State of IPBC and SOEs

Parliamentary Statement on IPBC and State-Owned Enterprises
Tuesday 06 September 2011

 

Mr Speaker

Hon Arthur Somare has repeatedly told the nation that the state-owned enterprises are performing fabulously as a
result of his policies and actions. Nothing could be further from the truth. All are grossly under-capitalised. Some
are bumbling along. Others are dead, but refusing to fall down.

Arthur Somare mutated IPBC into an octopus, with tentacles everywhere. This weakened the central role of IPBC
from being a house of rehabilitation to a warehouse storing junk. He turned IPBC into a petroleum house in
competition with Exxon, Oil Search and Petromin.

Arthur Somare, usurping Treasury and other functional departments, created a Department of Public Enterprises to
dabble in public policy – everything from sovereign wealth funds to his famous PPP pronouncements, and even
macroeconomic modeling.

The Somare regime concentrated power in the Kitchen Cabinet, increased its level of discretion over the people’s
assets, and hid behind a veil of secrecy.

The O’Neill-Namah Government has acted decisively to end this culture. It is my job as Minister to restore open,
honest governance to the operations of IPBC. This commitment was given to the people of Papua New Guinea by
the Prime Minister and I am determined to play my part to achieve this goal.

My first priority was to bring fresh blood to the IPBC; to open the windows and allow the air to ventilate. This is the
first step in restoring openness, integrity and accountability to the IPBC.

My next priority will be to attend to serious issues facing power supply, telecommunications and ports. These
utilities are vital to support social and economic development. We cannot ignore the state they are in any longer.
The public enterprises that are bumbling along will be largely left to bumble, with attention paid to their governance
and to ensure that they do not join the queue of the walking dead.

1. The institutional culture of the IPBC
Decisive action has already been taken to change the institutional culture of the IPBC.

Managing Director
Glenn Blake was paying himself millions of kina a year illegally. His contract had not been approved by the Salaries
and Conditions Monitoring Committee. This breach constituted misconduct in office under the law and NEC took a
decision to dismiss him.

NEC then appointed Mr Thomas Abe as the new Managing Director.

The position was publicly advertised so as to demonstrate the Government’s commitment to transparency and
desire to get the best qualified person for the job. Mr Abe was selected from a large field of candidates; the
assessment of all candidates was undertaken by an independent, professional recruitment firm.

Mr Abe’s track record as a public servant is exemplary. He is extremely well qualified for the position, having
previously worked in Foreign Affairs, Trade, IPA, Treasury and ICCC. His seven years as head of ICCC give him a
unique insight into the regulatory framework for public enterprises.

Papua New Guinea can thank Mr Abe for revolutionising people’s lives through access to telecommunications. It
was his fearless stance against the Somare Government and his resolution to follow the law that allowed Digicel to
continue operations and expand throughout the country. Through his work at ICCC Mr Abe became known and
respected in the private sector.

Board
NEC has appointed Dr Thomas Webster, the Director of the National Research Institute as Chairman of IPBC. Dr
Webster is highly regarded throughout Papua New Guinea, through his insightful research and comments on public
issues and public policy-making.

The terms of the previous members of the board expired in early August. It was important to have a new Board in
place immediately so that the work of monitoring of state enterprises and rehabilitation of a number of them can
start.

Other board members appointed include Ms Felecia Dobunaba, Mr Peter Aitsi (the nominee of Transparency
International) and Mr Aho Baliki (the nominee of the Institute of Bankers). Two more members to represent the
Institute of Directors and the PNG Chamber of Commerce will be appointed shortly. The full board also comprises
three ex-officio members – the Managing Director, the Secretary for Treasury and the Secretary for Justice.

2. Tackling systemic problems
We need to recognise that the system for overseeing public enterprises has become rotten. In particular there has
been a concentration of power in a few hands, growing discretion over public finances and very little transparency.
Monopoly of power
The IPBC Act bears the scars of systemic corruption. (A copy of the Act is now available on the IPBC website.)

  •  The Somare regime introduced amendments that systematically stripped the transparency and                                   accountability provisions in the original Act, and reduced the independence of the Board.
  • The Somare regime introduced amendments that concentrated powers in the hands of the Minister and left  the IPBC      vulnerable to political interference.
  • The Somare regime introduced amendments that sidelined the Treasury and Auditor-General in their oversight of              the IPBC, while at the same time giving additional financial and borrowing powers to the Corporation.

