Canberra, 9 July 1968
CONFIDENTIAL
Grant for Papua and New Guinea Administration in 1968/69
1. This submission seeks approval for a Commonwealth grant of $87.0 million to the Papua and New Guinea Administration in 1968/69. The grant for 1967/68 was $77.6 million.
2. The proposed grant is needed to finance development in the first year of the proposed five year development programme. This programme and basic policies for the development of Papua and New Guinea and for Commonwealth aid to the Territory over the five years commencing 1968/69 are discussed in a separate submission entitled ‘Papua and New Guinea Development Programme’.
3. Comparing the proposed 1968/69 Administration budget with the estimated results for 1967/68—
• total expected to rise from $135.9 million to $154.5 million—i.e., up 13.7%;
• internal revenue up from $49.90 million to $56 million, 12.2% increase, new revenue measures to be introduced to achieve this;
• loans up from $8.40 million to $11.5 million, including $1.5 million from the World Bank;
• share of the budget provided by Commonwealth grant would decrease from 57.1% to 56.3%—continuing the policy of reduction in dependence on the Commonwealth; the figure in 1961/62 was 67.8%;
•of the proposed increase of $18.6 million in the total budget, the Commonwealth is asked to provide $9.4 million, or 50.5%;
• because direct expenditure by Commonwealth Departments and non-commercial instrumentalities is expected to fall by $8.3 million in 1968/69, the net increase in Commonwealth expenditure in the Territory in 1968/69 will be $1.1 million compared with $3.34 million in 1967/68 and $6.26 million in 1966/67, and the proportion that total Commonwealth expenditure represents of total Government expenditure will continue to decline from 67.8% in 1966/67 to 65.2% in 1967/68, to 62.6% in 1968/69.
Receipts
4. In 1967/68 internal revenue fell short of the budget estimate of $55.0 million by about $5 million. This short fall is attributed largely to the decline of $4.4 million in direct Commonwealth Departmental expenditure in the Territory in 1967/68 following increases of $12.4 million and $8.5 million in 1965/66 and 1966/67, respectively. Although the estimated decline of $8.3 million in such expenditure in 1968/69 is almost twice as great as the amount of the decrease in 1967/68, the effect of this on internal revenue collections is expected to be offset to a large degree by the spill over in{to} 1968/69 of greatly increased export income in 1967/68. Having regard to the likely movement in the principal revenue generators, it is estimated that internal revenue will rise in 1968/69 by about 12%, allowing for the collection of $1 million from new revenue measures (these do not provide for any variation in the higher uniform rate of income tax for companies imposed in 1967/68). However, because of the sharp decrease in direct expenditure by Commonwealth Departments the rate of growth in internal revenue which averaged nearly 22% in the past three years and which resulted in an 80% increase in internal revenue over that period cannot be expected to continue. The long term rate of growth is expected to be nearer 12%—the estimated growth in 1968/69. For some years to come, internal revenue will not reflect much of the increasing expenditure of recent years on expanding the productive potential of the Territory.
5. Excluding estimated borrowing (of $1.5 million) from the World Bank which will occur for the first time in 1968/69, loans in 1968/69 are estimated at $10.0 million which is $1.6 million or almost 20% more than loans of $8.4 million in 1967/68.
6. The remaining item of receipts is Commonwealth Grant which has been included in the draft Territory budget at $87.0 million.
Expenditure
7. In the formulation of the draft Territory budget priority has again been given to those expenditures which should directly expand the productive potential of the Territory. The functional classification of the proposed budget, given in Attachment ‘A’,1 shows an increase in the proportion of the budget devoted to the Commodity Producing Sector and a substantial increase for the whole of the Economic Sector. In 1968/69, 33.2% of the budget is for economic development,2 compared with 30.7% in 1967/68.
8. The principal elements in the proposed budget increase of $18.6 million are shown at Attachment ‘B’.3 This increase is required to give effect to the Government’s enunciated policy of economic, political and social advancement of the people of the Territory.
9. An estimated increase of $4.6 million for salaries reflects the growth in the Territory Public Service. The net gain in overseas staff achieved in 1967/68 is estimated at around 300, compared with slightly under 200 in 1966/67, and funds have been provided in the draft budget for a net gain of 340 in 1968/69. For some time yet both the expatriate and indigenous components of the Public Service must grow to enable substantial progress towards policy objectives and for effective administration. From 1st July, 1968, there will be no further recruitment of expatriate officers to fill positions of base grade clerk and below.
10. Associated with the growth in the Public Service is an increase of almost $1 million in administrative expenses (duty travel, leave travel, motor transport, post and electricity charges, printing and incidentals). This increase is unavoidable if the Service is to be used effectively.
11. Expenditure on Capital Works and Services, including the capital works and services of the Harbours Board and Housing Commission financed from the budget, is expected to rise by $2.4 million or about 10%. The main increases are for development of roads and wharves.4
12. An additional $0.6 million required for the Electricity Commission is largely in respect of generators for the Rouna Hydro Electric Power Station which were to have been delivered in 1967/68 but which will now be delivered in 1968/69.
