As
described below, the government of Sir Mekere Morauta (1999-2002) succeeded
in divesting itself of most of this rather large portfolio of wholly or
partly publicly owned enterprises. Thus by April 2002 it had transferred
its stakes in all the mining and petroleum projects either to landowners
and provincial government in project areas or to Oil Search Ltd, and most
of its shareholdings in oil palm plantations and other non-mining companies
had also been sold. Also by April 2002 the Morauta government had completed
sale of PNGBC to the private sector bank, Bank of South Pacific, and had
established a framework for privatising Air Niugini, the Electricity Commission,
Telikom, and the Harbours Board.
The
justifications usually advanced for the kind of expansion of the public
enterprise sector that occurred in Papua New Guinea in its first few years
of independence included the argument that certain activities generate
social benefits to the wider community greater than the benefits accruing
to their private owners, with the implication that the private owners would
not expand the activity to a scale commensurate with the potential social
benefits. This argument had considerable force in the case of services
like education and health where inability of a proportion of the community
to meet the costs of provision could lead to under-provision by the private
sector, but was used more questionably to justify nationalizations, like
those of the privately owned copper mining industry in Zambia in 1970 (Faber
1971).[1]
Another
commonly used argument for public ownership in Papua New Guinea was as
a means of controlling “natural monopolies”, being those industries where
“the total market can be served at lowest cost by a single firm” (because
of declining marginal costs, Trebilcock 1982:8). Airlines are classic examples
of falling-cost industries, as the Australian experience of recurrent collapses
of Qantas’ fare-cutting competitors demonstrates.[2]
In Papua New Guinea telecommunications and electricity were also deemed
to be “natural” (i.e. falling costs) monopolies, without any evidence being
advanced that this was indeed the case, given that the manifestly small
domestic markets for these industries made it unlikely that they could
achieve economies of scale. After 1980 there was de-regulation and privatization
of state-owned telecommunications and power industries in many countries,
led by Britain and New Zealand, but the regular demise of new entrants
(like that of OneTel in Australia in 2001) suggests these industries may
indeed be natural monopolies. Irrespective of the existence of falling
costs, Papua New Guinea’s telecommunications and electric power undertakings
continue to enjoy statutory
monopoly status, which still prevent
new entrants to these industries.
Other
arguments for expanding public ownership in Papua New Guinea included replacement
of “inappropriate” foreign ownership in cases where that was perceived
to favour overly capital-intensive technologies, and a supposed need for
government to be a direct participant in certain industries as a means
of obtaining information needed to monitor the private sector participants,
for example, logging (Trebilcock 1982:9-11). In practice the government’s
joint ventures with various logging firms at Stettin Bay, Gogol, and Open
Bay never yielded the expected inside information on transfer pricing and
other unacceptable activities, perhaps because of the inevitable conflict
of interest for the government in its roles as both shareholder and tax
collector- a conflict present in
all firms in which governments have shareholdings. Under Papua New Guinea’s
Companies Act, the government directors on the boards of companies in which
it had shares had a primary fiduciary duty to all the shareholders
of companies like Bougainville Copper and Stettin Bay Lumber, not just
the government, and that duty would quite naturally include seeking to
maximize company profits, irrespective of environmental costs, and to minimize
taxes. The PNG government’s equity in Bougainville Copper Ltd, the Porgera
Joint Venture, and Ok Tedi Mining Ltd created a striking conflict of interest
in regard to the environmental impacts of those mines.
To
any first-time observer of Papua New Guinea’s economy in 1975, other than
the staff of the World Bank and International Monetary Fund (IMF) that
have constantly claimed that its public sector was too large, one of the
most striking features would have been the very small size of the public
sector, especially when measured by the number of employees, the proportion
these were of the total population, and the availability of public services
in general and public utilities and infrastructure in particular. At independence
in 1975 the total number of public servants in the central government was
25,951. In addition there were 4,034 government-funded teachers (in 1971-2)
and 6,137 health workers (1972-3). The total number of public servants
was 44,981 in June 1973. (Administration of Papua New Guinea 1974: 226-229,
236).
Thus
public servants amounted to under two per cent of the total population
of about 2.5 million – and about 4 per cent of the adult population. That
meant large areas of the country other than the towns were innocent of
any form of government presence, apart from some teachers and health workers
in the larger rural settlements. The education system enrolled fewer than
250,000 pupils, about half of total school-age children, but with only
371 in Year 12 and 4,374 in Year 10 by 1975 (Curtin1991:158).
Such
figures confirm Papua New Guinea’s status as a third world country when
it became independent. But with total internal revenue of A$93 million
in 1973, and grant revenue from Australia of A$83 million, for total recurrent
revenue of A$176 million or A$7 per capita, clearly the central government’s
resources were limited, while the local government councils were able to
raise only A$5.5 million in local taxes, rates, and charges (Administration
of Papua New Guinea 1974: 249,261).
The country’s public enterprise sector was even smaller than the administration, and provided services limited in the main to the towns, of which only three (Port Moresby, Lae, and Rabaul) had populations of more than 25,000 in 1971. For example, there were but 14,596 telephone subscribers in 1973, and electricity production amounted to only 474.3 million kWh in 1972, of which half was attributable to a single user, Bougainville Copper Ltd. (Administration of Papua New Guinea 1974: 226-229,236, 295, 300). The postal and telecommunications services were provided by a government department until 1982, and there were few statutory authorities carrying on commercial activities, with the exceptions of the Harbours Board and Electricity Commission (Elcom), which had been set up broadly in their present form in 1962, and Air Niugini, set up in 1973 (Whitworth 1993: 4). In addition to such utilities, the new state’s government was a minority shareholder in a few large private sector firms, such as New Britain Palm Oil Ltd and Bougainville Copper Ltd (20 per cent). The government was also directly involved in regulating various primary industries, such as coffee and copra, by the colonial legislation that had set up marketing boards – but was not itself engaged in production or ownership.
