Monday, 24 April 2017

So why is Papua New Guinea broke?

by BRYAN KRAMER

PNG has recently made the headlines across the globe for being in a financial debt crisis and struggling to pay its debts. 

It is no secret the O'Neill Government has a cash-flow crisis and only managing to keep its head above water by not paying its bills. 

What little tax income it earns each month is being used to ensure public servants are paid every fortnight and any difference is directed to propping up the failed free education policy. 

Meanwhile Peter O'Neill claims the country's financial crisis has been caused by dramatic fall in world commodity prices placing a strain on economies around the world.

So is Peter O'Neill telling the truth? Short answer is No. 
PNG Government funds its operations, development projects and services its debt obligations through the collection of taxes and overseas grants (donor funding). Tax collection or revenue is categorized into three main parts.

1) Tax on Income and Profits (company, wages tax etc)
2) Tax from Goods & Services (GST etc) 
3) Tax from International Trade (import & export taxes).

Included in tax on income and profits is Mining & Petroleum tax which relates to taxes imposed on mining and petroleum companies who earn large profits from the sale of natural resources; gold, silver, copper, oil and gas etc to overseas markets. 

How much tax revenue the Government earns from Mining & Petroleum companies will very much be determined by how much profits they make. How much profits they make is determined by world commodity prices (price of gold, oil, copper and gas etc) 

So a significant drop in the world commodity prices will directly affect their profits and in turn affect tax revenue collected by the Government. 

In 2012 when O'Neill took office PNG Government collected K981.1 million in Mining & Petroleum Tax. In 2013 is was K666.7 million. 

2014 - K794.2 million
2015 - K195.4 million
2016 - K88 million*

* estimate according to the Treasury 2016 mid year budget report. 

While Mining & Petroleum tax has significantly reduced in recent years due to fall in world commodity prices it is important to note it is only one component of tax the Government earns income from and by no means the main reason behind PNG being broke.

So the questions is has PNG's overall revenue significantly been affected by world commodity prices?

In 2012 PNG's total revenue was K9.57 Billion. 
2013 K9.8 Billion
2014 K11.5 Billion
2015 K11.0 Billion
2016 K10.7 Billion* 

*estimate according to 2016 mid year budget report. 

While Mining & Petroleum Tax has decreased significantly however PNG Government's overall revenue has increased, proving O'Neil is lying. 

So back to the question why are we broke then? 
Whether or not you end up broke or face a financial crisis depends on how much funds you have and earn and how much funds you owe and spend. If you spend more than you have or earn then you can expect to end up broke and struggle to survive or repay your debts. 

In 2008 the Somare Government's total revenue was only 7.0 Billion and it spent K7.5 Billion resulting in a deficit of K500 million. 

In 2009 following the worse global financial crisis in recent history and world commodity prices falling to record lows PNG Government's revenue fell to K6.65 Billion. It spent K6.68 Billion, resulting in deficit of K36 million. However we were never broke from it. 

When Government spends more than it earns it's referred to as a deficit (shortage from overspending). When it earns more than it spends than it's referred to as a surplus (resulting in excess funds).

Every year in the month of November the Government is required to prepare and present a National Budget to parliament to explain how much funds it expects to earn (collect in taxes) from the following year and how it intents to spend it.

If it intends to overspend what it expects to earn than it will hand down a deficit budget. While a surplus budget is to spend less than it expects to earn. 

Where it plans to spend only what is earns than it's referred to as "balanced budget." Balancing what you earn and with what you spend. 

On account all income collected by the Government actually belongs to the people the PNG Constitution imposes an obligation on the Government not to spend a single toea unless it is provided for in the National Budget. The budget is tabled on the floor of parliament to ensure transparency and accountability. Not even the Prime Minister has the powers to spend Government funds unless it is provided for in the National Budget. 

