PNG: Economic slowdown caused by declining production in the extractive sector

Papua New Guinea’s economy slowed down to 2% in 2016 as oil production declined. This is a sharp decline from 10.5% growth in 2015. The 2016 PNG EITI Report explains that the economic slowdown was a result of declining revenues partly attributable to the closure of the two major mines in the country, namely Ramu Mine and Porgera mine. Overall, the mining and petroleum sectors contributed to 3% of government revenue and 84% of total export value.

Gaps in transparency

The 2016 EITI Report discusses areas where there are transparency gaps in the management of the sector. At the national level, it was not clear how much money were in the trust accounts where royalties and levies from oil and gas are deposited . Trust accounts were created to facilitate payments of extractive revenues to landowners, as well as to invest a portion of such revenues for future generations.  The report notes that while there is evidence of trust account spending in the state budget expenditure, the weak management of trust accounts leaves significant scope for abuse. Furthermore, royalties, development levies and equity shares held by state-owned enterprises are not recorded in the national budget. In most cases, an audit opinion could not be made because of material errors, lack of adequate records and weaknesses in government accounting practices.

At the subnational level, the EITI Report finds that the Treasury does not adequately administer subnational transfers of revenue streams to local governments and landowners. The most recent audit reports indicate serious gaps and inconsistencies with respect to provincial and local-level governments. The determination of proper beneficiaries is problematic, so the funds do not go to the intended beneficiaries or the transfers are usually delayed.  Moreover, some benefits to regions affected by extractive projects are set out in memoranda of understanding (MOA) which are usually not publicly accessible, making monitoring of compliance challenging.   

The EITI Report also notes that mandatory social expenditures are agreed between the state or landowners and operators on a case-by-case basis. Since these agreements are usually confidential, reporting entities refuse to disclose this information. Lack of access to these agreements made it difficult for the report to accurately identify what is a mandatory or discretionary social expenditure in Papua New Guinea.

Identifying ways forward

To address these gaps in transparency, the Papua New Guinea multi-stakeholder group seeks to reform government systems by recommending changes in the way agencies collect data and manage the sector.  The recommendations include revising the Treasury’s budget and fiscal reports to collect information on subnational payments and transfers, and ensuring that the Mineral Resources Authority disclose the agreements executed by companies with landowners and local governments. These recommendations are supported by a directive from government through the National Executive Council which triggered amendments to the Public Finance Management Act (PFMA). As a result, the Ministry of Finance started reviewing all government trust accounts including extractives trust accounts so that they can be migrated to the Integrated Financial Management System (IFMS) for effective monitoring. 

For more information about extractives transparency in PNG, visit PNG's EITI website or see PNG’s country page on eiti.org.

Image: Taro Taylor, flickr.com