IMPLICATIONS OF THE Sovereign Community Infrastructure Treasury Bills (SCITB)



NATIONAL RESEARCH INSTITUTE
An advertisement by NASFUND’s Board of Directors on 8th June on the issuance of Sovereign Community Infrastructure Treasury Bills (SCITB) relating to projects in Kokopo District, has raised more questions than answers. The National Research Institute which is mandated to carry out research, analyze policy issues and propose ideas affecting the development of PNG, maintains that the issuance of the ‘Kokopo Community Infrastructure Treasury Bill’ and the arrangements for the expenditure of these funds is illegal. This article serves to inform and create debate and discussion among the wider public for a better understanding of the implications of the SCITB. It also calls on responsible authorities to clarify and take appropriate action.



Legality of Borrowing

The National Parliament is the approving authority for any forms of borrowing and loans negotiated and taken out by the Executive Government. The Executive Government draws up a money plan for the raising and expenditure of funds every year and proposes this as a National Budget to Parliament. A budget, when approved by Parliament, becomes an Act of Parliament and the responsibility of the Executive Government to implement it as the approved National Budget. The Public Finance Management Act provides for the Finance and Treasury Minister to implement the budget and take responsibility for negotiating loans either as direct loans from financial institutions or through the use of other instruments such as Treasury Bills, Inscribed Stock, etc. However, the Minister cannot borrow funds on behalf of the State for projects and programs that were not approved by Parliament as part of the National Budget. This is captured in Section 35 and Section 36 of the Public Finance Management Act. The ‘Sovereign Community Infrastructure Fund’ was not carried out by Government but a few government ministers outside of the legal decision-making framework and processes of government.



Position of the NASFUND Board

NASFUND maintains through its advertisement of 8th June that the borrowing is legal because the SCITB is ‘security’ created under the Treasury Bills Act. Therefore it cannot be called a ‘Loan’. The K125 million Kokopo Sovereign Community Infrastructure Treasury Bill not being called a ‘loan’ is questionable and arguable from a logical and legal perspective. If NASFUND expects the government to repay its principle amount of K125 million, plus 7.5% interest, what would the SCITB then be called?

The Treasury Bills Act, Section 2 as a principal law overrides the Public Finance Management Act. It states that: “The Minister may borrow, by the issue in Papua New Guinea of securities to be known as Treasury Bills, such amounts in any financial year as the Minister considers appropriate.” Some legal experts point out that there may be a loop hole in the “Treasury Bills Act” where it is silent on whether a Security can be classified as a “Loan”. NASFUND seems to be using this flaw in the laws to argue that since it is classified as a “Security’, it is not a loan and therefore the arrangements do not have to comply with the requirements of the Public Finance Management Act. NRI argues that even as a security, it is still an act of borrowing and a loan taken by Government,

which has committed to repaying the treasury bills from “Consolidated Revenue Funds.”



Legality on Expenditure Arrangements – Kokopo Community Infrastructure Funds

If for all intent and purposes, treasury bills are a loan to government, the expenditure for such funds should also comply with  provisions of the Public Finance Management Act. The Public Finance Management Act provides guidelines on the expenditure of public funds following approval by Parliament. At the beginning of the fiscal year, the Minister delegates to the Secretary for Treasury the authority to issue Warrants. Section 31, on Warrant Authorities states that:

(1) Subject to Subsection (2), no public moneys shall be committed or expended except as authorized by a warrant authority within a fiscal year. (2) Subsection (1) does not apply to payments from the Trust Fund.

The reference to trust funds is made to ensure that there is cash available. Warrant Authorities to expend funds as approved under the budget are issued to all Government Departments and Agencies. Heads of Departments, Provincial Administrators, etc are held responsible for the implementation of work programs as provided for under their budgets. However, the heads of government agencies are also limited to how much they can authorize for the procurement of goods and services. Costs beyond the ceiling allowed for a departmental head requires the approval of the National Tenders Board, a Provincial Tenders Board or a Tenders Committee of a government agency. This enables clear lines of accountably and guidelines for the management of public funds. It is unclear how the Kokopo Community Infrastructure Funds have been expended. According to media reports, it has not being implemented according to the requirements of the Public Finance Management Act. In addition, there is no government agency head accountable for the management and expenditure of the public funds. The questions are: Who is Chief Accounting Officer responsible for this project and have the funds made available? How are the provisions of the Public Finance Management Act being complied with?



