According to Acil Tasmans PNG LNG impact study, average annual cash flow to landowner groups will be around K260 Million per annum. That equates to a total of K7.80 Billion Kina over the expected 30 year life of the project. Clearly, a proportion of this will need to be spent. But in an ideal world, a proportion should also be saved.
Lets conservatively assume that 30% of this income or K78 million will be saved every year and invested monthly at a rate of say 5%.
If K6.50 Million is saved every month for 30 years, a total of K5.41 Billion will be saved.
During this period, landowners will: • Contribute K2.34 Billion in monthly payments • Earn a total of K3.07 Billion in interest
Through the power of compound interest, landowners will earn a risk less return of over K3 Billion.
Contrast this with the likely scenario whereby the entire funds flow will be squandered on consumer goods (largely imported and sold in outlets owned by foreign interests), social vices (such as alcohol and gambling), investment on depreciable assets (such as imported motor vehicles), other ill advised investment vehicles and on illegal contraband (such as firearms and the like).
In a society where extended family networks, tribalism and “short termitus” abound, it is almost inevitable that the cash will be again squandered unless such things as the power of compound interest can be provided to landowners through formal financial literacy programs.
Financial literacy is the ability to understand finance. More specifically, it refers to an individual's ability to make informed judgments and effective decisions about the use and management of their money.
Given the enormous amount of funds that will flow to landowner groups, it is imperative that they be armed with the ability to make those informed judgments in order to effectively manage their funds for the benefit of their children and their children’s children.
PNG 2020 Recommendation 1 – Develop a Financial Literacy program for the benefit of landowner groups with a view to broader facilitation throughout PNG.
With my “PNG 2020” plans in my mind and with PNG LNG now firmly on the horizon, I began considering what impact LNG would have on the country. I have decided to put my economists hat on (yes its time to put my Economics MBA to work) to provide my own thoughts in relation to what, in theory, should be the best thing that has ever happened to PNG and its people.
The PNG LNG project is much publicized and its potential impact much vaunted and lauded. Some pundits have forecast that the USD15 Billion project will more than double the GDP of the country over its expected 30 year life. Others estimate that around 15000 jobs will be created by the project whilst others still boldly predicted that PNG was going to be the “next Dubai”.
But amidst all the hype and government propaganda and armed with all the natural skepticism that I can render, I began considering the potential impact that LNG would have on PNG, largely by drawing on the experiences of other countries who have been blessed (or cursed) by the riches of mother earth.
One such example is Venezuela. The discovery of one of the world’s largest oil reserves was not met with exultation by all. Venezuelan politician, Juan Pablo Perez Alfonzo, famously proclaimed that:
“Ten years from now, twenty years from now, you will see: oil will bring us ruin … Oil is the Devil’s excrement.”
With Alfonzo’s words ringing in my ears, I reflected on PNG’s own circumstances. Whilst not possessing nearly as much oil as Venezuela, PNG was once described as an “Island of Gold floating on a sea of oil” and is almost embarrassingly rich in natural resources. Copper, Gold, Nickel, Natural Gas, Coffee, Palm oil, Fisheries, Timber - you name it, we got it.
But in spite of all these riches, PNG’s social development continues to lag the rest of the world. For instance, according to the United Nations, PNG’s Human Development Index rank dropped from 126th out of 172 in 1995 to 146th out of 177 in 2008 evidencing that although GDP has significantly grown over the past two decades, human development has not matched this growth. Over 50 per cent of the population lives in poverty (though I would argue that true poverty does not exist in PNG) with over one million people living in areas without access to education, health or transportation. Basic service delivery has declined. Problems of transportation, infrastructure, and education delivery are glaringly apparent. The continued national disgrace in PNG’s second city, Lae, where power and water supply issues have led to outbreaks of cholera, epitomize these issues to the core. Law and order problems are rife and PNG remains one of the most corrupt nations on earth.
So, why the apparent paradox?
The answer may lie in the so called “paradox of plenty” or “the resource curse” as it is more affectionately known. According to Wikipedia, “The resource curse refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources.
Wikipedia further outlines that “The idea that natural resources might be more an economic curse than a blessing began to emerge in the 1980s. In this light, the term resource curse thesis was first used by Richard Auty in 1993 to describe how countries rich in natural resources were unable to use that wealth to boost their economies and how, counter-intuitively, these countries had lower economic growth than countries without an abundance of natural resources.”
