SEAN JACOBS | Part 2 of 3
The IMF’s return to PNG is an opportunity to revisit the status of PNG’s State Owned Enterprises (SOEs) – a focus of previous IMF recommendations that triggered 2001 student protests, ultimately causing the IMF’s physical departure from PNG. “SOEs in PNG continue to dominate critical public utilities,” notes the US State Department’s most recent PNG investment summary, “ranging from electricity, water and sewerage, transport, and telecommunications.”
These enterprises each have unique challenges, yet of highest concern is PNG’s electricity sector, which requires desperate reform. Only 13 percent of PNG’s population have access to electricity – one of the lowest rates in the Pacific. “Lack of access to affordable, reliable power limits economic growth in urban areas,” notes the Asian Development Bank (ADB), “constrains growth in smaller urban centres and contributes to poverty in rural areas.”
PNG Power Limited (PPL) – the Government’s power utility company – manages generation, transmission and distribution of three main grids and 19 further mini-grids across PNG. The mini-grids, in particular, are powered solely by diesel, which not only has emissions but cost volatility repercussions, while PNG’s sparse and difficult terrain make provincial energy delivery extremely challenging.
PPL appears constrained in four ways. First, it is “cash-strapped,” according to one recent analysis, “and therefore unable to meet the investment needs pertaining to grid-based national electrification.” This is despite presiding over some of the highest household electricity prices in the world. PNG’s national target is 70 percent accessibility by 2030 – a goal only six years away. This, frankly, now appears out of reach after “having so far failed to have any impact,” in the words of former PPL Managing Director Carolyn Blacklock.
Second, PPL is politically constrained. The PNG Government itself consistently owes PPL unpaid bill payments, with the most recent being K78 million in arrears across a number of departments, including even PNG’s Department of Finance and Treasury, itself owing K5.4 million. Unpaid arrears obviously disrupt a commercial return and delivery, with PPL last year warning that over 200,000 customers would lose access to electricity if these bills went unpaid. Compounding this issue is electricity theft, amounting to PGK 25 million (about USD 7 million) per month – another source of much-needed lost revenue.
Third, PPL is constrained by pricing. Capital assets need to be serviced and maintained. This is usually achieved through an energy tariff, which PPL has been unable to adjust since 2013 “because of political interventions,” according to the ADB. Yet the network suffers “decades of under-investment,” notes Blacklock.
Fourth, PPL – like most other SOE sectors – suffers from shortfalls in coordination, leadership and management. A series of revolving CEOs, a “militant union” and sluggish reform progress have characterised the company’s internal politics in recent years. Its Board, although independent on paper, remains ultimately at the functional behest of PNG’s Cabinet via Kumul Consolidated Holdings, reducing company autonomy and creating unwanted space for political considerations to edge out commercial goals. “PNG’s SOEs generally lack transparency, accountability, autonomy,” to again quote the US State Department, “and a robust legal framework that requires the SOEs to operate as viable commercial entities.”
What is the solution? Privatisation is clearly the most optimal way forward for PNG’s grossly underperforming power sector. Greater privatisation of PNG’s SOEs would drive pressure from shareholders and other equity providers for improved performance – an observation made by an Australian Agency for International Development author as far back as 1996. In turn, a commercial focus would prompt greater customer responsive behaviour (e.g. in response to rolling blackouts), connecting more people and businesses to grids, generating a more reliable and sustainable energy supply and upgrading transmission networks as needed. All such outcomes are hampered without greater forms of privatisation.
One practical way forward – according to a recent PNG National Research Institute paper – is to enhance the number of Independent Power Providers (IPPs) in the PNG electricity sector. These “are private entities,” note its authors, “which own and or operate electricity generation facilities and sell electricity to a utility, central government buyer and end users depending on the underlying business models.” PNG currently has only seven IPPs, which all struggle with revenue security. However, this could be mitigated by creating stronger regulatory institutions and frameworks, the authors note, to ensure greater revenue security and cost recovery outcomes.
To take this a step further, one additional practical step may be to actually ‘call in’ the IPPs and other established IPPs through a market sounding mechanism to help co-design a regulatory framework and a realistic IPP prospectus for endorsement. All forms of electricity generation should be on the table, with ideology on the best form to be put aside. Small Modular Reactor (SMR) technology, for example, is not supported in Australia, yet its proliferation in other parts of the world may offer a timely solution to PNG, especially amid its fragmented electricity networks and geographic terrain, and the limited viability of solar and under-exploration of geothermal. An end state – indeed an optimistic overall outcome – could be a future where PNG’s 19 mini-grids are operating through IPP arrangements, delivering a reliable and affordable power supply to businesses and everyday Papua New Guineans to alleviate the effects of energy poverty.
Both steps above, of course, need to be supplemented by political will – a point consistently made by development experts. However, this consideration could also feature in the design process and, for example, may include political incentivisation measures for Members of Parliament to consolidate and expand electricity security – through measures such as district-controlled MP funds – yet minus the political interference.
Finally, another underacknowledged area of reform to PNG’s power sector is the desperate need for human capital – simply having Papua New Guineans with the appropriate engineering and other skills in generation, transmission, distribution and power system management. As one former PPL employee noted in PNG’s The National, the nation’s “current power supply woes… can be attributed to lack of proper human resources development and supervision.” “Most of the blackouts,” they add, are “a result of lack of this specialised knowledge in power system management.”
Although this may be a matter for PPLs to address if they are successful in penetrating the PNG market, it will also depend on a broader PNG-wide commitment to skills training and human capital – a point that I address in my third piece, “Resolving Papua New Guinea’s human capital deficit with more than just funding”.
Sean Jacobs is a Papua New Guinean-born Brisbane-based writer, government relations and public policy specialist, and Industry Fellow at the Griffith Asia Institute.