13. The combined budget provision for the University of Papua and New Guinea and the Institute of Higher Technical Education is $5.1 million, which is $1.1 million more than in 1967/68. This is the minimum provision necessary to enable these tertiary education institutions to develop in accordance with the proposals submitted to the Government at the time it approved their establishment. The provision made for the Institute of Higher Technical Education anticipates a Government decision on the strength of the P.I.R. which would release existing buildings at Lae for use by the Institute, thus deferring further expenditure of about $300,000 on accommodation for students and indigenous staff housing.
14. Development of telecommunications will require an additional $1.4 million of which $1 million will be financed from the initial drawings from the first World Bank loan to Papua and New Guinea of $6.25 million, which is for a four year telecommunications development programme with a total cost of $14 million.
15. Of an additional $0.9 million to be spent on certain agricultural projects, an amount of $0.5 million is expected to be financed from credit obtained from I.D.A. (subject to replenishment of I.D.A. funds).
16. The growth in borrowing in recent years will result in an increase in expenditure on interest and redemptions of $1.5 million in 1968/69.
17. An amount of $2.5 million (the same as last year) has been included in the draft budget as additional capital for the Papua and New Guinea Development Bank. This amount, together with $1.7 million which the Bank had on hand at the 30th June, 1968, will give it cash resources of $4.2 million in this financial year. The Bank’s outstanding commitments at 30th June, 1968, were $2.1 million—i.e., $0.4 million more than its estimated liquid resources.
18. It is proposed that in 1968/69 an arrangement similar to the one which was approved by the Commonwealth Treasurer for 1967/68 would provide that if the requirements of the Bank for funds appear to be likely to exceed its cash resources the Government will be prepared to consider increasing its grant to the Administration to the extent necessary to assist the Administration in making a further payment to the Bank’s capital; further, if the Bank has sufficient acceptable loan propositions the Bank, with the concurrence of the Administration, may enter into new commitments up to a total of $5.0 million in 1968/69, that is, up to $2.5 million more than the cash resources with which it would be provided from the budget. The ceiling for new commitments of $5.0 million in 1968/69 would not be regarded in any sense as a target at which the Bank has to aim and it would not be referred to publicly.
19. An increase of 13.7% in the Territory budget in 1968/69 compares with an average annual increase of 14.6% over the preceding three years. With constitutional development advancing apace, no lesser increase should be contemplated if economic and social advancement is to be kept at least in balance. The proposed lower rate of growth in the budget in 1968/69 is less than consistent with the tremendous effort that needs to be made in an endeavour to make the Territory substantially less dependent on external aid. But if Commonwealth aid is to continue to be a declining proportion of the Territory budget—and this seems essential if the aid situation is to be kept within reasonable bounds in a situation of rapid political development and mounting pressure for larger expenditure on education, roads and health facilities, etc. the Territory budget can only grow proportionately with the expansion of ‘internal receipts’ (including international loans). The estimated growth in ‘internal receipts’ of about 15% in 1968/69 is about one quarter less than the average rate of growth of almost 20% over the preceding three years, when the rate of direct Commonwealth expenditure particularly on defence was very high. At the same time, it is also a question at what rate the pace of development can be maintained without excessive social and human strains.
20. An increase of $9.4 million in Commonwealth grant representing slightly more than 50% of the proposed increase in the Territory budget would respond on a decreasing proportionate basis to the growth in ‘internal receipts’ of the Territory but would still be in harmony with the Government’s announced policy of continuing to spend more over the next few years on the development of the Territory. Taken together with the estimated decrease of $8.3 million in direct Commonwealth expenditure in the Territory in 1968/69, total Commonwealth expenditure, which is the largest single determinant of economic activity in the Territory, would rise by $1.1 million or 1%, and as a proportion of total Government expenditure in the Territory would decline by 2.6% to 62.6%.
21. The framework of the draft Territory budget has yet to be discussed with the new Administrator’s Executive Council of which the newly appointed Ministerial Members provide a majority. Final allocations within the overall amount of the budget will need to take account of the views of that Council.
22. As decided by Cabinet on 19th July, 1967, (Decision No. 417(M)),5 the Commonwealth grant would be on the basis that in the event that the House of Assembly (on whose decision adoption of the Territory budget depends) should attempt to vary the budget in a way unacceptable to the Government the intention would be that the amount of the grant and the arrangements for Australian aid should be open to review.
RECOMMENDATION
23. I recommend a grant of $87 million to the Papua and New Guinea Administration in 1968/69, the policy basis being as decided by Cabinet in July 1967 (paragraph 22 above), and the arrangement for the Papua and New Guinea Development Bank set out at paragraph 18 above.6
[NAA: A5868, 168]
1 Not printed.
2 Non-economic expenditure consisted of 34.6% for social services and 32.2% for administration and law and order.
3 Increases were recorded for salaries ($4.6 million), statutory authorities ($2.1m), public borrowing ($1.5m), maintenance ($1.4m), tertiary education ($1.1m), telecommunications ($1.4m), agriculture and education ($0.7m each), capital works ($0.9m), purchases ($0.6m), taxation rebates ($0.3m), and administrative expenses ($1.0m).
4 A handwritten correction appears to render this phrase ‘developmental roads and wharves’.
5 Document 136.
6 Cabinet endorsed the recommendation on 23 July (NAA: A5868, 168).