Sep 20, 2020 Last Updated 8:29 AM, Sep 19, 2020

Westpac says it will not respond to speculation in Australian media this week that it is on the verge of selling its Pacific businesses.

A Westpac Fiji spokesperson says the Bank “is currently undertaking strategic review of its specialist businesses, as we shared with the market in May. This includes wealth platforms, superannuation products, investments, general and life insurance and auto finances well as Westpac Pacific.

“Given this, there is going to be ongoing speculation circulating – as there has been since Westpac sold some Pacific operations in 2015. Westpac does not respond to speculation and, as always, if there is news to share about our business, our people and customers will hear it from us.”

On Monday, The Australian newspaper [paywall]  reported that it had information Westpac was close to selling its Pacific banking operations, and that while the buyer’s identity was unclear, “logical acquirers” would be either the Papua New Guinea-headquartered Bank South Pacific (BSP) or France’s BRED.

Westpac sold its Samoa, Cook Islands, Solomon Islands, Vanuatu and Tonga operations to BSP in 2015. It retains operations in Fiji and PNG.

In May this year, Westpac announced statutory net profit was down 62% (A$1,190 million) for the first half of 2020, compared to the first half of 2019. In a statement to the Australian Stock Exchange it said it was clear that Westpac needed to “simplify and focus on its Australian and New Zealand banking businesses,” and that a Specialist Businesses division under the leadership of Jason Yetton would review Westpac’s Pacific businesses, superannuation, wealth investments, insurance and auto finance.

“Over the coming months we will conduct a detailed strategic review on the best option for these businesses. This will include considering whether they would ultimately be more successful under different ownership” the Bank said in May.

Meanwhile in Fiji, “customers can be assured that we are here to help and continue  our support to people and communities across Fiji, including through our COVID-19 customer assistance package,” the Westpac Fiji spokesperson says.

PNG economy, health hit hard

  • Sep 20, 2020
  • Published in August

The impact of COVID-19 is accentuating trends that had already developed over the last decade, says  University of Papua New Guinea lecturer in economics, Maholopa Laveil.

He lists amongst these trends: “falling employment, large fiscal deficits, very mild resource growth and the increasing debt burden.”

Laveil says the exchange rate “is the only policy lever for government right now to use so it can allow a managed depreciation of the kina, but it refuses to do so. And the reforms going forward will be undermined by a looming vote of no confidence in November this year, a misperception of stability held by many government employees, the durability of leading civil servants who are resistant to change, the gradual deterioration as opposed to a sudden deterioration, this does not prompt them to adopt reforms and external financing available that is not conditional on policy reforms.”

In an update published in April 2020 the International Monetary Fund suggested “the kina is overvalued by around 11 to 18%. This overvaluation could be largely eliminated over the next three years without boosting inflation excessively.”

Executive Director of the PNG Business Council, Douveri Henao, said “there is a very lively debate in the market right now with policy makers whether the devaluation of the kina should kick in.

“Those that are pro-devaluation, their main argument is that everything is slowing down so this is the time to actually devalue. Whereas others, especially on the government side, are more reluctant because of the debt financing pegged into a stronger Kina.”

Henao says the Council is working hard to ensure businesses can survive, saying “we simply cannot go back to an April lockdown state of emergency scenario”. He says CEOS and managing directors the Council spoke to at that time, 75% expected revenue to decline, 70% expected a profit decline and 66% indicated they won't be operating any business by the end of the year. Henao says businesses are negotiating a co-regulation model where “social distancing, hygiene protocols, staff rotation protocols are now becoming the compliance mechanism that businesses are undertaking,” allowing them to continue operating.

He indicates that there have been signs of market resilience, with fresh produce moving across the market, “There have also been substitutions on services as well,  more PNG management are rising up to executive positions.   When the March period kicked in,  there were lots of expatriates that left the country,  called from their governments and in particular Australia.   All of those positions are being filled up by PNG middle to senior management.

“[There] has been a massive uptake on technology.  All the consumables have jumped up by 30-40% in purchases because everything's online from school curriculums to business engagement and so forth.”

The ADB projects economic growth will decline to -1.5% this year, likely leading to further cash flow problems for government. Development Policy Centre’s COVID Economic Database notes projected economic growth of -1.5% for 2020, down from 2% pre-COVID. Government revenue is anticipated to fall by 15% and debt will rise to 43.7% of GDP.

“The latest international commodity price data published by the World Bank in April 2020 indicate a general fall in the prices of PNG’s main export commodities. Prices for Liquefied Natural Gas (LNG), copper and nickel declined, while that of gold picked up reflecting investors’ preference for a safe haven investment. Non-mineral commodity prices for cocoa, coffee and palm oil also increased providing some relief to PNG exporters,” Bank of PNG Governor, Loi Bakani wrote for the Pacific Forum blog recently.

“The significant drop in some of the commodity prices has already affected PNG’s export tax revenue and foreign exchange inflows, and will continue to put pressure on the foreign exchange market. The Government’s support to increase local production and ensure its food security requirements are at a satisfactory level is critical to sustain domestic consumption, while reducing the country’s dependency on imports.”

