Chapter 14
Economic management and state institutions
14.1
Careful and sound management of a country's financial affairs and
business environment is central to its economic development. Good policy coupled
with its effective implementation can maximise benefits to the economy by
ensuring that opportunities for growth are fully exploited and the adverse
effects of external shocks, such as natural disasters, are kept to a minimum.
14.2
In this chapter, the committee looks at the ability of both the
bureaucracy and the policy makers in Pacific island countries to manage the economic
and business affairs of their state. The committee looks at a number of key
aspects to good government—its effectiveness in providing necessary services; managing
a budget, including the collection and allocation of government revenue; and
creating an environment conducive to enterprise and development.
Public administration and economic performance
14.3
Governance and the performance of state institutions is an important
factor in economic growth.[1]
A 2005 Joint Report to the Pacific Islands Forum Secretariat estimated that poor
governance in PNG, Fiji, Solomon Islands, and Nauru 'had resulted in nearly US$75
billion in forgone income in those countries since independence'.[2]
It stated that human capacity constraint is 'becoming increasingly important as
modern requirements of business and government become more complex'. It went
further to indicate that faced with policy and capacity constraints, the
governments of Pacific Island Forum countries experience difficulties meeting
two essential sovereign functions:
14.4
As shown in the following table, recent statistics produced by the World
Bank on matters of governance support these observations.
Table
14.1: Aggregate governance indicators for selected Pacific island countries,
2005–2007[3]
|
Country |
Voice and accountability |
Political stability and
absence of violence |
Government effectiveness |
Regulatory quality |
Rule of law |
Control of corruption |
|
|
per cent rank |
per cent rank |
per cent rank |
per cent rank |
per cent rank |
per cent rank |
|
Year |
'05 |
'06 |
'07 |
'05 |
'06 |
'07 |
'05 |
'06 |
'07 |
'05 |
'06 |
'07 |
'05 |
'06 |
'07 |
'05 |
'06 |
'07 |
|
Cook Islands |
.. |
.. |
.. |
.. |
.. |
.. |
68 |
56 |
44 |
69 |
68 |
55 |
88 |
84 |
67 |
71 |
73 |
83 |
|
Fiji |
56 |
32 |
32 |
61 |
45 |
47 |
54 |
52 |
36 |
40 |
36 |
34 |
52 |
53 |
46 |
36 |
46 |
42 |
|
Kiribati |
57 |
70 |
69 |
98 |
98 |
98 |
36 |
36 |
34 |
17 |
16 |
14 |
74 |
78 |
76 |
62 |
61 |
61 |
|
Nauru |
78 |
80 |
81 |
87 |
88 |
88 |
38 |
9 |
35 |
|
.. |
23 |
71 |
80 |
62 |
|
.. |
50 |
|
PNG |
43 |
50 |
52 |
24 |
23 |
23 |
15 |
22 |
25 |
19 |
24 |
30 |
16 |
20 |
21 |
14 |
13 |
9 |
|
Samoa |
66 |
68 |
67 |
88 |
89 |
89 |
64 |
58 |
49 |
53 |
54 |
52 |
84 |
82 |
82 |
61 |
63 |
64 |
|
Solomon Islands |
52 |
54 |
54 |
55 |
54 |
58 |
30 |
17 |
20 |
14 |
12 |
13 |
19 |
22 |
24 |
58 |
49 |
33 |
|
Tonga |
46 |
47 |
46 |
71 |
64 |
59 |
36 |
29 |
32 |
24 |
22 |
23 |
64 |
66 |
64 |
6 |
5 |
13 |
|
Tuvalu |
70 |
72 |
72 |
98 |
98 |
98 |
57 |
45 |
41 |
34 |
21 |
20 |
89 |
85 |
84 |
55 |
57 |
54 |
|
Vanuatu |
60 |
67 |
60 |
98 |
98 |
98 |
45 |
40 |
45 |
55 |
52 |
33 |
64 |
64 |
68 |
64 |
62 |
63 |
14.5
These governance indicators are based on statistical compilation of
responses on the quality of governance given by a large number of enterprises,
citizen and expert survey respondents in industrial and developing countries. They
show that, consistently, a number of Pacific island countries rate poorly on
some performance indicators, notably government effectiveness, regulatory
quality, rule of law and control of corruption. Again performance varies
greatly between Pacific island countries, with Samoa outshining most other
countries in the region. The Cook Islands and to a lesser extent Vanuatu also
achieved solid rankings in these areas of governance compared with other Pacific
island countries. PNG and Solomon Islands lag well behind. The committee looks
at these governance categories, starting with government effectiveness.
