FISCAL DECENTRALISATION IN A DIVIDED STATE: BOUGAINVILLE IN PAPUA

Satish Chand*

ABSTRACT Is fiscal decentralisation in a polity divided by languages, cultures, tribes, and geography a means to nation building or a route to secession? I consider the case of Bougainville in to provide nuanced information on the above question. This case study reveals that fiscal decentralisation, agreed to as part of a peace agreement signed in 2001 following a decade-long civil war in Bougainville, provided the opportunity for national consolidation. However, tensions surrounding the implementation of arrangements for budgetary support of Bougainville are forcing further fracturing. A definitive answer to the question of whether fiscal decentralisation helped or hindered nation-building will be provided by the referendum, due by mid- 2020, when the people of Bougainville will have the option to vote for independence from Papua New Guinea. I INTRODUCTION Fiscal decentralisation has historically been a central feature of federal structures where powers are devolved to subnational governments in a uniform fashion. Autonomous arrangements build on the above by allowing asymmetrical (often territorially-based) devolution where some subnational governments are granted exclusive powers and functions (ie, privileges) vis-à-vis the rest of the nation.1 Autonomies may be granted to allow the subnational units to choose their political future, including the option to secede; however, the units may instead choose to remain within the federation, given its fiscal benefits. Incentives for unilateral secession rest on the level of transfers received. Consequently, fiscal arrangements can serve as the glue holding a federation together.2 The success or otherwise of nation-building using fiscal transfers from the centre is

* Professor of Finance in the School of Business at the University of New South Wales, based at the Australian Defence Force Academy, Canberra. I am grateful to Christine Bell, Usman Chohan, Ron Levy, Anthony Regan, Thomas Webster, and an anonymous reviewer for helpful comments on an earlier draft of this paper. Views expressed and remaining errors are those of the author alone however. 1 Anthony Regan, ‘Comparative Perspectives on Institutional Framework for autonomy’ in Yash Ghai and Sophia Woodman (eds), Practicing Self-Government: A Comparative Study of Autonomous Regions (Cambridge University Press, 2013). 2 Alberto Alesina, Spolaore Enrico and Romain Wacziarg, ‘Economic Integration and Political Disintegration’ (2000) 90 American Economic Review 1276. 2 Federal Law Review Volume 46 ______investigated in this paper using the case of the Autonomous Region of Bougainville (henceforth Bougainville), which is due to hold a referendum before mid-2020 in which independence from Papua New Guinea will be offered as an option. Decentralisation creates joint responsibilities between national and subnational governments. The division of responsibility between levels of governments is based on the principle of subsidiarity, which provides that the formation and implementation of public policy must be assigned to the lowest level of government with the capacity to achieve the intended objectives.3 The principle of subsidiarity allows individuals and local communities to make decisions on issues affecting them rather than leaving these decisions to the larger group of which they may be a part. It is the precursor to the basic principle of fiscal decentralisation wherein ‘local matters [are best left] in local hands’.4 The objectives of decentralisation are to improve democratic accountability and the quality of services delivered. Decentralisation takes three broad forms: political, administrative and fiscal. Political decentralisation entails the transfer of decision-making authority to elected local-level governments under an agreed legislative framework. Administrative decentralisation, in contrast, allows for delegation of responsibility for delivery of public services to local officials through reforms to the public service. Meanwhile, fiscal decentralisation entails the transfer of resources to subnational governments relating to the powers to raise revenues and to spend public money. These powers may also include raising debt from local and foreign sources, and the divestment of public property. Autonomous arrangements entail both political and fiscal decentralisation. The principles of subsidiarity that provide the basis for fiscal decentralisation may be rationalised on the grounds of economic efficiency.5 The revenues required to fund public provisions may be raised, via tax, jointly by the central and subnational governments. Differences across subnational governments in their capacity to raise revenues and the need for funds to provide public services create room for ‘gap-filling’ grants from the central government. Such grants target fiscal equalisation while also allowing the nation to enjoy the benefits of economies of scale in collecting taxes and providing sovereign services (eg, national defence). Fiscal arrangements, moreover, may evolve as the revenue-raising capacity of each subnational government and that of the central government change over time. Subsidiarity’s locally funded public services may also be critical to building the legitimacy of leaders, which explains the recent interest in fiscal decentralisation in developing countries.6 Decentralisation, it has been pointed out, brings decision makers, who may include both bureaucrats and their political masters, closer to the population being served. This is expected to increase community participation in decision making

