Managing the Natural Resource Sector: A Case Study of the Liquefied Natural Gas (LNG) project in Papua New Guinea

This research is a study of the Papua New Guinea (PNG) Liquefied Natural Gas (LNG) project, the country’s biggest single investment in the extractive industry. The focus of the research is on understanding the impact and effect of the project on the country and in particular the distribution of the revenue and the influences on the distribution of the revenue. An additional area that was also looked at was the financial transparency and accountability of these distributions. The research arose in direct response to the fact that Papua New Guinea (PNG), which is well endowed with a wide range of natural resources, does not seem to use its natural wealth effectively to improve the human development of its people. The exploitation of these resources has in fact been associated with recurring fiscal and monetary crises, concentrations of investment in the minerals and petroleum sector, no improvement in the basic public services, and corruption at all levels of government. There has also been a persistent rising level of socio-economic inequality in the immediate communities hosting major resource projects and increasing poverty in the urban areas and pockets of rural areas. The research took a case study approach and used a multi-disciplinary lens by looking at the political, economic and anthropological literature and gleaning from them propositions about the influences on the distribution of revenues. In particular the case was used to investigate propositions related to the “resources curse” hypothesis that, in the absence of good governance, developing country governments are at risk to economic and fiscal mismanagement and corruption from the availability of resource rents from extractive industries. The research gathered evidence from people from project-specific documents made available largely through social media, accessible budget papers, parliamentary proceedings (Hansard), Acts of Parliament, government policy edicts, statements and press releases and websites of key government departments, state owned enterprises and the companies involved in the project, and some interviews of key informants. The Extractive Industry Transparency Initiative (EITI) reports on PNG were also specifically examined. The project has been exporting LNG now since 2014. While the construction of the project had a significant effect on economic growth, wages and prices and the exchange rate, the longer-term effects are more contestable. Returns to the economy and government revenues have been lower than forecast due to lower prices but also the effect of tax concessions and debt servicing leading to flows offshore larger than forecast. The government and landowners were making decisions based on a flawed projection and information to the extent that the government has been unable to sequester any revenues in a Sovereign Wealth Fund. Continued volatility in petroleum prices has affected government budget planning but overoptimistic forecasting of revenues including from the PNG (LNG) project, particularly in 2014-16, led to ballooning deficits. For short-term political reasons, government budgeting has tended to over-commit to new spending during the commodity booms and be forced in the downswings into cutbacks damaging to public services and investment or to rapid increases in broadly defined public debt. Budgets also pre-committed project revenues to new public expenditure project. The key point was the lack of attention being given to the downside risks of revenue projections supplied by the operator. The politics of access to resource rents have played out in the form of relations between local landholders and the government and in how the executive power has been able to structure access to project revenues nationally. The project also has had a destabilizing effect on local society where local-national relations have influenced the national politics of resource rent distribution and conversely have been put under pressure over contestation of the project impacts and access to benefits. Further, landholders have to date not received their full financial entitlements from the project despite the promises being made by successive governments since 2009. There has been ongoing discontent amongst landholders. The lack of transparency about the use of project revenues, particularly those not accruing directly to the Public Account, has contributed to this discontent. The research also found the few key project agreements have been officially released but much information has its way into the public domain via social media. Budget-related information has been more plentiful but the EITI has been hampered by poor financial reporting by public organisations receiving and managing revenues. When project information does enter the public and government is forced to acknowledge it, it can influence how government conducts its business and makes decisions.