Chapter 18. Privatization Policy in Papua New Guinea

In its short history as an independent state, Papua New Guinea has gone full circle, from a mostly private enterprise economy through state capitalism and back to private enterprise, much more rapidly than many developed countries. In 1975 its public enterprise sector was quite small, and broadly limited to the classical public utilities of electricity, water and sewerage, transport (airways and harbours), posts and telecommunications, and central banking. Shortly before independence, the government acquired the local banking network of the Commonwealth Bank of Australia, renamed the Papua New Guinea Banking Corporation (PNGBC). In addition, the new government owned the Papua New Guinea Development Bank and the Investment Corporation. However by 1981 the central government had acquired direct interests in 34 public enterprises (with at least 49 per cent ownership in 28 of them), and indirect controlling interests in another 23 companies through the Development Bank and the Investment Corporation (Trebilcock 1982, 4). Similarly, while in 1975 the government had equity of 20 per cent in one mine (Bougainville Copper Ltd), in 1979–80 it took up 20 per cent in Ok Tedi Mining Ltd, and announced its intention to take up 10 per cent in the Porgera gold prospect. In 1986 it took up 20 per cent in the smaller gold mine at Misima, and from 1992 it held 22.5 per cent in the Kutubu, Gobe, and Moran oilfields; an initial 30 per cent in Lihir Gold was acquired in 1995.

As described below, various governments culminating in that of Sir Mekere Morauta (1999–2002) had succeeded in divesting themselves of most of this rather large portfolio of wholly or partly publicly-owned enterprises, so that by 2002 they had transferred the state's holdings in almost all mining and petroleum projects either to landowners and provincial governments in project areas or to Oil Search Ltd, and most of its shareholdings in oil palm plantations and other non-mining companies had also been sold. By July 2002 the Morauta government had also completed sale of PNGBC to the private sector bank, Bank of South Pacific, and had established a framework for privatizing Air Niugini, PNG Power (formerly Elcom, the Electricity Commission), Telikom PNG, and the Harbours Board through a holding entity, the Independent Public Business Corporation (IPBC), but since then the Somare government (July 2002 to 2007) has stalled this process (see below).

The justifications usually advanced for the kind of expansion of the public enterprise sector that had occurred in Papua New Guinea in its first few years of independence included the argument that certain activities generate social benefits to the wider community greater than the benefits accruing to their private owners, with the implication that the private owners would not expand the activity to a scale commensurate with the potential social benefits. This argument had considerable force in the case of services like education and health, where inability of a proportion of the community to meet the costs of provision could lead to under-provision by the private sector, but was used more questionably to justify nationalizations, like those of the privately-owned copper mining industry in Zambia in 1970 (Faber and Potter 1971).^[2]

Another commonly used argument for public ownership in Papua New Guinea was as a means of controlling ‘natural monopolies’, that is those industries where ‘the total market can be served at lowest cost by a single firm’, because of declining marginal costs (Trebilcock 1982, 8). Airlines are classic examples of falling-cost industries, as the Australian experience of recurrent collapses of Qantas’s fare-cutting competitors demonstrates.^[3] In Papua New Guinea telecommunications and electricity were also deemed to be ‘natural’ (i.e. falling cost) monopolies, without any evidence being advanced that this was indeed the case, given that the manifestly small domestic markets for these industries made it unlikely that they could achieve the economies of scale that lead to declining unit costs. After 1980 there was deregulation and privatization of state-owned telecommunications and power industries in many countries, led by Britain and New Zealand, but the regular demise of new entrants (like that of OneTel in Australia in 2001) suggests these industries may indeed be natural monopolies. Irrespective of the existence of falling costs, Papua New Guinea’s telecommunications and electric power undertakings continue to enjoy statutory monopoly status, which still prevents new entrants to these industries.

Other arguments for expanding public ownership in Papua New Guinea included replacement of ‘inappropriate’ foreign ownership in cases where that was perceived to favour overly capital-intensive technologies, and a supposed need for government to be a direct participant in certain industries as a means of obtaining information needed to monitor the private sector participants, for example, logging (Trebilcock 1982, 9–11). In practice the government’s joint ventures with various logging firms at Stettin Bay, Gogol, and Open Bay never yielded the expected inside information on transfer pricing and other unacceptable activities, perhaps because of the inevitable conflict of interest for the government in its roles as both shareholder and tax collector – a conflict present in all firms in which governments have shareholdings. Under Papua New Guinea’s Companies Act, the government directors on the boards of companies in which it had shares had a primary fiduciary duty to all the shareholders of companies like Bougainville Copper and Stettin Bay Lumber, not just the government, and that duty would quite naturally include seeking to maximize company profits, irrespective of environmental costs, and to minimize taxes. The Papua New Guinea government’s equity in Bougainville Copper Ltd, the Porgera Joint Venture, and Ok Tedi Mining Ltd created a striking conflict of interest in regard to the environmental impacts of those mines.