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Can the Marape government reverse PNG’s ‘resource curse’

Paul Flanagan
Paul Flanagan - PNG industry was 20% worse off in 2016 than if it had continued ‘business as usual’ growth prior to the LNG project

PAUL FLANAGAN | PNG Economics | Edited

Link here to the full version of Paul Flanagan’s latest article

CANBERRA – Last year Dr Luke Fletcher and I co-authored a report comparing the projected economic benefits of the PNG LNG project with its actual outcomes.

So, more than a year later, do the controversial conclusions of ‘Double or Nothing: The Broken Economic Promises of the PNG LNG Project’ still hold true?

The broad answer is ‘yes’ – indeed the report’s conclusions have been reinforced by recent economic data.

Fortunately, PNG’s new Marape-Steven government is seeking better terms for future projects.

It is too early to tell whether the new government will make the important and politically difficult policy changes required to reverse the ‘resource curse’ approaches of the O’Neill government.

Recent PNG National Statistics Office figures confirmed that the PNG Treasury was over-estimating the health of the PNG economy in 2016.

The new figures increase the gap between PNG LNG promises and actual outcomes relative to if there had been no PNG LNG project at all.

At a sectoral level, there is a mixed story with some sectors such as health not doing as badly as thought (now minus 27%) but manufacturing doing worse (now minus 32%).

The average outcome remains that PNG’s industries were just over one-fifth worse off in 2016 than if they had simply continued ‘business as usual’ growth prior to the PNG LNG project.

Overall, the PNG LNG project massively over-promised and then failed to deliver. This is not because of the fall in oil prices – indeed LNG export returns are higher than predicted.

Resource projects should be good for development – but this requires good policies. The PNG LNG project induced poor policies under the O’Neill government. These poor policies overwhelmed potential PNG LNG benefits.

There are encouraging signs that the new Marape-Steven government is seeking better returns from PNG’s resources.

Hopefully, it will also pursue better policies in other areas such as competition policy and devaluing the exchange rate to deal with the resource curse. But these will be politically difficult.

Of course, there were beneficiaries from the PNG LNG project - local transport, catering and security firms, support for local health and education, responses to the 2015 drought and 2018 earthquake, some tax and dividend revenues, and some landowner benefit payments.

However, taking a helicopter view of the entire economy, worse off by 2016 were household incomes, government expenditures, employment and import levels.

Worse off, that is, compared with if the pre-PNG LNG ‘business as usual’ growth trends had continued.

The reasons for failing to deliver had nothing to do with the fall in oil prices in late 2014. Indeed, the PNG LNG project is earning more in export income than initially projected.

The reasons for failure are linked to the O’Neill government’s shortcomings in not addressing the well-known risks of a major resource project.

In PNG’s case these included a 50% build-up in spending before revenues flowed that led to the largest budget deficits in PNG history; crippling foreign exchange shortages due to poor exchange rate policies; a failure to put enough effort into other critical sectors of the economy; unwise state investments such as the Oil Search purchase funded by the UBS loan; and growing corruption.

Our ‘Double or Nothing’ report was condemned as “utter nonsense” by former prime minister O’Neill, even though he later admitted he hadn’t read it.

Oil Search CEO Peter Botten promised to subject the report to “rigorous analysis” by an independent accounting firm to “demonstrate that there are some serious flaws”. This was not done, or at least the findings have not been released.

It is encouraging that the new Marape government appears to be taking a more balanced approach towards the resource sector and its potential contribution for inclusive development.

Prime minister Marape has discussed PNG’s resources as more than minerals and gas to include agriculture, forestry, fisheries and human resources.

And given his strong legal background, new petroleum minister Kerenga Kua should help address local concerns about current and prospective LNG agreements.

There is also positive language from the government on what needs to be done to create a healthy economy even if it means it doesn’t make many friends. And the strong stance on corruption is welcome.

However, some policy corrections to move away from the resource curse will be extremely challenging politically. Time will tell if the new government will tackle it difficult economic challenges, challenges that must be addressed to make PNG a much richer black Christian nation.

Comments

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Corney Korokan Alone

Deficit budgets were necessary.
Such is a given in any economy that is slowing down after a flurry of construction activities and associated business growth. That's plain absorption and cushioning strategy than a sharp rise and sudden straight fall.

Those who leap to the lecturing pedestal must better show us what they have done in budget surplus fiscal years.

What are the underlying reasons in devaluing the exchange rate?
The full basis are sketchy at best as it is.

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