3 Robert P Inman and Daniel L Rubinfeld, ‘Subsidiarity and the European Union’ (Working Paper No 6556, National Bureau of Economic Research, May 1998). 4 Wallace E Oates, ‘An Essay on Fiscal Federalism’ (1999) 37 Journal of Economic Literature 1120, 1137. 5 Ibid 1122: ‘in the absence of cost-savings from the centralised provision of a good and of interjurisdictional externalities, the level of welfare will always be at least as high if Pareto- efficient levels of consumption are provided in each jurisdiction than if any single, uniform level of consumption is maintained across all jurisdictions’. 6 Pranab Bardhan and Dilip Mookherjee, ‘Decentralisation and Accountability in Infrastructure Delivery in Developing Countries’ (2006) 116 Economic Journal 101. 2018 Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea 3 ______at the local level, thereby addressing local needs that may not be obvious to a distant decision maker. When local officials are elected on a regular basis, their responsiveness to local needs can improve their prospects for re-election—which then closes the feedback loop between taxpayers and their government. Furthermore, the very process of taxation to fund delivery of services at the local level stimulates ownership of programs whilst improving both transparency in the use of public resources and accountability of those delivering the service to the local population.7 Not all services may be decentralised on the grounds of cost-effectiveness alone, however. While there are centrifugal forces for decentralisation of some public services, there are other services for which centripetal forces work towards centralised delivery. Examples of the latter include sovereign services such as national defence, international relations, border control, and currency which enjoy economies of scale in that the per capita costs of supplying these services fall with the size of the population of a nation. Besides, the effects of macroeconomic stabilisation and social welfare get transmitted across the whole nation and thus warrant national provision. Consequently, decentralisation may provide the economic incentives for the consolidation of a nation- state. Nevertheless, fiscal decentralisation can both be a force for the consolidation of a nation-state as much as a step towards fragmentation. The cases of Quebec in Canada and Catalonia in Spain illustrate the desirability of fiscal autonomy as a force for nation- building as much as a reason for secession. In both these cases, vibrant subnational identities have been developed through strong local and federal taxes used to fund social programs. This has occurred within contexts where contested political identities are undergirded by linguistic and regional cleavages, and by uneven spatial economic development across the federation. Federal programs for income-support, education, and healthcare in Canada have played ‘an integrative role in a country otherwise shaped by powerful centrifugal forces’.8 Meanwhile political decentralisation in Spain has been pursued to try to correct ‘a protracted conflict between central and peripheral nationalism’, and to increase national integration.9 The literature on the ‘paradox of federalism’ asks whether self-rule helps to accommodate or exacerbate ethnic divisions, suggesting that answering this question— which to a significant extent remains open—depends on the context.10 The literature has been particularly silent on the efficacy of fiscal decentralisation in keeping divided communities united. I address this void by considering the case of fiscal decentralisation put in place as part of a peace agreement signed on 30 August 2001 between the leaders of Papua New Guinea and of Bougainville, seeking to end a decade-long civil war. I ask if fiscal decentralisation has been a bridge to national consolidation or a drawbridge for

7 Robertson Work, ‘Overview of Decentralisation Worldwide: A Stepping Stone to Improved Governance and Human Development’ (Paper presented at Second International Conference on Decentralization Federalism: The Future of Decentralizing States?, Manila, 25–7 July 2002). 8 Keith Banting, Canada—Nation-Building in a Federal Welfare State (January 2005) ResearchGate 5. 9 Enric Martínez‐Herrera, ‘From Nation‐Building to Building Identification with Political Communities: Consequences of Political Decentralisation in Spain, the Basque Country, Catalonia and Galicia, 1978–2001’ (2002) 41 European Journal of Political Research 421, 427–8. 10 See Jan Erk and Lawrence Anderson, ‘The Paradox of Federalism: Does Self-Rule Accommodate or Exacerbate Ethnic Divisions?’ (2009) 19 Regional and Federal Studies 191. 4 Federal Law Review Volume 46 ______secession. This is pertinent in contemporary Bougainville given that a referendum is due by mid-2020; independence will be offered as an option to the voters in Bougainville, after which the PNG Parliament will have the authority to decide whether to ratify the decision. While this single case study cannot answer whether fiscal decentralisation helps or hinders the consolidation of a divided nation, it does provide the contextual details of an illustrative use of fiscal decentralisation for nation-building. The rest of the paper is structured as follows. Section II provides context on PNG and Bougainville. Section III describes the arrangements put in place for fiscal decentralisation. Section IV has an assessment of progress made on attaining fiscal self- reliance. Section V discusses the impact of fiscal decentralisation on political autonomy. The Conclusion then follows in Section VI. II THE CONTEXT11 Papua New Guinea is an archipelagic nation comprising many islands of differing sizes, and a diverse population made up of many ethnic and linguistic groups. Bougainville, which accounts for roughly three per cent of the total national population of 8 million, has 17 separate languages, and an equal diversity of cultures.12 As explained later, the decade-long conflict and the subsequent decade and a half of autonomous government have forged and consolidated a distinct identity amongst the people of Bougainville versus their national counterparts. The mainland of Bougainville is a volcanic island with a total land area of 8990 square kilometres (equal to 2 per cent of the total land mass of Papua New Guinea) situated 6 degrees south of the equator and located to the east of the mainland of New Guinea. Until 1998, the autonomous region of Bougainville was the Bougainville Province comprising the Bougainville mainland and the neighbouring islands. It was one of the 19 provinces which—together with the National Capital District—comprised the nation- state of Papua New Guinea (PNG). Bougainville acquired autonomy on domestic policies and policing as part of a peace agreement that was concluded in 2001.13 The conflict commenced with militants delivering a series of explosions from 25 to 27 November 1988. These explosions brought down several power pylons belonging to the Bougainville Copper Limited (BCL) gold and copper mine located at in Central Bougainville. BCL was then jointly owned by Conzinc Riotinto of (with equity of 54%), the government of PNG (19%) and through public shares (27%).14 The mine had been in production since April 1972, and up to its closure in May 1989 had accounted for 45 per cent of national exports, 17 per cent of internally generated

