Gas bonanza offers chance to tackle poverty in Papua New Guinea

By Laurence Chandy*

Within a matter of weeks, the Papua New Guinea Government expects to close a deal with Exxon Mobil to export liquefied natural gas, in what promises to be the single largest investment in the nation's history.

Once operational, the project will generate around $3.8 billion in exports each year - equal in value to 80 per cent of all the country's exports today. One indisputable effect of the project will be to boost the country's growth rate - some estimates suggest the economy could double in size within a few years.

However, this growth will only deliver for the 40 per cent of Papua New Guinea's 6.2 million people who live in poverty if the additional income it generates works its way around the economy. Unfortunately for PNG, its economy suffers from the equivalent of bad circulation. Limited financial development means that income is less readily recycled, and a rugged geography combined with low levels of infrastructure means transactions tend to occur locally.

The poor experience this most acutely; many are dangerously isolated and rely on bartering in place of cash. There are three types of player who determine how money is circulated within the economy through their use of income. The first is companies. Their income is either paid out to shareholders or reinvested.

In PNG, foreign firms dominate so either choice is likely to result in income going abroad, far from the country's poor. In the case of the LNG project, around 60 per cent of pretax income generated directly from the project may immediately be sent overseas. Another force is individuals. Their consumption of goods in local markets and willingness to lend and share money among kith and kin enable more income to reach the poor. The LNG project will produce a curious set of immediate beneficiaries.

Lucky landowners, numbering in the tens of thousands, will find themselves in the possession of a winning lottery ticket. Local employees, numbering far fewer, will receive more modest compensation. In fact, the project itself will hire fewer staff than a single tuna cannery. The final player is the PNG Government. Its income is ostensibly meant for public services and interventions targeted at the poor.

In practice, however, public services have limited reach and are of poor quality, while direct poverty interventions are few and far between. When the LNG project begins, the Government will find itself playing a gatekeeper role for almost all the income pumped into the economy. This will test its ability not only to direct its expenditure well, but to manage the macro-economic effects of large capital inflows, which have the potential to wreak havoc with the country's prices. There are two strategies for increasing the "poverty dividend" from the LNG project. The Government needs to pursue both simultaneously.

The first is to incorporate the poor into the rest of the economy. Two years ago, the Jamaica-based mobile phone company, Digicel, entered the PNG market, and by extending coverage to previously unserviced areas, helped connect poor communities with the economy in both a figurative and literal sense.

The Government can bring about the same effect by extending the reach of the transport infrastructure, financed through the LNG project's revenues. The second strategy is to promote an alternative growth pattern in which the poor can more meaningfully participate. This would require a greater role for PNG's non-mining sectors, which employ the majority of the workforce.

The competitiveness of these sectors is undermined by excessive transport, security and utility costs - costs which few outside the mining sector can bear. These costs can be brought down through targeted investments and improved policies. Another way to alter the pattern of growth is through investing in education.

Such a strategy would result in the LNG project substituting the country's natural capital for human and physical capital - a worthwhile exchange. The Prime Minister, Michael Somare, has implied that this project can finally put the country on the right track, allowing him to call time on a stewardship that has bridged four parliaments and four decades. Whether his expectations will be fulfilled depends on his Government's ability to recast the relationship between poverty and growth.

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Laurence Chandy* is a research associate at the Wolfensohn Centre for Development, Brookings Institution and the author of a Lowy Institute Analysis paper: Linking growth with poverty reduction in Papua New Guinea