Comments

Thank you. I will move on, but very sad I can never come back to PNG without putting my life at risk. I feel sorry for the students who will continue to get a 3rd rate or lower education. I also feel sorry for PNG citizens having to live with such abuse of Ministerial authority, policy powers, and violence. From the outside, however, there is little we can do about all this now.

Although without the required regulation, the government used its powers under the Higher Education Act 2014 to appoint new Chancellor and Council at the University of Goroka and the University of Natural Resource and Environment. Sir Nagora Bogan had been appointed as Chancellor of the PNGUoT in 2007, and then again in November 2012. At the PNG University of Technology I was the last "real" Vice Chancellor duly and lawfully appointed by Council, as the Sevua Investigation concluded in 2013. Prof. Burton mentions the UoG administration before 2015. All I know was that the former Chancellor was mentioned in the Panama papers, and the former Vice Chancellor was involved in shady dealings with the Chinese and regarding university procurement. Maybe it is a case of swapping one set with another set of dishonest and ineffective administrators? Prof. Howes correctly points about the reputational damage to the PNG universities with the last incidents is tremendous, and will be felt over the coming years. Sites like glassdoor.com and the international press coverage will make applicants think twice. What the national press writes is not so relevant. The Chancellors have now effectively achieved an end to any international recruitment of qualified academics or competent administrators. The current crisis raises the question whether the universities in their current state can be helped from the outside through any type of aid or support. They seem content being credential machines whose average graduates "only look good on paper" but have few real competences. I am quoting an industry partner here. Another one once asked "Vice Chancellor why is it that your graduates are unable to do anything? ". The other 2 parts of the mission, research and transfer, are barely developed at all. Apart from employable graduates, universities in order to stay relevant are supposed to produce active citizens and future leaders. With the elimination of the voice of the students at UPNG, UoG and PNGUoT the students are now expected to "shut up and get your degree", while for the large majority of them little opportunity is offered to develop leadership skills in the curriculum or outside it. Real reform of their governance is long overdue, driving a transformation allowing them to deliver a modern, competence based curriculum. In order to stay relevant Universities must contribute to a sustainable employment situation, and currently over 60% of graduates are still unemployed 6 months after graduation. The basic conditions for any learning to take place are not in place. Apart from the governance and focus on the mission, in my view the main urgent challenges for PNG universities are the financial administration, ICT and restructuring. At the PNGUoT we were able to sort out the finances in 3 years, make good head way with ICT, but we barely started the scratch the surface regarding the restructuring. Indeed PNG universities are funded badly, with less than half of the government benchmark of K30,000 per student per year. There is however also a lot of wasteful spending, and a lack of administrative and financial controls. Just by reducing the financial mandate of the heads of departments in 2017 at the PNGUoT, for example, we were able to save over K2M in unnecessary expenses. It did not make us very popular. At the PNGUoT the strategy was to get the house in order first financially, and then approach industry for support. The state is rather penniless and in the 10 year business planning was not expected to fund much more than the salaries. Achieving an unqualified audit in 2017 for all the 2015 accounts was a major step forward. The PNGUoT was the only university to do so, and it had not been achieved in over 2 decades. Since 2014, several large companies had been strongly supporting accreditation of engineering programs, and eventually assured me would have funded the refurbishment of the laboratories. Currently, hardly any of the laboratories have usable equipment, and there is no environment where scientist or engineers can be taught. The second leg of the strategy was to use "digital" to overcome some of the obstacles (e.g. no library) by improving the IT infrastructure. This was partially achieved, mainly because of deficient management, and failure to restructure the university's IT department which counted 40+ staff members, where 4 would have sufficed. Finally, there is a need for restructuring of all university personnel, but there is no willingness or capacity to execute a concrete plan. The academics to staff ratio in industrialized countries is 1 to 1, and even in Fiji it is only 1 to 2. In PNG public universities it is 1 to 4. I remember at one strategy meeting, I asked a head of department whether he would be willing to restructure and downsize some of his administrative staff. He agreed this staff was no longer necessary, but he said he could not support downsizing because of the long relationship they had in the department, and unwillingness to upset the social balance. Let me end with a quote: "Oh what a tangled web we weave / When first we practice to deceive." (Sir Walter Scott (1808) in the poem Marmion)

If I may put in a plug, and just to follow up on Amanda's comment, Colin Wiltshire and I will be providing an update on our research into constituency development funds in Solomon Islands at this year's State of the Pacific Conference (10-12 September at ANU). We'll also be hearing from Tony Hiriasia from the School of Government, Development and International Affairs at USP on his own research into CDFs in Solomons, and from Angela Nelson, Women’s Representative on the Milne Bay Provincial Assembly and Alotau District Development Authority, Papua New Guinea. Registration is open here: http://dpa.bellschool.anu.edu.au/news-events/events/6346/state-pacific-2018

