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

Part 2
Last Updated: 6 March 2011
Article by Michael Sullivan
This article is part of a series: Click Papua New Guinea As A Borrower – What Is Involved? for the previous article.


There are various statutes regulating the borrowing powers of the State.

Public Finances (Management) Act 1995 (PFMA)

The PFMA is the main Act of the PNG Parliament which regulates the borrowing powers of the State. The most relevant sections of this Act regarding the raising of loans are:

Restrictions on Borrowing (Section 35)

  1. The State may not borrow except under and in accordance with an Act of the Parliament.
  2. Moneys borrowed under Subsection (1) from whatever sources must not exceed the limit provided for by the Central Banking Act 2000.
  3. All debt charges for which the State is liable in respect of loan moneys must be charged on the Consolidated Revenue Fund.

Advances and Overdrafts (Section 36)

  1. The Minister may, for and one behalf of the State, borrow moneys:

    1. from such domestic and external sources; and
    2. on such terms and conditions,

    as the Head of State, acting on advice, approves, in order to meet temporary deficiencies in revenue in a fiscal year.

  2. Moneys borrowed under Subsection (1) from whatever sources must not exceed the limit provided for by the Central Banking Act 2000.
  3. The principal and interest on moneys borrowed under Subsection (1) must be charged to the Consolidated Revenue Fund and are payable from the Fund.

The Minister for Treasury & Finance is the responsible Minister under the PFMA.

The distinction drawn in these sections between borrowing money and accepting advances and overdrafts is not very clear however the better view is that all medium and long term loans contracted by the State must be authorised in accordance with Section 35. Section 36 on the other hand appears to be limited to short term loans and credit facilities to assist the National Government to meet deficiencies in revenue within a fiscal year.

There are other important sections of the PFMA including Section 37 under which the State may guarantee the repayment of loans (including interest and associated charges) made to any person for approved purposes. Pursuant to section 38 the State may make a loan to any person for approved purposes.

There are also provisions in the PFMA (Part VIII) governing "public bodies". Under Section 54 of The PFMA, a public body to which the Act applies may accept an offer by the Minister to loan moneys to it for the purposes of the public body on such terms as may be agreed. Under Section 56 a public body to which the PFMA applies may, with the consent of the Minister, borrow money for its purposes from any person on such terms as may be agreed or by overdraft within such limit as the Minister approves.

The term "public body" is defined in the PFMA to mean any body, authority or instrumentality (corporate or unincorporated) established by or under an Act or a constitutional law. Examples of a "public body" include the Bank of Papua New Guinea, the Investment Promotion Authority and the National Tenders Board.

The term "public body" is also subject to a number of exceptions. It does not include a company incorporated under the Companies Act 1997 and it specifically does not include:

  1. Independent Public Business Corporation (IPBC);
  2. the General Business Trust and any other trusts of which the Board of Directors of IPBC becomes a trustee (the Trusts);
    1. a business enterprise in which the State or IPBC owns any assets; or
    2. a business enterprise in which any of the share capital is owned by the State or IPBC; or
    3. a business enterprise in which a business enterprise referred to in Paragraph (i), (ii) or (iv) owns any assets; or
    4. a business enterprise in which any of the share capital is owned by a business enterprise referred to in Paragraph (i), (ii) or (iii), including by multiple applications of Paragraphs (iii) or (iv) (each a State Owned Enterprises),

    and any other enterprise in which IPBC, the Trust or a State Owned Enterprise holds shares, property or other interests.

Arguably, the PFMA does not apply to an issue of Treasury Bills. As noted above, Section 2 of the TBA provides that Minister may issue Treasury Bills "notwithstanding any other law".

Central Banking Act 2000 (CBA)

The CBA is the Act under which the Bank of Papua New Guinea is constituted. Part VII of the CBA deals with the Bank's relations with the Government, and provides for the Bank's role as banker and financial agent of the Government. As noted above, Sections 35 and 36 of the PFMA both refer to a limit on the State's borrowing provided for by the CBA.