The symptoms of the so called “resource curse” has reared its head throughout PNG’s 34 year history and whilst the likes of the Bougainville war (the 10 year conflict emanating from the Bougainville Copper mine dispute) were significant shocks caused directly by the curse, the emergence of the single biggest project in PNG history threatens to impact on the country like nothing before it.
Research has suggested that the curse produces the following main problems:
Conflict & War:
The presence of natural resources has provoked conflicts in the past as groups fight for there share of the loot. These conflicts can occur as separatist conflicts within the resource areas itself (such as in angolass oil-rich Cabinda province and in PNG’s own BougainvilleIsland) but they can also occur indirectly through fights between different government ministries or departments for access to budgetary allocations. This tends to erode governments' abilities to function effectively.
Conflicts can occur over the control and exploitation of resources and the allocation of their revenues. Note that the LNG reserves lie predominantly in the Huli basin in the Southern Highlands Province though control of the revenue will reside in Port Moresby. The very fact that control, and distribution of the LNG proceeds will likely be in the hands of non Huli, non Southern Highlander types, will prove a very sore point for Huli in particular given that revenue proceeds will need to be distributed disproportionately across the country (depending on who is in charge). It is further noted that in comparison with the Southern Highlanders, Bougainvilleans are a fairly passive people.
Dutch disease:
Dutch disease is an economic phenomenon in which the revenues from natural resource exports damage a nation's productive economic sectors by causing an increase of the real exchange rate and wage increase. This makes tradable sectors, notably agriculture and, to a lesser degree in PNG, manufacturing, less competitive in world markets. The increasing national revenue will often result in higher government spending that increases the real exchange rate and raises wages. The decrease in the sectors exposed to international competition and consequently even greater dependence on natural resource revenue leaves the economy vulnerable to price changes in the natural resource.
Revenue volatility:
Prices for natural resources are usually subject to wide fluctuation; for example crude oil prices rose from around $10/barrel in 1998 to over $140/barrel in 2008. When government revenues are dominated by inflows from natural resources, this volatility can play havoc with government planning. Abrupt changes in economic realities that result from this often provoke widespread breaking of contracts, and this erodes the rule of law.
Excessive borrowing:
Since governments expect more income in the future, they start accumulating debteven though they are receiving natural resource revenues as well. This is encouraged, since, if the real exchange rate increases, through capital inflows or the Dutch disease, this makes the interest payments on the debt cheaper. In addition, the country's natural resources act as collateral leading to more credit. However, if the natural resources' prices begin to fall, and if the real exchange rate falls, a government would have less money with which to pay a more expensive debt. For example, many oil-rich countries like Nigeria and Venezuela saw rapid expansions of their debt burdens during the 1970s oil boom; however, when oil prices fell in the 1980s, bankers stopped lending to them and many of them fell into arrears, triggering penalty interest charges that made their debts grow even more. Given the terrific inroads made by successive governments in relation to PNG’s foreign debt, it would be shame to see this eroded by in disciplined spending into the future.
Corruption & Graft:
In resource-rich countries, it is often easier to maintain authority by allocating resources to favored constituents than through growth-oriented economic policies and a level, well-regulated playing field. Huge flows of money from natural resources fuel this political corruption. The government has less need to build up the institutional infrastructure to regulate and tax a productive economy outside the resource sector, so the economy may remain undeveloped. The presence of offshore tax havens provide widespread opportunities for corrupt politicians to hide their wealth.
PNG is already considered one of the most corrupt nations on earth. Transparency International recently found that levels of corruption in PNG have in fact worsened in 2009 compared to previous years. Corruption exists in all walks of life in PNG especially when it comes to the disbursal of funds. An analysis of the PNG mineral and petroleum industry observed that ‘community members are generally unable to hold their community leaders to account for the management of any cash benefits bestowed upon them by governments. In fact much of these funds are generally spent unproductively and usually internationally where PNG receives no benefit.