The
most significant government involvement in private sector enterprises was
in the financial sector. In addition to owning the largest commercial banking
network (PNGBC), the government retained the Investment Corporation set
up by the colonial administration as a unit trust for acquisition of shares
in ownership of major foreign investments on behalf of Papua New Guinean
subscribers to the Corporation’s capital. The government also retained
ownership of the Papua New Guinea Development Bank set up in 1965 (renamed
Agriculture Bank and later, Rural Development Bank) that extended loans
for agriculture and mainly small-scale industrial and commercial undertakings
from resources provided initially by aid donors and later only by the government,
without ever becoming a deposit taking bank.
Thus
even if in 1975 privatisation had been a concern of the government – it
was not - there was little to privatize. To the contrary, the Allende government’s
nationalization programme in Chile (including the US copper mining company
Kennecott in 1971), and then the overthrowing of Allende by Pinochet, inspired
some of the new nation’s leaders, notably John Kaputin (the first national
to be Minister for Justice), to call in 1974 for expulsion of Kennecott
from the Ok Tedi copper and gold prospect (Jackson, nd:57). The World Bank’s
influential report (Overseas Development Group 1973) recommending interventionist
economic development policies after independence also stimulated the pre-independence
Somare government’s Improvement Programme of 1972 that called for “government
control and involvement in those sectors of the economy where control is
necessary to achieve the desired kind of development”. This statement found
its way into the Preamble and the Five National Goals of Papua New Guinea’s
Constitution in 1975, which in effect retainedthis
equivalent of Clause 4 of the British Labour Party’s manifesto (May 2001:
309-310).[3]
In
any event, shortly before independence, in March 1975 the government successfully
dislodged Kennecott from its Ok Tedi copper discovery (Jackson n.d.:70).
Then for a time the government in effect became a mining exploration company
in its own right, through its wholly owned Ok Tedi Development Company,
which supervised various drilling programmes at Tabubil, until it finally
succeeded in transferring the project to Australia’s BHP in 1980, with
retention of a minority equity stake of 20 percent.[4]
After September 1975 the government also embarked on a policy of direct investment in and management of agricultural and industrial production. This was partly a response to the eagerness of many expatriate plantation owners to divest from Papua New Guinea, and the government saw “buying back the farm” as an important tool in its programme of redistribution of wealth and income (to which it was committed by the stress in the Constitution’s Five Goals on the redistribution of income rather than its growth). Apart from its minority equity in foreign oil palm estates and logging operations, the government acquired 100 percent ownership of sundry normally private sector activities, such as piggeries, abattoirs, a hotel, a marine amusement park, and scattered rubber and cocoa estates. Clearly none of these amounted to the “commanding heights” of the economy, and the only programmed interventions were the acquisitions of plantations, most of which would have ceased production without the government assuming ownership.
Development
of State Enterprise Policy 1975-1983
The
tendency at independence for the government to contemplate direct ownership
and management of industrial and agricultural enterprises was soon moderated
(except for mining), and by 1978 the Minister for Finance (Julius Chan)
had invited the IMF to review Papua New Guinea’s non-financial public enterprises
(Whitworth 1993:5). In the following year Chan himself chaired a Committee
of Inquiry whose report, The role of government in development, criticized
the tendency for the government to assume activities properly pertaining
to the private sector (Ministry for Finance 1979).
The
IMF’s report was written by R.H. Floyd (1979), who noted that apart from
the four main utilities, all other non-financial government enterprises
had lost money, and that even the utilities were under-performing relative
to the opportunity cost of capital (i.e. rates of return in the private
sector). Floyd’s key argument was that economic efficiency requires that
prices paid by consumers for goods and services should cover the full opportunity
cost of resource used as inputs, and that if services are proposed to be
provided at prices fixed at below cost-recovery levels – as implicitly
mandated by the Constitution’s Five National Goals (Chand and Yala 2002)
- the government should provide explicit subbsidies to the enterprise through
the budget. He also recommended that to avoid hidden subsidies, state enterprises
should be subject to the same taxes and duties incurred by the private
sector, and that their investments should be determined within the overall
framework of the government’s capital expenditure budget (Floyd 1979: 24-39;
Whitworth 1993:7-8).
The
Floyd Report met with a mixed reception. Only one of its recommendations
was adopted immediately (ending of the exemption from company tax of the
Harbours Board and Electricity Commission in 1980). Trebilcock (1982) criticized
Floyd’s proposal to make the government responsible for determining the
enterprises’ capital spending. It was not until 1983 that the crucial principle
of commerciality (cost-based pricing and abolition of tax and import duty
exemptions) was adopted for all four of the utilities, namely, Air Niugini,
Harbours Board, Elcom, and PTC, which were thereafter known as the Commercial
Statutory Authorities (CSAs).
The
cabinet’s Decision (National Executive Council 163/1983:1-5) defining the
government’s future relations with the CSAs also laid down that they should
only undertake new investments if they earned at least the rate of return
to be laid down from time to time by the Minister for Finance in the annual
Budget, and that if a CSA wished to undertake a non-commercial investment
for “social/political reasons”, it should seek a subsidy through the budget
to cover any losses incurred by the investment.The
minimum rate of return was only announced once in a Budget, and that Budget
was rejected (in 1985), but the Minister for Finance had in 1984 advised
each CSA that an “appropriate” rate of return would be in the range of
16-22 per cent already permitted to the private sector on price-controlled
items (Whitworth 1993:25).
These
prescribed rates of return were rarely achieved by any of the CSAs. The
average return on investment (ROI) of all four CSAs between 1985 and 1989
varied between a low of 11.1 per cent in 1985 and a high of 13.1 per cent
in 1986 (World Bank 1992:178). Those were the good years: from 1994 onwards
Elcom’s operating profits were usually less than its interest payments
(partly because price controls prevented tariff increases to cover higher
costs of imported fuel after the devaluation of the Kina in 1994) and its
ROI fell below five per cent, while the Post and Telecommunications Corporation’s
(PTC’s) fell to four per cent in 1995, and Air Niugini incurred only losses
after 1994 (World Bank 1999:148-149).