The Central Bank is authorized to make advances to the Government (a term which is not defined but in the context must mean the National Government of the State) (CBA section 55).

Section 55 (2) of the CBA provides that:

"Subject to Subsection (3), the Central Bank may grant temporary advances to the Government in respect of temporary deficiencies of revenue due to cash flow mismatches at an interest rate or rates no less favorable than the prevailing rates payable by the Government on Treasury Bills or notes, or securities issued by the Government."

Section 55 (3) provides that the Central Bank may only grant such advances where to do so is not inconsistent with the monetary policy stance outlined in policy statements of the Central Bank. Furthermore, under Subsection (4) the total amount of such advances must not at any time exceed K100,000,000 (or such other adjusted amount as agreed by the Governor of the Central Bank and the National Executive Council to take account of movements in the general level of prices in PNG).

This limit on temporary advances from the Central Bank to the Government is the only limit on the State's borrowing powers to be found in the Central Banking Act. It may apply to advances and overdrafts under Section 36 of the PFMA, however, it seems not to apply to borrowings outside the general restriction on borrowing in Section 35(1) of the PFMA.



A borrowing by a sovereign state will usually involve a contract between a bank or financial institution as lender and the sovereign state as borrower. The enforceability of that contract depends largely upon its governing law and the jurisdictional rules which permit the courts of a particular country to adjudicate disputes arising under that contract. The main exception to the application of normal jurisdictional rules to sovereign states arises from the principles of sovereign immunity. These rules are recognised in varying forms in most countries and certainly under the common law in England (which forms part of the law of PNG), Australia and the United States of America.

The principle of sovereign immunity is twofold. First, a sovereign, meaning originally the personal sovereign head of state but now extended to the legal entity of the sovereign state itself (and indeed to certain separate legal entities within the state where they have sovereign purposes), cannot be impugned before the courts. Second, the person and property of a sovereign may not be subjected to the execution of a court judgement or order. Accordingly, there is immunity from jurisdiction and immunity from execution.

Immunity in PNG

Within PNG, the State and State owned entities generally do not have immunity from jurisdiction and have only limited immunity from execution.

Concerning the State, within PNG, the traditional common law immunity is removed by Section 247(2) of the Constitution and section 2 of the Claims by and against the State Act 1996. Pursuant to Section 2(1) of that Act, a person making a claim against the State in contract or in tort may bring a suit against the State, in respect to the claim, in any court in which such suit may be brought as between other persons. This is subject to Section 5 under which there is a special procedure for bringing claims against the State. Provided that this procedure is followed, courts in PNG have jurisdiction to hear claims against the State.

If a claim against the State results in a judgement against the State in PNG, the manner in which that judgement may be enforced against the State is also regulated by the Claims by and against the State Act. Section 11 provides that, in a suit to which the State is a party, judgement may be given and costs awarded as in a suit between other persons. Section 12, however, qualifies this and provides that a court giving judgement against the State may not include any order as to the time or method of payment for satisfaction of the judgement. Furthermore, Section 13 provides that execution or attachment, or any process in the nature of execution or attachment, may not be issued against the property or revenue of the State. Rather, Section 14 contains a special procedure facilitating the satisfaction of judgements against the State. In this way, the State' remains immune from execution and an alternative means of enforcement is provided.

For State owned entities, their susceptibility to jurisdiction and execution of judgements is determined by the general law in PNG and by the specific statutes under which they have been constituted. In most cases, such statutes provided that they can sue and be sued in the normal course. The Claims by and against the State Act does not apply to State owned entities.

Immunity outside PNG

Outside PNG, the entitlement of the State to immunity depends upon the applicable law in the country or jurisdiction in which a claim is brought against it. Typically, in respect of an international borrowing where the loan or facility agreement is governed by English or New York law, the relevant country or jurisdiction will be the United Kingdom or the United States of America.

