Two of Asia’s frontier markets have given new details of the sovereign wealth funds they hope will radically change their prosperity. Papua New Guinea plans to launch a new fund based on its reserves of liquefied natural gas, while Timor-Leste’s fledgling fund is set to make a major shift in its investment approach.

Timor-Leste’s Petroluem Fund was launched on the back of oil and gas field revenue that began accruing in 2006 and now brings in about $2 billion per year. The fund today has $7.7 billion under management, of which 90% is invested in US Treasuries or similar instruments, and the remaining 10% in equities managed by Schroder Investment Management.

Yesterday Timor-Leste’s Emilia Pires, Minister of Finance, told Emerging Markets that she has submitted a recommendation to change the allocation considerably to 50% global equities and 50% bonds. “The 50% bonds will not just be US Treasuries,” she added. “It is diversification we are after: increasing the risk, but also diversifying to counterbalance that risk.”

Andrew Oaeke from Papua New Guinea’s Department of the Treasury outlined plans to build a sovereign wealth fund to handle the revenues that will come from the country’s transformational PNG-LNG liquefied natural gas project, which he said was expected to start producing revenues from 2018 and should generate a total of around US$30 billion over the lifetime of the project.

The government and central bank have now set up a basic structure for a consolidated pool of three offshore funds: one for infrastructure, one for economic stabilization, and one future fund. The funds will be integrated with the budget and fiscal framework and will aim for international best practices of governance and transparency. Drawdown rules will be governed by legislation, which has yet to go to parliament, and an investment board will oversee allocation, including external fund managers.

Both countries are dealing with the challenges as well as the bounty that a discovery of commodity assets can bring to a small country. “It is likely that the scale of LNG as a new and major revenue resource will give rise to major macro pressures such as the appreciation of the exchange rate, potentially undermining the competitiveness of our export sector,” especially for agriculture in 80% rural PNG, said Mr Oaeke.

In Timor-Leste’s case, there has been an acute challenge to balance the need to improve the country today, and to save for future generations when the existing fields run out, expected in approximately 20 years time. “There was major civil unrest in 2006 [when] we were sitting on a growing bank account while many ordinary people were in desperate need to be lifted out of poverty,” Ms Pires said. “You do need a balance on this.” Since then the country has taken funds out to develop infrastructure, but must go to parliament for withdrawals over about 3% of the fund in any given year. The fund is considered among the most transparent in the world.

Mr Oaeke said communication would be vital. “It is important people understand how [assets] are going to be used and why they will be kept abroad and not onshore.”

The insistence on transparency is striking given that the largest sovereign funds in the world, such as those in Kuwait and Abu Dhabi, disclose very little about their holdings or performance. But SWF commentators said it was the right approach. “Transparency is a good thing for three reasons: it stops abuse; it is public money; and because it leads to better decisions,” said Professor Simon Chesterman of the National University of Singapore Law School.

October is going to be a big month for Papua New Guinea. It doesn’t sound much on paper: it’s the deadline for the final investment decision on a liquefied natural gas and pipeline project. But it’s a project that will change the country dramatically – economically and socially. In fact, it’s hard to think of another example anywhere in the world where so much, good and bad, might depend on a single investment decision.

The project in question is known as PNG LNG, and it is an attempt to commercialise undeveloped petroleum and gas resources in the highlands and western provinces of Papua New Guinea. The gas has to go through a 470 kilometre pipeline across rugged terrain to a liquefied natural gas facility 20 kilometres outside Port Moresby, the capital, for liquefaction; once there, about 6.3 million tonnes of LNG product a year will be loaded into tankers to be shipped to offshore gas markets worldwide. ExxonMobil, with its Esso Highlands subsidiary as operator, is the driver of the project with a 41.5% interest; also in there are Australia’s Oil Search (34%) and Santos (17.7%) and Japan’s Nippon Oil (5.4%) among others, with the PNG state expected to join as an equity participant at a later date.

The numbers attached to this project are extraordinary in any context, but particularly so in an economically small country where 85% of the population exists on subsistence agriculture. The development costs are put at between $11 billion and $14 billion, figures confirmed to Euromoney by the Investment Promotion Agency (IPA); once completed in 2013 or early 2014, it is expected to double Papua New Guinea’s approximately $12 billion GDP.

The consortium signed a gas agreement with the Papua New Guinea government in May and has since moved to what is known as the front end engineering and development (FEED) part of the project – a sufficiently big step that many seem to think the project’s development is now a foregone conclusion. “They are spending $400 million on FEED, so it would be silly to spend that kind of money and not have the project go ahead,” says Ivan Pomaleu, who heads the IPA. One foreign banker says he senses “100% certainty among local people that it’s going to happen.” But in truth it won’t be until October that the deal is confirmed. “That’s basically the point where we say yes, no or defer,” says Pomaleu. “That’s the moment when we can say: yep, we have a project; no, we don’t have a project; or we will have a project but not immediately. It’s a big project and we want to be sure.”

So big that those involved tend to use great understatement in describing it. “The scale [financially] will depend on commodity prices but if it doubles our current GDP, that’s quite big,” says Simon Tosali, secretary for the department of treasury. “It will be the biggest project this country has ever undertaken in its 34 years of independence. So it’s going to be quite big.”

The knock-on effects will be varied, and not entirely to the good. An increase in wealth on this scale obviously has enormous potential for budget revenues and the ability to fund badly needed spending on schools, hospitals and roads, among other things. There’s also the demonstration effect to consider: if a project like this is shown to be not only possible but practical then a host of other possibilities come to the surface in this remarkably resource-rich country. But there are real questions about Papua New Guinea’s ability to cope with this sudden influx of money and development. “There is already a strain on all infrastructure: telecoms, security, power, skilled labour,” says one banker. “There are lots of business opportunities but the capability of the local market to provide that support is already sorely tested.” Foreign banks – there are three of note, the Australians Westpac and ANZ and the Malaysian Maybank (Malaysia is the most active foreign nation in Papua New Guinea, particularly in areas like forestry and palm oil) – should stand to do remarkably well out of the development of Papua New Guinea, using their own global or regional networks to help serve the multinational companies who are coming in. But it’s the on the ground presence, from the 7500 construction workers required for PNG LNG, to the hotels and schools they will need and the roads they will drive on and the power for their businesses, to the local accountancy and legal professions, that are really going to be under stress.