Papua New Guinea’s 2017 budget, brought down last week, has some pretty simple maths behind it. With revenue projected to be slightly up, and borrowing slightly down, total expenditure is virtually unchanged – all compared to the supplementary 2016 budget, which scaled back both revenue and expenditure from their original 2016 budget levels. Salaries and interest are also unchanged (which seems optimistic given a mounting debt stock and threats of strikes). So are funds for MPs. An extra K550 million had to be found to pay for elections and APEC. Something had to give.
As the figure below shows, it is core services. According to the 2017 budget (Vol.1 Table 12), health is to be cut in 2017 by K315 million (21%), education by K80 million (6%), transport by K128 million (12%). Even law and justice, a government priority, gets a K108 million (9%) cut. All of these cuts are before inflation, and compared to the scaled-back supplementary 2016 allocations.
Figure 1: 2016 (supplementary budget) and 2017 sectoral allocations
These cuts come on top of significant sectoral reductions in both 2015 and 2016. The Central Bank (see Governor’s speech 16 May 2016) shows cuts between 2014 and 2015 in health of more than 30%. Matthew Dornan estimates road rehabilitation and maintenance reductions of 50% since 2012.
Education, health and so on are abstract categories. More concrete examples are useful. Take the Angau Memorial Hospital, PNG’s second biggest, in Lae. It received a nominal cut of 11% in the 2017 budget (relative to the original 2016 budget), on top of two successive annual 15% cuts. Adjusting for inflation, as one needs to do for comparisons over longer periods of time, Angau’s budget for 2017 will be just over half of what it was in 2014: see Figure 2. No wonder there are reports of staff being laid off. As the figure below shows, Angau did well during the boom years, but has suffered since: its 2017 budget is below 2009 levels. Just think about how much Lae has grown over that period.
Figure 2: Angau Hospital budget since 2003
How could have these cuts to core services have been avoided? It might be argued that the government should have borrowed more . Yet the government seems to be borrowing about as much as it can (as it should, given the drop in revenue); and debt/revenue ratios are approaching historic highs, as Figure 3 below shows. The International Monetary Fund, World Bank and Asian Development Bank could be tapped for further budgetary support lending, but that would require a reform program.
Figure 3: Debt/revenue ratio
Core services could have been better protected if MP funds had been reduced. These funds are spent at the district, provincial and sub-district level, through programs such as the District Services Improvement Program (DSIP), mainly under the control of PNG’s members of parliament (MPs).
As the figure below shows, MP funds were much smaller in the past, but they have been ratcheting up, first in 2006 and 2007, and then in 2012. There have been subsequent declines in both cases, but not back to their earlier levels. PNG makes more reliance on spending through MPs than any other country in the world. It spends as much on MP funds as it does on health, and more than it does on law and justice, or on transport.
Figure 4: MP funds (DSIP, etc.)
Whereas hospital funding as a whole in PNG is 16% below the 2012 level, MP funding is at five times its 2012 level. Perhaps it is unrealistic to think that MP funding might be cut before the election. But the increased share of MP funding in total expenditure from just 2% in 2012 to 9% now is a major fiscal shock squeezing out funding for core services.
Falling or stagnant revenue is an underlying problem. While the budget does contain some tax reforms, the trajectory for revenue is negative. Adjusted for inflation, revenue falls over the forward estimates. Adjusted for population growth, revenue is already back at 2004 levels. By 2021, it will be at the lowest level seen this century. PNG Treasury is renowned for its conservative revenue forecasts. But clearly, this is not a basis on which core services can be adequately resourced.
Figure 5: Government total revenue per capita
While tax compliance can be improved, the underlying problem is slow economic growth, which is projected to be just above population growth for the next five years. This is too pessimistic. Even without any further resource projects, PNG ought to be able to grow its GDP by 5% per year or more. Exchange rate depreciation and a range of economic reforms would rebuild economic confidence and allow growth and revenue to accelerate without having to wait for the next resource project.
But all of this seems to have been put in the too-hard basket. The exchange rate has been fixed since May, and the regulation of foreign exchange is increasingly intrusive. PNG may have to wait until after the 2017 elections for reforms to revive growth and prioritise core services.
Professor Stephen Howes is Director of the Development Policy Centre at The Australian National University.
Notes: Figures are actuals up to 2015. Other figures are budget and projection numbers, taken from the 2017 budget (except for the figure for 2016 MP funding which is from the 2016 budget). Supplementary budget figures used for 2016 in Figures 1 and 4; original budget in the other two. CPI from BPNG and the budget; population figures from the World Bank.
The name “ANGAU” is particularly poignant in the context of Australia/PNG relations, both prior to 1975 and currently. Excuse me while I provide further background, from https://en.wikipedia.org/wiki/ANGAU_General_Hospital. STARTS:
ANGAU stands for the Australian New Guinea Administrative Unit, which was an Australian Army unit that was formed on 21 March 1942 during World War II and was responsible for the civil administration of the Territory of Papua and the Mandated Territory of New Guinea. Following Japan’s entry in the war, the civil administration of both Papua and the Mandated Territory of New Guinea was taken over by an Australian Army military government and came under the control of ANGAU from February 1942 until the end of World War II
In September 2013, it was reported that the hospital had deteriorated over the last 20 years and that its buildings had become infested with termites. The renovation of the hospital is a core condition of the asylum-seeker deal between Australia and PNG made on July 19, 2013. ANGAU has only 12 of the 32 specialists it needs, and just 55 per cent of its 729 total staff.
In February 2014, the Australian Minister for Foreign Affairs, Julie Bishop, stated: “The Australian Government has committed to redevelop the ANGAU Hospital. The original hospital is now 50 years old. It was built in 1964 and is run down, it has been attacked by termites over time, there is asbestos in the building, so we need to work very hard to lift the standards to something that is world class.”