Capacity to deliver essential services
14.6
According to the researchers involved in compiling these statistics, government
effectiveness measures the quality of public services, the quality of the civil
service and the degree of its independence from political pressures. It also
measures the quality of policy formulation and implementation and the credibility
of the government's commitment to such policies.[4]
For 2007, most Pacific island countries registered below the 50th percentile
for government effectiveness. In comparison, Australia scored 97, Japan 89 and
New Zealand 96.
14.7
In its discussion on resources management, the committee highlighted some
of the problems created by under-resourced and under-skilled bureaucracies. While
it noted the potential for Pacific island countries to increase economic
productivity through sustainable development, it also drew attention to governance
and institutional gaps that undermine their ability to do so. This lack of
capacity to manage and develop their resources extended to conservation, data
gathering, reporting, monitoring and enforcement, administration, consultation,
marketing, negotiation and quarantine matters. For example, it noted the
prevalence of illegal or unreported activities in areas such as fishing and
forestry.[5]
14.8
Such unauthorised activities, which often result in a loss to government
revenue, are not confined to these two sectors. The Australia Papua New Guinea
Business Council observed that a large number of illegal foreign workers were
in PNG, many running small trade stores, and it seemed likely that some
companies were operating without appropriate permits and licenses. It urged the
Australian and PNG governments to ensure the Papua New Guinea Internal Revenue
Commission was fully resourced to protect revenue collection.[6]
14.9
The failure of PNG to monitor the movement of goods and their carriers effectively
also creates the potential for loss of revenue. Ms Wimmer, Australian Customs
Service, said that Australian Customs had been 'trying to get the relevant
agencies in Papua New Guinea to work together to do patrols of the border, with
assistance from Australia'. She cited an example where one of those [maritime
border] patrols identified an oil tanker that 'had not paid the relevant duties
or royalties...which in PNG was a significant amount of money'.[7]
14.10
In some cases, the causes of lost revenue to government are difficult to
determine. Dr Lake, AusAID, referred to leaks in Kiribati's current budget
system. She informed the committee that the policy and regulatory frameworks
around its state-owned enterprises are really unfortunate to the extent that
the government itself incurs quite considerable losses that are 'both
uncontrolled or poorly controlled'.[8]
A weakness in administrative capacity resulting in loss of revenue can also be
found in the judicial system in PNG. Ms Lucinda Atkinson, Attorney-General's
Department, explained that 'PNG has an entrenched lack of capacity within its
judicial system, so there are large numbers of backlogged cases and claims
against the state'. She explained:
Often people take advantage of the fact that judges do not
have the time or the resources to properly hear cases, and also the Solicitor-General’s
office is under-resourced in terms of being able to actually attend court hearings.
Often people will take advantage of that and make vexatious claims against the PNG government and, when the Solicitor-General’s office litigators cannot get to a court because
they are booked in five other courtrooms at the same time, the court has no
choice but to award in favour of the claimant.[9]
14.11
Weak, inefficient or poorly resourced government agencies also impede
economic growth through their inability to deliver essential services
effectively. The poor state of infrastructure and education services in the
region, discussed earlier, are key indicators of this failing. Indeed, numerous
witnesses spoke of the lack of institutional capacity in Pacific island
countries and their inability to deliver services as a major constraint to
economic development.[10]
Palms Australia identified a lack of administrative capability and weak
internal linkages without organisational structures as core impediments to
development in PNG. As an example, it cited the inordinate delays in PNG for a teacher to be placed on the payroll and stated further:
Such examples are common across sectors, from business owners
waiting for hours in bank queues to international governments and agencies
waiting for financial reports from local communities or NGOs which would
justify ongoing funding.[11]
14.12
Australia's High Commissioner to PNG suggested that there had been a
'hollowing out of the capacity and a lack of leadership' in PNG. In his view,
while there are competent officers in the public service who provide
leadership, others simply do not have the capacity and are challenged. He
informed the committee:
Some who are able and brought in to fix it are just defeated
by the chronic incapacity and unwillingness of their senior managers to respond
because there are entrenched interests at play.[12]
14.13
This inefficiency and lack of capacity to deliver services permeates
administrations throughout the region.[13]
Mr Brian Anderson, Australia Fiji Business Council, noted that the bureaucracy
