Comments

Yes, I agree totally for incentives to be given to good recruiters and same time harsher penalties be issued to non-complying recruiters such as debarring. The introduction of licensing of recruiters by the three States (Victoria, Queensland and South Australia) is a welcome move. The mandatory licensing of recruiters across the States will lift the SWP image and reputation and achieve the triple win outcome that NZ RSE is experiencing.

I tend to differ from the argument that seasonal workers earn more and costs more compared to backpackers. This is due to the fact that the recruitment agents or farmers do recover back all the costs incurred to getting one seasonal worker in terms of transport, airfare, visa, accommodation and of course the increase in labour productivity by the seasonal workers.

This is a culture in PNG and I think its a very bad practise by our people and the Hon Member has made it very cleare on this false expectations by our people. Good MPs who don't meet their voters personal and business request get voted out and so long as we have this perceptions and practice this country will remain corrupt. On the other hand, PNG national politics is going from bad to worse. Those MPs who are not on the government side are made to suffer by successive Prime Ministers including Peter O'neill's regime. For this we will also remain corrupt and have unfair distribution of resources and development funds. Both these practices in PNG politics must stop. The question now is what should we do as a country to stop this trend of money politics.

The critique proposed in this review is on target: there is an urgent need to walk the talk summarized in the report. Repudiating the "liberal state-building model of the 2000s in its most simplistic and hubristic forms" and advocating working with domestic governments are fine and (today) hardly objectionable theoretical objectives. The urgent problem, however, is to transform these well-meaning macro-generalizations into systematically documented practice at the micro-level – a transformation that often requires moving beyond orthodoxy, and challenging its tenets. Two of these tenets –ubiquitous in the report- come immediately to mind. First is the notion of transformative change. Among the important ideas that the report fails to take into consideration, the absence of the SDGs is the most remarkable. As stated in the two brief references made in the report, the SDGs are about reducing poverty, about gender, and about the relationship between the environment and the economy. But they also provide insight into institutional development, strategic alliances, and rural-urban synergies, promoting innovation in the design, measurement and implementation of policy at the local level - objectives that while not grandiose (as in transformative change) are likely to result in improvements in human development, in a more robust society, and in a more responsive state. An SDG based definition (and measurement) of state fragility would probably erode the sharp distinction between fragile and robust statehood –transforming a polysemic dichotomy into a continuum where we could more easily differentiate, say, the “fragility” of a nation-state such as Haiti, from that of a state-nations like PNG. Second is the urban bias built into assumptions such as “overwhelmingly, economic growth happens in cities” (page 19 of the report). True, many times “during periods of conflict, people rush to the main city” (page 18). But this doesn’t grant the claim that growth is overwhelmingly urban, and doesn’t preclude the opposite scenario: migration to the rural areas due to urban conflict. To (continue to) bias aid and cooperation towards urban centers is to bias it away from where people live –and in favor of an urban elite that may not be most representative of the country in question. Urban based growth can’t take place without paying attention to the rural areas. To be sustainable, urban growth requires a vibrant rural economy capable of producing, at least, a food surplus. And then, a vibrant rural economy requires the existence of a non-predatory urban center capable of absorbing that surplus without exploiting the periphery. Thanks for the review. As usual, good food for thought.

The last four paragraphs summarises the current situation well. Things could be done differently & have a greater understanding of the region. In the case of PNG, people must see there is a genuine interest & faith in their capability, and above all, a bit of positive reporting in the Australian media could work some magic.

Great article

While analysts argue over how big a threat China is, or whether a threat at all, sections of the Australian media have whipped themselves into patriotic frenzy, and taken up the cudgel on behalf of government, with a 'take no prisoners' crusading approach. Fact-checking has been cast aside in favour of cowboy-like antics. That said, the 60-minutes report did highlight some Chinese-funded white elephants that had become a financial burden on the government. There are one too many such monuments in the Pacific.