11 This section draws from Satish Chand, ‘Building Peace in Bougainville: Measuring Recovery post-Conflict’ (SSGM Discussion Paper 2013/3, ANU Press, 2013). 12 Darell Tryon, ‘The Languages of Bougainville’ in Anthony Regan and Helga M Griffin (eds), Bougainville Before the Conflict (Pandanus Books, 2005) 31; Eugene Ogan, ‘The Cultural Background to the Bougainville Crisis’ (1991) 92 Journal de la Société des Océanistes 61. 13 Text of the Bougainville Peace Agreement (BPA henceforth) is available at https://peacemaker.un.org/png-bougainville-agreement2001 (accessed 3 August 2018). 14 Herb Thompson, ‘The Economic Causes and Consequences of the Bougainville Crisis’ (1991) 17 Resources Policy 69, 71. 2018 Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea 5 ______government revenues, and 12 per cent of GDP.15 By 1986 BCL was in mid-life with a dozen years of proven recoverable reserves with annual exports of ore concentrate ‘containing 178 600 tons of copper and 16.4 tons of gold’.16 It was amongst the ten largest copper mines on the planet and poised for an investment program from 1988 to 1992 of 520 million Kina (approximately USD665 million at 1988 prices).17 The mine was classed as a low-cost producer and an ‘extremely successful venture’. 18 BCL suspended operations in the aftermath of the explosions as security deteriorated and was forced to close the mine indefinitely on 15 May 1989. The mine remains closed. The population of the island at the beginning of the conflict is estimated to have been 176 000, constituting approximately five per cent of the then total population of four million of Papua New Guinea.19 Importantly, pre-conflict Bougainville was a wealthy province with highly favourable socio-economic indicators in comparison to the rest of the nation. Per capita income as of 1983 at K1973 was the second highest amongst the 20 provinces of PNG; surpassed only by the National Capital District (with per capita income of K2115) that is home to Port Moresby, the nation’s capital.20 Bougainville ranked first amongst the provinces on life expectancy (at 59.6 years compared to the national average of 49.6 years) and infant mortality (at 33 deaths per 1000 live births compared to the national average of 72); and second lowest in terms of the proportion of population without any schooling (at 50.1 per cent compared to the national average of 78.0 per cent).21 The causes of the conflict on Bougainville are complex and many. Consequently, the coverage here is selective and succinct.22 There were disputes over the environmental impact of mine tailings between BCL management and the communities living downstream;23 simmering differences within landowner groups over the distribution of compensation and land rents; and growing tensions among the various groups within Bougainville, as well as those from outside on perceived inequities in income distribution and job opportunities from the mine. Many historians attribute the conflict to the difficulty of reconciling traditional Bougainvillean expectations of reciprocity with payment of compensation and royalties, the shoddy nature of the work identifying stakeholders and landowners when the mine was first established, and the bungled

15 Don S Carruthers, ‘Some Implications for Papua New Guinea of the Closure of Bougainville Copper Mine’ in Ronald James May and Matthew Spriggs (eds), The Bougainville Crisis, (Crawford House, 1990) 38. 16 Zia Qureshi et al, ‘Papua New Guinea: Policies and Prospects for Sustained Broad-Based Growth’ (Country Study, World Bank, 1988), 15. 17 Ibid iii: one Kina as of 31 March 1988 was worth US$1.33. 18 Ibid 16. 19 Ibid 107: the population of North Solomon Province as of the census of 1980 was 125 506. Assuming an annual growth rate of 3.4 per cent as reported in World Bank, the population in 1988 would have been around 164 000. 20 Thompson, above n 14, 78. 21 Qureshi et al, above n 16, 106. 22 See John Braithwaite et al, Reconciliation and Architectures of Commitment: Sequencing Peace in Bougainville (ANU Press, 2010); Anthony J Regan, Light Intervention: Lessons from Bougainville (US Institute of Peace Press, 2010) on the causes of the conflict and the negotiations to peace; Chand, above n 11 on economic recovery after the conflict. 23 Thompson, above n 14. The two rivers most affected by the mining include Jaba and Kawerong (which both drain into Empress Augusta Bay) as reported in a PNG Government commissioned report and quoted extensively. 6 Federal Law Review Volume 46 ______attempt at resolving the conflict by the police following the first series of explosions.24 Furthermore, there were demands by groups within Bougainville for separate sovereignty in the lead up to independence of Papua New Guinea (in 1975) from Australia. These demands accompanied protests by the local landowners against the issuing of mining leases by the colonial administration for the 12 500 hectares to be used for the mine site, access roads, and waste disposal.25 Thompson, however, opines that ‘economic causes [were] by far the most important’.26 The initial attempt to address the conflict was botched, and this had ramifications for the subsequent attempts to foster a lasting peace. The National Government saw the sabotage of BCL operations as a criminal activity and responded by sending in its Police Riot Squad from the mainland to bring those responsible to court. The conflict turned violent when police used force to apprehend those thought responsible. Their failure to contain the situation led to the deployment of soldiers from the mainland which escalated the violence further whilst creating a lasting-rift between the locals and the security forces. The police and soldiers who were largely posted from the mainland committed ‘random human right abuses [including] assaults, rapes, extra-judicial killings, and burning of villages’27 leading to ‘numerous reports of harassment and intimidation of Bougainvilleans’.28 Consequently, what started as a conflict between BCL and the communities surrounding the mine quickly escalated into an ethnic conflict, and one that later took on secessionist dimensions. The entire province was drawn into an armed conflict between the islanders and the (mostly) mainlanders, which began with 25 casualties on 28 October 1989, and ended at the end of the 1996 calendar year with an estimated 5000–20 000 casualties.29 Several attempts were made to broker peace. At least 10 peace agreements were negotiated between the warring parties before fighting was ended. Community elders, civil society, traditional chiefs, and women’s groups all contributed to the negotiations for peace. A truce was reached between the parties in conflict in December 1997 through mediation by the Government of New Zealand, and a ceasefire agreement was reached in April 1998. The Bougainville Peace Agreement was finally signed by the leaders of the warring factions in Bougainville and the National Government on 30 August 2001.30 The BPA comprised three key elements: (i) the granting of autonomous status to the government in Bougainville elected under its own Constitution with the right to assume ‘increasing control over a wide range of powers, functions, personnel, and resources on the basis of guarantees contained in the National Constitution’; (ii) the right to hold a referendum on the future political status ten to fifteen years following the election of the