in Fiji needs to be streamlined and strengthened: that in many cases it is a
roadblock.[14]
More generally, AusAID observed that many Pacific countries have 'difficulties
attracting, developing and retaining skilled staff'. It explained further:
Low levels of investment in human resources has led to many
public servants lacking basic skills (for example, literacy and numeracy),
including at senior levels. Skills at provincial levels of government are, on
average, substantially weaker than at the national level. Key public sector
skills urgently require development, especially for improved service delivery.[15]
14.14
Mr Ian Clarke, Australia Papua New Guinea Business Council, argued
strongly for the need to 'reinvigorate and assist the bureaucracy'. In his
view, if the bureaucracy is efficient and effective, 'the rest will look after
itself'.[16]
14.15
A number of witnesses agreed with the view of the Australian High
Commissioner that there are intelligent and committed people in the public
service but that other factors undermined their work including inadequate
resources.[17]
Mr Hodgson, Australia Pacific Islands Business Council, added that most
Australian public servants would not work under the conditions prevailing in
some places in Pacific island countries. He said they would 'not walk in the
front door' of those places, 'let alone sit there all day and try to do a job'.[18]
Professor Clive Moore cited the use of today's technology to highlight the
difficulties facing public servants in providing service:
The Solomon Islands subdepartment of statistics, for
instance, really does not have a clue what is going on or how to collect data.
Neither does it have equipment that does not break down. When a bank of
computers breaks down or a single computer breaks down, often there is not the
money available to replace them.
...
Air-conditioning systems break down in the Pacific constantly.[19]
14.16
He noted that the level of technical sophistication required in today's
bureaucracy is not only very expensive but also hard to maintain if technicians
are not available. He added 'there are a lot of dead computers out in the
Pacific'.[20]
Mr Clarke suggested that public servants may not 'even have a typewriter let
alone a computer' and that the services to their buildings are 'in some
disarray'.[21]
14.17
These ill-equipped bureaucracies are often called upon to deliver
services that require both technical skills and advanced technology. In
particular, Pacific islands countries with the potential to earn significant
income from large commercial enterprises require the support of a sound and
effective government bureaucracy if they are to seize opportunities for growth.
14.18
Mining projects provide a good case study. Although they tend to be
large scale and well resourced, these operations still require a business
environment that facilitates business activity and investment. Gladstone
Pacific Nickel Ltd noted that one of the major impediments to the progress of a
major project to mine lateritic nickel ore in Solomon Islands was 'the absence
of bureaucratic efficiency'.[22]
It detailed its unsuccessful efforts to overcome bureaucratic logjams,
including delays and missing documents, to obtain prospecting licences through
an international tender process. According to the company, such obstacles are
experienced by 'other Australian companies and to a lesser extent other
overseas companies trying to do business there'.[23]
14.19
The Australia Papua New Guinea Business Council indicated that the lack
of capacity in the PNG government sector to deal with permits, regulation and
compliance was 'a major impediment to development'.[24]
Mr Peter Graham, Esso Highlands Ltd, informed the committee that the proposed
PNG LNG project poses 'significant challenges for prudential government'. In
his view, the legislative, financial, commercial and practical implementation
matters would place substantial burdens 'on the currently limited resources of
the various levels of government'.[25]
14.20
As noted earlier, the proposed PNG LNG project presents a major
challenge for the PNG administration, including finding the capacity to analyse
and assess critically the 5,000 or so pages of the environment and social
impact statement and the accompanying 36 independent studies. It must also deal
with licence applications that already number 26. Quarantine and immigration
matters pose another major task for the administration such as processing the
anticipated 10,000 third country national visa applications from workers all
over the world, and having in place arrangements for the importation of 550,000
tonnes of steel pipe. The government also needs the capacity to reach agreement
with landowners on the benefit-sharing arrangement; to provide the necessary
economic infrastructure; and to develop and implement policy concerned with the
training and development of local people to work in the industry. According to
Mr Graham, government policies should seek to encourage and facilitate local
businesses to meet the requirements of the project and become suppliers over
its 30-year life.[26]
14.21
Although Pacific island countries such as the Cook Islands, Vanuatu and
Samoa have achieved relatively high scores on the scale of government
effectiveness compared to PNG and Solomon Islands, the evidence suggests that
all Pacific island countries would benefit from improved bureaucracies.