Thanks Stephen and Nelson. PNG's growth performance in recent years has indeed been lamentable (and this is even before considering per capita terms). As you indicate, recognition of the extent of economic crisis could have led to earlier and more appropriate policy actions. Unfortunately, the need for policy corrections is still undermined by PNG Treasury using poor information. Even in the most recent mid-year update (31 July), the Treasury did not update their 2015 GDP figures for those from the NSO (see Chart 13 on p18). They did drop their estimate of 2017 non-resource growth from 1.9% to just 0.2% - politically it would too difficult for them to concede a negative number - so the non-resource sector was still retreating by about 2.9% in per capita terms. The same MYEFO document claims PNG LNG production increased by 15% from 2016 to 2017, and this is part of the basis for a continuing up-beat revenue assessment for the 2018 budget. However, Oil Search on p24 of its 2017 Annual Report states "The Project produced 8.3 MT (gross) of LNG in 2017, up 5% on 2016 levels." Increasingly, it is difficult to believe the numbers in PNG government documents. This re-enforces the important role for the IMF and other financial institutions to tell it how it is. Their performance in recent years has been disappointing. APEC and talk of new resource projects are a mere distraction to the underlying economic crisis in PNG which requires deep and politically painful changes to policy.

It may be useful if I add a few more comments on the issue of the ‘fair’ return that PNG gets from resource development. These comments are additional to those made on August 21. That there is a significant amount of reveue derived from sectoral employment taxation should come as no surprise. This revenue stream comes off the front end of all resource development projects and is unaffected by the CAPEX debt amortisation and interest payment arrangements of any of the co-venturers for all kinds of projects. When analysing the aggregated BPNG figures for both company tax and dividend payments it needs to be kept in mind that these two sources of GoPNG income are subject to various influences which include not only commodity price variation but also production variation from a wide variety of causes including, for example the influence of drought on Ok Tedi output in 2014, the reconfiguration of mining operations from underground to pit, the reconfiguration of Kutubu for gas (gas re-injection has been taking place for many years), the closure of Mananda, the Lihir construction of a geothermal power plant, to name a few. At present the PNG LNG Project is a dominating influence because of its very large CAPEX and relatively thin income stream (no big ‘windfalls’ as there is from oil). This makes the financing of the project of considerable significance. The financing arrangements extend over 15 years for the licence share owners, except for the GoPNG interest which is said to be for 12 years. So how do the financing arrangements affect the rate of return to GoPNG? The short answer is that we don’t know but we can get a partial picture from OSL reports published on the ASX (http://www.openbriefing.com/AsxDownload.aspx?pdfUrl=Report%2FComNews%2F20180501%2F01977352.pdf) The OSL report gives us a chart on page 21 for an ‘Indicative PNG LNG Repayment Profile’, distinguishing between interest and principal repayments. For 2018 principal repayments are about USD$ 375 million, interest payments about USD$ 175 million. Interest rates are not stated. Perhaps they are about Libor + 4%. A chart on page 24 shows the Oil Search PNG LNG debt amortisation falling from a 2017 high of about USD$ 3 billion to zero in 2026. GoPNG LNG Project equity (Kumul plus MRDC) is about half that of OSL. Term finance is for 12 years and the rate may be Libor + 6% or less. It is possible that the Kumul loan repayment obligations may also end c. 2026. However, from 2021 Kumul debt service obligations may well rise above current projections as it incurs new obligations in respect of the PNG LNG expansion and the new Papua LNG Project. Accordingly, it seems likely that a significant upward lift in company tax and equity dividends from the enormous LNG resource development projects will not occur at least until the early 2030s. PNG has joined with major oil companies in the making of some very large long term bets. But we should be very grateful that GoPNG participation in resource development has created a ‘front-end load’ of benefits for citizen beneficiaries. An unusual form for a Sovereign Wealth Fund. Perhaps GoPNG should seek to source its forthcoming LNG project development equity funding through the AIIB where it may be granted a rate of Libor + 1.5%. Vailala

Dr Terence Wood, thank you for this most interesting blog post. Your post reminded me of the interesting research being done at the Australian National University's Department of Pacific Affairs (http://dpa.bellschool.anu.edu.au/ ) on the discretionary funds that Members of Parliament (MPs) are allocated. For instance, Colin Wiltshire and Thiago Cintra Oppermann explained that people in PNG do not expect services or projects to reach them if they reside in villages which did not support the successful candidate (see http://dpa.bellschool.anu.edu.au/experts-publications/publications/4124/politicising-drought-relief-papua-new-guinea ). In the Solomon Islands, the discretionary funds available to MPs are amongst the largest in the world, according to James Batley (see http://dpa.bellschool.anu.edu.au/experts-publications/publications/4073/constituency-development-funds-solomon-islands-state-play ). It certainly seems to be an area worthy of further investigation. Dr Amanda H A Watson Lecturer Australian National University

