Papua New Guinea's efforts to improve business environment support increased foreign investment

While economic diversification is expected to improve the business climate and incentivise investment, stakeholders are concerned that possible legislative changes may result in Papua New Guinea failing to reach its potential in attracting foreign capital.

 

Investment Inflows  

Foreign direct investment (FDI) in PNG has increased in recent years. Total FDI stock amounted to $4.5bn in 2018, with an FDI flow (inward minus outward) of $335m compared to negative $180m in 2017 and negative $40m in 2016, according to UN Conference on Trade and Development’s “World Investment Report 2019”. The accelerated levels of divestment were largely due to policy uncertainties surrounding large-scale mining and natural gas projects, as well as issues regarding the availability of land. Resource extraction attracts most of the inward FDI, although the country is attempting to diversify its economic output through a range of development strategies such as the creation of special economic zones and incentives for investors (see Economy chapter).

While the government is working to address some of the impediments to investment, there remain challenges yet to be addressed, such as the restriction on foreign ownership of land which impacts all sectors of the economy. This is reflected in the World Bank’s “Doing Business 2019” report, when PNG ranked 108th out of 190 countries. The business environment is particularly impacted by inadequate access to foreign exchange, an unskilled workforce and infrastructure gaps. Volatility to commodity price shocks and natural disasters also pose a risk to investors. In addition, reliable internet comes at a cost, which in turn has hindered the adoption of smartphones and mobile banking. As such, PNG’s transition from a cash-based society has been slower than other emerging markets.

Although investors in PNG are faced with significant hurdles, progress has been made in a number of areas. According to the “Doing Business 2019” report, PNG managed to reduce regulatory complexity during the 2017-18 review period, particularly with regards to the development of a more reliable power supply and transparency in tariffs. PNG also managed to improve its ranking for transparency of information, particularly in terms of land administration. It also strengthened minority investor protections by introducing greater requirements for the disclosure of direct and indirect beneficial ownership stakes in publicly listed companies.

 

Contested Bill 

In January 2019 the Foreign Investment Regulatory Authority (FIRA) bill was submitted to Parliament, which would substantially change the regulatory framework for foreign investment in PNG. If passed, a newly formed FIRA would regulate and monitor all foreign investment into the country, replacing PNG’s Investment Promotion Authority. Under the bill all investments below PGK10m ($3m) would be reserved for enterprises that are more than 50% PNG-owned. Foreign-owned businesses that are non-compliant would be given a three-year transitional period from the date of enactment, after which they would cease operations. The bill also seeks to expand the number of business activities restricted to national enterprises.

A number of stakeholders have objected to the draft law, citing concerns that proposed changes – particularly the PGK10m ($3m) threshold – would lead to a contraction in foreign investment. While part of the bill’s objective is to empower local small and medium-sized enterprises (SMEs), the Business Council of PNG has argued that the new restrictions would negatively impact local enterprises that flourish under joint ventures with foreign enterprises.

“The most sensible way to bring breathing space to our SMEs is to enhance and protect domestic industry – in particular SMEs that are injured because of dumping, unfair trade subsidies from importers or normal competitive trends,” Robert Nilkare, president of the Business Council of PNG, told local media shortly after the bill was introduced. In March 2019, however, the bill was shelved, although it was unclear at the time of print whether the government would try to reintroduce it. The Reserved Activity List that stipulates the industries closed to foreign participation was also under review.

Long-term Partners

As one of PNG’s regional neighbours, Australia has long been an important trading and investment partner. According to the Australian Department of Foreign Affairs and Trade, investment from Australia into PNG reached A$16.9bn ($12.5bn) in 2017-18. This investment was targeted towards natural resources, although significant amounts went into light manufacturing, infrastructure and service delivery. As PNG’s population continues to grow and its purchasing power increases, Australian investors are expected to continue to play a vital role in bilateral trade. With thousands of Australian companies exporting to PNG across the Torres Strait, it is the Pacific Island nation’s main export market and its top source for imports.