The
1983 Decision directed the CSAs to pay dividends to the government from
1984 equal to fifty per cent of the previous year’s after tax profits.
Initially this was complied with, at least for as long as the CSAs earned
profits, but with adjustments in cases where the CSA obtained cabinet approval
for netting off subsidies on unprofitable services it had been obliged
to undertake without ever receiving the promised explicit budget subsidy.
In this respect also the CSAs’ performance began promisingly but without
achieving the target, with total dividends paid by all four reaching K11.7
million in 1989 (the first year of a recorded subsidy) (World Bank 1992:178).
Thereafter dividend payments to government disappeared along with their
profits.
The
Decision had directed the CSAs to prepare annual rolling forward five-year
capital investment programmes for approval by the cabinet, and this was
complied with until they were corporatized in the later 1990s. The Decision
further stated that legislation would be drafted enabling the CSAs to vary
their prices and charges to the level needed to achieve the required rates
of return, but subject to the “price justification” procedures laid down
in the Prices Regulation Act.
The
force of the Cabinet’s decisions on pricing and investments was considerably
weakened by this failure to grasp the nettle of freeing the CSAs from the
government’s price controls. As the years went by the CSAs found it more
and more difficult to gain timely approval for price increases from the
Secretary of the Finance or Treasury Department, in his role as Price Controller,
and this largely explains the CSAs’ worsening profits performance noted
above. But even in the good years their overall gross margin (i.e. total
revenue less operating costs as a ratio of total revenue) was less than
20 per cent, whereas the private sector would aim for 40 per cent, and
this shortfall reflected operating inefficiencies, inadequate sales relative
to their large capital investments, and over-manning.
Nevertheless
there is some evidence of improvement in the productivity of the CSAs between
1984 and 1991. For example, they employed 6,636 persons on gross revenue
of K208.7 million in 1984, or K31,449 per employee, and 7,259 persons for
revenue of K369 million in 1991, or K48,656 per employee, an improvement
of K17,207 (over 50 per cent) in revenue generated per employee. The average
in 1991 conceals the dispersion between the capital intensive Air Niugini’s
K74,082 per employee and the Harbours Board’s K34,339 per employee) (World
Bank 1992:178; Whitworth 1993:1).
The
government’s justification for subjecting the CSAs to prices justification
was that each was supposedly a monopoly, but that was more by law (telecommunications,
power, harbours) than from any evidence of falling marginal costs preventing
new entrants to these industries. But even where some degree of competition
existed, as on Air Niugini’s domestic routes, price controls were enforced
on both Air Niugini and its private sector competitors. However there are
few if any absolute monopolies – for example, Elcom’s declining efficiency
led most large buildings and other big power users to install their own
generators during the 1990s, an airline monopoly may well have to compete
with other forms of transport such as shipping, and privatized harbours
(e.g. in Lae and Madang, Rabaul and Kavieng, Alotau and Port Moresby) would
have been able to compete with each other for traffic and for new “foot-loose”
industries to locate in their vicinity (see also Department of Finance
and Planning 1992:19).
It
is evident that the response of the government in 1983 to the growing difficulties
of the CSAs in the later 1970s and early 1980s was not to contemplate privatisation,
which was rarely mentioned as a possibility, except by Trebilcock (1982:
115), but to accept Floyd’s restructuring proposals by turning them into
quasi-autonomous entities free to behave as if they were private
sector firms, subject however to restrictions on price setting and staff
emoluments. The implicit contradiction between Floyd’s commercialization
of the CSAs and their continued public ownership was either not noticed
or justified on the grounds that given equal commercial efficiency, public
monopolies would somehow be more benevolent than private monopolies. Both
the CSAs’ autonomy and their ability to operate as if they were privately
owned began to be eroded in the 1990s, for increasingly their boards and
top management became the creatures of the current minister, and if he
was removed or transferred to a new ministry, the new incumbent soon acted
to replace both board and top management (Millett 1993:27).
After
the 1983 Decision on CSAs the government began to turn its attention to
its commercial investments. In some cases its hand was forced when many
of its wholly-owned commercial enterprises either became defunct or sank
into bankruptcy (e.g. Sea Park, the Food and Fish Marketing companies,
Energy Development Company, Baiyer River Alcohol, and Kagamuga Natural
Products) and were not bailed out. In 1987 the Wingti government initiated
privatisation of the wholly state-owned National Insurance Corporation
(NIC) and a few of its minority shareholdings in joint ventures.The
sale of NIC to Malaysian interests in 1988 was aborted at the last minute
after a change of government, and no action was taken on the minority shareholdings.
NIC remained a public entity until absorbed by PNGBC in 1998.
The
first comprehensive privatization policy paper was prepared by a committee
of officials chaired by the governor of the central bank and presented
to the Cabinet in 1991, after prompting by the World Bank in the context
of its initial Structural Adjustment Programme in Papua New Guinea (World
Bank 1992: 52-54; Millett 1993:12). The Committee stopped short of proposing
privatization of either the CSAs or the state-owned commercial bank PNGBC.
It also failed to address the incomplete implementation of the 1983 Decision.
Instead its main recommendations were establishment of a Unit Trust into
which the government’s shares in mining projects would be placed, and further
sales of the state’s minority equity holdings in plantations and the like
to the national public - which overlooked the pre-emptive rights of the
foreign shareholders that managed most of these concerns.
These
proposals were superseded when the return to government of Paias Wingti
after the elections in 1992 led to a much higher profile for privatization.
The government’s first Act set up the Papua New Guinea Holdings Corporation
as a statutory body under the prime minister with capital of K5 million,
replacing the previous government’s costless Privatization Committee of
officials. The Corporation became the statutory owner of all the government’s
non-mining enterprises, with full powers to proceed with privatization
and retain all proceeds for its own purposes (Millett 1993:40).
