The Setting Up Of PPL As 'Bankable' For Equity Financing Of PNG's Budget Deficits Pre APEC 2018

A framework is a mental or a physical model or a diagram on which to build your talk or write-up around. Here the DuPont's Holistic Financial Framework is used to narrate and stack on some seemingly random events which transpires into an economy conspiracy theory.

If you like an economy conspiracy theory involving geopolitical access to energy resources and the strategic role a maintenance practice in an energy company had on its financial value, then this article may interest you. The article also follows the underlying 'conspiracy' theme to weave through the apparently random events that culminated into presenting the Dupont's Framework and where the events are stacked to the framework and how these all lead to the setting up of PNG Power Limited (PPL) as 'bankable' to finance the National Budget deficits.

The story of the present state of PPL, when you follow history and look back, is akin to a big conspiracy theory involving an 'economic hitman' from John Perkin's book 'Confessions Of An Economic Hitman' but confined to the PNG Economy as the scene of this plot with the story timeline set about 10 years back before the 2018 APEC Summit in PNG.

Setting The Scene: Consecutive Budget Deficits And Funding Options

Prior to the 2018 APEC Summit in Port Moresby, GoPNG was already running five (5) years of consecutive budget deficits since 2013. When you have national budget deficits, this means that our expenses are greater than our revenue so we will have to borrow to finance this shortfall in the money plan or budget deficit. When it comes to borrowing to finance budget deficits, there are about five (5) options to pursue.

1. Government Bond Issuance,

2. Commercial Bank Borrowings,

3. International Funds Lendings/Borrowings,

4. Foreign Direct Investments and

5. Portfolio Shares Purchases by Multinational Corporations into SOEs.

(1) Bond Finance - PNG has tried selling sovereign bonds to other countries recently but it did not work to finance its deficits.

(2) Bank Finance - PNG borrowed extensively from investment banks and foreign commercial banks in the advanced economies like China and Switzerland.

(3) Official Lending - PNG borrowed from official foreign agencies such as the World Bank or IMF. Those were the concessional loans that can be made on a “concessional” basis, that is, at interest rates below market levels, or on a market basis, which allows them to earn the market rate of return without charging excessive interest.

(4) Foreign Direct Investment - Yes, PNG has Exxon Mobil, Total, Lihir Gold Mine, Barrick and others.

(5) Portfolio Investment In Ownership Of Firms - Investors in developed countries have shown an increased appetite for purchasing shares of stock in developing countries’ firms. The trend has been reinforced by many developing countries’ efforts at privatisation - that is, selling to private owners large state-owned enterprises in key areas such as electricity, telecommunications and petroleum. This is what PNG is doing by selling off some of its assets like OK Tedi, Telikom PNG and other assets to other countries or MNCs in the possible future.

These five ways are then classed into two main groups: Equity Financing and Debt Financing.

Bond, bank and official lending are all forms of 'Debt Financing'. In this case, the debtor must repay the face value of the loan plus interest, regardless of its own economic circumstances.

Direct investment and portfolio purchases of stock shares are, on the other hand, forms of 'Equity Financing'. Foreign owners of a direct investment, for example, have a claim to a share of the investment’s net return, not a claim to a fixed stream of money payments. Adverse economic events in the host country will result in an automatic fall in the earnings of direct investments and in the dividends paid to foreigners.

The distinction between debt and equity financing is useful in analyzing how PNG's payments to foreigners adjust to unforeseen events such as recessions or terms of trade changes. When a country’s liabilities are in the form of debt, its scheduled payments to creditors do not fall even if its real income falls. It may then become very painful for PNG to continue honoring its foreign obligations - painful enough to cause the country to default. Life often is easier, however, with equity financing. In the case of equity, a fall in domestic income automatically reduces the earnings of foreign shareholders without violating any loan agreement. By acquiring equity, foreigners have effectively agreed to share in both the bad and the good times of the economy.

Equity financing rather than debt financing of its investments therefore leaves a developing country much less vulnerable to the risk of a foreign lending crisis.

So Where And How Does PPL Come Into This Picture?

