Australia's PNG step-up in a tumultuous year

Smiling faces, songs and happiness aren’t words that have been associated with the troubled Papua New Guinea (PNG) region of Bougainville for decades.

But for the past fortnight Bougainville has been a place of joy and calm as the island’s residents – and thousands more across PNG, Solomon Islands, and Australia - have been casting their votes in a historic referendum on independence.

The vote is part of a peace agreement, brokered nearly two decades ago in part by Australia and New Zealand, to bring a long-running and bloody secessionist conflict on Bougainville to an end.

With 10 million people, a key strategic location, and endemic challenges of governance, service delivery, health and development– PNG and its success is in Australia’s interest beyond the simple reality of us being close neighbours.

A year ago, as PNG scrambled to host the APEC leaders in Port Moresby, a successful and peaceful hosting of the referendum seemed very far away, and anything but assured.

Prime Minister Peter O’Neill, the country’s then leader for seven years, had become notorious for dragging his feet in his dealings with Bougainville.

Originally slated for June this year, by January very little had been done – or funded – by the central government to get things ready. Bougainville’s president, John Momis, was getting worried, and had started approaching international donors to fund the vote.

O’Neill pledged to support the vote taking place but was clearly staking out the case against PNG’s parliament ratifying the non-binding referendum outcome – even if a vast majority of Bougainvilleans wanted independence.

Meanwhile, O’Neill was distracted sticking the landing of November’s APEC summit, navigating a protracted fiscal downturn, trying to secure major new natural resource deals and staving off political challenges that were mounting in intensity, while accusations of corruption swirled around him.

The master dealmaker had wanted a tangible result to come out of the glossy and logistical success of hosting an APEC Leaders Summit that was otherwise marred by a failed leaders' communique – and the purchase of a fleet of expensive Maserati sedans to ferry VIPs around the venues.

By April, he seemed to have achieved it with the terms of a massive new Liquid Natural Gas project agreed and signed with French company Total.

Over its lifetime, the Papua LNG project would be worth roughly 50 per cent of the country’s current GDP. And there was more good news on the horizon with even more mining and LNG deals filling the negotiation pipeline.

But the deal – heralded by Mr O’Neill as a triumph - contained the seeds of his political demise.

MPs and landowners felt the deal didn’t share the benefits widely enough. Bureaucrats complained that they had been cut out of the negotiation process in the rush to have an agreement linked to APEC.

And there were continuing questions over O’Neill’s judgement in pushing through a deal involving the Australian arm of Swiss bank UBS – a controversial loan for the government to buy shares in PNG-focused oil and gas producer Oil Search.

James Marape – who had until that point been finance minister, and a key faction broker for Mr O’Neill in the populous and politically dominant Highlands region – broke ranks and turned on his once benefactor. He turned O’Neill’s brittle constituency against him, defeating the longstanding Prime Minister on the floor of Parliament in late May.

O’Neill’s eight years in office had been marked by grand ambition but underwhelming results. Free school education and health, major infrastructure initiatives and a major decentralisation campaign were undermined by fiscal mismanagement, poor implementation, and allegations of corruption.

Marape moved into the top job with the expectation of a new generation of leadership.

He projected an aura of modesty, rejecting the government jet for economy class air travel, and stopping at roadsides to talk to people on his way to work.

He was also seen as the first "home grown" PM, having undertaken all of his education in PNG, and being young enough to have little memory of Australia’s pre-independence colonial administration.

He articulated a “fresh” new approach to politics, centred on a new “manifesto”: “Take Back PNG” he called it, promising to make the country the “Richest, Black Christian Nation” in the world by 2030.

On that score, PNG Economist Maholopa Laveil pointed out that currently sitting at 23rd overall in the leaderboard, and would require annual economic growth of more than 30 percent to eclipse Bermuda. He suggested that matching Fiji - requiring annual economic growth of more than eight percent each year – might be a more realistic, if still exceptionally ambitious, target.

Just months after the showiness of the country having hosted APEC, Marape seemed to give a voice to Papua New Guineans who wanted to know where the benefits of years of resource projects developments and ‘deals’ had gone. He was frank about the country’s economic challenges – claiming the economy was “bleeding and struggling”. While O’Neill had projected the glitz and glamour of APEC, Marape reflected the experience of everyday citizens who saw the state in retreat and services in decline.

