Case 5.3 – Sovereign Wealth Fund

Case 5.3 – Sovereign Wealth Fund

Papua New Guinea’s Sovereign Wealth Fund, developed in anticipation of the country’s expected income from resource projects, especially the PNG LNG project was first introduced in a Parliament sitting in 2010 by the then Prime Minister Sir Michael Somare where he promised a robust framework for effective and transparent governance of future revenues from the PNG LNG project (Kolma, The National, 2010). Estimated to receive around K75 Billion (US$30 Billion) making it the 26th largest SWF in the world, the Sovereign Wealth Fund will be managed in Papua New Guinea but invested offshore (Business Advantage PNG, 2014).

Government departments such as the Department of Treasury and the Bank of Papua New Guinea (BPNG) underwent research and studied models of other foreign SWFs for a possible SWF in Papua New Guinea where they concluded that fiscal discipline, independent management and prudent investment strategies are important in the success of SWFs in meeting their stated objectives and functions. This subsequently led to the Sovereign Wealth Fund Discussion Paper, a discussion paper jointly compiled by the Department of Treasury and Bank of Papua New Guinea which stressed on the importance of the objectives and functions. In 2011 the members of the Technical Working Committee consulted peers from Mongolia and Chile on how to establish an SWF. Regional forums were held in Kokopo, Alotau, Lae and Mt Hagen to alert the public to the SWF Bill.

The Constitution under section 212A provides for the establishment of the Sovereign Wealth Fund and further calls for the establishment of an Organic Law under section 212A (2) to set out the finer details of the SWF. The Organic Law of the Sovereign Wealth Fund 2012was established which outlined the procedures and processes of the Sovereign Wealth Fund but was defective due to a procedural error and had to be altered to correct the irregularities. This led to the enactment of the Organic Law of the Sovereign Wealth Fund of 2015 which repealed and replaced the former Organic Law and contain significant changes to that of the former organic law. For instance, in the former version the SWF consisted of a Development Fund whereas in the newer version, the Development Fund was replaced with the Savings Fund in order to deal with issues of intergenerational equity.

Zanie Theron, the Managing Partner of accounting firm KPMG currently overlooking the appointment of the SWF Board said the organic law relating to the Sovereign Wealth Fund stipulates that a large portion of the revenue is to come from extractive industry sector taxes (James, Business Advantage PNG, 2017). The Papua New Guinea Extractive Industry Transparency Initiative (PNG EITI), an organisation based on promoting transparency and accountability in the mining sector announced in 2017 that the SWF will be featured in the annual PNG EITI report (Post Courier, 2017).

When PNG began exporting LNG in 2014 the SWF had yet to be established, despite the passing of the Organic Law for the establishment of Sovereign Wealth Fund in early 2012 (Osborne, Australian National University Development Policy Blog, 2014). In November 2016, the Government announced that it engaged an independent firm to recruit suitable candidates to sit on the Sovereign Wealth Fund board, which will begin its work in early 2017 (Mou, Loop PNG, 2016). But the recruitment drive to get the new SWF board membership is now delayed due to challenges facing the accounting firm KPMG, says the BPNG governor Loi Bakani (Albaniel, Post-Courier, 2017). In September 2016, the Bank of Papua New Guinea (BPNG) stated in its monetary statement that it is seeking technical assistance to set up the Sovereign Wealth Fund administrative secretariat (Yapumi, PNG Loop, 2016). BPNG announced in 2017 that the World Bank will be assisting in establishing the Papua New Guinea Sovereign Wealth Fund Secretariat (Albaniel, Post Courier, 2017).

Zanie Theron expressed confidence in the 2019 National Government Budget pointing out an improving economic outlook. She further stated that the Government plans to operationalise the Sovereign Wealth Fund after the appointment of the inaugural Board in 2019, while recognising that it will not be fully operational until the required fund balances have been built up. The economic benefits of APEC are expected to be mainly in the areas of beneficial international trade and tax policies, as well as direct infrastructure development support (Theron, Business Advantage PNG, 2018).

The absence of accountability and transparency in the SWF board recruitment process and the failure by the Department of Treasury and the Bank of Papua New Guinea (BPNG) to continue to give the public updates is a cause for concern. In a report by Treasury in December 2017, a Board and Secretariat was to be established in 2018. The SWF bill is one of PNG’s most important legislations after 42 years of independence as it will guarantee the future of the next generation through the collection and savings of windfall revenue from gas and mineral exports. As of December 2018, the SWF Board and Secretariat are yet to be established and the exact date of establishment is yet to be confirmed.

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~ Reference/Bibliography ~

Kolma, F. (2010, July 15). The workings of the sovereign wealth fund. The National. Retrieved from https://www.thenational.com.pg/the-workings-of-sovereign-wealth-funds/

Papua New Guinea Sovereign Wealth Fund coming in the nick of time. Business Advantage PNG. (2013, September 25). Retrieved from https://www.businessadvantagepng.com/papua-new-guinea-sovereign-wealth-fund-coming-in-a-nick-of-time/

James, D. (2018, February 6). Sovereign wealth fund at least a year away. Business Advantage PNG. Retrieved from https://www.businessadvantagepng.com/sovereign-wealth-fund-at-least-a-year-away-says-kpmg-head/

Fund to feature in PNGEITI Report. Post Courier. (2017, July 13). Retrieved from https://postcourier.com.pg/fund-feature-pngeiti-report/

Osborne, D. (2014, October 28). What has happened to Papua New Guinea’s Sovereign Wealth Fund? ANU Development Policy Blog. Retrieved from http://devpolicy.org/what-has-happened-to-papua-new-guineas-sovereign-wealth-fund-20141028/

Mou, F. (2016, November 2). Government to announce SWF board in 2016. PNG Loop. Retrieved from http://www.looppng.com/content/government-announce-swf-board-2017

Albaniel, R. (2017, May 14). World Bank to assist PNG SWF. Post Courier. Retrieved from https://postcourier.com.pg/world-bank-assist-png-swf/

Yapumi, C. (2016, October 5). Government to enact the Sovereign Wealth Fund secretariat. PNG Loop. Retrieved from http://www.looppng.com/tags/png-sovereign-wealth-fund

Theron, Z. (2018, November 21). Analysis: Papua New Guinea National Budget reflects improving outlook in 2019. Business Advantage PNG. Retrieved from https://www.businessadvantagepng.com/analysis-papua-new-guinea-national-budget-reflects-improving-outlook-in-2019/