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Thursday, October 27, 2016



The 2016 Budget was one of emergency for Papua New Guinea. Adjusting to a 20% collapse in revenue caused by plummeting commodity prices and an economic slow-down, the government has implemented expenditure cuts that are harsher than those contained in Greece’s austerity package.
In many ways, the 2016 Budget was the one PNG had to have. While commentators, including myself, have questioned the severity and the way in which cuts have been made, all agree the government could not keep spending at the pace it has been given the collapse in revenue and rapid increases in public debt. But will expenditure actually slow? And what is the true level of public debt in PNG?
We can shed some light on these questions by focusing on a specific, big-ticket item of expenditure: PNG’s hosting of the APEC leaders’ meeting in 2018.
Port Moresby is going through a massive transformation in preparation for this event, driven by a confusing mixture of public, private and state owned enterprise (SOE) expenditure. Due to the degree of off-budget expenditure that is commonplace in PNG, it has been difficult up to this point to quantify the public cost of the APEC event, not to mention overall public debt. But, thanks to a recent Article IV consultation report from the IMF, we are a step closer to answering both of these questions. Before we move on, however, it is important to note that while sources don’t get much more credible than the IMF, these are sensitive issues in PNG and public information is scarce. What is sorely needed, and what the taxpayers of PNG should demand, is more information and transparency from the O’Neill government.
It was October 2013 when PNG was given the go ahead to host the 2018 APEC leaders’ meeting. At the time, Prime Minister O’Neill argued the event would deliver immense tourism and investment value by in elevating PNG on the global stage. The meeting, which brings together heads of state from 21 Pacific-facing nations including the US, China and Russia, is one of the few events on the annual international summit schedule that heads of state regularly attend. It is however, perhaps tellingly, most famous for decking leaders out in traditional, often colourful, attire.
Drawing up to 10,000 delegates and media for more than 180 planned meetings (as noted on page 46 of this budget document), the security, logistics and accommodation demands of the event are daunting for any city. Australians will no doubt remember the controversies surrounding Sydney’s 2007 APEC meeting, while last year’s Philippines APEC was also controversial and its value a source of debate. The challenges will be even more acute for Port Moresby, the 3rd least livable city of 140 measured by The Economist Intelligence Unit.
The government has not taken these challenges lightly, and quickly established a coordination authority to oversee the preparations for Port Moresby. Little was publicly heard from this authority in the following two years until CEO Christopher Hawkinsrevealed much more detail at the PNG Advantage Business Summit in August 2015, including the map reproduced above, that shows five major precincts for the Leaders’ week meetings.
Anyone who has recently visited Port Moresby will note how many of these precincts incorporate new developments, such as the Paga Hill development (where the leaders’ meetings will be held) and accompanying ring road, the Star Mountain Hilton development(being constructed by the Mineral Resource Development Company, a state owned enterprise), and another planned airport upgrade. (Despite this surge in construction, the leaders’ week itself will still require accommodation options on cruise ships to offset capacity constraints). Mr Hawkins stressed that the costs of these new developments would largely be absorbed by the private sector and this 'won’t be the multibillion dollar APEC people are expecting'.
Reflecting this commitment the government has budgeted, as shown on page 46 of this document, 80 million Kina (roughly US $26 million) in expenditure for APEC in 2016, half of which will focus on security (with which Australia is committed to assist). Expenditure will no doubt ramp up as we get closer to 2018, and that is to say nothing of what is being spent outside of the budget process. A comprehensive budget for APEC expenditure over the next three years was expected to go before Parliament in October, but nothing has yet been made public. Given the cash crunch the government now faces, such a lack of transparency is underwhelming.
Thanks to the IMF, however, we have a more feasible estimate of the true cost of APEC. Page 6 of the IMF report notes the government plans to spend 3 billion Kina (roughly US$1billion or A$1.5 billion) over the next three years on APEC, equivalent to approximately 7% of all government expenditure over that period (last year the Philippines spent roughly US$200 million while at the other end of the spectrum China spent about US$6 billion in 2014). To put that into perspective, health and education expenditure will total 3.5 billion and 3.7 billion Kina respectively over the same period. If APEC will indeed cost the 3 billion Kina forecast by the IMF, the PNG government will need to work hard to justify it as core services are slashed, and close to half a billion kina still needs to be found to finance next year’s general election.
Of course, expenditure of this scale will bring some benefits. The IMF notes that it will contribute to overall economic growth in the country, and employment in and around Port Moresby. The meeting itself may also promote tourism (though recent research from the ADB of major events held in the Pacific questions the validity of this claim) and investment in the country. New high end infrastructure and hotels will also benefit the Moresby elite and expat community.
But given the tight fiscal constraints and multiple expenditure demands facing the government of a country with one of the lowest levels of human development in the world, and where 40% of the population live in absolute poverty, voters have the right to ask what are the true costs and benefits of holding this event. 
Whatever the final figure is for APEC, it will no doubt have to be largely financed by debt, another contentious issue in PNG. The 2016 Budget has already pushed debt figures past the legislated debt limit of 35% of GDP (see page ii of this document). But the budget only tells half the story when it comes to public expenditure in PNG. The balance sheets of SOEs, off-budget loans, and outstanding obligations to government superannuation funds should all factor into overall public debt, regardless of how well they are collateralised. Until recently much of this remained shrouded in mystery, but, thanks again to the IMF, we can draw a more comprehensive picture of the government’s debt profile, as shown in Table 1.
Table 1: PNG's debt as a proportion of GDP
Description: IMF Article IV, page 9
These numbers are still moderate relative to many other countries, but they are significantly higher than the figures used by the PNG government, and they are growing rapidly. With official debt servicing already having more than trebled from 2012 to 2016 and now accounting for 10% of government expenditure, the government cannot afford any more extravagant expenditure. That isn’t to say that APEC should be completely abandoned — that train already appears to have left the station — but the government’s financial position obliges it to be as frugal and transparent as possible over the next three years.
When the PNG government made the decision to host APEC, Prime Minister O’Neill hoped it would be an opportunity to showcase the country’s burgeoning economic success and promote PNG as a confident and modern nation deserving of its seat at the APEC table. The 2018 event may still fulfill that goal, but it can no longer be at any cost. If the government is still confident in the event’s value, then it must be prepared to prove it to the people of PNG with greater transparency and comprehensive, justifiable, costings.
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