this figure to estimate the increase in arrears as K250 million.

So, overall, my conservative estimate is that actual expenditure liabilities in 2017 was K700 million higher than admitted in the FBO. But it could be as high as K1.5 billion.

Such expenditure under-reporting seriously damages the credibility of the 2017 FBO by treasurer Abel. It is certain that PNG’s budget position is significantly worse than officially reported.

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