A New Deal and Steps to economic Recovery

by Rt. Hon. Sir Julius Chan GCL GCMG KBE MP

Mr. Speaker, I rise with other Honorable members to recognize and congratulate the new Treasurer Hon. Sam Basil in highlighting the general Government Economic and Financial situation.

Mr. Speaker, in the past month we have gone through a difficult and challenging time. But we have made it through. We have shown that the democratic process works. I want to congratulate this august body for showing that democracy is alive and well in Papua New Guinea.

And I want to congratulate the new Government, the Marape Government. I said a little just days prior to the change of the Prime Minister, “There is no sea more dangerous than the ocean of politics. And it is when the waves rise to their highest that there is the greatest need of an experienced captain, a good crew, and of a single, unfaltering purpose. “

Mr. Speaker, My comments were drowned out by dissenting Members now sitting on your right. The change has come; a new captain and somewhat mixed old and new crew. Blend together let’s hope the country can expect a new deal and bold steps to economic recovery. The wisdom and the courage to do what must be done. PPP and supporters of our group commit us to being members of the “good crew.” I hope all of us here today make the same commitment.

As a member of the crew with perhaps more experience than most, I have some suggestions. The first suggestion is that we be brutally honest with ourselves. Our country is facing serious economic challenges. Hon. Ian Ling Stucky, Member for Kavieng was right.

All we need to do is look at the most basic economic document in the country – our National Budget. The truth is that for the past five years we have not been true to ourselves. Each year we have greatly overestimated revenues. And each year we have greatly underestimated expenditure. That means each year we have ended up with a far higher Budget Deficit at the end of the year than was projected at the start of the year.

Just look at the evidence. In the 2016, Budget the Budget Deficit was originally projected to be K2.1 billion. In fact Revenue was less than expected and Expenditure more than expected and the actual deficit at the end of the year was over K3 billion, a billion more than was projected.

In 2017 the projected deficit was K1.88 billion. However, once again the actual deficit was nearly K3 billion. In 2018 the actual deficit was again more than a billion more than projected.

Our Budget for 2019 looks set to repeat the same mistake. We need to start being honest. We need to admit we have a problem. New Ireland IDG, SSG, financial grants are up to 2018 still outstanding.

And, Mr. Speaker, that is not even our most serious problem. Our most serious problem is that we are not spending money on development, on making our peoples’ lives better. The truth is that most of our National Budget goes to pay off our loans, to pay interest on our loans, and to pay for the National Bureaucracy. Just look at the 2019 Budget. Shadow Treasurer once again was right.

That budget allocates K11.12 billion to pay off loans, K1.98 billion in interest payments and K4.51 billion in personal emoluments. The Economic Statement was not a fake because it tells the truth.

So just in recurrent costs we are spending K17.6 billion – this is out of a total expenditure budget of K26.64 billion. So we are spending 66.1% of our total budget on debt repayment and the bureaucracy – two-thirds of our budget. We have almost nothing left to pay for services, infrastructure and development for our people.

So not only do we run high deficits every year, but we are also spending twice as much money on recurrent costs as on development and services. We need to fix this. We cannot continue to complain on the same old thing.

Mr. Speaker, today I want to propose some steps that will help us to put Papua New Guinea on the track to prosperity. And, Mr. Speaker, that is what we should be. We should be prosperous. Our people should be prosperous. Our people should be rich.

Just look at the evidence. Our country is rich. Our natural resources are the envy of most of the world. Each year we export more than 10 billion US Dollars worth of natural resources - oil, LNG, gold, copper, nickel. That is well over K30 billion in resource exports.

But the truth is that very little of that revenue actually comes to us – to the State, the Provinces, the Landowners.

Let me give you an example. Norway exports about $US50 billion worth of natural resources each year – oil, LNG, forestry and fisheries. And Norway retains about $US26 billion of that year in country – that means over half of the export value of resources goes to the State and people of Norway. The same is true in countries around the world.

And in PNG? Well, of the more than K30 billion worth of resources we export each year, less than K5 billion stays in PNG. That includes all taxes the companies pay, all royalties, all Tax Credit Scheme, everything.

So Norway and Ghana and Senegal and Canada and America and many more countries get over half of the value of the resources taken out of their ground and their seas. And PNG? We get less than 20%.

That must change. We must take our country back.

First, we must increase the benefits to the State, the Provinces and the landowners from resource extraction - gold, copper, nickel, LNG, oil and others. Let me begin with royalties.

Look at royalties. Royalties on oil and gas, under the Oil and Gas Act 1998, are set at two percent well-head value of oil and gas extracted. That sounds like the company is paying 2% of the value of oil and gas to the landowners, the province and others. But what is really happening?

The truth is that every toea of royalty paid by the company can be claimed as a tax deduction for the company. This means that if the company pays 50 million in royalties, they are able to deduct 50 million kina from their tax bill. In other words, the company pays NOTHING.

Who pays? We pay. The State pays, because it gives up tax revenues equal to the amount of royalty paid. The State is the People. So guess what? The People are actually paying their own royalties!

And this is only the beginning.
Not only does the company actually pay nothing for royalties, the rates at which royalties are calculated are ridiculously low by international standards. In Norway the royalty on LNG and oil is 12.5%. In the US the royalty rate on offshore oil is 12.5% to 16%. The same is true all across the globe. We need to dramatically increase the rate of royalties paid.

The same is true in the gold and copper sectors. We are getting 2% royalties while in Canada royalties are from 12% to 18%, in much of Africa they are between 8% and 15%, and similar rates apply elsewhere.

If we increase the royalty rate from 2% to 10% for oil and gas and minerals, and eliminate the tax deduction for oil and gas royalties, we would end up with close to K3 billion more per year in revenues. That alone would wipe out our annual National Budget deficit. It is that simple.

