GOVERNMENT’S CREDIBILITY WITH INVESTORS AT ROCK BOTTOM: INEPT FINANCIAL MANAGEMENT BY O’NEILL, PRUAITCH AND MARAPE PREDICTS LOOMING ECONOMIC DISASTER
by WILSON TALAG
“For a small country whose economy is heavily dependent on volatile commodity prices to borrow heavily hoping that commodity prices will remain high is the pinnacle of stupidity.”
Smart investors are not anywhere as dumb as the average Papua New Guinean citizen whenever Prime Minister Peter O’Neill speaks. O’Neill can utter complete lies about the PNG economy and government budget to the public and people will take his words at face value. Foreign investors and the foreign owned private sector in PNG make good money because they are not so gullible. They check things out and what they have learnt is disturbing. The Prime Minister himself does not understand this reality and continues to present only information he wants the investors to hear. But the investors are wise to his tricks and overall investor confidence in PNG has plummeted close to nil if the side comments of investors are to be taken at face value.
Papua New Guinea’s Prime Minister Peter O’Neill has made many overseas trips to attract foreign investors to his country. Unfortunately, what he tells the investors doesn’t always correspond to what the investors find out for themselves about the state of PNG’s economy and government financial management when they further investigate.
It now appears that the PNG economy started to contract (a 'recession') starting in 2014. Nobody noticed at the time because the change was masked firstly by the carryover from LNG project construction, and secondly by private sector investors who too optimistically viewed the LNG construction phase as a sign of continued economic expansion and implemented their own business expansions, including expanded infrastructure.
Today hardly any new major private sector projects are in serious planning and implementation phase. Exceptions are a few projects that were planned long ago and speeding to completion. More dominant on the skyline are major government money-funded projects, which is largely dependent on borrowed money or taking advantage of resource owner trust fund monies, such as that committed for the 5 star Star Mountain Hotel, being built expressly for the APEC 2018 meeting, where naïve gas and mineral landowners will be the ones ultimately footing the bill.
The Star Mountain Hotel is an example of how the O’Neill government builds infrastructure using other people’s money. In this case, the Star Mountain Hotel risks a huge amount of royalty monies of uneducated village people. Construction of the hotel is funded by the government Mineral Resources Development Corporation (MRDC) which is using up rural resource owner mineral and oil/gas royalties for the project. The landowners will own the hotel through MRDC which also means they will be the ultimate victims for any financial losses. This investment shows all likelihood of going sour. First, the Hilton Hotel chain is only involved because it assumes zero risk in the venture. It has no ownership. It will only manage the hotel and the hotel owners will have to pay for the use of the Hilton name. Building so many ‘5-star’ hotel rooms as planned for APEC 2018 has considerable risk of becoming a financial disaster on the level of the 2006 Greek Olympics. That is because the whole business model for Port Moresby hotel expansion depends upon Papua New Guinea’s capital city to outcompete Cairns as a regional tourist, gambling and international sports/convention destination in a few short years. This is an impossible dream that perpetuates the long standing PNG government blindness to PNG’s chronic reputation for high random criminal violence against visitors. Compared to Cairns, Moresby offers little in terms of a world class, cost-attractive variety of places to visit and things to do. Expect the Moresby hotel industry to enter a deep depression following the 2018 APEC meeting.
The PNG economy is unlikely to reverse and start expanding for a few years. Principal commodities upon which the government deeply depends do not show much of a recovery in price for at least the next 3 years and possibly longer.
International Monetary Fund prediction of world natural gas/LNG prices for the coming 4 years is not good. Thus, large amounts of LNG will be exported out of PNG by ExxonMobil at bottom level prices. This means less revenue for the PNG government and less royalty for landowners for gas that once taken out of the ground, is gone forever.
International Monetary Fund prediction of world copper prices for the coming 4 years does not show improvement for PNG government revenues, nor profits for its Ok Tedi mine.
Gold commodity prices show only moderate recovery during 2017-2018 and thus is likely to do little to boost PNG government revenue for some time to come.
In addition, investors are beginning to see that the Prime Minister has displayed a pattern of behavior that to strongly resembles how Zimbabwe’s Robert Mugabe came to power and subsequently destroyed Zimbabwe’s economy. This did not worry investors at first because apart from the nationalization of Ok Tedi, Peter O’Neill has not grabbed state and foreign-possessed land for distribution to PNG’s growing landless population, but instead does the opposite, including the Central Province SABL to allow mechanized rice farming on thousands of hectares of land that will marginalize the customary landowners permanently. Foreign investors are not against dictatorships because they don’t have to live under them. So long as the dictators enforce government policy that will allow them handsome profits, investors are willing to invest.
Instead, what is beginning to concern foreign investors is the glaring incompetence of the O’Neill government in managing the economy and the national budget. This definitely threatens their ability to make profit in PNG and with each passing month, evidence of the depth of this mismanagement becomes clearer. The headlong plunge into additional massive government debt for the APEC 2018 meeting
An example of insane spending of government money for the 2018 APEC meeting at a time when the government is spitting on everyday people in PNG by major, painful cuts (over 40% from 2014-2016) in health, education and infrastructure spending, core government services whose delivery should take precedence above all else. As usual, the unnecessary “white elephant” APEC 2018 spending will likely be funed by further government borrowing, even though all indications are that it has already borrowed over the legal limit and is simply ignoring the law, as Peter O’Neill has always enjoyed doing.
This incompetence comes on top of the O’Neill government’s inability to admit to error. In fact Peter O’Neill shows a history of repeated lying that only those potential investors who have been connected with PNG for awhile would have picked up on. As the word spreads that PNG’s Prime Minister and his finance Ministers James Marape and Patrick Pruaitch are not to be believed, a zinger compounds the problem for the PNG government and business investors. For the first time in PNG’s 41 years of independence, the government has decided not to release the International Monetary Fund’s annual report on the state of the PNG economy. This is strong evidence that there is information in the IMF report that will pull the last rug out from under the PNG government in terms of putting on a happy face on the prospects for the PNG economy.
In going overboard to hide government financial details from potential investors, the PNG government has pounded the last nail in the coffin of significant, legitimate foreign investment for some years to come. Investors will continue to come to PNG, but only those who operate unethically or expect to generate excessive profits from relatively little investment. Such business activities benefit the unscrupulous foreign investors much more than the people of PNG.