The
Wingti government also moved to raise the state’s involvement in the mining
industry. The policy from 1980 until 1992 had been for the government to
take up to 30 per cent of the shares in mining projects, and 22.5 per cent
in oil projects, but in each case only when the projects - including their
financing plans - had been approved. This meant that the government avoided
the exploration and pre-development risks it had incurred between 1975
and 1980 at Ok Tedi. Payment for its equity in mining was paid up-front
pro rata with its share of developers’ previous exploration and pre-development
costs. In the case of oil projects, the developers were obliged to “carry”
(i.e. finance) the state’s equity, with recovery of their costs plus interest
from the state’s forgoing of its 22.5 per cent share of oil production
until paid for.
In
1979 the joint venture of three mining companies (Placer Dome of Canada,
and MIM and Goldfield Ltd of Australia) formed to develop the Porgera gold
deposit had asked the government to determine the size of its equity in
advance of the more intensive drilling programme they proposed to undertake.
The government chose to limit its holding to 10 per cent and signed the
1979 Shareholders Agreement on that basis, despite the precedent of its
20 per cent stake in Bougainville Copper Ltd and its intention to take
20 per cent in Ok Tedi. The large burden on the government’s resources
of financing its share of the Ok Tedi project explains its decision to
limit itself to 10 per cent at Porgera, but the private joint venture partners
were evidently keen to be sure of retaining at least 30 per cent each before
embarking on a major exploration programme.
The
new drilling was successful in proving the existence of a larger and richer
ore body than had been expected, and in 1985 the Managing Director of Placer’s
Australian subsidiary, Robert Needham, wrote to the prime minister seeking
confirmation that the government would honour the Shareholders Agreement
and limit itself to 10 per cent of the project. Sir Michael Somare replied
in the affirmative. Placer Dome floated its Australian subsidiary Placer
Pacific in 1986, and amidst controversy some of the government’s ministers
(including the new prime minister, Paias Wingti, and the minister for finance,
Julius Chan) acquired shares at what proved to be a heavily discounted
float price, despite the restrictions of the Leadership Code.
By
the time the second Wingti government took office in 1992, Porgera had
begun production and proved for a few years to be the most profitable gold
mine in the world. In September 1992 Wingti secured cabinet approval for
removal of Mel Togolo, the chief executive of the Mineral Resources Development
Company (MRDC), the government’s holding company for its mining equity
stakes, and his replacement by Robert Needham, the same Needham who when
managing director of Placer Pacific had written to the prime minister about
the government equity in Porgera the year before its float in 1986. Needham
prepared demands presented by the prime minister to Placer and its partners
claiming that the government had been “misled” as to the potential richness
of Porgera in 1979 and again in 1985 when it limited itself to only a 10
per cent stake and that therefore the companies should grant the government
an extra 20 per cent stake in the mine, at a price based on the original
cost rather than the current market value, taking it to 30 per cent. This
demand looked to many to be akin to nationalization or even expropriation,
but an agreement was eventually reached whereby the companies provided
the government with an extra 15 per cent (for a total of 25 per cent),
at a price based on market valuations rather than original cost, and payable
from the future profits earned by the government’s extra holding (World
Bank 1993:91).
The
appearance of a new phase of direct state involvement in mining was strengthened
when Wingti’s and Needham’s next move was to demand that Rio Tinto should
grant the government an extra 20 per cent equity stake in the new Lihir
gold project, taking it to 50 per cent, to be held on behalf of the government
by the Malaysian Mining Corporation. Rio Tinto rejected what was seen as
a move to replace its management by a team led by Needham – and the government’s
Minister for Mining, John Kaputin, then refused to proceed with Rio’s application
for a special mining lease.In mid-1994
a faction of the government led by the finance minister in 1994, Masket
Iangalio, succeeded in having Needham dismissed from MRDC while Kaputin
was abroad, and this was soon followed by the resignation of Wingti in
August 1994 after loss of a court case on the validity of his purported
resignation and re-election by parliament in 1993. The new government quietly
dropped the demand for extra equity in the Lihir project, and the project
was approved in March 1995. The subsequent international share float of
Lihir Gold Ltd provided an opportunity for the government to finance its
share of the development costs from the proceeds of selling 40 per cent
of its holding in the float – and its residual 17.6 per cent holding was
in effect further privatized by assignment of half (6.8 per cent) to a
trust on behalf of the Lihirian landowners.
Before
Wingti was obliged to resign, his government had set in train what became
the notorious purchase of the Cairns Conservatory, concluded under the
direction of the next government by the Public Officers Superannnuation
Fund in October 1994. The Ombudsman’s Report (Ombudsman Commission
1999) on this money-laundering transaction provides a graphic account of
the departure by ministers (led by Prime Minister Chan himself), and the
most senior officials of the Department of Finance, from the high-minded
principles that in the early years of independence they had advanced as
justifications for public ownership.
Privatization
in progress 1995-2001
Wingti’s
replacement as prime minister by his deputy Sir Julius Chan also led to
the immediate departure (after being declared persona non grata)
of the Holdings Corporations’ expatriate managing director (Peter Steele)
and to its winding-up before any of its planned privatizations had taken
effect, but not before some K2 million of budget funding had been spent
on its staff and board. However, independently of the Holdings Corporation,
the Finance Department had sold the government’s 70 per cent equity in
PNG Forest Products (Pty) Ltd. to the 30 per cent shareholder and manager,
Prime Group of Singapore[5].
The
Chan government remained interested in privatization, partly due to renewed
pressure to that end from the World Bank, to which it had applied for new
loans after being forced to devalue and then float the Kina in October
1994. Additional impetus came from Chan’s Deputy and Finance Minister,
Chris Haiveta, who however hoped to avoid conformity with the World Bank’s
conditions – especially those relating to forestry - for its offered second
structural adjustment loan in support of the 1995 Budget, by borrowing
against the Government’s share of oil exports from the Kutubu project.