Financial management
14.22
The management of the financial affairs of a country is critical to
economic development. In this regard, a number of Pacific island countries have
greatly improved their performance. For example, ANZ noted that the Government
of PNG had done a sound job establishing macroeconomic stability with its
economy experiencing consecutive years of positive growth. It attributed this
turn around to the implementation of prudent fiscal policy.[27]
It concluded:
...there is now greater transparency and consultation with the
private sector and the wider population around the preparation of the budget.
Notwithstanding, more work is needed to ensure greater headway is made.[28]
14.23
Solomon Islands has also improved its financial management but again
weaknesses remain. Mr Motteram, Treasury, observed:
In the case of the Solomon Islands a shock like the massive
civil war that they had must have made a huge impact on their middle management
capacity, so there is some work that needs to be done. At the end of the day
most of the tasks are quite achievable for them to build their indigenous
capacity.[29]
14.24
A number of witnesses were particularly concerned about the capacity of
governments to manage revenue windfalls from large commercial enterprises. They
recognised the difficult challenge facing governments in devising and
implementing policies that would ensure that these proceeds 'translate into
generalised wealth and economic prosperity in the host country'.[30]
The Commission on Growth and Development pointed out, however, that history generally
indicated that the reverse tended to happen:
Sometimes the state sells extraction rights too cheaply or taxes
resource revenues too lightly. Sometimes the money it raises is stolen or
squandered by rent-seeking elites and vested interests. When the money is
invested, it is not always invested wisely or transparently. And by providing a
ready source of foreign-exchange, natural resources can also reduce incentives
for diversifying exports, a predicament known as 'Dutch disease'. States will
improve on this sorry historical record only if they capture an appropriate
share of the resource rents; save a judicious amount overseas; and set clear,
growth-oriented priorities for absorbing the remainder at home.[31]
14.25
The Pacific Islands Forum Secretariat also referred to experience that
suggested that 'resource booms often give rise to difficult economic and
governance problems'.[32]
Managing income from large
commercial operations
14.26
PNG stands out as a country grappling with the task of harnessing revenue
earned from the proceeds of commercial undertakings and feeding it back into productive
areas of the economy. The Australia Papua New Guinea Business Council commented
on the nature of this challenge:
These funds [from current and projected resource projects] need
to be directed at economic infrastructure, health and education services and
sustainable small business development...it is important that appropriate
frameworks are put in place promptly to manage these flows for long term
sustainable purposes.[33]
14.27
The proposed PNG LNG project underscores the urgency for the PNG
Government to meet this challenge. In Mr Graham's view, the project would act
as a catalyst in putting PNG 'on the pathway towards achieving its full
potential'.[34]
He informed the committee that 'the true potential of PNG goes well beyond the
oil and gas reserves that form the basis of our project'. He cited an economic
impact assessment by independent economists ACIL Tasman which found that the
project has the potential to transform the PNG economy, potentially doubling
the GDP.[35]
14.28
Esso Australia was of the view that the PNG Government would 'need to
grow both its size and its governance capacity significantly if it is to
properly support the Project [LNG] and truly reap the community rewards
possible from a major project like this'.[36]
14.29
Mr Motteram, Treasury, also expressed concern about the ability of PNG's
administration to use the large amount of money that the government has in
trust funds for their intended purposes (building roads, education and so
forth) and to fully expend them. In his view, 'Capacity constraints within the
public services are a critical issue for them'.[37]
Professor Clive Moore was of the view that 'at the mining royalty level a lot
of advice needs to be given to Pacific governments about how to involve the
community in that distribution'.[38]
He noted that money intended for local landowners may go instead to building 'an
ever richer and more powerful Papua New Guinea elite—creating a new one, too,
because a lot of these projects are in rural areas'.[39]
Smaller Pacific island countries
14.30
In some Pacific island countries the requirement for sound financial
management of government revenue is magnified because of their limited ability
to absorb the effects of poor decisions. Those without significant natural
resources, in particular, have few policy options to help them counter the
adverse effects of their small size, remoteness and susceptibility to natural
disasters. The tiny scattered atoll nation of Tuvalu is a case in point:
Despite a long-standing record of sound economic management, Tuvalu has failed to achieve sustainable growth due largely to constraints imposed by the