24 Ogan, above n 12; Terence Wesley-Smith, ‘Papua New Guinea in 1990: A Year of Crisis’ (1991) 31 Asian Survey 188; Anthony J Regan, ‘Causes and Course of the Bougainville Conflict’ (1998) 33 Journal of Pacific History 269. 25 David Hyndman, ‘Digging the Mines in ’ (1991) 15(2) Cultural Survival Quarterly 32–9. 26 Thompson, above n 14, 69. 27 Regan, above n 24, 277. 28 Wesley-Smith, above n 24, 194. 29 The Uppsala Conflict Data Program defines an armed conflict as: ‘a contested incompatibility that concerns government and/or territory where the use of armed force between two parties, of which at least one is the government of a state, results in at least 25 battle-related deaths.’ See http://www.pcr.uu.se/research/ucdp/definitions/. 30 Bougainville Peace Agreement 2001 (Papua New Guinea) 30 August 2001 (‘BPA’). 2018 Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea 7 ______first autonomous government; and, (iii) disposal of weapons to proceed in stages and by regions within Bougainville. 31 Within the first of these points, detailed financial arrangements were agreed to including grants that would be provided from the centre for the operation of the Autonomous Bougainville Government (ABG henceforth). The fiscal arrangements put in place were to fund public goods and lend time to rebuild the economy. Whether this arrangement provided space for ethnic and institutional diversity in an accommodating PNG nation-state or the route to secession is the issue addressed next. III FISCAL DECENTRALISATION The autonomous arrangement put in place for Bougainville was an extreme step in the decentralisation of government services that began with the birth of sovereign PNG on 16 September 1975. The original motivation for decentralisation, as expressed in the PNG National Constitution, was to allow for equality of participation in the affairs of the government by every citizen, including having equitable access to the benefits of development and to public services. 32 The decentralisation of government services entailed the creation of 19 separate provinces, with each province given the powers to spend, and to a lesser extent to tax economic activity within their jurisdiction. 33 Demands by the locals for equitable sharing of proceeds from BCL, the lone mine operating in the country at the time, played a crucial role in setting up the provincial government and the grant of mining revenues to Bougainville. The importance of political solidarity and economic self-reliance were emphasised in the National Constitution. The third National Goal called for the promotion of ‘internal interdependence and solidarity among citizens, and between provinces’34 through self- reliance in that ‘economic development [is] to take place primarily by the use of skills and resources available in the country either from citizens or the State and not in dependence on imported skills and resources’. 35 These same principles were emphasised in the BPA, and were debated in the formulation of the financial arrangements. Chapter 9 of the BPA specifies the financial arrangements, including the revenue raising powers to be made available to the ABG and fiscal grants to be provided from the National Government until fiscal self-reliance is achieved. The Organic Law on Peace-Building in Bougainville36 and a new Constitution for Bougainville were enacted to give effect to the BPA, and amendments were made to the PNG National Constitution for the same reason. Post-conflict Bougainville, during the period when the BPA was being crafted, had had its economy destroyed and thus needed resources for rebuilding. BCL was absent for a dozen years, alternative industries like cocoa and copra were miniscule, and most of the public infrastructure had been destroyed. The capacity of the ABG to collect taxes