GoPNG SOE PPL operates in the 'energy industry'. Energy resources are increasingly becoming a powerful and influencing trade commodity. As is happening in the world today, energy resources have and will influence geopolitics. Relying on energy endowments will shape the way countries in a region will interact with the energy producer country in the future and involves longer term focus and planning. This warrants that pursuits in energy endeavours should be approached more on National Rationalisation than Economic Rationalisation.

Ending Electricity Market Monopoly To Improve Electricity Reliability

For PPL as the GoPNG energy company, unreliable electricity has been a big hinderance undermining our potential to leverage energy to progress and advance our development aspirations. This unreliable electricity supply now presents an opportunity for foreign interests to gain entry into and access energy resource in our country for their own security as well as dictate our development and our place among community of nations in the world. For example, if China was to build a parallel power grid to alleviate the issues of unreliable electricity, China is going to be one step ahead to consolidate its influence in our country and our region through the energy sector.

The issues of unreliable electricity hindering development became apparent and prominent around the mid to late 2000s. Since 2009 almost all of the letters to the editorial columns of the dailies or posts in social media sites about PPL have been complaints about power blackouts (and PPL’s rolling power blackout service strategy in major urban areas, especially in Port Moresby and Lae). Talk of improving reliability of electricity supply became focused on removing the PPL monopoly in anticipation that introduced competition would lead to improvements in the reliability of the power supply. Eventually in 2009 a policy paper, called 'Electricity Industry Policy', was developed which outlines the electricity markets in PNG where competition can be introduced.

Restructuring PNG Power Limited To Address The Issues Of Reliability

In its endeavour to maintain, improve and sustain power availability in the face of increasing demand and incensed customer complaints as well as keeping customers less unhappy, PPL had evolved and embarked on various projects and reorganisations to try and meet customers' and shareholder's expectations. One part of its proactive evolution, to become competitive in anticipation of the introduced market share competition, was the reorganisation that PPL undertook to give due attention on maintenance issues which involved the creation of the Performance Engineering Division within PPL in mid 2010.

Two years later in 2012 an Asian Development Bank’s (ADB's) benchmarking study titled ‘Finding Balance: Benchmarking the Performance of State Own Enterprises in Papua New Guinea’ was released. This ADB report highlighted the oversights in policy, legal and regulatory frameworks of the past decade with corrective actions recommended that are pro commercialisation of PNG’s SOEs. Commercialisation will require physical asset intensive PPL, with a then total asset worth of PGK1.19 billion, to be operating its core production assets at optimum capacities, not only to maximise returns on equity and returns on assets, but, to ultimately survive in a real business setting amid competitors. If PPL was to operate commercially and carries Community Service Obligations (CSOs), PPL, as a physical asset intensive entity will, for a long time to come yet, not be able to meet the government’s goal of providing affordable power in the most reliable, cost-effective and doing it efficiently. This was because the then experience, observations and now quantified and documented comparative finding from that ADB study showed that PPL's production assets were unreliable and unmaintainable.

Restrictions To Increasing Electricity Tariff Hindered Revenue Generation

Further handicapping of PPL had happened in 2013 where PPL had been directed to reduced tariff and was not going to be allowed to increase electricity power tariffs again for the next 10+ years. The increase tariff would have helped to raised sufficient internal revenue to adequately maintain its production assets. But due to the CSO PPL carried and GoPNG wanted to impress as the government of the people doing the people a favour by providing cheap and affordable electricity, PPL endured on with this 'stay where your are on electricity tariffs' and continue to dish out increasing frequencies of power disruptions.

To alleviate the power disruptions in POM and Lae the then GoPNG of PMPO in 2013 bought two 15MW Diesel Fired Turbine Power Gensets from an Isreali company at PGK50 million. This unfortunately led to this now infamous 'Isreali Genset' saga which had now seen former PMPO implicated for corruption which mostly stem around the breach of procedures in authorising the release of funds for the purchase of these gensets.