PNG’s Acting Health Secretary has announced another suspected death from COVID-19 in the Nation's Capital.

Dr Paison Dakulala said a 35-year-old health worker died due to respiratory illness as a result of COVID-19 over the weekend. However the man’s relatives say he died from other health issues.

Meanwhile, a first case of COVID-19 was reported in Lae Tuesday. There are 63 confirmed cases in PNG.

"The reality is, that based on reputable modelling, the number of cases in Papua New Guinea is much higher than that which has been recorded” Prime Minister James Marape said. “Based on current numbers, we can expect to see a double in the number of cases every 2 to 3 days.”

The increased number of diagnoses has prompted a 14-day lockdown of Port Moresby which will see schools closed and public transport cease operations, apart from taxi services. Masks will be mandatory in public places, a  10pm-5am curfew is in place  and flights into and out of Port Moresby are restricted. There will be a maximum limit of 15 people gathering in public places.

The Business Council of PNG is concerned a prolonged lockdown could see 68% of PNG businesses shut their doors by the end of this year. Council President Nuni Kulu has suggested businesses be allowed to self-regulate to ensure high hygiene standards and social distancing.

PNG’s health system is under immense stress. Port Moresby General Hospital has reorganised its emergency department and essential services, and has made a public appeal for a wide range of supplies including face masks, gloves, fruit and vegetables, bottled water, toilet paper and motor vehicles for staff transportation.  Meanwhile the PNG Nurses Association is threatening strike action. It has petitioned the government calling for a change in management at the health department, citing shortages in personal protection equipment (PPE) for front line officers, an absence of standarding operating procedures, and a lack of training and alloances for nurses caring for COVID-19 patients.

Meanwhile Australia is sending up to eight medical specialists to PNG next week to assist with the COVID-19 response.“This forward team will provide immediate on ground assessment to improve laboratory strengthening, case management, infection control, triage and emergency management, and public health,” an Australian government statement said. The United States has  donated 40 ventilators to PNG on top of the US$3.5 million provided to the PNG government for the response. China has also donated ventilators and PPE kits to PNG. PPE kits have also been donated by UNICEF, World Bank, Japan Government, Newcrest Mining and others.

Down south, the mayor of Torre Shire in North Queensland says border controls may need to be tightened to stop PNG nationals entering the Torres Strait for emergency health care.

Solomon Islands Prime Minister Manasseh Sogavare has already said security at the Solomon Islands-Papua New Guinea border remains a top priority.

“As you might already be aware, in previous weeks, we had a case involving two PNG nationals who have crossed the border and came into contact with seven of our locals. All seven individuals have undergone quarantine and their tests have returned negative,” the Solomon Star reports Sogavare as saying.

Sources: Pacnews/NBC NEWS/MOROBE PROVINCIAL HEALTH AUTHORITY/ISLANDS BUSINESS

PNG Mining: Layoffs and laws

  • Sep 20, 2020
  • Published in July

The Parliament of PNG has passed a series of amendments targeting the mining, oil and gas industries, which give the Minister greater flexibility in determining whether to grant or refuse petroleum development licences, according to a briefing note by law firm, Allens.

One of the key elements for the mining industry is that the Mining Minister may impose a 'minimum expected level of return' for the State on a licensee, say Allens authors Rob Merriam, Jacqui Rowell and Sarah Kuma, writing in Insights.

“What the level of return might be, how it would be calculated and how it would be enforced are not prescribed in the O&G Amendments,” they say.

Existing applicants may also be subject to these amendments if the Minister has not yet granted their licence, they add.

The legislation follows the Marape government’s refusal to grant an extension of the Porgera mining licence which expired last August, although JV company Barrick New Guinea Ltd (BNL) had sought a 20-year extension as far back as June 2017.

Barrick’s CEO, Mark Bristow, reaction was that it was “tantamount to nationalisation without due process” and legal action in the PNG Courts is continuing.

This month (July), Barrick has begun layoff staff. According to Barrick, most of the 116 expatriate employees have already been retrenched, while 2650 PNG nationals will have their employment terminated prior to the end of July at a projected cost to the company of K180 million (US$52 million).

“This is already having a big impact on the economy,” Shane McLeod, analyst at the Lowy Institute, told Islands Business.

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Around the world, tax compliance is a serious problem with big consequences. The case is no different in Papua New Guinea (PNG). It is an important concern of the current government. In July 2019, Prime Minister James Marape highlighted that there were outstanding tax payments of K2 billion (A$840 million) due to poor compliance from businesses.

Last year, we partnered with the PNG Internal Revenue Commission (IRC) to test two new forms of tax-positive messaging in an attempt to improve tax compliance and government revenues. We sent SMSs to over 15,000 small and medium businesses before they were due to lodge their monthly salary and wages tax return, and the IRC included flyers detailing the shared benefits of tax in letters and emails sent to non-compliant taxpayers.