Lack of Industry diversification:
Economic diversification may be neglected by authorities or delayed in the light of the temporary high profitability of the limited natural resources. The attempts at diversification that do occur are often public works projects which may be misguided or mismanaged. However, even if the authorities try to diversify the economy, this is made difficult because the resource extraction is vastly more lucrative and out-competes other industry. Successful natural resource exporting countries often become more dependent on extractive industries over time. While the resource sectors tend to provide large financial revenues, they often provide few jobs, and tend to operate as enclaves with few forward and backward connections to the rest of the economy.
Human resources:
In many poor countries, natural resource industries tend to pay far higher salaries than what would be available elsewhere in the economy. This tends to attract the best talent from private and government sectors, so damaging these sectors by depriving them of their best skilled personnel.
Another possible effect of the resource curse is the crowding out of human capital; countries that rely on natural resource exports may tend to neglect education because they see no immediate need for it. Resource-poor economies like Taiwan and South Korea, by contrast, spent enormous efforts on education, and this contributed in part to their economic success.
PNG LNG has also been widely credited with job creation for Papua New Guineas.The sad reality however is that PNG does not have the skill base to supply sufficient human resources for the projects (save perhaps for the 500 new drivers the project requires) and therefore these resources will need to be sourced from overseas. A quick check of the various Australia employment web sites reveals a quantum leap in the number of roles available on LNG related projects. It is noted further that the vast majority of these roles are FIFO (Fly in fly out) and therefore PNG will again miss out on the potential economic flows emanating from project spend. Finally, given that (a) PNG LNG will compete with the major miners in Queensland and Western Australia for resource and (b) the best resources will not move to PNG anyway, PNG will again be subjected to second rate, mediocre candidates who, as history has shown are the wrong type of individual to assist with PNG’s human capital development and economic growth.
Liberty and democracy:
Econmists have argued that one can correlate rises and falls in the price of petroleum with rises and falls in the implementation of human rights in major oil-producing countries. Does the recent assassination attempt on the countries Attorney General provides some evidence of this erosion in liberty?
However, probably the greatest threat of all is posed by the potential social impacts of a project of this magnitude.
HIV AIDS:
The large influx of funds and foreign workers and cash are likely to have a major impact on PNG’s social fabric. The presence of large numbers of male workers with large disposable incomes will have distorting effects on the local economy and likely upset social relations. Increased alcohol and drug use, generally higher levels of gambling and social disharmony will become evident. PNG’s crippling HIV/AIDS problem will likely worsen with the influx in workers can lead to a new two-way catastrophe: with increased exposure from expatriate workers to local people and from local people to expatriate workers who then move on to infect people in other countries.
Cash wastage:
The increased level of money in the community will further exacerbate social ills. Concerns have been expressed that local ‘big men’ are receiving the money on behalf of communities but not sharing it with community members and reports from PNG are already suggesting a sharp increase in the purchasing of liquor and use of hire cars. This habit of in disciplined spending is symptomatic of all walks of PNG society due in part to the extended family apparatus, in part to the Melanesian tendency to focus on short term needs rather than long term and in part to the lack of financial savvy in the community. The establishment of formal financial literacy programs could potentially arrest the continued wastage of cash on unproductive areas.
The haves & the have nots:
The gap between the haves and have not’s will further widen as the elite reap the benefits from the LNG. Much of the vaunted benefits of the project will in fact flow to minority groups (property owners who are in the whole are elite Papua New Guineans, landowner groups or foreigners) as well as internationally (foreigners in search of employment and foreign companies winning tenders) with the majority of the population completely dependant on governments ability to support development. The Port Moresby property market (where rental yields are upwards of 20% and affordability levels are well above 10 times annual salary) exemplifies this increasing gap.
Law and Order:
The influx of people into the country will also attract its fair share of unsavoury characters hell bent on profiting from the project. Its is said that in the best oftimes, three types of people come to PNG –missionaries, mercenaries and misfits. Aside, from the former, surely the country does not any more of the latter types.
Law and Order issues particularly at the sophisticated end of the crime spectrum (tiger kidnappings, extortion, political assassination) will continue to increase fuelled both by the influx of foreign interests (Chinese Triads are rumored to already be in operation in the country), the surge of surplus cash in the economy and the widening gap between rich and poor. This coupled with the crippled state of the PNG police force (due largely to many years of under funding) will only worsen the countries plight.