Over K300 million has been invested in the redevelopment of Angau, including the master plan and 50 percent of the capital cost of renovation works. It will take two years to plan and design the new Angau hospital, while the major construction work will commence in 2016–17. ENDS
So – is the PNG Government cutting back because Australia is picking up the slack ?
I think what this shows is the complete lack of leverage the Australian government has in PNG. The Manus agreement under which Australia committed to pay for 50% of the Angau reconstruction also committed the PNG Government to pay for the other 50% and for PNG to meet “ongoing recurrent operational costs” See http://dfat.gov.au/geo/papua-new-guinea/Pages/joint-understanding-between-australia-and-papua-new-guinea-on-further-bilateral-cooperation-on-health-education-and-law-and.aspx
Yet not only is Australia proceeding with the reconstruction without any funding from PNG (as Daniel Flitton has reported) but we are proceeding in the face of PNG slashing recurrent funding for Angau.
It’s not that PNG is cutting back because Australia is picking up the slack (the major investments are still to be made) but rather PNG cutting back and Australia proceeding regardless.
Your discussions around MP funds is interesting to the fact that it increases over the last few years. Maybe you referred to other MP funds as well but the most popular top-up is DSIP funds currently stands at PGK15 million per year, in a 5-year term of Parliament, its equivalent to PGK75 million. This is a lot of money for an electorate and everyone has to fight tooth and nail to get into power and control it.
This DSIP fund is legally pegged against all social development aspects (education, health, agriculture etc) in district, which the MP and his/her committee now called the DDA will have to formulate budget for it. A small portion from this funding (DSIP) is regarded as discretionary funds for MP. That is the allocation which MP can decide where and how to use, but not to personal use.
So concern raised by many is on the use of this PGK15 million in the district and nothing tangible is on ground to show. Also the mechanism in place to monitor expense of this public funding is weak and subject to manipulation. However, few of those subject to honest monitoring and audit resulted in some MP being prosecuted before the laws for miss appropriation and thieve.
At the same time this current government introduces “free education and health care services” and poured money directly into district, but this should not give MP or DDA the leeway to cease funding allocation to education and health in the district with DSIP funding.
The reality now is that, MP is the CEO of DDA and appoint his/her cronies to DDA board, influence DDA to entertain paper proposals along cronies and tribal loyalists. They walk away with fatty cheques while some put huge claims for little cost or value of job done. To paint the situation in the district look better, most MP bought vehicles and presented to schools, health centres and ward counsellors as gifts with slogan like “donation by MP…..”. People see and thought this MP is performing well, but if you go down to the school with the new vehicle donated by MP, the classrooms are run down, no desk for students and even no teacher house, the same goes to health centre with the new donated vehicle.
To change this model of MP funds is up the legislators themselves or need an honest prime minister to propose a review to this MP funds. Otherwise they knowingly create this system to appease their hunger for wealth and power.
I am now a little out of touch, but the great tragedy of MPs funds is not its magnitude per se, but how little is actually accomplished with it. National Audit Office reports and Provincial Audit Committee reports – where such committees exist and are active – tell a shameful story. Is it the same country-wide? I do not know, but some information highlighting better and worse performances would help PNG citizens hold poor performing MPs to account, and give reasons to re-elect MPs who have not just spent funds, but delivered results.
Thanks for these comments. I stand corrected, James. My assertion was based on our “Lost Decade” report. Our Figure 7.2 has PNG MP funds at 9% of total expenditure and Solomon Islands at 8%. But that was a couple of years ago, and it sounds like Solomon Islands has changed since then. Philippines and Kenya were the only two other countries we could find where such funds made up more than 1% of total spending.
That chapter has some useful information re your question Jo. It is hard to know how much of the MP funding ends up with schools and hospitals, but our survey in 2012 did find it was an important source of funding for them – and that was before the massive scaling up. For example, we found that 20% of schools and 23% of health clinics reported having benefited from MP funds. Most of the projects involved building something. You can read the analysis here (https://devpolicy.org/publications/reports/PEPE/PEPE%20Chapter%207.pdf) but the most telling statistic I think is that 41% of the schools and 45% of the health clinics believed that their MP-funded project would never be completed.
Tony also makes an important point. 30% of the government’s payments to schools are now made to MPs! (see Grant Walton’s post: https://devpolicy.org/creeping-re-centralisation-pngs-education-sector-20160615/. So that should really be counted in the MP funding. That’s an additional K 200 million or 1.5% of total spending.
Great post, thanks. Does anybody have any data or reasonable estimates regarding if and how much MPs spend from their funds on health and education, and what the nature of this expenditure is? I’m aware of all the problems/issues, etc. regarding constituency funds, just curious.
Also, the cuts to education and health funding are arguably made worse by the protection (in nominal terms) of “free” education and health policy funding in the budget. Free health policy is probably not providing any additional support to health clinics that were previously raising funds through user fees, and the same might be true for schools now that there are reports that a substantial proportion of TFF funds that were previously paid directly to schools (in lieu of abolished tuition and project fees) are being diverted to the control of district authorities. Again, something has to give within these sectors, and so the actual cuts to funding of goods and services that support education and health service delivery will be larger than what you have reported.
Stephen – thanks, fascinating post. If I could pick you up on just one point, that is your statement that ‘PNG makes more reliance on spending through MPs than any other country in the world’ (at 9% of total expenditure). My analysis of recent Solomon Islands budgets suggests that equivalent spending through MPs now represents over 14% of total SIG-funded outlays (recurrent and development budgets) in that country. Either way, both countries are international outliers in terms of the amounts allocated to such schemes.