Australia: Papua New Guinea As A Borrower – What Is Involved?

Part 1
Last Updated: 6 March 2011
Article by Michael Sullivan

As the PNG economy grows and the need for capital increases, the borrowing powers and the sovereign immunity of the Independent State of Papua New Guinea (State) become more important to understand.

This article explores both the State's borrowing powers and its entitlement to sovereign immunity inside Papua New Guinea (PNG) and elsewhere.


The Constitution of the State (Constitution) details the basic borrowing powers of the State.

Section 1(1) provides that:

"Papua New Guinea is a sovereign, independent state by the name of the Independent State of Papua New Guinea."

In the Constitution, "Papua New Guinea" means the legal entity of the State.

Section 247 of the Constitution provides that:

  1. "Papua New Guinea has power to acquire, hold and dispose of property of any kind, and to make contracts, in accordance with an Act of the Parliament.
  2. Papua New Guinea may sue and be sued, in accordance with an Act of the Parliament."

The Constitution also provides ( section 209(1)) that the raising and expenditure of finance by the National Government, including the imposition of taxes and the raising of loans, is subject to authorisation and control by the Parliament, and shall be regulated by an Act of the Parliament.

The Constitution further provides (section 210(1)) that:

"The Parliament shall not provide for the imposition of taxation, the raising of loans or the expenditure of public moneys of Papua New Guinea except on the recommendation of the Head of State, acting with, and in accordance with, the advice of National Executive Council."

This is, in substance, a re-statement of the rule generally applicable in the Westminster-style parliamentary system that laws relating to the raising or expenditure of public revenue should be initiated by the executive government and not by the legislature itself. Accordingly, in PNG, a money bill may only go to Parliament on the recommendation of the National Executive Council.


There are other Acts of the Parliament (as envisaged by section 209(1) of the Constitution) which confer specific borrowing powers upon the State including the following:

  • Loans (Works, Services and Other Purposes) Act (Chapter 347)
  • Loans (Works, Services and Other Purposes) Act (Chapter 376)
  • Loan (Arawa Town Works) Act (Chapter 26)
  • Loan (Bougainville Copper Agreement) Act (Chapter 27)
  • Loan (Works, Services and Electricity) Act (Chapter 130)
  • Loan (Works, Services and Government Instrumentalities) Act (Chapter 131)
  • Loans (Overseas Borrowing) (No 2) Act (Chapter 133A)
  • Loans (Overseas Borrowings) Act (Chapter 133)
  • Loan (Works and Services) Act (Chapter 129)
  • Loans and Assistance (International Agencies) Act (Chapter 132)
  • Loan (Electricity) Act (Chapter 128)
  • Loans Securities Act (Chapter 134)
  • Treasury Bills Act (Chapter 135)

The Loans (Overseas Borrowings) (No.2) Act and the Treasury Bills Act warrant particular attention.

Loans (Overseas Borrowings) (No.2) Act (LOBA 2)

The LOBA 2 is similar to the Loans (Overseas Borrowings) Act which preceded it, except that the first Act included a limit on the borrowing under that Act which has already been used up. If loans are contemplated from the World Bank, the Asian Development Bank or other international agencies, then the Loans and Assistance (International Agencies) Act will be relevant. The general borrowing powers under the LOBA 2 are set out in Section 2(1) as follows:

"The Head of Stale, acting on advice, may, on behalf of the State, borrow from or through overseas financial institutions, in such manner and on such terms and conditions as are agreed on by the Head of State, acting on advice, and the institutions, such sums as are specified in Subsection (3), for the purpose of —

  1. meeting the expenses of borrowing; and
  2. works and services of the State; and
  3. the purchase of equity in companies; and
  4. making loans to:

    1. . . . [Repealed]
    2. the Papua New Guinea Harbor's Board for the purposes of the Board; and
    3. A Departmental Head of the Department responsible for transport matters, for the purpose of performing his functions and powers under the Harbors Act; or
    4. the Housing Commission for the purposes of the Commission; and
    5. the Agriculture Bank of Papua New Guinea for the purposes of the Bank; and
    6. the Investment Corporation of Papua New Guinea for the purposes of the Corporation; and
    7. the Post and Telecommunication Corporation for the purposes of the Corporation; and
    8. any other prescribed public authorities for prescribed purposes."

Under subparagraph (vii) other public authorities (for example IPBC) and the purposes for which they need to borrow could be prescribed by regulation.

Section 2(3) of the LOBA 2 sets the limit on borrowings under that Act as follows:

"The sums which may be borrowed under Subsection (1) shall be such that the total value of overseas commercial debt which will be owed by the State after any borrowing shall not exceed 125% of the estimated internal revenue for the year in which the borrowing takes place except only as the result of any bridge finance and subject to Subsection (2)(b)."