31 BPA ss 1–3. 32 See Constitution of the Independent State of Papua New Guinea (Papua New Guinea) (‘PNG National Constitution’). 33 Roger Berry and Richard Jackson, ‘Inter-Provincial Inequalities and Decentralisation in Papua New Guinea’ (1981) 3 Third World Planning Review 57, 57. 34 PNG National Constitution s 3(3). 35 Ibid s 3(7). 36 Organic Law on Peace-Building in Bougainville — Autonomous Bougainville Government and Bougainville Referendum 2002 (Papua New Guinea) (‘Organic Law’). 8 Federal Law Review Volume 46 ______was absent and as a result the National Government was to continue to collect revenues and transfer these to the ABG until the local economy and taxation capacity was rebuilt. These grants were to fund public services to the people of Bougainville and in the process act as a force for national consolidation. It was also agreed that the National Government would support the ABG move towards fiscal self-reliance; defined as ‘the year in which the revenue from company tax, 70 per cent of Value Added Tax (VAT) and customs duties is equal to the value of the recurrent grant on a sustainable basis’.37 It was envisioned at the signing of the BPA that the economy would recover quickly following the recommencement of mining, lending the ABG the resources to fund its own budget and share in the costs of sovereign services. The actual collection of taxes in the interim was left to the National Government until such time when ‘restoration’ was achieved; restoration being defined as ‘the time when Bougainville had returned to a standard of peace and development approximating to that of the remainder of Papua New Guinea’. 38 The Internal Revenue Commission (IRC) until then had the responsibility to collect all taxes and duties; and, to deposit all personal income taxes collected in Bougainville into a trust account for the ABG.39 All the personal income taxes so collected together with the balance of 30 per cent of Value Added Taxes collected, was to be distributed to the ABG on request to be used ‘for the purpose of supporting development’. 40 The National Government was to retain control over company tax, VAT, and customs duties prior to the attainment of fiscal self-reliance, while the ABG was given powers to adjust company tax rates applicable in Bougainville to within five percentage points from the national rate following the attainment of fiscal self-reliance.41 The ABG was handed powers to set licensing fees for liquor sales and gambling, property taxes, motor vehicle registration charges, road user taxes, and any other taxes which are available to provincial governments.42 Equity in access to public services as mandated by the National Constitution is a cohering force and provides the rationale for fiscal transfers across subnational governments in PNG. Transfers from the national budget to the ABG were initially mandated in the form of ‘recurrent unconditional grants, restoration and development grants, specific-purpose conditional grants’, and a one-off establishment grant.43 These grants were to be phased out as domestic revenues recovered.44 The recurrent grants are provided to the ABG to meet the costs of functions for which it has responsibility. Prior to the establishment of the ABG, the value of this grant was determined by the National Economic and Fiscal Commission in order to ‘ensure that provincial governments and local-level governments obtain a fair share of national wealth’.45 Following the signing of the BPA, the value of the recurrent grants provided to the ABG, and their time of release and methods of adjustment, remained generally similar to those for provincial governments; however, now the grants included the costs

37 BPA s 137. 38 Organic Law s 38. 39 BPA s 141(a); Organic Law s 41. 40 BPA s 141(a); Organic Law s 41(3)(b). 41 Organic Law s 41(4). 42 Ibid s 44. 43 BPA s 149. 44 Ibid s 150. 45 Organic Law s 117(8)(a)(iii). 2018 Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea 9 ______of the additional functions transferred to the ABG in the new autonomous arrangement.46 The restoration and development grant is made to the ABG for public investments, and is set at an amount ‘no less than the 2001 Public Investment Programme appropriations for Bougainville’.47 The concept of restoration and development grants was unique to Bougainville. It was the only region of PNG where life and property were lost on a massive scale through conflict. The war had destroyed the Bougainvillean economy, leaving little administrative or economic capacity there. No province is mandated by legislation to receive similar transfers, and none has escalation factors for the value of development grants as mandated for Bougainville. In addition to the above, the one-off establishment grant was to be used for development purposes as decided by the ABG, while conditional grants were to be provided and used for purposes agreed to between the ABG and the National Government.48 The financial arrangements in the BPA provide exclusive fiscal powers to the ABG to raise revenues locally to become financially self-reliant and, in the interim, gap-filling grants are mandated from the National Budget to meet Bougainville’s recurrent costs and those for public investments.49 Conditional grants were allowed for funding of specific projects in Bougainville by the National Government. The ‘Special Intervention Fund’ (SIF) is an example of a conditional grant provided for the rebuilding of infrastructure in Bougainville. In addition to the above, members of the National Parliament representing Bougainville receive grants in the forms of the ‘District Services Improvement Program’ (DSIP) and ‘Provincial Services Improvement Program’ (PSIP) from the National Budget, which is not reflected in the ABG-Budget. Specific provisions were made for adjustment to grants over time, depending on the financial situations of both the ABG and the National Government. The recurrent grant for an activity was to be adjusted annually in a manner analogous to that for provincial governments, with the proviso that the level of the grant ‘be cut only if seriously adverse economic conditions arise, requiring “across-the-board” cuts to the National Budget and by no more than the average of these cuts’.50 Similarly, restoration and development grants were to be ‘adjusted upwards pro rata in accordance with the National Public Investment Programme averaged over a rolling five year period’. 51 That is, the minimum allocation for public investment to the ABG is set at the level for 2001 with the annual escalation factor set at the rate for the public investment program for the nation. The ABG is thus guaranteed minimum fiscal transfers for public investments from the national budget at the proportion for 2001. IV PROGRESS MADE IN ACHIEVING FISCAL SELF-RELIANCE The BPA—of which the autonomous arrangements above are core components—had the objective of resolving a protracted conflict without the need for immediate secession. The people of Bougainville were also given the exclusive right to elect their own government, which in turn was handed the powers to raise revenues and the

46 BPA ss 151–5; Organic Law s 48(2)(a). 47 Organic Law s 49(1). 48 BPA s 171. 49 Ibid ss 134, 149. 50 Ibid s 156. 51 Organic Law s 49(2). 10 Federal Law Review Volume 46 ______responsibility to deliver services. Financial resources, as explained earlier, were guaranteed in the interim to enable the ABG to reach fiscal self-reliance. Furthermore, the architects of the BPA had foreshadowed a sharing of the sovereign costs both prior to and after Bougainville reaches fiscal self-reliance. The financial arrangements, including the monitoring of progress towards fiscal self-reliance, remained a standing item in the five-yearly reviews of the implementation of the BPA. So, what progress has the ABG made in achieving fiscal self-reliance? In practice, revenues from all company taxes and customs duties, and 70 per cent of VAT collected in Bougainville, is placed in a trust account created by the Minister in the National Government responsible for internal revenues (ie, the Treasurer). This sum is credited against the value of the recurrent grant provided to the ABG to ascertain progress on attaining fiscal self-reliance as defined above. 52 The National Government collects Personal Income Tax for employees in Bougainville and Goods and Services Tax while the ABG collects Motor Vehicle Registration fees, sales taxes on beer and cigarettes, liquor license fees, housing rentals, and fees from grants of mining exploration licenses. The value of these taxes for 2016, the most recent year for which data are available, is shown in Table 1. On these figures, Bougainville had reached 5.66 per cent of the value required for achieving fiscal self-reliance.