Thank you Paul for your comments. I found some of your comments not at all understandable until I turned to your reference to the IMF 2017 report. Unfortunately the IMF report contains a somewhat common error which may at first glance seem trivial, but it covers a key point in understanding the political economy of the LNG project. The error is to assume that the royalty benefit (and sometimes the development levy) accrue to GoPNG. These two items underpin the basic legality of the LNG project and the GoPNG scheme for natural resource development. The royalty benefit forms an essential step in creating the State’s title of ownership to uplifted petroleum and the simultaneous transmission of this title (not to the “LNG Project”, which has no legal identity, or form) to the licence concession holders or co-venturers. Why is this fact important? The grant of benefit takes the form of a gift and as such requires, for perfection, offer, acceptance and the passing of the property from grantor to grantee. This explains why there is a Development Forum with an MOA as its outcome or product. The MOA provides the necessary documented attestation for a dealing involving land and the identified landowners signed acceptance of the grant or gift. Much the same considerations apply to the development levy and the income due to landowners, etc, from the grant of equity. The monies that the State receives from the co-venturers (which includes the PNG entity as a co-venturer) in fulfillment of these obligations is property awaiting identified landowner, LLG and PG collection and must, accordingly, be held in trust accounts before payment to the identified beneficiaries. Arrangements for the holding and management of these trust funds (SPVs) parallel those made for the ‘stichting’. The MOAs provide some detail on these matters. This also explains why the GoPNG MOA committments are limited to ‘good efforts’ and ‘best endeavours’. These efforts and endeavours are to be made by GoPNG in support of the choices that landowners, LLGs and PGs are expected to make in respect of their local social welfare, infrastructure and development plans and budgets. So what is at issue here is not the State failing to ‘honour’ its MOA promises but rather the recipient parties (landowners, LLGs and PGs) failing to honour their commitment to engage in local initiatives for the expenditure of the trust fund monies. In part this failure can be attributed to the long failure to identify beneficiary landowners and the confusions engendered by genealogical reckoning. Many Southern Highlanders and Hela people understand this very well. The current political turmoil is a source of great frustration to them as they work continuously to build political solutions and trust. Especially so when they look at the achievements of some other Provinces in implementing social welfare and development initiatives through their own political processes. Other comments made bear on the issue of the commercialization of a gas extraction and export industry, policy settings and tax issues. These can be best viewed through the lens of the unincorporated joint venture structure and its grounding in the concessional licensing scheme legislation. To take just one example, APT. If you don’t have a project people will tell you that the settings are too high. If you do have a project the same people (often the IMF) will tell you that the settings are too low. And so it goes. Recently PM O’Neill and treasurer Abel have commented - “We love our concessional loans” “We need free equity” “We need better returns from resource development projects” A general conclusion is that GoPNG now reckons that the cost of 14.5% LNG Project equity (19% when the landowner equity grant is included) imposed too great a burden on the PNG economy and financial system resources. GoPNG equity was initially pegged at 22.5% in anticipation of a Project capex of US$10 billion. The ExxonMobil discussion papers and reports on the financing arrangements that it led for the co-venturers (but not, I believe, including PNG) note on more than one occasion PNG’s difficulties caused by the negative pledge. Very briefly, this requires that any monies raised by PNG borrowing be allocated first to the pay down of the obligations created by concessional loans. GoPNG participation as an equity owner and co-venturer in resource development projects is an important component, perhaps the most important component, in the management of country risk. Needless to say it is backed up by contract stability agreements with the co-venturers. So, what do we have here? To me it looks more like a “Capex Curse” rather than a “Resource Curse”. It illustrates well the perils that may follow when you enter into a strictly commercial relationship with a very large multinational and and engage with a world of fluctuating commodity prices and markets. I’ll leave the SWF discussion to another day. You have my sincere sympathy in regard to the clumsy and error prone analysis of the IMF. I too once regarded these reports as the epitome of icy analysis based on established facts. Too often these reports are regarded as statements of factual record. That they may be no more than the tergiversations of FIFO ‘cowboy’ economists should always be weighed in the balance, as the experience of other countries shows. Vailala

Interesting article. It's great to see research being done into this oft-overlooked aspect of economic development.

