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Crunch time in Papua New Guinea

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Papua New Guinea's Prime Minister Peter O'Neill arrives at an event in Port Moresby in 2013. (Photo: AAP).

In Brief

The talk in Canberra is that the priority in Australia's diplomacy for 2015 will be its own backyard in the Pacific. This is long overdue, and may be too late. Mending diplomatic fences with Fiji may be one thing; Australia's ability to have a positive impact on outcomes in Papua New Guinea is likely to be quite another thing altogether.


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Despite its significant aid program in Papua New Guinea, which delivers more than half a billion Australian dollars in assistance annually to its former colony, Australia’s influence on outcomes in Papua New Guinea has taken a remarkable dive. This is partly because the resource boom over the past decade has played a much more important role in the PNG economy, although that is now in jeopardy with the tanking of commodity prices. More importantly it is because diplomatic initiative has been seriously compromised by Australia’s being beholden to the past two PNG governments over the delivery of its offshore processing strategy for refugees. The government led by Peter O’Neill would appear to have had the Australian government over a barrel with the deal it has done on refugees with recent Australian governments.

The last phase of Australia’s so-called ‘Pacific Solution’ — a response to the influx of asylum seeking refugees by boat through Southeast Asia — has seen first the Rudd government and then the Abbott government become totally reliant on Papua New Guinea as the final dumping ground for its unwanted refugees. Australia’s current policy is anchored on Papua New Guinea’s willingness both to host refugee processing facilities (the management of which have been subject to intense criticism) and to accept that all asylum seekers placed there only have access to re-settlement in Papua New Guinea or in countries other than Australia. Delivery of the Pacific Solution has burdened the Australian government with a huge political debt, one that has effectively silenced it on other issues of grave importance to its strategic interests in the stability and healthy development of the country.

While the economy and government revenues grew strongly over the past few years, and there was some progress in economic reform under the Morauta government earlier, the boom that is now coming to a rapid end with the collapse of oil prices impacted little on basic services and the living standards of the Papua New Guinean people.

At the core, Papua New Guinea’s challenge during the resource boom was the issue of how to capture revenue from the resource boom and transform it into effective development spending. A special challenge in Papua New Guinea was directing the revenue take to economic and social development purposes rather than wasting it as ‘grease’ money. In a small resource-dependent developing country the case in principle for using a sovereign wealth fund instrument for smoothing expenditure patterns is strong. The move to establish an SWF to manage the flows of dividends and tax revenue that were hoped to come on stream from its massive LNG project is still to be consummated and the time has passed where it might have been helpful.

Papua New Guinea was among the first developing countries to put in place a resource-rent taxation regime and it set up the PNG Sustainable Development Program (PNGSDP) in 2002 to manage revenues from the Ok Tedi mine prudently for investment in economic and social development. Yet the integrity of PNGSDP has been undermined since Prime Minister O’Neill nationalised Ok Tedi and sought to dismantle PNGSDP’s independent management structure, steps that are currently under challenge in international courts.

O’Neill came to power with the promise of being tough on corruption. He set up Task Force Sweep as a powerful instrument for investigating and bringing corrupt officials and practices to court. It had some wins. But over the past two years, O’Neill and his government has become mired in controversy and tainted by impropriety and corruption. Apart from the ongoing saga over control of PNGSDP, the legality of a US$1.2 billion loan to replenish the government’s equity in the gas company Oil Search (over which the treasurer resigned) is in question and O’Neill has been referred by the Ombudsman to the Leadership Tribunal. Task Force Sweep has been squeezed out of existence because it has levelled charges of corruption against O’Neill. While the brave remnants of legal and judicial authority cling on for survival in Papua New Guinea itself and the power of international courts over the affairs of PNGSDP might act as a constraint, there has been a gradual descent in the standards of governance in the country.

The Economist claims that Papua New Guinea runs the risk of turning into a fully-fledged kleptocracy. On Transparency International’s Corruption Perception index Papua New Guinea ranked 145 out of 175 in 2014, level pegging with Kenya, Guinea and Laos.

At every step in recent developments the Australian government has publicly remained silent on these central issues. With so much at stake in the stability of its neighbourhood, it can no longer afford to. Indeed, Australia’s silence on the issue of the standards of Papua New Guinea governance and its complicity in enterprises and behaviour that are inconsistent with the standards of a strong and moral state have begun to sully its own standing and image in the region.

As Stephen Howes observes in this week’s lead essay, the need for a sovereign wealth fund in this resource cycle may have disappeared with the collapse of oil prices. ‘The timing of this could not have been worse for PNG, with its liquefied natural gas (LNG) project coming on line in the second half of 2014, ahead of schedule’. With oil prices currently way below the budget assumption of US$90pb, the revenue from the PNG LNG Project will be much less than expected. This will impact adversely on the budget, on GDP growth and on the balance of payments.

Now is a time for decisive economic policy action. The exchange rate needs to depreciate significantly. The government needs to cut spending. Both measures will be painful but, as Howes says, possible. There has been incredibly rapid growth in expenditure over the last few years, so finding savings should not be difficult. But a political mess will complicate things.

From this month the prime minister will no longer be protected by constitutional provisions which, as amended by the parliament in 2013, prohibit a vote of no confidence for the first 30 months of a government’s term. Though it may be an unlikely prospect it would be ideal if such a vote were tied closely to the outstanding questions of national governance. The elections in 2017 are no longer that far away. If O’Neill is forced to stand down as a result of one or both of the cases now pending against him, there will be uncertainty in political leadership.

Whether there is a full-blown economic crisis in the making or not, it’s certainly crunch time for Papua New Guinea and, more than ever, Australia’s performance of its international and neighbourly diplomatic responsibilities will be crucially important to outcomes.

Peter Drysdale is Editor of the East Asia Forum.

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