This borrowing (as proposed by merchant bankers Paribas Capital Markets
and Salomon Brothers) would have involved a forward sale of the State’s
oil to these bankers at a fixed price of US$15 per barrel, granting them
any excess of actual oil prices, with the State’s net proceeds (after interest
at around 15 per cent) used first to repay the state’s liability to its
joint venture partners and then to fund the 1995 budget deficit. A team
of officials from BPNG and the Department of Finance successfully persuaded
the cabinet that this quasi-privatization was potentially very high cost
and that a float of part of the State’s 100 per cent equity in MRDC would
be more cost effective (State Negotiating Committee 1995:3). This cabinet
paper marked the first occasion privatization was seen as a means of raising
fiscal resources.
Haiveta
subsequently took a close personal interest in this proposal for a partial
privatization of MRDC by means of an Initial Public Offering (IPO). In
August 1995 Haiveta replaced the MRDC board’s chosen financial and legal
advisers for the float (McIntosh Securities and Mallesons of Sydney) with
his own appointees, Jardine Fleming of Hong Kong and Allens Arthur Robinson
of Port Moresby, together with their Sydney partner firm (Allen Allen and
Hemsley, Australia’s largest law firm and leading specialist in mergers
and acquisitions).
The
Mineral Resources Development Company (MRDC) was the new name after 1986
of the former Ok Tedi Development Company, and by 1995 it held on behalf
of the government, land owners, and provincial governments, the state’s
initial equity in the Porgera Joint Venture (10 per cent), Misima Mines
20 per cent), Kutubu Joint Venture (KJV) (22.5 per cent) and Lihir Gold
(30 per cent). The additional 15 per cent state equity in Porgera that
had been forcibly acquired by the Wingti government in 1993 was held separately.
MRDC’s new advisers developed concepts whereby MRDC itself would remain wholly owned by the government, and would retain those portions of the state equity in mineral projects that had not been assigned to landowners and provincial governments, while the national government’s own residual equity would be placed in the new entity Orogen Minerals Ltd. Orogen was assured that it would have an option to purchase from MRDC up to 20 per cent of the state’s usual 22.5 equity in future oil projects and 25 per cent of its 30 per cent in new mining projects. Orogen’s initial holdings included 15.75 per cent in the KJV, 20.5 per cent in the Gobe Joint Venture, 15 per cent in Porgera, 6.81 per cent in Lihir Gold Ltd, and 20 per cent in Placer Dome’s Misima Mine. Orogen would be floated both nationally and internationally with the public able to take up 49.9 per cent, and with MRDC retaining 50.1 per cent on behalf of the government. Orogen was so constituted that MRDC would not have a majority on its board, and that the government’s majority would not be voted at general meetings of the company except in regard to its name and place of registration (Port Moresby) (Orogen Minerals Ltd 1966: 23-32).
The
float took place in October 1996 and was remarkably successful, with a
substantial over-subscription. The total proceeds from the sale of 49.9
per cent of its shares amounted to K304 million (about A$288 million in
1995), of which 13 per cent was subscribed in Papua New Guinea by its institutions
and some 6,400 resident individuals. This partial privatisation was wholly
transparent by virtue of the public flotation process, which included a
prospectus containing independent technical experts’ and accountants’ reports
on the various projects, and did not require a World Bank loan or any up-front
charge on the national budget. Instead the float contributed over K100
million to the Budget, after clearing MRDC’s debts, capitalizing Orogen,
and meeting the float managers’ fees, totaling some K16 million (see also
Dorney 2000:98-99).
The
float also enabled some thousands of Papua New Guineans to subscribe for
shares that yielded capital gains to those who sold in good time – its
price rose from the discounted float price of K1.75 for Papua New Guineans
(overseas investors paid A$2 per share) to over A$2.50 in 1997. Orogen’s
share price slumped to around A$1.00 during 2000-2001, but recovered late
in 2001 to A$1.9 when the Papua New Guinea government announced it was
contemplating releasing its majority stake of 50.1 per cent. Unlike the
rest of Papua New Guinea’s public enterprise sector during the 1990s, Orogen
yielded dividends both to the government in its role as shareholder and
to the public at home and abroad at levels above the average rate on Australian
mining shares.
The
other notable privatization by the Chan-Haiveta government was its sale
of the government’s 46 per cent holding in New Britain Palm Oil Ltd (NBPOL)
to the Malaysian corporation Kulim in 1996. The British firm Harrison and
Crosfield had established this very successful and profitable project near
Kimbe in West New Britain in 1968 but had decided to divest its overseas
operations in Papua New Guinea and elsewhere. The local management had
persuaded Harrison and Crosfield to put its shares into a public international
share offering, and the underwriters (McIntosh Securities) valued the firm
at not more than K115 million (about A$110 million) of which the government
would receive A$50 million for its shares. Chan and Haiveta were persuaded
that a trade sale would realize more for the State’s shares, and used the
negotiating skills of Dr Jacob Weiss, an adviser in the Bank of Papua New
Guinea, to devise an arrangement whereby the government first exercised
its pre-emptive rights to buy out Harrison and Crosfield’s 54 per cent
at a price which valued the whole of NBPOL at K159 million (i.e. K1.59
million per one per cent), with funds provided by the ultimate purchaser,
Kulim. The latter then bought the State’s now 100 per cent holding (less
10 per cent retained in trust for landowners and the provincial government)
at a price valuing NBPOL at K171 million (National Executive Council 1996).
The outcome was that the State sold its shares at a price per one cent
of K1.71 million, considerably more than the K1.15 million per one per
cent that it was likely to have realized from the McIntosh public float’s
indicative pricing (where the price was heavily discounted because of the
unfamiliarity of the Australian share market with tropical plantation businesses).
The
government’s net receipt from these transactions was K68.04 million. One
of the conditions imposed by the government was that Kulim would in due
course arrange a flotation of NBPOL into which it would place part of its
holding, and this is now in progress on the Papua New Guinea Stock Exchange
(National Executive Council 1996).
