Papua New Guinea’s struggle to start a sovereign wealth fund demonstrates the difficulties facing resource-endowed least developed countries (LDCs) seeking to put their wealth to good use. Major obstacles are political will, technical know-how, and defining a clear purpose and vision. PNG is still some years away from achieving the right environment for a successful SWF, but if it waits too long it runs the risk of frittering away a resource endowment that could underpin fiscal stability and bolster economic development.
PNG’s sovereign wealth fund was proposed over a decade ago to reinvest revenue from liquefied natural gas exports to support government finances and avoid the “Dutch disease”. Last week, the country’s former deputy prime minister Don Polye urged Prime Minister James Marape to revive the plans during a parliamentary debate on financing a Covid-19 economic stimulus package.
The government of Prime Minister Sir Michael Somare – under which Polye served as his deputy – spearheaded the moves to create a SWF in 2010, which would receive US$30 billion of income from the exploitation of natural resources – making it about the current size of Malaysia’s Khazanah and Russia’s RDIF. The framework of an SWF with a development mandate was outlined in legislation passed in 2012, but was halted due to irregularities that cast doubt on the legitimacy of the legal framework.
After PNG began exporting LNG in 2014, the government made another attempt to launch an SWF in 2015, focusing on inter-generational savings. Yet again, the plans met with obstacles with delays in the recruitment process due to the absence of accountability and transparency and the fact that revenue to the government from LNG exports was not expected until 2021 at the earliest. The struggle to establish an SWF came amid a backdrop of political crisis and disputed elections.
PNG’s LNG exports are growing rapidly and in 2020 it produced LNG at a record rate of 8.8 million tonnes per annum, 28% above its design capacity, due to long-term contracts and growth in spot markets. Yet, there is no sign that an SWF will be in place any time soon to capture the wealth generated by gas production.
A Familiar Story of Struggle
The country’s slow pace of establishing an SWF not unique with similar challenges seen in other countries where governments are seeking to develop resource-backed SWFs. In addition to institutional weaknesses that complicate the ability to formulate a governance structure with adequate levels of transparency and accountability, there are political demands for wealth to be spent immediately to reduce the external debt burden or invest in economic development.
The challenges facing PNG are similar to those facing Mozambique. The Southern African country has been cursed with civil unrest since huge gas reserves were discovered in the North of the country. Global SWF has also drawn attention to potential long-term doubts over the commercial viability of its massive offshore Rovuma basin due to slowing demand growth, delayed extraction and commercialization, and increased global liquefaction capacity likely to soften prices and undermine revenue targets. At the same time, pressure is growing to use gas resources to bring down Mozambique faces high debt servicing costs, as well as to develop the troubled northern regions that have seen far slower development than the south since the end of civil war in 1992.
Even when funds are established, they can take years to come into full operation. Guyana’s Natural Resource Fund (NRF) was launched in 2019 to manage the country’s petroleum revenues, making the country one of the few in the world to have created legislation to establish an SWF in the context of managing expected revenue windfall ahead of its first oil extraction. Yet, it is yet to start investing and has been slow to implement transparency and oversight measures in the Natural Resource Fund Act, which established the fund.
The election of a new government last year under President Irfaan Ali led to a shift in priorities and a push to amend the laws establishing the SWF with a desire to put national economic development ahead of inter-generational savings. Indeed, Ali recently eschewed the IMF’s suggestion of a Norway model, which would split oil revenue between foreign investments for long-term savings and a domestic investment mandate, due to the dire need for development. He said, “What we have to understand is that Norway adopted that model after the country has a certain level of infrastructure; a certain level of service, a certain level of development, and this is key.”
Nigeria’s NSIA: Showing the Way
There are, however, some recent successes in SWF development in LDCs. Rwanda’s US$200 million Agaciro Development Fund is transitioning from being a small-scale fund based on donations and contributions from civil service salaries to a more mature state-owned investor, under a board drawn from domestic and international talent. It has taken nine years since its founding to get to a point where it is moving to the next level, to become a weightier strategic investor. Rwanda also benefits from being politically unified behind the administration of President Paul Kagame, eliminating the political risks that come with changes of government as well as institutional weaknesses.
Nigeria’s NSIA has also gone a long way to fulfil its three-part mandate to provide fiscal stability, strategic investment, and inter-generational savings. Recent fund growth and healthy returns were the result of a lengthy process of establishment of good governance, transparency and oversight – and the fund is still evolving and developing its sophistication 10 years after its establishment. Part of the reason for its growing success is the political consensus behind its multifacted purpose, which helps it overcome the more fractious political debates that have encumbered the development of funds in PNG and Guyana.
In an interview with Global SWF this month, NSIA’s CEO Uche Orji explained the characteristics of a well-run fund, “Since NSIA’s beginning, its main characteristics have been the clarity of its establishment act and structure, including a solid withdrawal mechanism; the independence and transparency, including the hiring process of all the staff; our risk aversion, with no losses since the start of the fund; and our internal culture where everyone is encouraged to contribute.”
PNG may take some more years to find the political will and technical know-how to emulate NSIA. While its challenges are not unique, a lengthy process delays the ability of the state to capture wealth that is being created right now and put it to a greater purpose. For politicians in a country with a fractious political landscape, the temptation to spend that wealth immediately may well overwhelm the impetus to build a rainy-day fund that may not feel its full effects until after they leave power.