So that is my sobering assessment of PNG LNG at this moment. Curse or blessing, devils excrement or otherwise, the jury is out on PNG LNG. Whilst only time will tell, hopefully it is not too late too to change the inevitable. I will provide my two cents worth at next submission as to how I think this can be done.
One of my mantras in leadership and life has always been to not reinvent wheels. If something has been done well and has been proven to work, why try to reinvent it. Another of my mantras is that we can all learn from each other and from every interaction with each other. These leadership notions coupled with my strong desire to contribute back to my own country has driven me to thinking about how I can combine these sentiments for the betterment of PNG.
One of the thoughts that I have harbored for a while has been to try and replicate the Australia 2020 Summit which was held on 19-20 April 2008 in Canberra, Australia, aiming to "help shape a long term strategy for the nation's future". The summit ran as 10 working groups of 100 participants with 1000 delegates ( a cross section of the smartest people in the country from all walks of life)attended the summit to discuss ten "critical areas". Ideas and proposals were invited from all members of the community in regard to the following:
1. Productivity—including education, skills, training, science and innovation.
2. Economy—including infrastructure and the digital economy.
3. Sustainability and climate change.
4. Rural Australia—focusing on industries and communities.
5. Health and ageing.
6. Communities and families.
7. Indigenous Australia.
8. Creative Australia—the arts, film and design.
9. Australian governance, democracy and citizenship.
10. Security and prosperity—including foreign affairs and trade.
Some of the key ideas presented by delegates at the 2020 summit for some of the relevant areas included:
Climate:
-A sustainability, population and climate change agenda supported by robust institutions.
-A cities program to reduce emissions, save water and encourage public transport
-All new buildings after 2020 to be carbon neutral
Creative:
- Link artists with schools through mentoring programs
-Mandatory creative, visual and performing arts subjects at school
Health
- Establish a health equalities commission
-Create a national preventative health agency
-Make healthy food choices easy
- Promote better research
-Create a self-sufficient and flexible medical workforce
Productivity:
-Establish 2020 scholarships for vocational education and training and higher
education institutions to address skills shortage
- "Learning for life accounts" for every Australian from birth, into which the
government and others can make payments for education, training, parental leave, and superannuation contributions
-Parent and children centers to give communities access to integrated services to support children's
health, development, learning and care.
A full copy of the report is available at the australia2020 website for those interested.
The significance of “2020” for me is what a similar summit could generate for PNG. Clearly, and with all due respect to those in public life, the best and brightest of PNG society do not necessarily find themselves at the pointy end of the decision making tree. A “PNG 2020” would potentially provide the opportunity for those best and brightest men and women to put forward their ideas to help drive the country forward.
For instance, drawing on the many ideas that emanated from the Australian version, some of the specific ideas that resonated for me particularly in the PNG context included:
1. 2020 scholarships: deliver merit-based scholarships to vocational education and training and higher education institutions in skills shortage areas.
2.Teaching first: establish a national program to attract talented graduates and career-switchers into teaching, and reward teachers for working in national priority areas, including in disadvantaged communities, in remote areas and in subjects with teacher shortages.
3. Golden Gurus: retired people acting as mentors in all aspects of economic and social life.
4. A National Preventive Health Agency that would tax hypothecation of cigarettes, alcohol and junk-food products to fund the agency including a 2.5 cent increase in tax on each cigarette, a volumetric tax on alcohol, a tax on high-energy, low-nutrient foods (a junk-food tax) and the abolition of bringing duty-free alcohol and cigarettes into the country.
5. Establish a national housing foundation, with a small percentage from the sale of every property in the country to go to public housing and homelessness.
6. Establish programs for young offenders across a range of industries, such as the automotive industry, where cars are repaired and rebuilt by offenders and then are given to sole parents who have had their car stolen.
7. A new form of national service for young people to travel through the country, visiting a variety of places and performing some sort of community service while in that location.
8. Provide training for parents. The current focus of programs is on birth, not on parenting. The training should be postnatal: antenatal does not work. Also, develop a mentoring system, rather than just mothers groups, especially since the extended family is generally not around.
9. A national civil service, where working for the country could be a profession of first choice; introduce a public service exchange program between federal public service, state and territory public service and the private sector.
The question now is how do I make “PNG 2020” a reality? Stay tuned.