Hi Richard and thanks for the blog, The analysis and studies you refer to remind me of some others: (i) "Escaping Capability Traps through Problem-Driven Iterative Adaptation (PDIA)" by Matt Andrews, Lant Pritchett, and Michael Woolcock, Harvard Kennedy School; (ii) William Easterly's distinction between planners and searchers (https://williameasterly.files.wordpress.com/2010/08/49_easterly_plannersversussearcersinforeignaid_prp.pdf); and (iii) my own discovery and use of participatory process planning. In my experience, development is better served by a combination of initial humility that admits to all our limitations when considering designing assistance and the confidence that allowing for judgment, iterative adaptation, searching, and participation can lead to more successful outcomes. Unfortunately, I've found such a brave combination to be so rare in all aid agencies and programmes. Steve

Thank you Terrence, This is very true in Solomon Islands.What else can we say or do?This is like a link that transform from our ancestor to this modern world.

Three down really, if you count the removal of the top tier of management from the University of Goroka in 2015. The capers at the top distract from more basic facts PNG's state universities are funded at a fraction of the level they were in 1975 (at 17th of the level according to one ex-prof https://johnmenadue.com/allan-patience-the-serious-under-development-of-papua-new-guineas-university-system/). A colleague has been pursuing anything recent written on science education in PNG but, unless there is a hidden trove of unpublished PhDs somewhere that he hasn't found, in the last 20 years the field seems to have gone dark. It presages rather badly for the critical shortage of useful people like doctors, civil engineers, and properly qualified provincial disaster managers (Madang's is a former seminarian). Nothing is surprising here. We have polio back, such that several DWU staff needing to travel later in the year are going for boosters at Modilon this morning. Sadly to say, but the 5th funeral on our small campus for this year is scheduled for this afternoon. Stark fact: members of our university die faster than we can graduate new ones with higher degrees to grow the teaching body. Four to five deaths is the average for the last six years. At what point will PNG's governmental idleness to provide for its own development future, coupled with emerging bio- and health threats, cause its regional neighbours to begin classing it as a menace to other countries in the region, I wonder.

Thank you, you hit the nail on the head.

Hi everyone, Thank you for your comments. They're all interesting and thoughtful. Unfortunately I have encountered unexpected health issues and so cannot give the comments the time they deserve at present. I'll do my best to return to them as soon as possible. Terence