paucity of land-based resources, extreme isolation, smallness, and dispersion
over vast ocean spaces.[40]
14.31
In June 1987, the Tuvalu Trust Fund was established to help the country
achieve financial stability by providing government with an additional and
reliable source of funds. It was intended to finance chronic budget deficits,
underpin economic development and achieve greater financial autonomy. The fund
was initially capitalised with contributions from the UK, New Zealand, Australia, Tuvalu, Japan and the Republic of Korea. Some commentators
regard it as the most successful public fund in the Pacific which provides a
model for the effective use of such funds for small-state economic development.[41]
In the view of the Tuvalu Trust Fund Board, the agreement has provided Tuvalu with:
...a level of financial security not thought possible at
Independence. It has provided an additional source of government revenue that
underpins the Budget and so the whole economy.[42]
14.32
Kiribati is another of the small Pacific island countries with a revenue
base that is 'highly volatile and narrow'. It has a Revenue Equalization
Reserve Fund that was established in 1956 from phosphate mining royalties.[43]
With sound financial management, the funds have steadily increased.[44]
Even so, a more recent ADB Update registered concerns about the heightened risk
that the fund's value 'could be entering a long-term period of decline if
management is not improved'.[45]
In chapter 2, the committee noted that the global economic downturn is eroding
the value of the assets held in these trust funds.
14.33
Nauru stands as a stark reminder of the need for the prudent and capable
management of a country's finances. The Nauru Phosphate Royalties Trust was
established to build up funds from phosphate royalties in order to generate
income once the mineral reserves were exhausted. The country accumulated
substantial offshore assets that peaked at approximately $1 billion but,
according to an ADB report, a decline in phosphate mining, combined with poor
management of the country's offshore assets and public expenditure, led to 'a
dramatic deterioration in its economic and fiscal position'.[46]
Another ADB study stated that the management of the fund 'broke almost every
rule in the book':
...its trust fund governance structure was weak and not
transparent, it made poor trust investments, it raided its funds and used them
as collateral, and it maintained an unwarranted expansionary fiscal position.[47]
14.34
Nauru is now heavily indebted and relies on income from fishing licences
and foreign aid, especially from Australia. An ADB project has been approved to
establish a 'well managed Nauru Trust fund on par with the Tuvalu Trust Fund'.[48]
The country, however, has severe capacity constraints in its financial
management. Mr Motteram, Treasury, indicated that a generation of people 'have
missed out on comprehensive education' and noted further:
There are a number of people within the finance ministry who
are possibly going to be going forward, but I was talking to our manager there
recently and he sees it as possibly another five years before there will be an
indigenous capacity to have a local secretary of finance there.[49]
14.35
The current global financial crisis has elevated the importance of sound
and prudent financial management to a new level. Fiji exemplifies the difficult
task facing Pacific island countries as the global economic crisis worsens. Mr Peceli
Vocea, Governor of the Bank for Fiji, said:
It adds to the already precarious situation we face in
managing the risks related to commodity price increases. Policy making as a
result, has become more challenging with the trade-off between inflation and
growth whilst ensuring financial stability is at the forefront of policy makers’
consideration. As such, the current crisis calls for more urgency in
strengthening surveillance.[50]
14.36
The small Pacific island countries in particular have been buffeted by
the global economic downturn, especially the economies that rely heavily on
tourism and remittances. As mentioned earlier, those with trust funds invested
in international financial markets have seen the value of their assets plunge.
The ADB noted that to date, these governments 'do not appear to have reduced
public spending to compensate'. It urged Kiribati and Tuvalu to 'trim
government spending quickly so as to match the decline in the value of their
offshore investments'.[51]
Conclusion
14.37
To be a constructive and productive sector of a country's economy, the
public service needs to have the necessary resources, skills and commitment. A
competent, professional public sector is well placed to deliver government
services to a high standard. Whether providing advice or managing finances or
projects, it is better able to reduce the costs of government through greater
efficiencies and the elimination of waste; sound budget processes; and prudent
and effective financial management, including the collection of revenue and
allocation of resources. Evidence suggested, however, that the performance of
state institutions in many Pacific island countries is mixed. Clearly, Pacific
island countries would benefit from assistance to help them build capacity in
their bureaucracies.
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