'HELD IN TRUST' 'Held in trust': the role of public funds in economic management Ron Duncan, Peter Larmour and Colin Hunt Public trust funds can serve useful functions, particularly in Ron Duncan is Executive resource or aid-dependent economies like those of the South Director, Pacific islands. They serve to enhance savings, and to stabilise Peter Larmour is Director, and sterilise large natural resource revenue flows. But these Graduate Studies in funds are susceptible to political forces that undermine their Development Administration, and effectiveness. Mechanisms to check these influences, such as Colin Hunt lectures in statutory independence, broadly based board membership and Environmental Manage- public reporting, should be in place. Decision rules on ment and Development at drawdowns from the funds need to be carefully selected to the National Centre for avoid disrupting fiscal management. Development Studies. Public funds of various kinds have a to whether their objectives could have been prominent role in several of the Pacific better achieved by other means. island economies. The functions which Given the importance of resource they were established to perform are exploitation to the South Pacific economies extremely important, such as the and the difficulties which the management stabilisation and sterilisation of mining of resource revenues invariably present, revenues or the offshore investment of this is an important topic for consideration savings accumulated from resource in the South Pacific context. revenues or from payments by donor nations. The performance of these funds, however, has been mixed. Pacific island trust funds The performance of several funds is examined in this paper, with a focus on Here the term 'trust fund' is used in a broad why some of the funds did not live up to sense to include all funds which are held expectations and how their performance in trust on behalf of the peoples of a country. could be improved. Attention is also given This definition could include commodity 41 PACIFIC ECONOMIC BULLETIN price stabilisation funds which are publicly was also to be used to accumulate savings held funds created for the purpose of out of mining revenues and even to build stabilising the price of a particular these up in real terms by means of invest- commodity for the benefit of the producers ment. The Fund is managed by the of that commodity. While funds of this kind Secretaries for Finance and Planning and are not discussed here, some of the for Minerals and Petroleum. conclusions drawn would be applicable to The Reserve Fund of Kiribati was set them. The Mineral Resources Stabilisation up in 1956 by the colonial administration Fund of Papua New Guinea is included in of the Gilbert and Ellice Islands with an the discussion. This is a fund accumulated initial sum of A$555,580 (Toatu 1993). from mining revenues held in trust for all Toatu describes the purpose of the Reserve the peoples of Papua New Guinea. It does Fund as being to accumulate savings from not have any mineral price stabilisation taxation of phosphate mining operations function. Its main function is the to provide for government revenues when stabilisation of mining revenue flows into the phosphate deposits at Banaba (Ocean consolidated revenue. Island) were exhausted. By the end of 1979 The Kiribati Revenue Equalisation when phosphate mining operations ceased Reserve Fund or the Reserve Fund of Kiribati and Kiribati gained its independence, the and the Tuvalu Trust Fund are also included Fund was valued at A$69 million. By 1993, in the discussion. There is considerable with minimal drawdowns into consolidated information publicly available about these revenue and with offshore investment of funds and they were the subject of a recent the Fund pursuing a growth strategy, the study by the authors (see Duncan, Larmour Fund had increased in value to A$353.4 and Hunt 1995). Some reference is made to million. the trust funds of Nauru, but there is less The Tuvalu Trust Fund was established public information on the performance of in 1987 from contributions by aid donors these funds, so firm conclusions cannot be (Australia, New Zealand and the United drawn on their performance. Kingdom) and from Tuvalu itself. With the The Mineral Resources Stabilisation threat of withdrawal of UK budgetary aid Fund was established in 1974, one of the by 1987 or 1988, the Tuvalu government first mineral revenue management schemes convinced its major aid donors to contribute to be established world wide. The purpose to the Fund. The funds are invested off- of setting up the Fund was to stabilise flows shore and revenue generated from the of mining revenues (comprising corporate investment is directed to the annual income taxes on mining ventures, dividend budget to finance recurrent expenditure; withholding taxes and earnings from the this means that government services can government’s equity holdings in mining be provided at