An EPIC Fail – Somare Legacy

By Government Insider

Much has been said about the UBS Loan and the re-financing of it. But have we forgotten where it all started??? Do we understand why O’Neil had to take a loan on this?

In March 2009, Somare mortgaged 17.6% of Oil Search shares to International Petroleum Investment Company (IPIC) to raise $1.7 billion to fund PNG’s equity (19.6%) in the PNG LNG Project. The details of the agreement are sketchy but the main gist was that the Oil Search shares (196.6m) which was selling at $4.2 in 2009 was sold on its future expected value of $8.55 raising $1.7b when it expired in 2014 for mortgage repayment.

What actually happened was that when Somare got the IPIC loan, he mortgaged almost everything, on top of the Oil Search shares, he mortgage all of the SOEs as well. What O’Neil is trying to do is to get all the other SOEs out of that mortgage so that PNG is not held to ransom. For example, every time PNG want to buy a new plane for Air Niugini, they have to get the Arabs permission to do so.

This is the most risky business deal ever done by Somare, and of all funders he would have approached, he went to bed with the Arabs who are known for their ruthlessness. Even Japan Bank for International Corporation who had signed an MOU with the PNG Government for the same mortgage was overlooked. IPIC was chosen and an EPIC FAILURE  it was!

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Papua New Guinea had a very weak economy in 2009. At the time economists and commentators said the world was facing its worst prospects since the 1930s Great Depression. Giant US financial institutions such as Lehman Bros collapsed. Global player Citibank survived only because of a US government intervention. Around the world governments went to major banks and financial institutions for rescue.

Amidst the financial crises, Somare forsaking the advice from the Treasury Department, sold PNG to the Arabs!

Oil Search never closed at $8.55 during maturity, it closed at $8.49 and we could not repay the $1.7b mortgage, giving the IPIC the negotiating power to refuse the buyback and demand new terms. IPIC basically converted its bonds into shares and now holds 13% share in one of Papua New Guinea’s largest employer Oil Search.

To regain a footing in Oil Search, O’Neil approach UBS to fund a new 10% equity, this was to regain some degree of control in Oil Search and to ward off Woodside who wanted to buy Oil Search for $12billion.

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Is PNG Bankrupt

By Government Insider

Recently, commentators on social media have been preaching doomsday on Papua New Guinea and comparing it to a ‘Greece-like economy,’ which will be declared bankrupt.

Is Papua New Guinea really on the verge of bankruptcy?

How do we define bankruptcy and when does a country become bankrupt?

Bankruptcy occurs when individuals take on more debt than they are able to service. This means they can no longer can repay their debt and default.

Throughout the World, Governments borrows money locally and internationally to finance its development goals. These borrowing is called ‘Public Debt’ or ‘National Debt.’

There are two standard ways to measure the extent of National Debt: Gross Financial liabilities as a percentage of GDP or net financial liabilities as a percentage of GDP.

The difference between Gross Debt and Net Debt is how the former is very large for some countries, and some analyst believe that net debt is more an appropriate measure of a debt situation for any particular country.

However, not all countries are the same and their financial assets differs therefore, gross debt as a percentage of GDP is the most commonly used government debt ratio.

According to 2015 Budget in June, Papua New Guinea’s Debt to GDP ratio stands at 33.5 percent and on current trend will rise to 41.3 percent. Is this cause for concent? Not so much as we think it should be.

Let’s look around the world, in February 2015 these are the Debt to GDP for 40 countries around the World.Global debt to gdp

Most analyse says that 50% Debt to GDP ratio is a healthy position for any Government and looking at this chart, Papua New Guinea is way below 50% of the healthy Debt to GDP Ratio.