Amendments to repair this damage will be brought to Parliament in due course.

As well as concentrating power in the hands of a few cronies, the Somare regime systematically excluded the
interests of ordinary Papua New Guineans.

Subsidies are sometimes needed to get services out into rural areas – to pay for community service obligations.3
In 2002, when I was Prime Minister, legislation was passed to set up a Community Services Trust to help the
Government to decide on the level of community service obligation and then to ensure that budget-funded subsidies
would be delivered accurately and transparently.

The Somare regime didn’t like this idea, so it repealed the Community Services Trust Act. Result – poor and
deteriorating services in rural areas.

It is my strong view that people, as well as the Government, should benefit financially from the dividends and sale
proceeds from public assets.

When assets were vested with the IPBC in 2002, clear instructions were given to establish a special trust, containing
around 10% of the shares in public enterprises, and to distribute the dividends and share the sale proceeds with
ordinary people through local level governments.

The Somare regime didn’t like this idea either, so it repealed the Peoples Unit Trust provisions of the original IPBC
Act. Result – no participation by ordinary people in the benefits and rewards of PPP.

These policies will be revisited by the O’Neill-Namah Government to ensure that services extend to rural areas and
people benefit.

Discretion
A second area of systemic corruption is the extraordinary discretion that Arthur Somare and Glenn Blake had over
public funds.

One of the key questions that I have been asking Arthur Somare over the years was about what has happened to the
dividends from our public enterprises.

According to the 2010 audited accounts, IPBC did pay dividends to the State – 85 million Kina in 2009 and 72 million
Kina in 2010. But these are not recorded in the Annual Budgets, so Parliament did not agree on how they were used.
So where did they go?

According to the IPBC’s financial statements:

  • 15 million kina was used to pay for the ICT policy – a personal act of retribution by Arthur Somare against theICCC for introducing competition in mobile phones.
  • 109 million kina was used to pay for MRDC’s cash calls and 36 million Kina was used to pay for LNGdevelopment costs.

These are public funds, not Arthur Somare’s private piggy bank to use as he wishes.
Mr Speaker, it is frightening that so much public money has been in the hands of a minister who displayed so little
regard for his responsibilities to the nation in handling public money.
From now on, IPBC will agree a dividend policy with Treasury, and dividends from the Corporation will be paid into
the Waigani Public Account.

Transparency
A third area of systemic corruption has been the lack of transparency.
The operations of IPBC under Arthur Somare and Glenn Blake operated under a thick veil of secrecy. The
amendments to the IPBC Act that Arthur championed stripped IPBC of transparency and accountability.4
Yet the IPBC Act, despite its weaknesses, sets out some very clear corporate requirements, most of which have been
ignored.

One is that majority public enterprises and IPBC must have Annual Plans approved the IPBC and NEC (respectively).
These plans have never been made public. Starting with the 2012 Annual Plans, this will change.

Another is that the IPBC’s financial statements must be submitted to the Auditor before the end of March. Original
provisions in the IPBC Act that required the accounts to be published and tabled in Parliament were removed.
Shocking; suspicious. Again, this will be changed.

I can report that audited accounts for 2010 were signed off by the Auditor-General at the end of June 2011.
Although the Auditor-General has not qualified the accounts, he has highlighted some areas of concern, including:

  •  The management of IPBC, without Board approval, invested 31 million Kina in Lehman Brothers just beforethe Global Financial Crisis. All the money has been lost.
  • The IPBC accounts show a large 1.3 billion Kina loan to the National Petroleum Corporation, but there is no documentation to verify this.

These are serious concerns and the Board and MD of IPBC will examine them closely.
Mr Speaker, I have also asked the MD to provide an update on public enterprise audits, and what can be done to
improve their timeliness and get them published.

This will help Parliament, and the general public, to see how our public enterprises are performing.

3. State of public enterprises
I will briefly outline the current status of the major public enterprises.

Air Niugini
Air Niugini is in the bumbling along classification, and has identified a number of issues that will help improve
competitiveness and profitability.

On international routes: The two key issues are the cost of maintaining flights on the Japan route, which is leading to
a 30 million Kina per annum loss; and a proposed code-share with Qantas on the Cairns route, which would increase
profits, but which has not been approved by the regulator.