This work is motivated by the application of behavioural insights and the success of similar interventions elsewhere. Behavioural insights (or “nudges”) seek to leverage an understanding of humans’ reliance on simple rules of thumb to shape their behaviour, often through small changes to how options are framed. Our trial was the first tax compliance study in a lower-middle-income country to send messages to all possible taxpayers. We randomised who received the messaging so we could compare the taxpaying behaviour of the individuals who received the messages with those who did not, and by doing so isolate the impact of the messages.

There were three key lessons we learnt – we discuss these in more detail in our new working paper.

  1. The content of the messaging is not especially important

Before we developed the SMSs and flyers, we conducted a survey and focus groups for IRC staff and small business owners to understand local explanations for why compliance was so low and what types of messages may be most effective in making improvements. Respondents suggested that messaging that focused on simplifying the tax return process and highlighted the shared benefit of tax was expected to be most effective. Many said that messages that focused on social norms or the potential punishment for non-compliance would be perceived as not credible – this is consistent with the results of similar trials in other low-enforcement jurisdictions (for example, in Rwanda). For the SMS trial, we tested two messages, sending them to separate businesses. One was a simplifying reminder and the second one highlighted the shared benefit of taxation.

SMSs sent as part of the trial to improve tax compliance in PNG.

We were able to compare the relative effectiveness of the two SMSs. We saw that there was no significant difference in the effectiveness of the SMSs in improving compliance. Other studies have also observed similar effects from different messages (for example, in Ethiopia). This is likely because recipients treated the messages as an indication of engagement from the tax administrator (and the potential for follow-up) rather than focusing on the explicit content.

  1. Those who are already engaged with the tax system and are exempt from paying tax are most likely to respond to messages

We were able to test how businesses with different taxpaying histories responded to the messaging. We could separate eligible businesses into three groups, those who had not filed a return for over 15 months (we call them “non-filers”, making up 74 per cent of businesses eligible to receive an SMS), firms that had previously filed but claimed to be exempt from paying tax because they had no employees (“zero filers”, 13 per cent) and firms that had previously filed and were paying tax (“non-zero filers”, 13 per cent).

We found that previously filing taxpayers were much more likely to lodge their tax return if they received an SMS or a flyer than those who did not. This is likely because they were experienced with interacting with the tax system and deciding whether to file or not was a more marginal decision, so they were more susceptible to a slight nudge.

Among previously filing firms, non-zero filers were hardly influenced. Whereas zero filers were about twice as likely to lodge if they received an SMS as those who did not. Similar results also occurred with the flyers. This is understandable as zero filers only face the transactional cost of complying. In contrast, the non‑zero filers face the transactional and financial costs of complying, so they are less likely to be swayed.

We saw that the taxpayers that were most likely to respond to the SMSs and flyers are those that faced the lowest cost from compliance.

  1. This compliance strategy will not fix PNG’s revenue problem

The COVID-19 crisis has compounded PNG’s revenue problem and the government is now expecting a record budget deficit of over K6 billion in 2020 due to an expected additional K2 billion hit to tax revenue. Unfortunately, while these interventions were able to improve the tax filing behaviour of some firms, they will not be able to address PNG’s revenue problem. There was a moderate (but statistically insignificant) increase in the amount of tax paid by those who received the SMSs, but it disappeared within a few months of businesses receiving the messaging. So did the compliance improvements. This contrasts with the success of similar interventions in other middle-income countries where significant revenue increases have been obtained (for example, in Guatemala).

There are two key factors that may have driven the failure of these messages to raise significant revenue in PNG. First, by sending the messages to a broader group of taxpayers than previous studies in low- and lower-middle-income countries, the messages would have been received by a significant share of businesses that are no longer actively operating. Second, according to some indicators compiled by the World Bank, PNG has weaker governance than other countries where these trials have been set (i.e. Rwanda, Ethiopia and Guatemala). This likely reduces the effectiveness of messaging received from the government. Future research could explore whether differences in the “social contract” between taxpayers and the government could help to explain cross-country variation in the effectiveness of nudges in raising revenue.

Ultimately, this tax-positive messaging is not a silver bullet and the PNG government will need to adopt other tools to realise Marape’s vision of “a time when all big corporations and all companies share the workload in paying tax and we can ease the burden on our small people paying huge tax out [of] their salaries”. The government and IRC are aware of this and have also been adopting more traditional methods to improve tax compliance. Appropriately, these measures place more emphasis on ensuring businesses pay the correct amount of tax rather than focusing on ensuring businesses are registered and are submitting returns. However, to further boost their effectiveness it may be worth testing incorporating data from third parties (such as banks, suppliers and clients) to personalise their messaging to non-compliant taxpayers. A study in Costa Rica saw a sizeable increase in the total amount of taxes paid by non-filing firms for over two years after they received a nudge that showed the tax office was aware of specific economic activity of the firm, such as their total credit card sales reported by a credit card provider. However, as always, it should be kept in mind that not everything that works overseas works in PNG.

This article first appeared on the devpolicy blog. 

For more on randomised controlled trials in the Pacific: https://www.islandsbusiness.com/past-news-break-articles/item/2636-why-is-the-nobel-prize-for-economics-important-for-the-pacific-it-s-changing-the-way-we-do-development.html

 

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