So what happens if the Government decides in the middle of the year that it needs to spend additional funds that are not included in the budget? Or if it hands down a balanced budget and halfway through the year realises revenue is significantly higher or lower than it budgeted for? 

It will pass what is called a supplementary (revised) budget in an effort to either 1) reduce budgeted spending on account revenue will be less or 2) provide for increased spending due to unexpectedly higher revenue than initially projected. 

Lets compare 5 years (2007-20011) under Somare Government and 5 years (2012-2016) under O'Neill Government. 

Somare Government Budget Record 
Revenue less Spending = (Deficit) / Surplus 
2007 K7.0 Billion - K6.5 Billion = K476 million
2008 K7.0 Billion - K7.5 Billion = (K478 million)
2009 K6.6 Billion - K6.6 Billion = (K36 million)
2010 K8.3 Billion - K8.1 Billion = K183 million
2011 K7.07 Billion - K7.55 Billion = (K63.7 million)

It is important to note O'Neill illegally removed Somare in August 2011 and passed a supplementary budget to spent an additional K500 million. Had Somare remained in power his Government would have recorded a record surplus of K536 million and not the deficit of K63.7 million. 

O'Neill Government Budget Record 
Revenue / Spending = (Deficit) / Surplus
2012 K9.7 Billion - K10.0 Billion = (K340 million)
2013 K9.8 Billion - K12.5 Billion = (K2.67 Billion)
2014 K11.5 Billion - K14.5 Billion = (K3.0 Billion)
2015 K11.0 Billion - K13.5 Billion = (K2.5 Billion)
2016 K10.7 Billion - K14.7 Billion = (K4.0 Billion)

In comparison Somare's careful spending over five years resulted in a K681 million surplus. While O'Neill enjoying record revenue from Somare's Government economic polices since 2002 has racked up record deficit / overspending of (K12.5 Billion). 

Last year November O'Neill Government passed a further K1.9 Billion deficit budget for 2017. Based on previous trends this will blow out to K2.5 Billion bringing a total of K15 Billion deficit. 

So PNG is broke not because of the fall in world commodity prices, but because of O'Neill's mishandling of the economy and reckless spending on inflated contracts. For example less than one kilometre roads that are suppose to cost K1 million to construct O'Neill Government is happy to use the people's money to pay K77 million, more than 77 times the real cost.

You are probably wondering how do you spend more money than you earn? 
There are three options to meet the shortfall in revenue 1) use any previous years savings/cash reserves 2) take out a loan; or 3) a combination of both savings and borrowed funds. 

In 2011 under Somare Goverment PNG's total debt was K7.4 Billion. In the past five years O'Neill has ran up the country's debt to K22 Billion. On account he has deliberately kept massive loans off the budget record example K6 Billion China Eximm Bank Loan and K3 Billion UBS loan PNG's true debt maybe closer to K30 Billion.

O'Neill has borrowed to a point it has run out of options to borrow further. It tried to raise K3 Billion through the sale of a sovereign bond on the international financial market, however it ended up being a complete failure given PNG's poor governance record no international financiers would take the risk. 

In summary our Government is so broke it is refusing to pay service providers, its free education policy has failed and its struggling to pay public servants salary each fortnight. 

The only people that aren't broke are Members of Parliament, notably Ministers in O'Neill Government and those who benefit from being awarded mulit-million Kina inflated contracts by O'Neill. Meanwhile the hospitals, schools, overseas missions, and even the public service are struggling to operate. 

So what now? 
Well what would you do if you were broke, neck deep in debt and can no longer borrow further funds? You start selling off what you own. 

So O'Neill is now trying to sell off important key State (peoples) assets - Air Nuigni, PNG Power, Telikom etc. It has also increased the tax rate passing the burden to everyday people to make up for his Government's overspending. 

So can the problem be fixed? 
The short answer is Yes but we first have to ensure O'Neill Government is removed from office and pave the way to go after those who have enriched themselves on the peoples money.


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