Thanks Sharman, great to see you continuing this most important work. Louise

Hi Vailala Thanks for the comment and providing some interesting additional material on some of the project details. Before going into the specifics, I was left wondering whether you had any disagreements with the reports conclusions? For none of the big picture issues were discussed or commented upon. Do you agree that the benefits from the project are much less than expected/promised (and please don’t use the fallacy of the 2014 fall in oil prices)? Do you agree that the government has made poor policy decisions which seem driven by the resource curse? Do you agree that PNG should look to re-focus toward a more-inclusive approach to development? On some specifics, all models are inevitably based on assumptions – and to that extent “conjecture”. For example, there are many climate change models. We are not at 2050, so the different results could be dismissed as just “conjecture”. However, the vast majority of climate change scientists believe that some models are better than others –using criteria such as transparency, use of best available information on what has happened previously, providing a range of scenarios, plausibility of assumptions etc. The ACIL-Tasman analysis was a seriously flawed black box that clearly failed in its prediction that PNG’s GDP would be double what it otherwise would have been in 2016. That would have required an assumption of an underlying growth path of a negative 3 per cent for every year from 2010 to 2016. That is one conjecture – PNG otherwise having a serious recession going on year after year for 8 years. My alternative conjecture was that the economy was most likely to have grown at its pre-existing rate from 2007 to 2009 of a positive 5 per cent per year (with a range of 3 to 7 per cent tested). I’m quite relaxed to say one conjecture is better than the other. The detailed comments seem to be based on some mis-understandings. For example, the discussion of “net” well-head value is not about impurities to determine energy – it is about whether full capital costs should be netted off from sales revenue when determining royalties. The IMF discusses using a gross basis (not allowing such capital costs for royalties) as an example of an improved tax arrangement on any new project in Box 2 of its 2017 Article IV report on PNG p18. On tax havens, I’ll leave it to readers to see if the comments about using tax haven intermediaries is convincing (why couldn’t the ‘stitching’ be done in a country with OECD average rates of taxation rather than Netherlands Antilles with a Bermuda intermediary?). Lack of budgeted figures for UBSA and other agreements wasn’t about an MOA process, it was just that governments should consider both costs (which were very substantial) as well as revenues when considering the budget impacts of a project (including implicit equity costs). The report didn’t say the PNG-LNG agreement was secret – the report went through a known set of fiscal terms in the general PNG-LNG agreement but noted “the detailed commercial agreement between the PNG LNG joint venturers remains secret”. If this is incorrect, I apologise, and look forward to the detailed revenue model from joint venture partners being released immediately (or if you could provide a web-link?). Would also be good if the PNG-PNG Agreement could be made available through an official source – interested people in PNG may not trust a web-site that describes financing of the project as a “dodgy deal”. The diversion of funds of PNG LNG income to Kumul Petroleum Holdings is just one of the key flaws of the redesigned Sovereign Wealth Fund – the first version passed by Parliament had all of these revenues going straight to the budget without the risk of them being siphoned off. I don’t understand how this has anything to do with the discussion about poor land-holder identification – although we all agree this is a serious issue that has been mishandled. Equity participation was a well known challenge but it was under control. The equity costs were largely covered through the sale of Oil Search shares the government previously owned. Indeed, when IPIC decided to pay cash to the PNG government for the Oil Search shares the government’s full equity requirement was met – there was no residual issue about covering country risk or negative pledges (the cost over-run from $US16bn to $US19bn was covered directly through the budget). The issue then became O’Neill’s decision to purchase over K3 billion in additional Oil Search shares on top of its PNG-LNG equity (a decision which led to PNG’s Treasurer being dismissed when he questioned the legality of the arrangement). We know that this bad PM call cost at least $US245m, and this bad call helps explain the diversion of PNG-LNG funds to Kumul Petroleum Holdings rather than into the budget to fund desperately needed programs in health, education and infrastructure. Paul