Despite
these commercial successes, which also provided significant injections
of foreign exchange into the reserves of the Bank of Papua New Guinea,
the Chan-Haiveta government proved less adventurous in tackling privatisation
of genuine public enterprises – both Orogen and NBPOL concerned sale of
state shares in privately managed concerns. The CSAs were badly affected
by the nearly continuous depreciation of the Kina after it was floated
in 1994, a trend that was exacerbated by the rise and rise of the United
States dollar and the Japanese Yen, the main currencies in which the external
debts of the CSAs had been incurred. Depreciation of the Kina did not affect
the external value of the debts, but raised the Kina value, so at least
equivalent increases in the CSAs’ tariffs and charges became essential
(since unlike Orogen and NBPOL they were not protected by export earnings
denominated in dollars).[6]
But the Price Controller when wearing his Secretary for Finance hat was
under constant pressure from his political masters to moderate the rate
of inflation of the Consumer Prices Index (CPI) – and in this conflict
of interest the CSAs’ requests for approval of electricity tariff increases
and the like were usually the losers.
A
precondition for privatization would have been substantial liberation of
the CSAs from price controls, which was unthinkable (because of ministers’
concerns about aggravating the rising CPI) by both the Chan-Haiveta and
the Skate governments (in 1998 the latter held out against allowing fare
increases on domestic air routes to the point of the near-collapse of the
private operators crippled by the rise in the Kina cost of aviation fuel).
Instead these governments pursued a policy of “corporatization” of the
CSA sector, whereby they ceased to be statutory commercial authorities,
each with its own Act, but were registered as companies under the Companies
Act. Ostensibly this was to be a first step towards privatization, but
no moves in that direction were discernible. Instead the boards and management
of the former CSAs used their new exemption from the provisions of the
1983 Decision relating to terms and conditions of staffs to improve their
personal positions. As companies, the former CSAs were also in effect freed
from the 1983 Decision’s rate of return targets and minimum dividend payments,
though as they all declined deeper into bankruptcy this was immaterial.
The
government of Bill Skate (1997-1999) followed the Chan-Haiveta government’s
example of milking the government-managed superannuation funds. The National
Provident Fund as a result was by 1999 on the verge of liquidation (World
Bank 1999:187). Potentially even more serious was the spoliation of PNGBC
by the Skate government’s restructuring, which had the effect of subjecting
it to direct government direction. By 1996 PNGBC was already carrying relatively
high staff costs, but these increased rapidly in 1997-1999, by 31 per cent
alone in 1999, and the bank was by then alone of PNG’s banks with an average
staff expense higher than the average operating profit per staff member.
PNGBC’s efficiency ratio was well over 60 per cent in 1997-99, compared
with the usual less than 50 per cent of its competitors.[7]
By 1999 also BPNG was in breach of the central bank’s minimum liquid asset
ratio (MLAR), and it probably also barely met the BPNG’s minimum 8 per
cent capital adequacy ratio (PriceWaterhouseCoopers 2000:22, 49, 123).
Iario
Lasaro, the minister for finance, instead of attending to his prudential
supervision of the banking system, found time in his 1999 Budget to announce
privatization of not merely the remaining state commercial investments
(other than the now corporatized CSAs and financial institutions), but
also of large areas of the traditional public sector, such as research
institutes and training colleges, using the novel technique of instant
cessation of their budget funding (see Curtin 2000a:3). This “sink or swim”
approach was as short-lived as the government, which fell in July 1999.
The
new government of Sir Mekere Morauta (July 1999-July 2002) reverted to
the more institutionalized approach of the Wingti government of 1992-94
(of whose PDM party Sir Mekere had become the parliamentary leader). The
Holdings Corporation was revived in the form of a Privatization Commission,
complete with Board, well paid executives (K450,000 a year for the executive
chairman), teams of consultants, and access to a large loan from the World
Bank (Post-Courier, 28 February 2001; Weise 2000). In addition like
the Holdings Corporation, the Commission was not obliged to remit net privatization
proceeds to the government’s Consolidated Revenue (until its Act was proposed
to be amended in March 2002, see The National, 28 March 2002).
But
unlike all previous governments’ privatization exercises, which had treated
the CSAs and state-owned financial institutions as sacrosanct, the Morauta
government committed itself to meeting the World Bank’s requirement that
at least major public enterprise should be “brought to the point of sale”
if not actually sold during 2000, with PNGBC selected as the most feasible
(see Curtin 2000b). This proved to be much easier said than achieved, given
the need to bring PNGBC’s loans portfolio into reasonable shape after the
period of large increases in its unsecured lending during the Skate government.
PNGBC had also been placed by the Skate government under the umbrella of
a holding corporation, Pacific Finance, as part of an asset stripping exercise,
and this also needed to be disentangled (Weise 2000).
The
government eventually met the World Bank’s extended deadline for bringing
PNGBC to the point of sale in mid-2001, and then unexpectedly went one
better by announcing on 29 November 2002 that a bidding process had been
won by the smaller but nominally privately-owned Bank of South Pacific.
Reportedly (Post-Courier, 30 November 2001), the sale price valued
PNGBC at K233 million, but with the government keeping a 25 per cent holding,
proceeds would be K175 million, of which K22 million would be retained
by the Privatization Commission, and the balance paid into the government’s
consolidated revenue. The government also indicated that part of its retained
25 per cent would be placed in the proposed Privatization Unit Trust (see
below) to which the general public would be invited to subscribe in due
course.
The
“trade sale” model adopted for privatization of PNGBC was similar to that
employed for the state’s shares in New Britain Palm Oil Ltd in 1996, and
like that exercise suffered from some lack of transparency, in that the
value of other bids was never disclosed. In the case of PNGBC one of the
other bidders was the ANZ Banking Group, already well established in Papua
New Guinea. The Prime Minister’s announcement of the sale to BSP said it
was the government’s “preferred bidder” (Post-Courier, 30 November
2001), implying that it was not necessarily the highest bid (it later emerged
that all the other offers were nominally less than BSP’s).[8]
In
any event the government evidently preferred a domestic purchaser in which
it already had large indirect interests (through the pension funds that
have major shareholdings in BSP) to a foreign investor willing to pay in
Australian dollars that would have boosted the frail Kina’s exchange rate.