On domestic routes: Many routes are unprofitable and management has suggested that a ‘hub and spoke’ model
would improve efficiency. There is also a proposal to set up a third-tier airline, managed by Air Niugini.

The MD and Board of IPBC will examine these issues in more detail and work through solutions with other
Government agencies, including the ICCC.

The options may include more radical measures, quite different from those suggested by Air Niugini, with immediate
impact in rural areas.

Ports
The big investment issue for the ports sector is the Lae Port development project.
Lae Port handles more than 50% of PNG’s trade and accounts for 43% of PNG Ports Ltd revenues. 5
A major upgrading of the Lae port is currently underway with ADB support. The original cost estimate produced by
the ADB was 154 million US dollars, but this has now blown out to 310 million US dollars.

Additional funding of 157 million US dollars is needed and it is proposed that this will come from a supplementary
ADB loan (of 110 million dollars) and extra Government counterpart funding.
This is a critical funding issue and the IPBC is examining the options.

Telecommunications
The State’s interests in telecommunications are not performing well.
The two biggest issues are:

  • The precarious financial position of BeMobile, brought on by past poor management; an obsession withfighting Digicel in the courts instead of investing in infrastructure and competing; and a reckless 15 millionUS dollar investment in the Solomon Islands.
  • The need to upgrade the country’s telecommunications backbone, with an opportunity to do this throughoptic fibre as part of the construction of the LNG project.
  • The IPBC is examining these issues and options for their solution will be presented to NEC shortly.

Mr Speaker, we need to note that BeMobile represents the Somare regime’s one and only PPP project in the lastnine years. How Arthur trumpeted his PPP toy. Compare the loss-making BeMobile to my PPPs, the mergers ofPNGBC and Bank South Pacific, and Orogen and Oil Search. Do I need to state the obvious conclusion?

Power
PNG Power is struggling financially; power outages are common and there are large capital expenditure
requirements.

  • There are three options being explored to increase power capacity in PNG.
  • The first is to rehabilitate latent capacity in PNG Power.
  • The second is to bring in new partners as Independent Power Providers to add capacity to the system in PortMoresby and Lae.
  • The third is to bring in new partners for major hydroelectric projects, including Yonki, Purari and BrownRiver.

A detailed submission detailing these issues and options for their solution will also be presented to NEC soon.

LNG
Mr Speaker, the IPBC, through Kroton, is the State’s nominee for a 16.6% interest in the LNG project and is also
financing a 2.8% interest for landowners.

The sums of money involved in participating in a 15 billion US dollar project are huge, and the issues are complex.
Unfortunately, the veil of secrecy that the previous one-man-show operated under, bypassing key agencies such as
the Treasury and the Bank of Papua New Guinea has resulted in the State finding itself in a precarious position, with
national interests insufficiently protected.

As an urgent task I am unraveling the complex web of problems we face to find solutions, and will make a detailed
statement on the State’s participation in the LNG project in due course. I am confident that we can put the State’s
and landowners’ interests back on track in this vital national project soon.
Conclusion

Mr Speaker, in the short time the O’Neill-Namah Government has, I am determined to find solutions and effect
change.

We will increase the openness, integrity and accountability of IPBC.

1. The new MD and Board will systematically work through audits, annual plans, investment decisions and
outstanding regulatory issues.

2. Above all we will increase the level of transparency of how public enterprises are being managed and how
they are performing.We will restore policy and oversight functions.

3. The Government will clarify a range of policies for public enterprises, especially for dividends, community
service obligations and regulation. [A Statement on these will be made as part of the 2012 Budget.

4. Legislative amendments will be drafted to strengthen the oversight roles of Parliament, Treasury and the
Auditor-General with respect to public enterprises.

We will address the most pressing problems of public enterprises.

5. IPBC will start addressing the structure, performance and financing needs of public enterprises, using their
annual plans as a basis for analysis and discussion.

6. We will give priority to some of the big issues on power, telecommunications and ports.
The O’Neill-Namah Government has just nine months to rebuild the systems of good governance and, working with
the private sector, to breathe life back into our public enterprises. There is no time to waste.

Mekere Morauta KCMG MP
Member for Moresby North-West and
Minister for Public Enterprises

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