This article does an excellent job of pointing out all of the government's options at funding resource projects and the dilemna it faces at this point; before PNG LNG starts really providing revenue to the government, as well as Gulf LNG and others, they have a cash shortfall. The O&G Act states that the project developer(s) will carry the government's share and then recoup it on the back end out of proceeds, but as this article states, that's seldom done because developers find that very tough to do. At PNG LNG Artie Somare made the poor decision he did, and that's caused a shortfall in addition to the cost overruns that the government now must fund out of the 2013 budget. What the above writer who JFT copy/pasted leaves out is something the government has obviously considered is this from the article, "Another alternative was for the government to divest part of its equity interest in resource projects to fund the remaining equity." With the up to 50% option the government has they could try and peddle a chunk of their project equity at "commercial terms" as required by the O&G Act to pay for all or most of their share of opt-in costs. This would support the comments that some have heard that the government has been working closely with IOC to assure that it is able to obtain fair "commercial" value in the SD. That provides more margin for the government should they decide to take that route, plus it has lent additional muscle to IOC in the negotiations. A great example of IOC and the government working together. Recently there have been rumors that the government probably will NOT opt in for more than the 22.5% standard equity, but if they do it might only be an additional 2.5%. If that's the case it's understandable why IOC has thanked the government profusely for its support and assistance in the SD negotiations. Helping with that "commercial rate" has been huge.
Here's the whole article; it's worth a read:
"Wednesday, 30 January 2013
TREASURY secretary Simon Tosali gave some interesting insights into the national government's strategic planning at the recent PNG Mining & Petroleum Investment conference in Sydney that received no media attention either in PNG or in Australia. By Wantok
Tosali's role as treasury secretary since 2002 has been one of the longest to ever serve in that position. He survived through two Somare-led governments and remains in that position in the current O'Neill regime.
As such he has been a key architect of government fiscal policies and a solid behind-the-scenes achiever during which time public sector debt plunged from 72% of gross domestic product to well below 30% at a time the rest of the world is headed in the opposite direction.
It is quite possible politicians have taken much of the credit for the good work Tosali has done, harking back from the days in 2002-03 when his then minister Bart Philemonm was roundly insulted by the World Bank at a meeting in Washington and strongly defended by then Central Bank governor Wilson Kamit. These days kudos are more likely.
The strong fiscal conservatism of the decade since 2002 is now being replaced by more robust and aggressive fiscal policies that many would like to see as the work of over-ambitious politicians. As a consummate bureaucrat who can be trusted to give totally confidential advice to his minister, Tosali was true to form when he gave no clue about his level of concern at the record levels of government borrowing that is currently happening.
In the next two years successive budget deficits will push the debt to GDP ratio beyond the 30% level that the former Somare government felt was a necessary lynchpin of its Fiscal Responsibility Act. This year alone, 2.5 billion kina will be raised in public sector debt for a K13 billion budget.
In this context, Tosali told the Sydney conference that financing of the government's share of resource projects - it can take up to 30% equity in any mining venture or 22.5% in an oil or gas project - has been one of the "most difficult" challenges facing government.
He said in the past year the national government had to raise an additional K900 million to fund the shortfall it faced for its 19.6% of the PNG LNG project. It needed another K305 million for recently announced cost overruns, he said.
Such commitments, he noted, "takes funding away from other possible social and development programs".
Tosali said he felt heartened by current market conditions for loan raising especially since the PNG government "has not borrowed commercially for a long time”.
“Times have changed and government will look at different options for funding of future projects," he said.
There was now also the prospect of tapping PNG superannuation funds and local banks for the national budget as well as for equity in resource projects.
Another alternative was for the government to divest part of its equity interest in resource projects to fund the remaining equity.
"As a small resource-rich country financing its share of these projects could be problematic," he said.
With his treasury secretary hat firmly in place and his well-known conservatism apparent, Tosali warned that "a lot of care is needed to see the balance is right".
Tosali disclosed that another option open to the government was to pay for its equity share out of project cash flows, which had been done in the past, but this option was one generally opposed by project developers facing the burden of high development costs.
PNG needed high levels of investment for roads and other infrastructure but it needed to remain "fiscally responsible" with a need for "a balanced approach", Tosali reiterated, without any particular reference to the 2013 budget he played a key role in drafting.
Tosali would have been very pleased at the same session in Sydney to hear highly placed Australian bankers heap praise on PNG and the way it had managed financing of the resources sector.
What the PNG government and its partners in the $US19 billion PNG LNG project had shown was that the legal work needed to be done once and done right; it also set firm targets and handled the LNG negotiations with "military precision", said Peter Field, executive director for portfolio management at the Australian government-owned Export Finance and Insurance Corporation (EFIC).
The $US14 billion debt component the partners raised was "a great compliment to PNG", he said.
Investment banker Anthony Miller, managing director of Goldman Sachs, said PNG presented a contrast in terms of fiscal and legal regulations as compared with Australia. He believed "Australia should feel humble" in seeing the manner and efficacy with which the PNG government handles its resource projects."
http://www.pngindustrynews.net/storyview.asp?storyid=795112185§ionsource=s0