NASFUND Board’s position on Implementation

The Directors through their advertisement imply that NASFUND has nothing to do with the Kokopo

Project. They state: “The amount of issue was K125 million and the proceeds of the issue were designated for a specific purpose. NASFUND does not decide where the money is spent. That is a decision of Government. NASFUND invested in the SCITB but otherwise does not administer the Bill or any other of the infrastructure works financed by the Bill nor does NASFUND have any other responsibility other than as investor.” This position is contrary to what was reported in the NASFUND newsletter of April 2010 in regard to the issue. “The Treasury note has the following characteristics 1. It is issued by the Treasurer under the Treasury Bill Act using National Capital Limited (40% owned by NASFUND) as the Agent, Registrar and holder of the monies raised. 2. The Treasury Bill is guaranteed by the State in line with all T Bills issues. 3. National Capital and another party will disperse the monies on invoices from the developers of the infrastructure project and only on review of all tender documents, works completed and the like. National Capital has the right to refuse payment if it seen to be outside the parameters of the programme. This is but a variation on a theme developed for electoral funding under the Morauta Government of which the accounting firm Deloittes was used to monitor the expenditures and administer payments on a bill of works for electoral funds.” It goes on to say; “The Project was introduced to NASFUND by the National Capital Managing Director, who is an Australian and was reviewed by proper process” The newsletter goes on to conclude in the following manner; “We cannot be 100% sure that this new approach to infrastructure development will be an entire success as indeed it is not possible to be 100% sure about most things in life. The NASFUND Board had some very robust discussion as to accountability and trust – two core ingredients for a successful private-public infrastructure project like the one just undertaken. At the end of the day, the Board was of the view that with proper controls, this was an experiment worthy of support on the basis that it could be a blue print  for infrastructure development going forward or at worst further knowledge gained on the road to an even better programme perhaps later on.” This experiment by NASFUND borders on questions of law. Moreover, the NASFUND Board’s denial that it has no knowledge of the implementation arrangements is suspicious. Unless there were significant changes to what was stated in their newsletter, NASFUND is fully involved through “National Capital Limited” in the implementation of the Kokopo Community Infrastructure Projects. It was aware of the project and had some influence on the project undertaking as well as its financing arrangements. There remain many questions that need to be answered and a Government investigation report is required to answer most of them.



A Matter of Public Importance. – Management of Public Debt by Government



The issue of “Community Infrastructure Treasury Bills” needs to be debated and discussed with clarification from the Government especially on debt management and the implications of this policy. The main concern of Papua New Guineans should be about how this as a policy, will affect public debt and the future well being of Papua New Guinea. Papua New Guinea’s history of managing public debt has been notorious with serious repercussions for PNG and this should not be repeated.

The National Research Institute in a study titled, “Papua New Guinea’s Development Performance 1975-2008” shows that Government expenditure since Independence has in most years been higher then revenues (deficit budgets). This has resulted in increasing annual government borrowing. Sustained accumulated debts with public borrowing from both domestic and foreign sources reaching a peak of more than 70% of GDP in 2003, nearly brought the country to bankruptcy in the 1990’s.

Budget cuts were made to education, health, and road infrastructure, etc. and the kina was devalued as government’s attempted to deal with the growing public debt levels.  Finally, financial reforms introduced in 2000 by the then Mekere Government and the result of prudent management by Government since then, together with high commodity prices have led to some recovery of stability in the financial sector. Government borrowings have declined resulting in a decline in interest rates since 2002. We are now beginning to see an increase in private sector lending by the financial institutions. Borrowing by the private sector will in most cases result in new business and the creation of job opportunities, tax for government and so on. This means that there are more job opportunities for young people coming out of school. However when government borrows more and interest rates are high, people with money will leave their monies in the bank and earn high interest. Governments do not create jobs. The private sector does. The role of Government is to create the enabling conditions for the private sector to grow by sound economic policy making and implementation. The issuance of Treasury Bills by way of securities from financial institutions including NASFUND to fund public sector projects is welcome. However, this needs to be managed within the public debt management procedures and processes established by Government and for public programs that are approved under the laws of Papua New Guinea, in this instance, the Parliament of Papua New Guinea. If we allow the Treasurer and only a few Ministers to make decisions and approve the issuance of Treasury Bills for Community Infrastructure Projects by simple Ministerial Determinations, how many more million kina Community Infrastructure Projects are going to be approved? This is not sustainable must be re-checked. The Government has a clear responsibility to have a responsible Public Debt Management Strategy. We need some further explanations from Government.

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