Moreover it is not clear that the BSP tail now about to wag the PNGBC dog
(the latter is much the bigger of the two banks) will indeed have a capital
base adequate for the new venture. As of October 2001 the combined capital
and reserves of the two banks amounted to 7.2 per cent of their combined
but non-risk-weighted total assets. On the face of it, this ratio falls
below the Basle Agreement’s minimum capital adequacy rule of 8 per cent
– but after risk weighting of its assets, the new bank could just pass
muster (Rose 1999:488). On the other hand, a take-over of PNGBC by a large
if well-capitalized international bank like ANZ might well have reduced
competition, with BSP reduced to minnow status by comparison.
Nevertheless
as the enlarged BSP is an unlisted company whose main shareholders will
include not only the government (25 per cent) but also government-controlled
entities such as the Defence Force Retirement Benefits Fund, the National
Provident Fund, the Public Officers Superannnuation Fund, and Motor Vehicles
Insurance Ltd, there is some risk that the new Bank could prove to be no
more than a state-owned bank in disguise. However although BSP’s own track
record has been one of independence from government interference despite
its publicly-owned institutional shareholders, that may be more difficult
to sustain when it has become by far the biggest bank in Papua New Guinea,
with 52 per cent of total deposits of the banking system (Bank of Papua
New Guinea, Statistics Update, 16 November 2001).
The
government’s intention to set up a “Peoples’ Unit Trust” might appear to
be yet another version of the failed Investment Corporation of Papua New
Guinea (which manages a form of unit trust holding shares mostly in unlisted
domestic companies) unless it is itself privatized - some of the latter’s
assets disappeared during the Skate government’s tenure, with its headquarters
building being sold cheaply to its chief executive, and it has paid no
dividends since 1997 (Post-Courier, 29 October 2001). Unit Trusts
in other countries typically invest in a broad range of equities at home
and abroad. A Papua New Guinea Peoples’ Trust restricted perforce to holdings
in at most one or two unlisted privatized companies like the enlarged BSP
does not seem likely to offer local investors sufficient diversification.
It is at least arguable that the government could have made it a condition
that the new bank be required to seek a listing on the Port Moresby Stock
Exchange. That would both improve its accountability and afford an opportunity
for Papua New Guineans to diversify their own investments by buying shares
in BSP directly.
The
Morauta Government likes its predecessors has been unduly concerned with
the risks that
1.privatized
“natural” monopolies like Elcom and Telikom would be able to use their
monopoly power to force up their prices or tariffs and earn “excessive”
profits; and that
2.when
privatized the CSAs would fail to meet the so-called community service
obligations that are ostensibly required of them by the Constitution.
The
Government perhaps considered that if it addressed these issues it would
at least in part head off the opposition to privatization of the unions,
some students, and other members of the public and the defence force. But
that opposition would not be so easily fobbed off, and it is possible that
the new price controls announced in February for future owners of Elcom
and Telikom may make it more difficult to complete these privatizations
Those putative owners will want to earn profits, the bigger the better
from their point of view – and for the government and people of Papua New
Guinea. Large profits should deliver large tax revenues, which the government
could use to meet non-commercial community service obligations, in the
form of subsidized power and communications. Moreover large profits would
in time attract new entrants to the industries in question, and end their
so-called natural monopolies. In that regard it should be noted that in
reality:
(1)there
has been no evidence of the defining condition of falling marginal costs,
not surprising given the small scale of the domestic market for power and
telecommunications; and
(2)these
monopolies have always been protected in Papua New Guinea by legislation
preventing new entrants (e.g. by the Elcom and Telikom Acts, although the
latter did have a “sunset clause” to its bar on new entrants).
Finally,
the story of government equity in Papua New Guinea’s mining and petroleum
sector, that had begun with such acrimony when local communities in Bougainville
objected to the start-up of the Panguna copper mine in 1970-72 and were
not appeased when the government was offered equity of 20 per cent (see
Denoon 2000), ended in April 2002 with the take-over of the government’s
51 per cent owned Orogen Minerals by Oil Search Ltd. Apart from a residual
stake in Ok Tedi and a minority (18 per cent) holding in Oil Search, the
government’s involvement in the mineral sector has ended, apart also from
MRDC’s role administering the equity stakes of landowners and provincial
governments in the Porgera, Lihir and Kutubu projects. The merger resulted
in the Government receiving A$0.45 per share by way of return of capital
from Orogen (i.e. A$73.7 million) plus 1.2 shares in Oil Search for each
of its shares in Orogen, an implied price of A$1.97 per share, above Orogen’s
list price in Australia in 1996 of A$1.75 and very more above its price
of A$1.00 in October 2001 before the government disclosed it was reviewing
its holding in Orogen. Time will tell whether the short-term gain offsets
the Government’s abdication from the strategic role in the industry that
it sought in the period from 1975 to 1995, but the cash benefits of that
role were far from impressive, and disengagement relieves the government
of the conflicts of interest that created so many difficulties at Panguna
and Ok Tedi.
Conclusion
One
of the enduring strengths of Papua New Guinea is the pragmatism of both
people and politicians, unfettered as they are by the fashions in ideologies
that momentarily hold sway in other countries. Thus, just as in practice,
despite the Constitution, no governments have had overt ambitions for outright
nationalization of the whole of the enterprise economy, tilts towards privatization
have only been effective when the public sector has demonstrably failed
to deliver, as has increasingly been the case since 1994. Even then, with
the private sector’s performance in Papua New Guinea less than stellar,
having provided no net increase in the employment it offers since 1988
(BPNG 2001), it has hardly been a role model. Moreover external observers
of the failures of Papua New Guinea’s public sector need to remember the
much more spectacular debacles engineered by private entrepreneurs in Australia
(Bond Corporation in 1988, and in 2001 alone, HIH, OneTel, and Ansett)
and most recently in the USA (Waste Management, Sunbeam, and Enron, the
last a one-time major shareholder in Papua New Guinea’s upcoming oil refinery).