Practicing 'Project Centric Maintenance' Lowered The ROE Of PPL

Years of such capital funding not expedited to the energy company start to put a strain on PPL's financial performance with its last profitable year in 2016. From 2016 through to 2018 the financial ratios of PPL in terms of liquidity, activity, debt and profitability were all trending negatively. This downward trends were largely due to PPL addressing operational problems with what little capital budgets/expenditure it received. This practice turned the maintenance function and especially maintenance personnel into parts replacement specialists as PPL was focusing on what is called 'Project Centric' Maintenance. Project Centric Maintenance is now proven to have strategically reduced PPL's shareholders' value (ROE) over time.

Setting The Final Stage Of Making PPL 'Bankable' To Offer Up For Sale

A lower ROE makes PPL susceptible to a cheap and aggressive takeover and so it happens that in January 2018, eleven (11) months out from the 2018 APEC Summit planned for November 2018, a Ms Carolyn Blacklock was appointed as the new Acting MD, a position she held for almost two years. The appointment was largely perceived has not of merit due mostly to the fact that it wasn't clear whether Ms Blacklock did have any prior electric sector experience. Her experience were around private sector finance and corporate banking where she had experience in creating 'bankable' projects in attracting high quality developers and investors to PNG.

By April of 2018 the new acting MD of PPL, Ms Blacklock, announced that the electricity power tariff which was frozen since 2013 will now be further slashed by half. GoPNG of PMPO had wanted to further reduce power tariffs to impress as a government that is easing off the economic burden of high prices. ICCC had warned that reducing tariffs further would be ‘commercial suicide’ for PPL after it had earlier reduced tariffs in 2013. This means that PPL cannot raise internal revenue to fund its maintenance needs when inflation was high. To date (in 2023) there has been no increase in power tariff for about 10+ years now. So PPL must borrow or GoPNG borrow on its behalf (just like we have with the Israeli generator saga) to keep afloat in the game.

Summary Of Setting Up PPL For Sale To Finance The Budget Deficit

To create PPL as a 'bankable entity' to be offered up for sale, the following happened:

Firstly, a policy was put in place and law now enacted to end PPL's electricity market monopoly;

Secondly, a rise in power tariff was denied for PPL so it could not raise revenue to carry out timely and required maintenance and this resulted in accelerated equipment degradation and high cost of ownership; and

Thirdly, the management and BOD of PPL prior to APEC 2018 were borrowing heavily following a 'Project Centric Maintenance' operational approach to maintain PPL's physical assets.

A reduced tariff will reduce sales and an increase capital asset acquisitions will lower the total asset turnover. Both of these will brought down the Return-On-Assets (ROA). The borrowed funds to acquire more capital assets now also become liability which is then used as leverage to soar up Return-On-Equity (ROE). But the higher the equity leverage the more the debt. A higher debt means that the company will be unable to repay its lenders or settle its debts. These all will make the option of acquiring PPL attractive (i.e. high ROE will entice portfolio investment into ownership of PPL) and cheap (i.e. high debt firms will have difficulties obtaining funding and may be forced to sell off shares cheaply) to those who had come to the 2018 APEC with cash and the intention to invest in the country.

Conclusion

Prior to the 2018 APEC meeting in PNG: the practice of 'Project Centric Maintenance' had strategically weakened shareholders value; the monopoly of the electricity market was legally ended with new market segmentations established and PPL was being strategically set up as a 'bankable entity' to be offered up for sale, either fully or in various market segments of the electricity power market that PPL had monopoly over. PPL or the segments of the market that it own are to be sold to the many businesspeople and corporations, especially from China, who were expected in PNG for the APEC Summit. The proceeds of this sale were to be a source of equity funding to finance GoPNG's latest runs of consecutive National Budget deficits but at a greater risk of foreign agents gaining access to PNG's SOE energy company and energy resources.

Postscript

The Chinese were obviously interested but the West saw this and countered with their strategy to rollout 'Major Electricity And Internet'. This, however, did little to thwart China as it pressed on with its anti-NATO (no action talk only) approach to now complete the Edevu Hydro Power Project and, as we now learnt, China also now has a plan to rollout a 'Parallel Power Grid' which will effectively end PPL's electricity monopoly and further consolidate its geopolitical ascendancy and influence in PNG and our region.