There are definitions of "ordinary revenue", "overseas commercial debt" and "year in which the borrowing takes place" to assist in the interpretation of this provision. Subsection (2)(b) (referred to at the end of the provision) limits any bridging financing to six months.

A loan agreement for a borrowing under the Act must be made in the name of the State and be executed on behalf of the State by the Minister (meaning the Minister responsible for the Act, currently the Minister for Treasury & Finance) or a person authorised in writing by the Minister. Any such loan agreement must be laid before the Parliament for its information. (section 2(7)).

All payments of principal and interest and other charges payable under a loan agreement must be made out of the Consolidated Revenue Fund. (section 4).

A loan agreement entered into under the LOBA 2 has the force of law as if contained in the Act, and applies notwithstanding anything in any other law. (section 5). This is an important provision in that it allows covenants and undertakings in a loan agreement to modify PNG laws to the extent that this may be necessary for the implementation of the loan.

Notwithstanding anything in any other law, where a loan agreement provides that any person, income, matter or thing shall be exempt, wholly or partly and absolutely or conditionally, from any rate, charge, tax, duty, levy, fee or imposition under any law, the person, income, matter or thing is exempt accordingly. (section 6).

Only the State may borrow under the LOBA 2.

If it is intended that a State owned entity is to borrow in its own name, then it is necessary to look at the law and constituent documents under which it is established. Specifically, in relation to a statutory corporation, it will be necessary to look at the purpose, functions and powers of the corporation under the Act by which it is established.

The negative pledge given by the State to the World Bank and other international assistance agencies probably prevents any external borrowing by the State or a State owned entity from being secured on public assets.

Treasury Bills Act Chapter 135 of the Revised Laws (TBA)

The TBA is a curious piece of legislation on which there has been very little commentary.

The term "Treasury Bill" is defined to mean, unless the contrary intention appears, "a Government Treasury Bill issued under Section 2." There is no further definition of that term in the TBA or elsewhere in PNG legislation.

In the absence of a statutory definition, the term "Treasury Bill" will have its ordinary commercial meaning.

Interestingly the Central Banking Act (discussed below) defines the term "Securities" to include Treasury Bills. (section 77). Arguably, in PNG a Treasury Bill is a security and not a loan as such. This technical distinction is important given that the borrowing powers detailed in Sections 209(1) and 210(1) of the Constitution (discussed above) refer to the raising of loans but not to the issuing of securities. The fact that a loan may effectively be raised by an issue of securities is a further distinction that has not been tested by the PNG Courts.

Treasury Bills appear not to be covered by Section 210(1) of the Constitution as evidenced by the fact that PNG's Department of Finance & Treasury regularly issues Treasury Bills without the recommendation of the Governor General acting on the advice of the National Executive Council.

Section 2 provides that:

"Notwithstanding any other law, the Minister may borrow, by the issue in Papua New Guinea of securities to be known as Treasury Bills, such amounts in any financial year as the Minister considers appropriate".

The reference in Section 2 to "any other law" presumably means any law other than the Constitution. All PNG laws operate subject to the Constitution.

Section 3 further provides that:

"The Minister may, from time to time, determine—

  1. the form in which Treasury Bills shall be issued; and
  2. the method by which Treasury Bills shall be issued; and
  3. the minimum amounts in which Treasury Bills may be issued; and
  4. the terms on which Treasury Bills may be issued, including all matters relating to issue price and maturity; and
  5. the conditions of payment of money payable under Treasury Bills; and
  6. the conditions under which Treasury Bills may be transferred; and
  7. any other matter necessary for the management of the borrowing."

A Treasury Bill issued under the TBA is payable at par at such time or times as the Minister, before the issue of the Treasury Bill, fixes, being not later than one year from the date of issue. (Section 5).

The principal moneys secured by Treasury Bills issued under the TBA rank equally and without priority or preference with moneys secured by PNG inscribed stock and treasury bonds and are a charge on and are payable out of the consolidated revenue fund which, to the necessary extent, is appropriated accordingly. (Section 7). This is an important provision in that the money needed to repay Treasury Bills does not need to be separately appropriated by the Parliament in accordance with Section 209(2) of the Constitution. Instead, the appropriation occurs automatically pursuant to section 7 of the TBA.

Finally, Section 9 provides that the principal moneys secured by Treasury Bills issued under the TBA are repaid by the Central Bank on behalf of the Government, and on such repayment the Treasury Bills are cancelled by the Central Bank.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Papua New Guinea As A Borrower – What Is Involved? for the next article.
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