Enron’s debts of K300 billion were 66 times larger than Papua New Guinea’s
total external debt in 2001. The World Bank’s extolling (1999) of the benefits
of privatization in terms of accountability and transparency also ring
hollow when the world’s fifth largest accountancy firm, Arthur Andersen,
was directly involved in the frauds surrounding the bankruptcies of Bond,
HIH, Waste Management, Sunbeam, and Enron (The Australian, 17 January
2002). Even so, those bankruptcies demonstrate the condign punishment by
the market of fraud and mismanagement, and in the last analysis it was
only the protection of the explicit guarantees by government that protected
Papua New Guinea’s public enterprise sector from the same fate (including
PNGBC and National Provident Fund in 1999).
Against
that background one needs to preserve a degree of caution in recommending
any particular ideology-based set of policies for or against public enterprise,
and to revert to Jeremy Bentham’s utilitarian calculus: what are the relative
costs and benefits of alternative forms of enterprise management on a case
by case basis? The promising performance of the CSAs in the later 1980s
when their managements were not subject to political appointees is enough
to suggest that under the right conditions, including crucially freedom
from price controls and an appropriate non-government regulatory body,
they might have been able to survive as public enterprises.
That
perception appears to have informed at least part of the major overhaul
of its privatization strategies announced by the prime minister on 16 January
2002 (Post-Courier, 17 January 2002). The main elements of the new
policies are:
The
People’s Trust at first glance appears to be yet another revamp of the
old Holdings Corporation without replacing the existing Privatization Corporation.
From the press report it would be difficult to answer Bentham’s question,
“what is the use of it?” At best it seems designed to ring fence the remaining
state enterprises from direct government interference, but at worst might
do no more than perpetuate public ownership of its portfolio behind a screen
excluding overt political interference or direction, except potentially
by the managing director of the Privatization Commission. The present incumbent
is the former Governor of BPNG (Sir Henry ToRobert) - but remains a political
appointee, instead of being appointed by the Board.
The
proposed compulsory employee share scheme seems intended to mollify the
opposition of the trade unions to the privatization programme, but amounts
to a new tax on investors of questionable benefit to employees, since if
their firm collapses, its shares will be worthless (as Enron employees
around the world discovered to their chagrin). There is also a doubtful
harmony of interest for employees striving to secure higher wages at the
same time as awaiting hypothetical dividends arising from wage restraint!
The
new Independent Consumer and Competition Commission will fill a long-standing
gap in Papua New Guinea’s regulatory framework to the extent it secures
minimum standards of services (e.g. mail delivery schedules for PNG Post)
and guards against price-fixing cartels and monopolies – but the apparent
intent to extend the existing price controls (which are limited to a relative
handful of products such as fuel and power) may fall foul of the World
Bank and IMF and, as noted above, make it more difficult to attract buyers
for the remaining state-owned enterprises.
Finally, given the concern about monopoly, it is far from clear why PNG Power’s new private owners (if any emerge, given the price moratorium to which it will be subjected) should be protected from competition. Papua New Guinea already has a number of industry-specific independent power generators (e.g. Ok Tedi, Porgera, PNG Forest Products, Ramu Sugar, Lihir Gold) some of which could if allowed by legislation compete with a privatized Elcom power generation operator to sell power to a separate privatized power distributor.
All the same, the Morauta government deserves considerable credit for being the first to follow-through with implementation of its predecessors’ supposed commitment to privatization of PNG’s state enterprise sector. Air Niugini, Telikom and Elcom are on the market, PNGBC and Orogen Minerals had both been sold by April 2002. The Prime Minister’s own lead has been impressive in the context of two army mutinies (2001 and 2002) and student protests (June-July 2001).
The
main caveats emerging from the narrative in this paper are first, that
while some trade sales may yield higher returns than floats, as with NBPOL
but not perhaps PNGBC, the gains of floats, in terms of transparency and
opening up to ownership by the public, are potentially very large, as demonstrated
by the Orogen Minerals float in 1996. Secondly, whatever holding or privatization
corporations and trusts are in place to manage the privatization process,
success will finally depend on the kind of commitment to privatization
of the managements of the individual enterprises that was evident at MRDC
in 1996 and in PNGBC in 2001, but has yet to be seen anywhere else in Papua
New Guinea’s public enterprise sector.
Finally,
we have seen how small Papua New Guinea’s public sector was in 1975, in
both its administration and enterprise components, how the latter grew
rapidly in the 1970s, and how the sale of PNGBC in 2001 was the first privatization
of a wholly owned public enterprise. The non-enterprise public sector by
contrast has not grown at all, apart from education, despite enduring complaints
from the World Bank (in every one of its country reports since 1988) and
other aid agencies that the country suffers from an overblown and burgeoning
public service. As demonstrated in Curtin (2000a and 2000b), Papua New
Guinea’s public expenditure expressed as a ratio to its GDP at around 26
per cent is well below the norm in developed countries, and has consistently
declined both in real financial terms per head of the population – and
more pertinently, in numbers of public servants per head of the population
(with, for example, not merely no increases in the police and defence forces
but actual declines since 1975). This negative growth is perhaps a function
of the very slow growth of per capita GDP since independence, and that
in turn may partly flow from the monetarist fiscal and monetary policies
pursued by the government over most of that period (Curtin 2002a), and
partly from the failure of all Papua New Guinea’s governments to address
effectively the issue of reform of land tenure first proposed by the Faber
Report (Overseas Development Group 1973, see also Curtin 2002b). Until
conditions are created that enable both the public and the private sectors
to grow, Papua New Guinea itself will not fulfil the ideals laid down in
its Constitution.
Acknowledgment
The
author acknowledges the useful comments of Ronald Duncan, Chris Elstoft,
Alan Robson, Anthony Siaguru, and Charles Yala, but remains responsible
for any remaining errors and omissions.
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