Thank you Paul for your post. I am unpersuaded by your elaboration of your modelling methods for the PNG economy. The model remains conjectural and comparing one set of conjectures with the conjectures of the Acil model is fraught, in my opinion, with the possibility of error. Your ‘Double or Nothing’ report mentions the PNG LNG Agreement, signed by the co-venturers on 22 May 2008 as secret. A copy of this agreement can be found on the web-site banktrack.org (with links to Jubilee Australia). The PNG LNG Agreement defined the financial terms under which the co-venturers agreed to enter the Project. This document was followed late in 2009 by the Final Investment Decision document (FID) which committed the licensee partcipants to meeting equity capital calls. Post the GFC the co-venturers met with some difficulties in raising the needed capital from private equity markets. This was largely overcome by ExxonMobil taking a lead role and involving various export credit agencies (ECAs) to both shepherd commercial banks into the deal and handle the vexing issue of country risk. See for example the contribution of JBIC and NEXI (both country risk and technical risk). The following are some specific comments of the ‘Double or Nothing’ report. Page 31 argues that “net well-head value” was a “generous financial concession” on the part of GoPNG. Not so. Net value is more or less an industry norm for gas projects. Examination of the Conocophillips process will show that it is driven by gas-derived energy as are other parts of the field operations, such as the Hides Gas Conditioning Plant. Raw gas is contaminated by impurities (including water) which must be removed before sale. Using gas as energy is both energy efficient and cost-effective. Any joule consumed by processing is a loss to the gas sales volumes that accrue to all UJV co-venturers. The costs of using gas for this purpose are subject to scrutiny and approval of the co-venturers. Page 32 refers to tax havens. There appear to be some serious misunderstandings here. The entity referred to here is a ‘stichting’ created under Netherlands law and probably domiciled in the Netherlands Antilles (Bermuda may be merely an intermediary). It is not a commercial entity or a trading company and has no members or share capital. It’s purpose may be narrowly defined as the pay-down or amortisation of LNG project debt. As such its existence may be part of pledging arrangements. Its broad purpose is to shield the project debtors from some of the consequences of project failure, either partial or complete. For that reason it is always located in a jurisdiction in which none of the parties hold any assets, operations or bank accounts. In order to maintain the necessary legal distance from the debtors (beyond the ‘guiding hand’) it is necessary that ExxonMobil and other debtor company directors have no knowledge of or contact with the stichting directors, whose function is merely that of ‘trustees’. Creation of SPVs is a component part of risk management for both creditors and debtors. Accounting for the discrepant rates of tax paid by ExxonMobil as against co-venturers may find its explanation in the role of ExxonMobil as LNG Project co-lender. PNG LNG Agreement “Exhibit K Capital Uplift Provisions” may be of relevance. Page 22 – 24 refers to the absence of budgeted figures for UBSA and the not-mentioned LBBSA. There is again a serious misunderstanding here. The MOAs LBBSA and UBSA are just that – MOAs. In these agreements GoPNG gives an undertaking to support landowner development project wish-lists by either using its “best endeavours” or making “good efforts” to bring the proposed projects before the EIC and/or the relevant stutory authorities (National Planning, Roads, etc, etc). The MOAs also include and tie-in both LLGs and Provincial Governments. The policy intention is to push project initiation, planning and budgeting onto local authorities whenever appropriate. This general policy has been in place for decades and has produced some very good results in some provinces and marginal results in others. The creation of the Hides Gas Development Corporation is partly an attempt to replicate the success of organisations such as the Gazelle Restoration Authority. The epic failure of the anthropologist driven social mapping and landowner identification studies scheme is the root cause as to why there are no budgetary entries pertaining to the project MOAs (except for business development grants to landowner companies). Both the other Jubilee Australia report and the “The Monthly Report” that you mention are in need of a re-think of their basic assumptions on this matter. Page 39 mentions the SWF and the “diversion” of LNG income to the SOE KPHL. To understand the background to this decision we have to go back to the 2008 PNG LNG Agreement and the disastrous inclusion into this agreement of the ExxonMobil/OSL “sweetheart deal” with the Australian-based contract anthropologists. The 2008 PNG LNG Agreement Clause 15 covers Social Mapping and Landowner Identification issues. Clause 15 (a) (ii) and (iii) require the State to agree that existing and future SMLI studies have met the requirements of the Oil and Gas Act. Further details as to what is to be determinative here are provided in Exhibit J. This latter provides, inter alia, that the persons engaged for the SMLI studies shall be “scholars” and that their principal task shall be to “generally report” under the headings of: “Social-Cultural Context – detail who the ethnic groups are in the Licence Area (e.g. Huli, Febi, etc)” “Social Organisation – to provide a description of the clan structure, migration history, ... principles of group formation (kinship and descent) ... (s)ample genealogies should be collected. “Mapping Results – Findings – To provide a preliminary distribution map showing the relative positions of major groupings such as clans in the area”. An uncharitable view would be that the resulting consultants SMLIS reports never advanced beyond what could be accomplished by desk-based studies using decades-old, anthropological fieldwork reports. Actual landowner identification was simply elided. PNG law and the possibility of court action were air-brushed out of existence. Arguably ExxonMobil and Oil Search were in breach of their obligation to comply with PNG law. GoPNG was in the embarassing and impossible position of appearing to deny the relevance and applicability of its own statutory law. It was this edifice that came crashing down in the P’nyang Case in 2016. The effect of this colossal blunder was to eliminate any possibility that PNG equity might be financed by concessional finance obtained from development banks (IBRD, ADB, etc). These organisations not only offer concessional rates but they also supply loans that are effectively without a country risk component. Instead the risk component of these loans is met by a PNG legislative provision which is sometimes sometimes over-looked – Loans and Assistance (International Agencies Act (1971), S4 (1) and (2). A form of negative pledge. In 2005 the PNG equity in the Gas to Australia project was estimated at USD$800 million. By 2007 the PNG equity in the new LNG project was estimated USD$1.8 billion (total project USD$10 billion). By start of LNG production PNG equity share had grown to an estimated USD$3 billion plus. Standardly risk is assessed on an actuarial basis, except for country risk, which is logarithmic while rates are linear. It is doubtful that a country can insure itself and its creditors against country risk except by pledging assets, which brings into play the negative pledge. Accordingly, GoPNG faced many difficulties in meeting its LNG Project equity capital calls. The diversion of SWF funds to KPHL is a consequence. Vailala