Table 1: Progress on Fiscal Self-Reliance, 2016 ABG-Budget REVENUE 2016 Company Tax K727 850 VAT (GST) (70% of total) K1 532 118 Customs Duties K79 452 TOTAL Bougainville Revenue K2 379 009 Bougainville Recurrent Grants K41 291 300 Fiscal Self-Reliance Achieved 5.66% Source: Presentation by Secretary for the Department of Finance and Treasury at the Tax and Revenue Summit on 27 September 2017.

There is broad consensus within PNG that Bougainville is well short of achieving fiscal self-reliance. However, significant disagreements remain over the support provided by the National Government as mandated in the BPA to allow Bougainville to reach fiscal self-reliance. Most contentious is the value of developmental grants provided to the ABG. The ABG claims that it is owed an annual sum of K70 million in the form of Restoration and Development Grants while the National Government has budgeted K15 million—which have not been released on time, or on some occasions at all.53 Dr John Momis, the President of Bougainville, announced in his opening remarks to the meeting of the Joint Supervisory Body (JSB)—held in Bougainville on in June 2018,

52 BPA s 136; Organic Law s 39. 53 See Bougainville News, Bougainville News 2 of 3 Coverage of #JSB meeting Arawa June 29 (1 July 2018) . 2018 Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea 11 ______and reported widely by the media—that the National Government owes Bougainville one billion Kina in the form of overdue Restoration and Development Grants. The President went on to argue that the ‘ABG is in extreme budget crisis due to the National Government’s failure to make payments [such that] we simply do not have the money to do anything’.54 The President has made this complaint in various forums, including a 2017 meeting of the JSB in Port Moresby. The minutes of 2017-JSB meeting note that the differences between the two governments on the calculation of the value of the Restoration and Development Grants ‘have brought tensions to relationships and partnership of the two governments posing a threat to joint working relationships to implement the BPA’.55 The BPA included mechanisms for resolution of disputes. As a general principle for intergovernmental relations, consultation and cooperation were enacted to minimise disputes.56 The JSB, with equal representation from the National Government and the ABG, was created to oversee implementation of the BPA, prepare draft legislation to facilitate the above, provide a forum for consultation between the two governments, and resolve any disputes arising. 57 Implementation of the BPA was made a joint responsibility but with the explicit provision that the National Government may not withdraw or suspend powers granted to the ABG; it can only withhold grants for ‘systemic and widespread’ financial abuse.58 Progress towards achieving fiscal self-reliance since the signing of the BPA has been slow. There are several reasons for this. While the Bougainville Constitution states that that ABG shall ‘aim to achieve fiscal self-reliance as soon as possible’,59 no milestones were provided in the Organic Law or the Bougainville Constitution to track progress. Contrary to the expectations of the leaders when the BPA was being negotiated, the mine remains closed and the economy remains weak, with urban per capita GDP having reached only 39 per cent of the level prior to the conflict. The prospects for attaining fiscal self-reliance before the referendum are weak given that the bulk of economic production in Bougainville is within the subsistence sector, and therefore difficult to tax, and the prospects for mining are limited by a moratorium on the derelict BCL mine. Furthermore, the incentives for the ABG to aspire towards reaching fiscal self- reliance are equally weak. This is so for at least four reasons. First, the ABG is guaranteed access to grants from the National Government, and therefore lacks the need to expend effort in collecting taxes. Second, the ABG lacks the incentives to expand the revenue base since the existing revenue-sharing formula allows ABG to collect all personal income taxes, but none of the company taxes and just 30 per cent of VAT. Recall from Section III that company taxes are included in consolidated revenues and used only for

