Transcript
STEPHEN HOWES: In fact we've done some analysis looking back at a longer period of time. And once you adjust for inflation - which is just change in prices - once you adjust for that, revenue has fallen by about 20 percent over the last two years and in fact is back where it was ten years ago in 2006.
JOHNNY BLADES: That's incredible, really, isn't it? I mean, the economy had grown so much in the last several years with the LNG Project construction and related stuff, and is this (revenue drop) not a surprise?
SH: I think it's very surprising. It's bad news for the country because of course over the last ten years the population has grown by let's say 25%. So you've got a significantly larger population, and nor more revenue. As you say, the real question is, the economy has doubled - that's even after inflation the economy has doubled - why hasn't revenue doubled. That's what normally you expect revenue to keep pace with, GDP. What's really happened are two things: one, last couple of years economic slowdown with the fall in commodity prices, so we've seen a reduction in general government revenue in the last couple of years. But then more importantly actually, right over the last ten years, you're seeing a real reduction, almost a disappearance, of taxes from the resource sector, from the mining and petroleum sector. So they've gone from about 3-billion to virtually zero this year. And that's for two reasons: 1) the falling commodity prices, so all the projects are less profitable; and 2) you've got these mature projects like Ok Tedi and the oil fields that are actually depleting, they're producing less, so those old projects are less profitable therefore generate less tax revenue. You've got new projects - you've got the Ramu Nickel project and you've got the PNG LNG Project - they're certainly producing a lot of exports but because they're in the early stage they're subject to various accelerated depreciation provisions and, in the case of Ramu Nickel, there's a tax holiday. So although they've come on stream, they're subject to various producing hardly any tax revenue at all. So yeah PNG has been caught between these old, declining resource projects and newer ones that aren't generating tax revenue. It's an unfortunate situation, but it's one that is going to last for several years because the new projects, like PNG LNG, they're not going to generate a lot of tax for say another seven or eight years, actually. So PNG's going to have to get used to coping with a much more revenue-constrained environment than it has been in the past.
JB: And with the LNG Project, are some of the revenues tied up with paying back some of the loans?
SH: That's right. The whole project is heavily funded by debt, and so those loans have to be paid off before they start paying taxes, or at least significant taxes, especially given the low gas prices we're seeing today. But also, the PNG does get dividends from this project as well as tax revenue. But a lot of those dividends have either been brought forward - they've already been given to the PNG government because they were short of money - or they're being used to pay off the Oil Search loan (a state loan that the government took out with Swiss bank UBS in order to buy back shares in Oil Search). So it looks from the budget documentation in fact that there'll be no dividends coming from the PNG LNG Project to the government this year.
JB: What should PNG do, why hasn't it diversified more?
SH: I think one strategy the government needs to look at is how to grow the economy more. Because with a bigger economy, you will generate more revenue, and the economy has shown good growth over the last decade, but not in the last two years. So I think the government does need to look at its economic strategy and one thing they clearly can do is allow the exchange rate to depreciate. I think all the analysis shows that PNG's exchange rate is very strong, and you know you'd expect the kina to have depreciated a lot more, just like the Australian dollar has. But the depreciation of the kina has been very modest and in fact it has appreciated against the Australian dollar. The government has now... well the central bank has taken control of the exchange rate, it's no longer a floating exchange rate, so it is within the government's capacity to bring the exchange rate down, and that's one measure that will stimulate the economy. I think another measure is providing some greater confidence to investors. with the various reforms that are being discussed, such as introducing a quota system on rice imports, taking foreign ownership out of the small to medium enterprise sector: those kinds of moves are undermining business confidence, so they're holding back investment in the economy. So I think the government could look at measures to stimulate the economy and that would bring in more revenue, and would help PNG finance.. it would obviously be good for employment, it would also help government make up that revenue shortfall.
JB: In its last issuance of a budget, or the re-worked budget, do you think the government was cognisant of the need to address this revenue shrinkage?
SH: The government is certainly aware that it's not meeting its budget targets in revenue. And it has said that it's going to bring out another supplementary budget this year, which it did last year. And I think that's going to happen very shortly, I understand. So I think that's good. I think what our analysis points to though is that this is not something you can just deal with on a year-by-year basis, on the basis that this year we have a shortfall. This is really a fundamental shift in the government's revenue position, that it is in such a tighter revenue position than it was a couple of years ago. We're back to 2006. There has to be a re-think of what are the government priorities. and perhaps some of the initiatives that the government has put forward in the last couple of years have to be considered as no longer affordable. And I'm think especially here of the large increase in district funding, funding that goes to members of parliament. That's really exploded in growth in the last couple of years.
