High stakes

PAPUA New Guinea is approaching another turning point as policy-makers decide what approach to take with the PNG LNG-linked sovereign wealth fund.
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Published in the August 2013 PNG Report magazine

Construction of the marine jetty for the LNG plant. First exports from PNG LNG are expected in 2014.

There have already been some surprises to emerge from the National Executive Council earlier this year. The most notable so far was the aim to restructure the ownership of all state assets.

Following reports that state-owned Petromin PNG Holdings was going to be disbanded, Prime Minister Peter O'Neill was forced to confirm that there were plans to transfer all state assets into the new entities of Kumul Mining, Kumul Petroleum and Kumul Holdings.

On top of these companies was expected to be the Kumul Trust, which would have O'Neill as trustee and former PNG prime ministers as shareholders.

The potential value of such centralised assets may come as a surprise. In the case that Kumul Petroleum holds all of the government's petroleum assets, including its significant stake in the PNG LNG project, some believe it may host as much as a $US9 billion price tag.

And if the project is expanded from its existing two-train scope to four trains in coming years, the estimate for Kumul Petroleum's worth may jump as high as $20 billion.

When considering the value of the other Kumul entities, with Kumul Holdings flagged to own a myriad of state-owned enterprises such as PNG Ports, PNG Power and Air Niugini, the Kumul Trust could end up big enough to sit in the middle of the existing league of sovereign wealth funds in its own right.

Bills concerning the Kumul plans are expected to be tabled in parliament in September, curiously, at the same time as the bills expected for the PNG LNG revenue-fuelled Sovereign Wealth Fund.

In June, Institute of National Affairs PNG executive director Paul Barker told this reporter that cabinet was talking about tabling all of these proposals together and "making a link up".

"I'm not sure they've really fully clarified in their minds how that is going to occur," Barker said at the time.

"The Kumul Trust should certainly not be managing the sovereign wealth fund and I think that's what some people have in mind - the management of Kumul Holdings would have a say in the board and administration of the sovereign wealth fund.

"That would severely run against the governance criteria that are essential for the Sovereign Wealth Fund to have credibility and to perform."

Transparency International PNG chairman Lawrence Stephens wants to know who may end up controlling the Sovereign Wealth Fund.

He already has issues with the proposed Kumul Trust framework.

"The suggestion that Ex PMs should be automatically qualified, therefore, to be entrusted with the wealth of the people, is not really reasonable from my point of view," Stephens told PNG Report.

"There is genuine concern that we have not protected the funds of the people of PNG adequately in the past. We are constantly hearing reports of funds being misappropriated, or mislaid, and we are concerned the same scenario could continue into the future," he said.

Perhaps an ominous sign of what may come are the recent moves by the O'Neill-led Coalition to reduce sitting days and make it more difficult to launch a vote of no-confidence, with the first reading of the two constitutional amendments passed in July.

"We share concerns of many other people in PNG that the manner in which constitutional changes are being pushed through parliament is wrong, in fact, very wrong," Stephens said.

"The opportunities for people to discuss changes to the constitution are simply not readily available and there is great concern at efforts to speak of ‘stability', as if that removes the responsibility for answerability."

The increasing centralisation of power in O'Neill, ahead of plans to centralise control over state assets and introduce amendments to the Sovereign Wealth Fund legislation passed last year, has not gone unnoticed overseas.

"How the proposed Kumul reforms link to the Sovereign Wealth Fund is for the PNG government to decide," Australia's Parliamentary Secretary for Pacific Island Affairs, Matt Thistlethwaite, told PNG Report.

"The Australian government is encouraged by public comments made by PNG Treasurer Don Polye recently about the need for good governance and transparency in relation to the Sovereign Wealth Fund."

Australian assistance on the establishment of PNG's Sovereign Wealth Fund has so far emphasised the importance of adhering to the internationally endorsed Sanitago Principles.

These rules are designed to minimise the kind of misappropriation that occurred in Africa with a World Bank-assisted oil fund, which was compromised in 2005 to allow for significant weapon purchases by the Chad government.

"It is important that the fund has articulated structures of transparency and accountability for the government and Sovereign Wealth Fund, including that the board is independent in its investment decisions and ensures spending from the Sovereign Wealth Fund is fully integrated into the budget," Thistlethwaite said.

"It would be difficult for Australia to continue providing assistance to a sovereign wealth fund that does not adhere to these standards of good governance and transparency."

While it is not clear what road will be taken, any Kumul Trust link to PNG's Sovereign Wealth Fund is guaranteed to fail the independence test, with O'Neill's government already having the Ex PMs of Sir Michael Somare, Paias Wingti and Sir Julius Chan in its ranks.

But whether the government is concerned about triggering international scorn is really another matter.

With first exports from the ExxonMobil-led PNG LNG project expected next year, the final formulation of the nation's first Sovereign Wealth Fund could be complete in the coming months.


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