Papua New Guinea’s fiscal decentralisation: A way forward

PHASE 3: MORE CONTINUITY THAN CHANGE (1995 TO PRESENT)

Financial functions became more centralised with the introduction of the Organic Law on Provincial Governments and Local Level Governments (OLPLLG) in 1995, which repealed the OLPG of 1977. The new law introduced a third tier of government — Local Level Governments (LLGs) — and was later amended to add another tier in 2013 called District Development Authorities (DDAs). Although the provinces retained access to grants from national government, collection of large revenue sources such as sales taxes was subsumed by national government and generally saw PNG’s sub-national fiscal arrangement move towards a hybrid between a regional and federal arrangement.

Heavy dependence on national government meant that national grants expanded to include provincial and local level administration, provincial infrastructure development, local level government and village services, town and urban services, provincial and local-level staffing, and a grant equivalent to exports sourced from the province (five per cent of the province’s export value). The local level government and village grant, and the town and urban services grant, were allocated based on population. A major problem was that sub-national grants were variable and disbursed too slowly, impeding service delivery. By 2006, the National Research Institute observed that most provinces and local level government administrations were inadequate in “scale, finance, or function”, arguing that the functions devolved to these levels were too fragmented for services to be delivered appropriately.

Revenues expanded with the introduction of Value Added Tax in 1998, but revenue inequities persisted among the provinces. Value Added Tax was later rebranded the Goods and Services Tax (GST) in 2003. GST added another significant revenue stream for provincial governments. The funds are collected by the national government and distributed according to where they were generated, not where needed. Thus, the bulk of GST remains with National Capital District and Morobe, the two provinces with the most economic activity, leaving provincial inequities unsolved. Furthermore, volatile national government revenues in this period meant provincial needs went unmet as revenues did not match the devolved service costs.

As of 2023, PNG’s sub-national governments have expanded to comprise 22 provincial governments, 96 district authorities, and 333 local level governments. Unfortunately, more did not prove to be better.

One improvement to governance came through the Intergovernmental Relations (Functions and Funding) Act introduced in 2009, which unified all transfers to the provinces under a single transfer termed the Function Grant. The new Act established the National Economic and Fiscal Commission (NEFC), whose responsibility was to assist sub-national governments formulate budgets and assess performance. However, governance generally deteriorated and by 2014, it was noted that though fiscal strategies were satisfactory, management, accounting, and reporting at the provincial level were “very weak”. 

Provincial governments failed to provide oversight of district planning. Poor accountability was not surprising, given provinces suffered a lack of administrative capacity, poor commitment by government officials, political appointments and interference in administration, excessive spending on staff remuneration, and high numbers of staff working in temporary positions. With this phase of decentralisation, the number of sub-national governments increased without addressing systemic weaknesses such as administrative capacity, financial reporting, and auditing.

In 2014, parliament amended the 1995 law to further empower local government. It removed the Joint District Planning and Budget Priorities Committee, with an accompanying Act to create District Development Authorities with greater decision-making power. These authorities have effectively added a fourth tier of government. But governance and service delivery safeguards for district authorities are poor. Districts do not possess revenue-raising powers and rely only on MP slush funds for spending. The Department of Implementation and Rural Development, tasked with monitoring MP slush fund projects, has only been able to visit 16 of the then 89 districts, with its most recent project site visit conducted in 2016. A study in 2014 surveying eight provinces found that spending under MP slush funds reached only 20 per cent of schools and 12 per cent of health clinics. Further, many projects initiated under the slush funds were found incomplete or of poor quality. Once again, decentralisation had failed to deliver.

As of 2023, PNG’s sub-national governments have expanded to comprise 22 provincial governments, 96 district authorities, and 333 local level governments. Unfortunately, more did not prove to be better. Of the four regions, the Islands fared better in governance and service delivery, likely due to their smaller size and relatively stronger administrative capacity.

SWINGS AND ROUNDABOUTS PERSIST

Despite efforts to improve the quality of fiscal decentralisation, PNG’s sub-national governments remain largely dependent on transfers from national government, administrative weaknesses persist, and new challenges are emerging. Most provinces are not able to raise finances and manage their affairs effectively. A more centralised model seems the most efficient solution given institutional, capacity, and resource constraints at lower levels of government.

PNG remains largely centralised with respect to its financial and administrative governance arrangements compared to Organisation for Economic Development and Co-operation (OECD) high and upper middle-income countries. As shown by Figure 4, PNG’s sub-national governments remain heavily dependent on transfers from national government. For a poor country, this level of centralisation is likely better suited to PNG’s level of development.