I thank the authors for this interesting blog-post. As the authors say the BPNG statistics that follow the old MRSF reporting model (BPNG Table 7.2 (https://www.bankpng.gov.pg/statistics/quarterly-economic-bulletin-statistical-tables/) show a marked discrepancy between the posted value of mineral resource exports and the aggregated value of resource company taxes and resource development SOEs dividend payments. But the BPNG tables are only a small part of the overall picture as the recent EITI report makes clear. GoPNG has, following the Bougainville crisis, for many years pursued a strategy of increasing the value of both direct cash payments and quasi-fiscal sub-national payments to resource project-affected landowners, LLGs and PGs, especially so in relation to petroleum projects. The balance that was struck between the national interest and the local interest has moved from the initial Bougainville point of about, say 98:2 to somewhere near 70:30 in terms of benefit flows. In population terms the perimeter fence that establishes who will receive both direct (cash payments) and less direct local area benefits from resource development has greatly expanded beyond the confines of the original Special Mining Lease context. For example, the expansion of Ok Tedi benefits to encompass downstream project-affected landowners. This expansion has proceeded apace in the petroleum projects with the PDL concept of large graticular blocks and petroleum pools that extend over several such blocks. The PNG LNG project and the ‘unitisation’ concept has further enhanced this tendency. In the interests of resource contract stability and the creation of a social licence to operate GoPNG has increasingly found ways to divert resource project benefit streams into the hands of landowner beneficiaries, LLGs and PGs. There has been an evolution of the PNG legal regime for resource development. Under the Petroleum legal regime the royalty, development levy and landowner/PG equity shares, are taken off the front-end of the project and are the property of the recipients, held in trust accounts, and are not part of the GoPNG project-derived central government revenue stream, at least not in the form of taxes and SOE dividends. In addition to these changes, all of which have an impact on the quantum of the GoPNG benefit stream, there are other public goods investments derived from resource development projects. The easiest of these to quantify are the Infrastructure Tax Credit (ITC) arrangements to which Paul Flanagan relevantly draws to our attention. At present ITC arrangements are only to be found in the PNG LNG Project and they are specified and described in Exhibit F of the PNG LNG FID (https://www.banktrack.org/download/png_lng_gas_agreement/080522_pnglngagreementexecutionversion.pdf). For the LNG Project GoPNG has allocated K1.2 billion divided over two five year periods. The scheme covers 107 km of public roads, including 23 bridges and about 7000 metres of culverts. The construction cost is offset against the LNG Project companies tax liabilities so the effect is of a direct transfer of benefits from the national to the local/regional interests. It is also, of course, revenue foregone by GoPNG. The ITC arrangements are currently the subject of GoPNG review. It may be that the better GoPNG option is not to finance these projects by way of tax credits but to bring them ‘shovel ready’ to the AIIB for concessional financing. Certainly the funding of rural roads is difficult to justify using conventional World Bank/ADB assessments in terms of EIRR and FIRR measures. Recourse to Chinese development thinking may be an effective way around these conventional economic road-blocks. As the EITI report notes (p. 142), in order to understand the economic effect of resource projects in PNG, it is necessary to develop a much better understanding of the role of sub-national payments in both mining and petroleum projects. There also needs to be improved reporting. For example there needs to be better analysis of the quasi-fiscal payments made by OSL and ExxonMobil. Listed payments for 2016 were K43 million (OSL) and K 80 million (ExxonMobil, this later figure is garbled in the EITI report). The EITI report lists these items as discretionary social expenditure but information is not available to fully assess the infrastructure and socioeconomic development impact of these expenditures. However, it should be noted that both companies employ PNG staff who are actively engaged in responding to community welfare and development proposals. ExxonMobil’s focus on local economic growth appears to be both well-thought out and well-implemented by its PNG staff. My point is that all of these various expenditures variously contribute to meeting community development needs and infrastructure development. Collectively they have not merely a local effect but also a pervasive effect on the wider area, the province and the nation as a whole, difficult though it may be to capture all this in a conventional cost/benefit analysis. Despite the fact that many years have elapsed since the LNG Project Social Mapping and Landowners Identification Studies should have been completed it is still unclear as to exactly how many people will be directly affected by LNG Project infrastructure investments and royalty and development levy payments. Estimates vary between a low of 30,000 to a high in excess of 60,000. Assuming, as a minimum, at least 8000 households and estimating a cash equivalent for income derived from subsistence production it may be that a project-affected household will experience a doubling of their household income when the royalty benefits and other benefits are finally paid. But I attach no significance to this estimate because it is entirely speculative. But there is an additional point here that relates to the discussion of the proposed sovereign wealth fund and the usual Norway model for the natural resource development context. Proponents of an SWF rarely refer to the World Bank’s Chad-Cameroon Pipeline debacle. What receives only a bare passing mention in the BPNG discussion paper on the PNG proposed SWF is the Alaska Permanent Fund. This Fund makes cash payments (currently USD$1,600) on an annual basis to all Alaska residents. This is the Permanent Fund Dividend. The creation and structuring of the Alaska Permanent Fund were motivated by a belief held by many citizens that at least a portion of the revenue derived from oil exploration and development that accrues to the State should fall outside of political control. In effect PNG has created its own improved version of the Alaskan arrangement. PNG has achieved a sharper division between politically controlled resource derived expenditure and household controlled resource derived expenditure. We know that delivering cash payments into poor housholds has an effect on welfare (including nutrition, health and education) and that these improvements in turn lead to improvements in productivity, especially in a poor rural subsistence economy. As far as GoPNG LNG Project derived equity income is concerned the arrangements are briefly summarised in the EITI report which mentions GloCo, the SPV that handles gas marketing sales proceeds and ensures repayments to the project lenders (p 103). No doubt the requirement to pay back lenders is greatly constraining the growth of the Kumul equity interest dividend. Some information on the financing of the LNG Project can be found here -http://www.gastechnology.org/Training/Documents/LNG17-proceedings/1-6-Steven_Kane.pdf As a final comment on ‘fairness’ I think it is appropriate to point out that GoPNG embraces resource development by entering into unincorporated joint venture (UJV) arrangements with developers. A UJV arrangement is preferred in many cases because it is a risk management or mitigation device for the co-venturers. A UJV is typically not a legal entity. The relations between the co-venturers are governed by contract in the form of the Joint Venture Operating Agreement. The co-venturers obligations are to meet the project capital expenditure obligations in proportion to their respective licence shares, apportion costs across the respective licence shares and to take their profits accordingly. Generally speaking a concession made by GoPNG to the resource developers is, pro rata by licence share, benefits the SOE that holds the GoPNG equity share in the licence. With these points in mind the LNG Project is no more, or less profitable for GoPNG than it is for ExxonMobil. Vailala