Papua New Guinea: Reforms planned for SOEs

As Papua New Guinea’s top banks and financial services firms record healthy profits, citing overall strength of the economy, the government has pledged a broad and ambitious infrastructure development programme in hopes of further boosting growth. However, concerns about the future distribution of an expected resource-driven boom continue to dampen long-term expectations.

On March 18, Bank South Pacific (BSP), the country’s largest bank, posted an operating profit before tax of PGK545.3m ($257m) for 2012, up 14.8% from the previous year’s figure of PGK475m ($223.9m). This followed the March 13 release of 2012 financial results from PNG-based general finance company Credit Corporation, which saw its profits rise some 250% year-on-year to reach PGK106.11m ($50m). The company also reported that its core business cash operating profit, which includes financing, property and dividend revenues, increased from PGK74.16m ($35m) in 2011 to PGK80.79m ($38.1m) in 2012.

PNG’s first listed investment company, Kina Asset Management, announced in March that it had recorded a net profit of PGK4.73m ($2.2m) in 2012, a significant improvement over the net loss of PGK9.43m ($4.4m) in 2011. In a further boost to confidence, Prime Minister Peter O’Neill said on March 13 that his government would continue to invest in improving the island’s infrastructure. Speaking at the groundbreaking ceremony for a PGK380m ($179m) real estate project, O’Neill noted that his administration would spend more than PGK3bn ($1.4bn) this year on infrastructure projects, including the Highlands Highway and the port development in Lae, the second-largest city in PNG.

Such announcements combined with rosy profit figures underscore the positive outlook for the future health of the economy. While GDP growth is projected to fall from 9.2% in 2012 to 4% this year, this figure is expected to jump to 20% in 2015, the year the LNG project will likely reach peak production.

The Exxon-backed scheme is expected to generate a windfall of some $50bn for the country, five times GDP and translating into roughly $10,000 per person. However, the impact these funds will have on the economy will depend largely on the performance of a sovereign wealth fund (SWF) that has been established to ensure the LNG revenue is used to spur development and alleviate poverty.

“Having a high degree of transparency ... is very important for the SWF,” Jonas Moberg, the head of the Extractive Industries Transparency Initiative, told reporters after meeting with O’Neill in March. He added that the premier had talked about “the importance of getting it right” with the SWF.

However, the Asian Development Bank (ABD) said earlier this year that the design of the fund was not sound, and that less should be spent “until the government undertakes necessary public financial management reforms”. The ABD has also been critical of PNG’s debt-laden state-owned enterprises (SOEs), which include electricity, insurance, airline, telecoms and energy providers. Last September, a report from the bank said the country’s SOEs absorbed an estimated PGK700m ($329.9m) in direct government transfers during the financial years 2002-09, against which they generated a net profit of PGK500m ($235.7m) – of which only PGK23m ($10.8m) was paid to the treasury in the form of a dividend.

“By absorbing large amounts of scarce capital on which the SOEs provide very low returns, crowding out the private sector, and diverting public funds that could otherwise be invested in such high-yielding social sectors such as health and education, SOEs act as a drag on economic growth,” the bank wrote.

However, the government seems willing to embrace reform of this bloated system. Indeed, the ADB study was commissioned by the Independent Public Business Corporation (IPBC), which manages the SOEs, and Ben Micah, the public enterprises minister, has endorsed its findings. It is expected that improving the performance of these monoliths of the past will help PNG secure its economic future.