It has recommended that the PNG Government broaden its economic base in order to increase its bargaining power in current and future extractive projects.
The research study titled: Does the PNG government get its fair share from the resource sector? was presented at a public seminar at the Institute of National Affairs in July to an audience representing Government, Industry and Civil Society stakeholders.
It focused on the Government’s ability to increase its bargaining power in its current and future planned resource projects.
The study was undertaken by Economists, Associate Prof Martin Davies at the University of Washington and Lee and Dr Marcel Schroder Economics lecturer at Lebanese American University. Both researchers are also guest lecturers at the University of Papua New Guinea and the Institute of National Affairs.
The researchers constructed a new database based on the PNG EITI annual reports that documents fiscal resource revenues for a large set of resource rich countries from 2006 to 2017.
“Using this dataset, we analysed the PNG Governments’ take from the resource sector and study its determinants through a simple game-theoretic model as well as regression analysis. This allowed us to make comparisons between Papua New Guinea and other resource rich developing countries,” said Prof Davies.
The study used regression analysis which allowed them to control factors of bargaining strength as implied by the game-theoretic model and found that PNG’s government take has declined substantially in recent years and seems low compared to other resource rich countries.
“Salary and wage tax is largest payment received. PNG is the only country in our database of 50 countries where this is the case. Corporate income tax and royalties seem unusually low,” said Dr Marcel Schroder.
The study provided potential Fiscal Regime recommendations.
“PNG is a developing country which means funds for crucial spending such as infrastructure, health and education are needed today rather than tomorrow. Therefore, avoid deals with MNCs that lead to extreme back-load of fiscal take.”
They also recommended avoiding giving too many incentives (loss carry forward arrangements, tax concessions, treating royalties as advance income tax, etc.) and recommended that the State reconsider zero rating GST.
“Many resource rich countries derive significant revenue through GST. It is also relatively easy to administer. Consider relying more on royalties on sales. They have many advantages with revenue flows today vs tomorrow, they are more stable than income tax and other payments and they are relatively easy to administer,” said Prof Davies.
The study encouraged the audience to understand reasons behind low income tax payments.
“There seems no mechanism for government to benefit from exceptionally high commodity prices (e.g. additional royalty, excess profit tax). Therefore, in future, if deal offered by MNC isn’t attractive, valid to leave resources in the ground for later,” said Dr Marcel Schroder.
The researchers further provided economy-wide policy recommendations.
“We need to foster better macro policies and change the national mind-set where we need the next resource projects to save us,” said Dr Schroder.
The study recommended to focus less dependence on resources sector for growth, revenue and foreign exchange and focus better policies in non-resource sector such as agriculture and tourism.