PNG passes record budget, infrastructure biggest beneficiary

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The recently approved 2014 budget for Papua New Guinea (PNG) provided no major policy changes or surprises and is likely to play well to an international investor audience.

The budget, passed by parliament on November 19, sets out spending of PGK15bn ($5.8bn), a 13.8% increase over 2013. Major spending on infrastructure, education and health care is expected to support growth in the long term.

Keystone support

With much of PNG’s infrastructure in need of an upgrade or renewal, around PGK2.7bn ($1bn) will be channelled through the Department of Works, the Independent Public Business Corporation and PNG Power to push expansion of roads, ports, and power and water treatment facilities.

Education received a PGK160m ($61.6m) funding increase to PGK1.5bn ($577.9m). The government’s programme to provide free education from primary through to high school will be a significant recipient, expanding to benefit 18,000 students. Additional support is being directed toward distance learning capacities and the rehabilitation of higher education institutions.

Health care funding also increased, with PGK1.4bn ($539.3m) being funnelled, principally, through the Department of Health and Hospital Management Services to support the upgrade and rehabilitation of 16 national hospitals, as well as the construction of two new facilities in Central and Hela provinces.

Improving PNG’s law and order record remains a national economic priority. Substantial expansions in the recruitment and maintenance of standing forces, infrastructure and facilities in the police and army are backed by a PGK1.3bn ($500.1m) allocation in 2014.

On the other side of the ledger, revenues are expected to rise by 21% to reach PGK12.7bn ($4.9bn). Around three quarters of this amount, some PGK9.7bn ($3.7bn), is set to be collected as taxes, an increase of 13% over 2013.

Around half of this growth will come from “company taxes”, which are projected to hit PGK2.6bn ($1bn), while mining and petroleum taxes are set to rise by PGK186.1m ($71.7m) to PGK1bn ($385.2m). A larger jump in mining and petroleum taxes is forecast for 2015, following the launch of operations at the liquefied natural gas (LNG) facility, which is expected in late 2014.

Critics respond

The budget deficit of PGK2.3bn ($886m), equivalent to 5.9% of GDP, would bring public debt to PGK14bn ($5.4bn) and has been criticised by opposition members of parliament.

The state plans to finance the shortfall through a combination of loans from international development agencies as well as domestic borrowing, according to the treasury minister, Don Polye.

Beyond the issue of the deficit, others have noted that the government may encounter some difficulties in carrying out its plans.

As Aaron Batten, PNG country economist for the Asian Development Bank (ADB), commented in a recent statement, “While the government's increasing prioritisation of expenditure towards key development enablers of infrastructure, education, health, and law and order is welcome news, the real challenge for 2014 will be one of implementation.”

PNG has a history of shortfalls in capacity to administer and manage large budgets, particularly at provincial and local levels. The Public Investment Programme, budgeted at $2.4bn in 2013, had its allocation cut to $1.6bn mid-year and just half of this amount had been disbursed as November 2013, the ADB reported.

However, this is an acknowledged issue, and reforms started in 2013 are expected to continue next year, including the development of combined budgets and an expanded financial management system.

Support for the private sector

In parallel, there is a move to enable greater private sector participation. The government is looking to support small businesses, conscious that foreign investors may push local firms out of the market without some measure to protect them in the short term. Accordingly, reforms are being tabled to address competition, the regulatory environment and, separately, changes within state-owned enterprises that will afford greater opportunities to domestic companies.

While PNG’s ambitions are large, they are commensurate with both projected earnings from its LNG facility and the demands of a developing nation. GDP is expected to rise 6.2% in 2014 and 21.2% in 2015, before growth stabilises at around 3% per year to 2018. The challenges are substantial, yet the 2014 budget is a continuation of current economic strategy, delivering key investments that support inclusive and sustainable growth.

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