By July, Marape was being feted as a guest of Australia’s prime minister on an official visit. Scott Morrison topped off the visit by taking Marape for a night at the NRL with Scott Morrison, watching his beloved Sharks notch up a win at Cronulla.

The effort by the two leaders to cement a strong new relationship have borne fruit. The 2020 budget - released last week – shows Australia at its most prominent in PNG’s political affairs in many years.

The budget is the strongest evidence yet of where James Marape and his government will try to take the country.

Heading into 2020 he’s set himself an ambitious goal of refinancing more than $US1 billion ($1.5 billion) in government debt, while also cutting spending and boosting tax revenue. At the same time he has revealed the massive hole in liabilities – from unpaid rents to overdue superannuation – left by the previous government.

By acknowledging the problems of the structural challenges plaguing the budget through the O’Neill period, Marape is showing a willingness to reform.

Australia – recognising the slim window for significant reform before domestic politics consumes the Marape government – has provided a $440 million dollar loan to shore up the government’s finances for 2019.

The loan is the first of its kind to PNG – and while Australia was at pains to deny any link to looming Chinese influence in the region, PNG’s budget papers helpfully explained that the funding would directly displace an equivalent loan offered to O’Neill by the China Development Bank.

Australia hopes the loan will be enough to draw PNG in to a larger package of international donor and IMF support on the condition of significant reform. With a record breaking 5 per cent GDP deficit forecast for next year, the options of financing the budget without it appear impossible.

Australia has made the right decision helping bridge the gap – if it all goes right, it will generate a lot of goodwill and could catalyse reform at no cost to the Australian taxpayer. If it all goes wrong, PNG has never defaulted on debt and it’s safe to assume they wouldn’t start now. Regardless, the ball is now firmly in the Marape government’s court to deliver on the confidence that the Morrison government has entrusted in them.

In parallel with Marape’s efforts to square the budget circle, his cabinet colleague Kerenga Kua – Petroleum Minister – has been charged with the trickier task of negotiating three big new LNG deals with international producers Total, ExxonMobil and Oil Search. These projects – an expansion of the existing PNG LNG facility, the Papua LNG project and the P’nyang gas field – have the potential to underpin at least eight years of construction-driven economic growth, and even further revenue beyond.

But Kua – a critic of the dealmaking culture of the former PM Peter O’Neill – has found the going more challenging.

Having moved into government pledging that “Take Back PNG” means a better outcome for the country in big resource projects, Marape and his government are finding LNG proponents playing hardball on the future of the LNG expansion.

PNG wanted each of the new fields to be dealt with separately, and to ratchet up the benefits for the country from each negotiated deal.

But Oil Search, Total and Exxon Mobil want the projects seen as linked and interdependent – saying that expansion of the LNG Processing trains outside Port Moresby can only be viable if all projects go ahead.

A deadline for sealing the deal late last month passed with the talks stalling.

The gas majors have other projects on the shelf – but for PNG, the prospect of the projects being delayed looms as a major challenge for the country’s economy.

The budget challenge, LNG and Bougainville are showing that Marape will need to be adept at dealing with multiple challenges simultaneously.

Bougainville is not a situation that money can fix. The referendum result is expected to show overwhelming support for independence.

But Parliament has the final say on what happens next, after a pre-defined yet somehow ambiguous ‘period of consultation’ which will be further muddied by local elections in Bougainville in the middle of 2020.

Marape will be the prime minister who presides over the government’s response, and will have to straddle the views of those who want the country to remain united, and those who think it’s time to let PNG’s reluctant province finally go its own way.

And by November 2020, Marape’s immunity from a vote of no confidence in the parliament will expire.

The best-case scenario by that point would be PNG having three new gas projects in the pipeline, a negotiated transition for Bougainville towards some form of sovereignty, and reformed fiscal settings based on IMF best practice.

But, as James Marape’s predecessors have found – events in PNG can tend not to run to plan.

The honeymoon is well and truly over for the Marape government, and the stakes are high.