a higher level than would ventures) into consolidated revenue. The otherwise be the case (Saltala 1995). The Act setting up the Fund identified the initial contributions to the Tuvalu Trust promotion of national financial stability and Fund amounted to A$27.1 million. In protection of the government’s development September 1995 the Fund was valued at program from revenue fluctuations as its A$42.8 million. Up to that point A$8.35 main objectives, as well as ensuring that million had been directed to consolidated funds available to consolidated revenue revenue and the value of unused drawdowns rise in line with the development needs of (held in the B Account) was A$8.58 million. the economy. This last-mentioned objective The Fund is managed by a Board of can be interpreted to mean that the Fund Directors comprising donor government 42 'HELD IN TRUST' and Government of Tuvalu representatives. output and employment in the other traded An Advisory Committee, also comprised goods sectors. These changes can be trans- of donors and Government of Tuvalu mitted through the appreciation of the representatives, provides advice on the nominal exchange rate or through increases distribution of the drawdowns and their in the price of non-tradeables. Because of impact within the annual budget. the temporary nature of these increases in foreign exchange earnings, they can be associated with significant economywide Purposes of trust funds costs where labour markets are rigid and public sector policies are difficult to reverse. Trust funds can serve one or more of several purposes. The Kiribati Revenue Equalisation By modifying the flows of resource Fund was set up to save revenues from a earnings into consolidated revenue, the non-renewable resource against the day trust fund also plays a stabilisation role. when they would no longer be available. This can make fiscal management easier With the exploitation of a non-renewable than it would otherwise be. The more certain resource such as minerals or petroleum, it the revenue components of the budget, the is economically sensible to invest part of the more certain is expenditure planning and the rents in replacement assets which can be less important is the need for allowance to expected to have at least the same income- be made within the budget for unforeseen generating capacity as the non-renewable circumstances. Just as important is the fact asset being used up. Where investment that booms in natural resource revenues opportunities in such assets are difficult to usually lead to unsustainable commitments find within the country—as is likely to be to consumption or investment expenditure. the case in atoll island economies such as Unfortunately, the record of resource- Kiribati—investment offshore can be an dependent developing economies is that attractive alternative. If funds were to be they have a tendency towards unsustain- invested onshore, there is the absorptive able consumption expenditures rather than capacity of the economy to consider. Hold- investment expenditures in the wake of ing revenues in an offshore fund can thus resource booms (Duncan 1995). serve the purpose of regulating the flow of In 1994, the Kiribati Reserve Fund was onshore investments. used to stabilise the flow of fishing licence Where a country has its own currency, revenues. Fishing revenues were A$9 an offshore trust fund can also be used to million more than budgeted. For that year sterilise the foreign exchange earnings by A$7.5 million had been appropriated from preventing them from expanding the the Reserve Fund for consolidated revenue. domestic money supply at a rate which When the fishing revenues became known, leads to currency appreciation with its the appropriation was not utilised. Fishing 'booming sector' or 'Dutch disease' effects. licence revenues are very uncertain and if The usually volatile foreign exchange the Reserve Fund continues to be used in earnings from sales of natural resources this way it will perform a very useful can then be brought into the economy at a stabilising role. Tuvalu is also now receiving stable rate which is consistent with the fishing licence revenues from distant water economy’s absorptive capacity. Otherwise, fishing nations. The B Account of the Tuvalu a surge in export earnings from the resource Trust Fund could be used in the same way sector can lead to an appreciation of the as the Reserve Fund to stabilise the flow of real exchange rate and the depression of fishing revenues into the budget. 43 PACIFIC ECONOMIC BULLETIN Another more recent use of trust funds weight would be given to equity stocks. is in aiding the establishment of biodiversity Both the Kiribati and Tuvalu funds specify reserves in countries where land is held strict guidelines for their fund managers under customary tenure. In Vanuatu, for which define the proportions of government example, a project is underway involving securities and equities for the fund portfolio.