54 This view was widely reported in the print media and online: see Bougainville News, Bougainville News Alert: Agreed Record of Outcomes #JSB Meeting Arawa June 29 (30 June 2018) . 55 Joint JSB Resolutions (Papua New Guinea–Autonomous Bougainville Government) 15 December 2017 s 4.4(iii) (‘Joint JSB Resolutions’). 56 PNG National Constitution s 331. 57 BPA ss 263–4. 58 PNG National Constitution s 329. 59 Constitution of the Autonomous Region of Bougainville 2004 (Autonomous Region of Bougainville) s 153(1)(a). 12 Federal Law Review Volume 46 ______the purposes of calculating fiscal self-reliance, while only 30 per cent of the collections from VAT accrue directly to the ABG. Third, while the delivery of education and health services are the responsibility of the ABG, some of these services (eg, hospitals and tertiary education) are delivered nationally and therefore distance the recipients of these services from the ABG. Besides, services delivered in Bougainville by the National Government circumvent the ABG and in the process undermine the compact between the local taxpayers and their government. Last, the prevailing arrangement of taxes being collected by the IRC further isolates the taxpayer and the taxes paid to the services being received in Bougainville. This last point lends the opportunity for the ABG to blame the National Government for poor access to basic services in Bougainville. These factors may explain both the slow progress made towards achieving fiscal self- reliance, as well as the high dependence on national grants for the delivery of basic services in Bougainville. Moreover, the ABG has complained repeatedly that its activities are hamstrung by the failure of the National Government to provide grants in a timely manner as legislated in the Organic Law.60 While I do not have the data to test the veracity of this claim explicitly, the incentive effects of fiscal transfers for such behaviour are observed more broadly—an issue that I take up in the next section. V FISCAL DECENTRALISATION AND AUTONOMY While the autonomous arrangement for Bougainville is unique to PNG, comparison may be made with the forms of financial arrangements for subnational governments elsewhere. The Spanish state, comprising some 17 autonomous communities of varying size, population, and levels of economic development, and each with distinct ethnic groups (eg, the Basques, Catalans, and Galicians who are linguistically and culturally distinct from the rest of the nation) has some parallels with PNG.61 The Spanish National Government has exclusive jurisdiction over international affairs, justice, merchant shipping, civil aviation, economic planning, and finances. But the Constitution acknowledges the rights of the autonomous governments to financial autonomy ‘for the development and exercise of their powers, in conformity with the principles of coordination with the State Treasury and solidarity among all Spaniards’.62 Like the ABG, the autonomous governments can impose local taxes and levies and receive support from the State Budget. Fiscal policy is coordinated across the nation through a national agency, the Council for Fiscal and Financial Policy, composed of the federal and subnational Finance Ministers plus the Minister for Public Administration. The mechanisms for coordination provides the Spanish National Government control over the activities of the subnational governments.63

60 Joint JSB Resolutions acknowledges the tensions on the value and release of Restoration and Development Grants (RDG). It decided, as a compromise, on a figure of K437 million to be paid in 2018 and 2019. It was also agreed that: ‘the two governments must … assess the economic situation in the country and ability of the National Government to meet its commitment and stand ready to review the commitments under this compromise’: at s 4.4(v). 61 Eric Solsten and Sandra W Meditz, Spain: A Country Study (December 1988) Library of Congress . 62 Spanish Constitution (Spain) ratified on 7 December 1978 s 156.1. 63 The details on the financial arrangements are provided in the Organic Law on the Financing of the Autonomous Communities 1980 (Spain). 2018 Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea 13 ______

For the ABG, the extant fiscal regime in the Organic Laws and the ABG and PNG Constitutions provide the incentives for fostering growth of the local economy. On the one hand, guaranteed access to finance from the centre entails problems of the ‘tragedy of the commons’.64 In other words, when the National Budget is treated as ‘common property’ then each subnational level government has an incentive to spend more than they would if given the responsibility to raise their own finances. This problem of ‘over- spending’ by subnational governments is exacerbated when voters suffer ‘fiscal illusion’; that is, where transfers from the centre are set by legislation (as that for the Restoration and Development Grant for the ABG explained in the previous section) and seen to originate from non-residents (ie, non-Bougainvilleans). The problems of fiscal illusion and over-spending are made doubly serious when the beneficiaries fail to connect service delivery to taxes paid at the local level. Consequently, transfer- dependent subnational governments face weak incentives for fiscal austerity ex ante and have an incentive to blame the National Government for their failures ex post. The National Government on the other hand has an incentive to use fiscal dependence of the subnational governments for political control. In the case of PNG, the National Government is prevented from withdrawing any powers and functions granted to the ABG and thus may only withhold grants for ‘systemic and widespread’ financial abuse.65 Furthermore, resources from the national budget must accompany newly handed down responsibilities. Consequently, the ABG has the mandate to draw down all policymaking powers except those relating to sovereign functions such as national defence, immigration, and international trade—and with it the resources to fulfil these responsibilities. The extant fiscal regime, however, fails to lend the incentives to the ABG to attain fiscal self-reliance. The BPA does not contain a fiscal pact with clear milestones on progress made in reaching fiscal self-reliance. While the impending referendum has heightened awareness within the ABG for fiscal autonomy, progress made to date has been slow and the prospects remain poor. Regardless of the outcome of the referendum, the importance of fiscal autonomy is likely to remain pertinent for reasons of fiscal prudence and expedience. On fiscal prudence, the ABG will need to take greater responsibility for raising revenues for its own budget. There is econometric evidence from cantons in Switzerland in support of the proposition that ‘direct democracy [yields] a higher economic efficiency than a pure representative democracy’.66 There is also evidence to suggest that voter involvement in funding government activity improves the efficiency with which public services are delivered. 67 Finally, a hard budget constraint will provide the incentive for the ABG for prudent fiscal management. The international experience suggests that fiscal transfer systems can be designed to simultaneously achieve

