PNG LNG: What could Papua New Guinea’s new pipeline project bring?

“It’s a strong contributing factor to ensure that policy is stabilised,” says Tosali. “When you have continuous change the system is unstable. This is the only government that was there in the last term and has continued to rule.” And so one begins to see long-term policy being effected:  a fiscal responsibility act, a continuous and more predictable attitude towards energy and resources, and the implementation of five-year fiscal frameworks.

Also, Tosali rankles at the idea of Papua New Guinea as a difficult place to do business. “Papua New Guinea has always got a very bad press overseas. People still ask if it is one of the hardest countries to do business in. But if you look at some of the laws currently, especially in terms of the fiscal incentives we have for foreign investors in this country, it is very robust and very competitive. For a long time we were being told our fiscal regime has not been the best, but in some of the latest reports we see it has improved quite dramatically. We have changed a lot.” Legal codes in the commercial sphere tend to be modelled on Australian approaches.

Fiscal discipline will be vital as the money starts rolling in, and the best illustration of the current administration and central bank’s ability to be prudent with it all comes with some real achievements in the field of national debt. In 2002 the debt to GDP ratio stood at a crippling 70%, and is now down to 30%. “I think that is a remarkable achievement we have made in the last five years or so,” Tosali says. The aim now, over the five-year medium term fiscal strategy that runs out in 2012, is to get it down to about 20%. As the strategy document says: “Bringing public debt down to near the 20% level would represent a major fiscal achievement. It would make it more likely that according to the measure used by the International Monetary Fund, PNG’s public debt would be assessed as sustainable.” It would also likely improve rating agencies’ assessment of sovereign debt, and in turn promote investor confidence.

Additionally, as commodity prices rose last year, PNG found itself with, as Tosali puts it, “so much money floating around in the system the problem was how best to manage it.” Indeed, while subsequent commodity price falls have clearly impacted the country, it doesn’t look remotely like any other nation in the grip of a global financial crisis: it has been putting interest rates up, not down, most recently to 8%.

While PNG hasn’t gone quite so far as some other commodity windfall nations – most notably East Timor, which is putting almost all of its newfound oil and gas bounty into a sovereign wealth fund for the next generation and only drawing off replaceable quantities for spending today – Papua New Guinea has tried to set a similar policy of sorts for its incoming revenues, and this will become more and more important as more money comes in in future. From now on, once mineral revenues go above 4% of GDP, that additional income over that level is then drawn off. It is then split 70-30 between public investments and paying down public debt. (Tosali had wanted the whole lot for public debt, but this ended up being the compromise.)

While that looks prudent, the country is still wrestling with problematic double-digit inflation that is surely only going to get worse as the big projects get rolling. Oil price falls have brought it down a touch, from 13.5% mid last year to 11.5% at the end of December, but those are still worryingly high levels. “We are still very worried about inflationary pressures on the economy,” says Tosali. PNG’s central bank, Bank of Papua New Guinea, was not available for a meeting during Euromoney’s visit to Port Moresby.

And while political stability, fiscal strength and simplification of business processes are all positive, there is still not yet much sign in the numbers of growing FDI: in fact, it peaked in 2004. This maintains the sense that Papua New Guinea is a country in which things are about to happen from a foreign investment perspective, rather than one where they already are. That said, there are also good signs of foreign engagement: both Australian airlines, Qantas and Virgin Blue, now run code-share arrangements and other partnerships with local PNG airlines, while a particularly interesting deal came in a major Chinese investment in Madang, in the country’s north. It’s a $1.4 billion nickel and cobalt mine which will employ 4000 people; Chinatowns are now emerging in the wilderness. China is already the third most active foreign country in PNG and it may be that this, rather than western nations such as Australia, is where the country’s future lies. “There has been a special effort on our part to encourage Chinese investment,” Pomaleu says.