DJ. INTERVIEW Sep 22, 2002 By Veronica Brooks
CANBERRA (Dow Jones)--The World Bank remains anxious to see Papua New Guinea's economy dragged out of the mire. But it is willing to give the new coalition government breathing space to tackle a crippling budget deficit. The Washington-based multilateral institution is also realistic about the challenges that confront the South Pacific nation's government as it attempts to salvage an economy in its third year of contraction.
"Clearly, any country that has to govern on such a broad coalition with such diverging views has a major task in simply managing the politics of reform," said Klaus Rohland, the World Bank director for PNG and the Pacific Islands. "That's certainly the challenge for the new prime minister," Rohland told Dow Jones Newswires in an interview Friday. "The good intentions are definitely there."
PNG is resource-rich, with oil, gas and gold mines crucial props for its ailing economy. But endemic corruption, tribal violence and crime continue to prove troublesome for some global resource companies, in turn hindering the nation's financial development.
The Porgera gold mine is the latest example. Power supplies to the project have been disrupted since mid-July as a result of vandalism that has been inspired by PNG's strife-torn general elections. Porgera is 50%-owned by Canada's Placer Dome Inc. (PDG), while Australia's AurionGold Ltd. (A.AOR) and PNG's Oil Search Ltd. (A.OSH) each hold 25%. Lost gold production is estimated to reach 120,000 ounces.
The problems at Porgera are similar in some ways to those faced by Bougainville Copper in 1989 when its power supply was continually sabotaged, forcing its eventual closure amid the secessionist uprising on that particular PNG island. Controlled by Rio Tinto Plc (RTP), Bougainville Copper accounted for 10% of PNG's export income.
The key for PNG's economic revival is a A$6.8 billion project to build a pipeline to connect PNG's vast uncommercialized gas resources to markets in Queensland. But the project has been beset by constant delays as the partners struggle to sign up sufficient customers to underwrite the project.
ExxonMobil Corp. (XOM) is now leading the project after ChevronTexaco Corp. (CVX) failed to get it over the line. The U.S. oil giant has set a deadline for the end of the year to secure customers otherwise the project will miss its 2006 start date and be relegated to the backburner.
ExxonMobil estimates that over the life of the project, the pipeline will add about US$5 billion to PNG's economic output. About US$250 million annually willflow into the country through returns to local participants, tax revenue and royalties to land owners.
While the pipeline is important for PNG's economic development in coming years, the World Bank's Rohland said that PNG's near-term worry is its fiscal deficit,
forecast to rise to 7.7% (US$200 million) of gross domestic product in calendar 2002. Rohland warns this isn't sustainable, though concedes it is difficult to nominate what is an acceptable target for the impoverished nation.
PNG's new prime minister, Michael Somare, has pledged an export-driven recovery. In a precursor to the 2003 annual budget scheduled for November, his finance minister Bart Philemon has unveiled a mini-budget designed to slash spending.
Rohland, who met with Somare and Philemon late last month, said significantly reducing government spending is just the first step needed to stabilize PNG's economic position, though it will hit development spending in the short-term. "That is something that has to happen to get back to a sound fiscal framework," he said. "The medium term challenge for the country is to improve the budget systems and above all budget management," he said.
Privatization Needs Support Of People
Rohland said he is relaxed about the government's decision to suspend its privatization program, which includes national airline Air Niugini,telecommunications operations, and the Harbors Board that manages 16 ports.
He said it is appropriate for the new government to take stock of completed asset sales such as PNG Banking Corp. "Reviewing the major policy decision of the previous government is something that to my mind is quite all right," Rohland said. "We still feel in substance that privatization is the right way to go for the country. But we also feel that when you privatize you need to have a public discussion of what you are doing," he said.
Creating public understanding in PNG about the reasons and benefits of privatization has been lacking in the past, Rohland noted. "To make privatization work, you need broad consensus, broad understanding of the issue," he said.
Public acceptance of selling government assets would give potential buyers comfort that the decisions are supported by the majority of PNG's 5.3 million people.
Rohland stressed it is premature to comment on whether the World Bank will eventually embark on a fresh PNG structural adjustment program.
The World Bank in December disbursed the final tranche in its US$90 million program. It is still funding a number of specific projects including road maintenance and forestry preservation, but has no immediate plans to launch a new program and PNG hasn't requested such assistance.
"The government needs to understand and we need to understand what really has happened; what were the causes for the budget blowout in the middle of 2002."
"The government there really needs to focus on getting its budget management in order. Once this has been done, this would certainly would be an important condition for any financial support."
Rohland and a representative of the International Monetary Fund will meet PNG's Finance Minister and central bank governor next week during the World Bank's annual meeting in Washington.
Rohland said the World Bank is preparing to help the PNG government finance the US$90 million-US$100 million rehabilitation of the Highlands Highway, that connects its mountainous villages with key ports.
"This road is crucial for the country if it wants to return to an economic growth path," Rohland said.
"That is a major project we hope to approve next year. We probably would provide something to the tune of US$30 million to US$40 million," he said.
Financing from other donors may include the governments of Australia and Japan, and the Asian Development Bank.
-By Veronica Brooks, Dow Jones Newswires;
61-2-6208-0901; veronica.brooks@dowjones.com
(Andrew Trounson in Melbourne contributed to this article)
(END) Dow Jones Newswires 22-09-02
(C) Copyright 2002 ODJ
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