And that is not the end of it. We also have a Development Levy that is paid to Government. This is also calculated at 2%, but 30% of that is deductible from tax paid by the company. If we were to eliminate that tax deduction and increase the Development Levy significantly we would be able to realize several hundred million kina more per year.

Another lesson we need to learn from the world concerns equity, ownership of the resources. Right now we literally give our resources away to the companies. For example, under the Mining Act once a company is issued a Mining Lease they are given ownership of all minerals that come out of the ground. If the State – or anyone else – wants equity in the project we must buy that equity from the company for a resource in our ground or sea.
So the State ends up paying K300 or 400 million or K1 billion for a minority stake in a resource it just gave away.

But in many countries the State gets automatic, free equity of 10% or 15%. In many others, for example, in Algeria, Brunei Darussalam, Cameroon and Libya, the State automatically gets at least 50% of any oil or gas project in “carried interest.” The State does not pay for equity. Instead, the company takes all the costs of exploration and development, and when the project begins to produce the State has to pay 50% of the operating costs, but in return gets 50% of the profits. Therefore, any project that makes a profit will result in large incomes for the State.

In Papua New Guinea we should insist that in any oil or gas project the State should receive at least 30% carried interest equity. That would guarantee the State 30% of the profits from the project once production commences. The same thing for gold or copper. And when the State gets 30% or more of the profits, one third of that should be shared with the Province and one-third with the landowners.

The total profits of oil, gas and mineral companies in PNG in 2018 were approximately $US3 billion, or K10 billion. If the State, Provinces and landholders, combined, had just 30% equity in these companies, the country would realize another K3 billion per year in income.

Another area we need to correct is our tax system. I already mentioned the tax deductions we should eliminate. But even our overall taxation regime is very low by international standards.

In Norway in 2018 the ordinary company tax rate was 24%, but because they are so profitable, there is an additional the special tax rate for oil companies of 54%. Overall that means that oil companies operating in Norwegian territory pay a tax of 78%. Seventy-eight percent! In other countries around the world tax rates of 50% to 60% are common.

And PNG? In PNG our tax rate is only an average of 30%, and the real tax rate is less than 20% because we give tax holidays and because of the tax deductions given for royalties and development levies. We should increase our tax rate to 50%. If we do that we will realize another K1 billion per year in revenues.

Mr. Speaker, I hope the members in this hallowed chamber are listening closely. Let me recap what I have said so far. First, if we raise the royalty rate on oil and gas to 10%, eliminate the tax deduction on royalties paid, and eliminate the tax deduction on development levies we would make close to K2billion more per year. Two billion.

Second, if we raise the royalties on key minerals to 10% per year we would raise another K800 million plus per year. 800 million.

Third, if we insist on 30% carried interest equity in any project we would realize another K3 billion per year. Three billion.

Finally, if we raise the basic tax rate from 30% to 50% we would realize another K1 billion per year. One billion.

Add it up. Mr. Speaker, that represents a total increase in revenues and benefits of about K6.8 billion kina per year.
Instead of a deficit of two or three billion per year, Papua New Guinea would have a surplus – a surplus! – of two or three billion per year……

Mr. Speaker, there will be a great hue and cry from the industry when we propose these measures. That is to be expected. The same thing happens around the world when any country has the courage to say it is time for the companies to pay a fair price for extracting the resources. It happened in Norway, but guess what? The companies are still there. And they are there for one simple reason. They are still making a profit.

Not an obscene profit. Not as much profit as they made before. But a good profit. That is as it should be. The companies should make a good profit. But at the same time the people should be getting what they deserve from the resources coming from their land and sea.

Mr. Speaker, I realize that not all the revenues I am speaking of will go to the State. Much – as much as half – will go to the Provinces and the People in increased royalties and other payments. But this is the way to the future.

We have spoken much in New Ireland about Autonomy. We see Autonomy as a way to strengthen the country, not weaken it. When the revenues begin to flow to the landowners and the Provinces they will be able to shoulder a significant amount of the burden that is now carried by the State. The future will be a partnership between the Central Government and the Provinces.

This means the Expenditure of the State will decline as Provinces begin to realize sufficient incomes to pay for infrastructure, a good part of education and health and other costs of service delivery. The country will become a federal system, one in which provincial and local levels share in the fiscal burden of infrastructure development and service delivery.

And, Mr. Speaker, we in New Ireland have already made a recommendation that will share the wealth with the rest of the country. We are recommending that 20% of any increases in benefits to the Province should be put into a trust fund and used exclusively for projects and programmes in non-mining provinces. We want to make every province in PNG a Mining Province. And we should do the same for oil and gas provinces.

Mr. Speaker, what I am suggesting would reduce National Government Expenditure by K3 billion per year. What I am suggesting would increase National Government Revenues by at least K1.5 billion. What I am suggesting would increase incomes for provinces, landowners and the people of Papua New Guinea in general by at least K15 billion per year.

Mr. Speaker, our country is in economic crisis. But we are not the first country to face such a crisis. The United States faced the Great Depression. 1932 The most important thing is make sure the common people of Papua New Guinea prosper. Control borrowing or beaurocracy, life development expenditure to 75%.

My friends, today I ask that we all dedicate ourselves to a New Deal for the People of Papua New Guinea.

Today I ask that we all – together – declare that we will no longer be victims of history.

Today I ask that all of us join hands and proclaim that we will make history – we will be the architects of history.

Today we join the community of nations that have had the courage to insist that their resources benefit themselves, their people.

Today we begin at long last to claim Papua New Guinea as our own.

No comments

Please free to leave comments.