64 Andrés Velasco, ‘Debts and Deficits with Fragmented Fiscal Policymaking’ (2000) 76 Journal of Public Economics 105, 108. 65 PNG National Constitution s 329. 66 Lars P Feld and Marcel R Savioz ‘Direct Democracy Matters for Economic Performance: An Empirical Investigation’ (1997) 50 Kyklos 507, 529. 67 Benny Geys, Friedrich Heinemann and Alexander Kalb, ‘Voter Involvement, Fiscal Autonomy and Public Sector Efficiency: Evidence from German Municipalities’ (2010) 26 European Journal of Political Economy 265. 14 Federal Law Review Volume 46 ______horizontal equalisation with fiscal incentives to expand the tax base of subnational jurisdictions whilst preventing tax competition between them.68 On expedience, the political tensions between the ABG and the National Government with regards to fiscal transfers have been building for several years now. The approaching referendum will raise the tempo of debate on the need for fiscal self- reliance. The impending referendum has also raised the urgency of attaining fiscal self- reliance for political autonomy since otherwise fiscal dependence lends the opportunity for political control. The existing autonomous arrangement attempted to mitigate the risk of political control from the centre via legislating transfers from the national budget to the ABG. In sum, the autonomous arrangement for Bougainville is an attempt to strike a balance between self-rule and shared-rule through consultation and cooperation facilitated through the Joint Supervisory Body (JSB). Institutions were designed to resolve disputes through mediation and arbitration at first, and the use of the courts as a last resort but with the proviso that the National Government may not withdraw powers from the ABG but is permitted to hold back fiscal grants.69 But these institutions have not prevented disputes regarding the level and timeliness of fiscal transfers from arising in the first place; nor has it resolved them afterwards. I have explained why these disputes may have arisen and presented reasons why the impending referendum provides the incentives to reach for fiscal self-reliance. Fiscal federalism provides the mechanisms for the balancing of self-funding and shared-funding of public services. The case for shared funding reached through the BPA illustrates that the costs of rebuilding following a devastating conflict can be spread across a large nation, but doing so without concerted efforts at cohering the nation may create the conditions for self-rule when the opportunity arises. With the benefit of hindsight, the fiscal arrangements in the BPA could have been strengthened such that the room for disputes between the National Government and the ABG could have been contained while incentives were created for the ABG to grow its own tax base.

VI CONCLUSION Attempts to maintain the pan-Papua New Guinean political community created at the birth of the nation in 1975 faced their first serious test during the decade-long conflict between the Bougainville Revolutionary Army and the national institutions, including the National Defence and Police Forces. The conflict ended with the signing of a peace agreement in August 2001. The pact for peace included the grant of political autonomy to Bougainville, an agreement to a phased disposal of all weapons from the region, and an agreement to hold a referendum between 10 and 15 years after the election of the first autonomous government. The referendum is due to be held by mid-2020 when voters in Bougainville will be provided with an option to choose independence, exposing PNG to another test of political unity. Decentralised democratic federalism—where the population is partitioned to provide public goods as efficiently as possible with locally elected legislatures—

68 Barry R Weingast, ‘Second Generation Fiscal Federalism: The Implications of Fiscal Incentives’ (2009) 65 Journal of Urban Economics 279, 284. 69 There are strong parallels with the autonomous communities of Spain, see, eg, Robert Agranoff, ‘Federal Evolution in Spain’ (1996) 17 International Political Science Review 385. 2018 Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea 15 ______provides a way forward toward cohering the nation. Such a federation would assign the responsibility to supply local public goods, such as primary education, basic healthcare, and policing, to the local level government while the responsibility to provide communications, currency, and national defence go to the national government. Democratically elected legislatures allow a voice for local interests in policymaking. The responsibility for the protection of the rights to property, guarantees to political participation and personal freedom, and social protection, would also rest with the national government—and are particularly relevant where mobility across locations is limited by customary land tenure arrangements. These roles may be assigned in the national constitution. In the case of a post-conflict situation such as that of Bougainville, the risks of tyranny by a majority may be mitigated through national protection of the above-enumerated rights. Fiscal decentralisation for post-conflict Bougainville was part of the pact for peace. Chapter 9 of the Bougainville Peace Agreement (BPA) contains specific provisions relating to the financial arrangements between the National Government and the Autonomous Bougainville Government (ABG). These arrangements include the provision of Recurrent Grants to the ABG, the release of development grants for the rebuilding of infrastructure destroyed by war, and built-in formulas for adjusting the value of these grants over time. Included as well were the means for revenue sharing after the local economy had recovered sufficiently to meet all of the recurrent costs; that is, after having achieved fiscal self-reliance. The architects of the BPA had envisioned a quick rebound in the economy, enabling the ABG to attain fiscal self-reliance before the due date for the referendum. But the gap-filling grants mandated by the BPA may have inhibited progress towards fiscal self-reliance whilst providing the incentives to the ABG to blame the National Government for some of its own failings, such as being unable to revive mining. Consequently, some 15 years later, the ABG has reached only six per cent of the distance to fiscal self-reliance. Meanwhile disagreements on the value of grants provided from the centre have deepened the divide between the two governments—the effects of which are reverberating with voters in Bougainville. This paper has focussed on the role of fiscal decentralisation in cementing ties between peoples divided by geography, ethnicity, culture and language, using Bougainville as a case study. An equalisation formula that measures fiscal need and compares this to fiscal capacity, with transfers instituted on the ground of equity, can be the glue that holds autonomies together with the national government. The architects of the peace agreement, possibly cognisant of this, crafted conditions for fiscal transfers to bind a nation divided by a decade-long conflict. Integrationists may have seen the BPA as the bridge for nation-building, while secessionists possibly saw it as a drawbridge to be used for secession at the referendum. Who has won? A definitive answer will be provided by the referendum. But the evidence presented suggests that the mechanisms designed for shared funding of public services failed the integrationists, while limited progress on achieving fiscal self-reliance has similarly failed the secessionists. In the meantime, the cracks of conflict remain to be cemented. Finally, a note of caution: a single case study cannot lead to generalisations, but what is clear from this case study is that flawed implementation of fiscal arrangements can further fracture a divided nation. Rectifying the fiscal arrangements is likely necessary, albeit not sufficient, to allow fiscal decentralisation to act as cohering force for nation- building.