PNG is also strengthening economic ties with other regional partners. Malaysia was the largest foreign investor in PNG in 2018, with about 200 Malaysian firms operating across retail, services, agriculture, forestry and manufacturing. Malaysia accounted for $420.5m in trade during the first half of 2018, exporting around $280.1m and importing $140.4m in the same period.

 

Trade Deals 

A number of important trade deals were signed in the first quarter of 2019. The UK signed a trade deal with Fiji and PNG as it stepped up Brexit preparations. With total trade between the UK and the Pacific Island nations worth around £369m a year, PNG is set to benefit from exports of sugar and fish in particular. The deal will eliminate all tariffs on goods imported from PNG and will also gradually remove around 80% of tariffs on UK exports. What is more, Indo-Pacific cooperation is set to increase in the years ahead. In March 2019 PNG, Fiji and Indonesia announced they would begin negotiating a preferential trade deal. PNG is also in talks with China to establish a free trade agreement that could prove pivotal for future trade flows given the ongoing trade war between China and the US. China and PNG announced in April 2018 they were opening negotiations. In addition to these developments, a host of new international agreements signed at the APEC leaders’ summit promise to unlock new growth avenues.

 

New Wave 

While the government has been keen to stimulate investment in the extractive sector, a series of proposed amendments to the Mining Act 1992 could see fundamental changes to the sector’s regulatory regime. If implemented, the reforms could see the maximum term of a mining lease reduced from 40 to 25 years, and the renewal period for a mining licence reduced from 20 to 10 years. The legislation would also give the government the right to acquire the ownership of a mine once the first term of the lease expires. Further, the proposed changes include regulating the fly-in, fly-out employment practices upon which some mining firms rely for temporary foreign labour, due to a lack of skilled local or permanently domiciled foreign workers. The proposed changes have been met with concerns from industry players. The Papua New Guinea Chamber of Mines and Petroleum has suggested that the changes could hamper investment in the country, along with the technology- and skills-transfer benefits that are often associated with foreign investment.

Despite these concerns, developments in the segment are poised to attract foreign investment and lead to a rebound in government revenues. Most notable of these are the Wafi-Golpu mine, the Ramu mine and the Frieda River mine. Australian company Newcrest Mining and its partner, South Africa’s Harmony Gold, signed a memorandum of understanding with PNG’s government in December 2018 for a potential investment of PGK9.1bn ($2.8bn) to develop the Wafi-Golpu mine, a copper-gold asset in Morobe Province. Although the project was placed on hold in June 2019 as the new government seeks to review the terms of the agreement, the deal is still an important step in unlocking the sector’s potential. In early 2019 Toronto-listed Cobalt 27 Capital also announced a $70m investment to purchase Australia’s Highlands Pacific, which will see the former obtain a 11.3% stake in the Ramu nickel-cobalt mine, which produces around 3300 tonnes of cobalt annually – 3% of global supply annually – and 34,000 tonnes of nickel. The Frieda River copper-gold project, meanwhile, is set to be sold off to Australia’s PanAust – the mine’s operator and 80% shareholder – as part of the agreement with Cobalt 27.

After a challenging 2018 characterised by February’s earthquake and a shortage of foreign exchange, PNG is now on the brink of the next wave of development. By most accounts, the timely implementation of Total’s liquefied natural gas (LNG) project, Papua LNG, and ExxonMobil’s P’nyang project, as well as the A$300m ($221.7m) Coral Sea Cable System – a 4700-km fibre-optic submarine system connecting Sydney to Port Moresby and Honiara in the Solomon Islands – is of utmost importance. After receiving the green light from the government in September 2019, the $13bn Papua LNG project – the country’s largest investment since ExxonMobil’s PNG LNG – is on track to help double existing LNG output capacity to 16m tonnes per year.

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The Report: Papua New Guinea 2019

Trade & Investment chapter from The Report: Papua New Guinea 2019

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