Improving the business environment in Papua New Guinea a key state goal

 

The state has been modifying its legal framework to improve the investment environment in Papua New Guinea. The hope is that these changes will make economic activity more transparent and efficient, thereby helping PNG improve its position in the World Bank’s Doing Business rankings and attract more international participation in the economy. However, in what appears to be a set of contradictory moves, PNG is also working on initiatives that could engender more protectionist economic policies and more nationalistic investment strategies. If these are implemented, as some fear, the country could start to lose one of its greatest strengths: its reputation as an open economy.

Transparency

In an effort to improve transparency, the country applied for membership to the Extractive Industry Transparency Initiative (EITI) in 2013 and acceded to the organisation the next year. The release of PNGEITI’s “2015 Annual Progress Report” has set the standard for more accountable management of the country’s energy and mineral resources going forward.

Other efforts are more incremental in nature but are also potentially important steps in developing the investment environment. For example, the Companies Act of 1997 was amended in 2015 to bring it closer to international standards. The reforms make shareholder voting easier, clarify the duties of directors, protect shareholders from the improper actions of directors, make it easier for companies to buy and sell their own shares, provide greater protection for investors during liquidation, make directors personally liable if their mismanagement leads to shareholder losses and allow for the filing of documents online without the need for a physical signature.

A new Business Names Act was also introduced in 2014. Under the act, a wider range of entities, including individuals, are able to register business names; however, the period before renewal is required was reduced from three years to one. After a number of years of development and testing, some business registration activities can now be conducted online. The Investment Promotion Authority’s ”Do It Online” portal, which was launched in 2013, allows foreign and local business owners to conduct a number of registration procedures on the internet, including searching for business names, incorporation, updating information, applying for foreign enterprise certification and making an initial application for exemption.

Shifting Priorities

While the PNG economy has traditionally been considered open and its investment and trade policies liberal, the country is beginning to alter its approach in some areas. In 2013 a national interest test was added to the PNG Takeovers Code 1998 by way of an amendment. As such, the Securities Commission can halt a transaction if does not deem it to be in the interests of the country. Richard Maru, PNG minister of trade, commerce and industry, approved the bill and was quoted by media as saying, “It is time the country has to serve the interests of its people and not allow too much control of our resources by foreigners”. Under Rule 27A, as it is known, a wide range of deals involving companies with more than PGK5m ($1.7m) in assets can be blocked. The term national interest is not clearly defined; however, the test has been used, and in 2013 Kulim Malaysia was prevented from increasing its ownership in New Britain Palm Oil to above 50%. More broadly, the government has been working to keep certain sectors in domestic hands. In 2013 it blocked the acquisition local telecoms firm BeMobile by the UK’s Vodafone, while in 2013 Ok Tedi, the country’s largest mine, was nationalised.

In mid-2015, the government imposed a total ban on the import of vegetables in an effort to encourage the local agricultural sector. The ban led to shortages and a rise in prices, and was consequently lifted in July 2016. Tommy Tomscoll, minister of agriculture, said the decision was made after consultations with industry stakeholders.

Deeper Reform

In May 2016 amendments to the Land Act were proposed which, if implemented, would prevent PNG incorporated companies more than half-owned by foreign interests from receiving land leases from the state. The mooted changes would also stretch to land ownership for non-citizens. As per the proposal, existing leases to the aforementioned parties would expire within 30 years. The changes would also stop special agricultural and business leases, as well as urban development leases from being granted.

In addition, the government launched a small and medium-sized enterprise (SME) master plan in 2016 with the aim of fostering a transition away from PNG’s heavy dependence on mining and petroleum and to help stabilise growth. The state has said it will commit PGK200m ($68.3m) per year to support the development of smaller companies, the goal being to create 500,000 new SMEs by 2030. The funds will be distributed through the National Development Bank of PNG (NDB), which will also provide training in financing and literacy skills through its business incubation scheme. Private banks have also announced their commitment to the programme going forward.

The Other Side Of The Coin

Despite this support, concerns have been raised about the negative impact the plan might have on international participation in the economy. Maru stated after the plan’s announcement that he would like to see all shops and small businesses owned by foreigners transferred into domestic hands by 2019. Prime Minister Peter O’Neill later talked down these comments, saying the country does not want to restrict foreign investment but to direct it to areas of the economy where locals are unable to invest.

Some argue that the policy is simply aimed at the owners of trade stores, mostly Asian investors making small investments, and will not affect the manufacturing sector or other industries of greater interest to the country. After independence the trade stores were bought by the government and handed over to local business people, but over time were obtained by foreign interests. It is estimated that 95% are now owned by non-locals.

Some argue that the vast majority of legitimate foreign investors would be able to participate in the market much as before. Others are not so sure, remarking that it is possible that the policy will eventually become wider-reaching and that it could damage the reputation of the country as well as the ability of investors to raise funds internationally. They assert that engagement with the government is important to ensure that a law designed to do one thing does move beyond its intended remit. “There is genuine concern,” Mark Baker, managing director for PNG at ANZ Banking Group, told local media. “It is at a relatively early stage, but some of the concern may be around unintended consequences.”

One of the problems with the SME policy is a lack of transparency. While drafts of the plan have been available for some time, and stakeholders have been able to comment on its content, there is very little agreement on any of the finer details. Some of the documents reviewed are said to be fair and well-targeted, while others have suggested the plan is nationalistic and anti-foreigner.

The Big Picture 

Observers highlight that it is not necessarily any single policy or reform that is a cause for concern, but the sum total of all of them. Each strategy can be justified, understood and potentially managed, but restrictions on SMEs, land, imports and investments, as well as the acquisition of companies deemed to be in the national interest, could expose foreign investors to unacceptable levels of risk, which would in turn have a profoundly negative effect on the economy. These constraints also send a message that foreign investment is not necessarily welcome.

The subtext to the developments, in terms of the SME policy and others, is a growing discontent with the Western model of liberal economics. While these discussions take place outside the mainstream, and the government remains committed ostensibly to an open economy, dissatisfaction is high, and the search for a solution to PNG’s economic problems is taking the conversation in many different directions. Commentators note that countries like China have done well in pursuing a more centralised approach and that the economic philosophies of Westminster, the IMF and the World Bank might not be the best examples to follow. This sort of debate is common in resource-rich developing nations, and PNG is no exception.

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The Report: Papua New Guinea 2016

Trade & Investment chapter from The Report: Papua New Guinea 2016

Cover of The Report: Papua New Guinea 2016

The Report

This article is from the Trade & Investment chapter of The Report: Papua New Guinea 2016. Explore other chapters from this report.