Traditionally, in each of these jurisdictions, a foreign sovereign had absolute immunity from both jurisdiction and execution. This doctrine of absolute immunity prevailed until the 1970's when, increasingly, sovereign states and their entities were engaging in commercial activities. The courts, particularly in England, proceeded to develop a more restricted doctrine of immunity and declined to grant immunity in cases where commercial activities were involved.

An additional issue is whether a sovereign state may effectively waive its immunity from suit or execution in advance by means of a waiver of immunity clause in a contract. Under English law, the answer has been "no", and waiver clauses have been held to be ineffective.

The issue was dealt with by legislation, first in the United States with the Foreign Sovereign Immunities Act 1976 and later in the United Kingdom with the State Immunity Act 1978. This legislation was prompted by banks in New York and London lending to sovereign borrowers and wanting to be able to enforce their rights in their home jurisdictions.

The US Foreign Sovereign Immunities Act is based on the premise that the restricted theory of sovereign immunity was already part of international law in so far as the commercial activities of sovereign states were concerned. The Act set out to codify and refine it. It does this at three levels - first, in respect of commencing suits against sovereign states; second in respect of maintaining such suits in the face of pleas of immunity from jurisdiction; and third in respect of attachment of the property of sovereign states and enforcement of judgements against them in the face of pleas of immunity from execution. It provides that a foreign state is not immune in any case where it has waived its immunity either explicitly or by implication, notwithstanding any withdrawal of waiver which the foreign state may purport to effect. Waiver provisions in contracts for sovereign states therefore became fully effective before US courts. Furthermore, there is no longer immunity in respect of commercial activities of states, and for this purpose "commercial activity" means either a regular course of commercial conduct or a particular commercial transaction or act.

The US legislation also spells out a number of exceptions to the principle that the property of a foreign state in the United States is immune from attachment, arrest and execution. In particular, property held for a commercial activity is available in prescribed circumstances for the satisfaction of judgements against sovereign bodies. The circumstances differ for a foreign state and for an agency or instrumentality of a foreign state.

The UK State Immunity Act works in a similar way. While recognising the general principle of immunity from jurisdiction accorded to foreign states, it spells out a number of exceptions which include submission to jurisdiction and commercial transactions. The term "commercial transaction" includes any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligations.

Under the UK legislation, there are also exceptions from the principle of immunity of a foreign state's property from execution, although they are probably not as wide ranging as in the United States. Execution in respect of property which is for the time being in use or intended for use for commercial purposes is allowed in limited circumstances'.

In Australia, there is now similar legislation in the Foreign State Immunities Act 1985. Like the US Act, the Australian legislation deals with all three aspects: commencing suit by service of process, immunity from jurisdiction and immunity from enforcement. Part II of the Act restates the general immunity of foreign states from jurisdiction and then details a number of exceptions to this principle. Important exceptions relate to submission to jurisdiction and commercial transactions. Part IV of the Australian legislation restates the general immunity of the property of foreign states from execution and again exceptions are set out. The principal exceptions relate to waiver of immunity from execution and execution against commercial property.

In summary, when borrowing outside PNG, the State or any State owned entity can expect that:

  1. in the loan or facility agreement it will be asked to submit to the jurisdiction of the courts in the relevant place and to waive its sovereign immunity;
  2. as a result, the courts in the relevant place are likely to have jurisdiction over the State or State owned entity if any claim arises as a result of that borrowing;
  3. the court will be able to give judgement against the State or State owned entity; and
  4. any property of the State or the State owned entity in that place which is used for commercial purposes may be subject to attachment in execution of that judgement.

The author can be contacted by e-mail ( or telephone (675 3203333)

Winners of the 2010 Lawyers Weekly Asia Pacific Box Breaker of the Year Award and the 2009 NSW Exporter of the Year Award

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 previous article.
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