PNG's business climate affected by new acts and reforms

 

While Papua New Guinea has a free and open economy, it is also a place where it can be exceedingly challenging to do business. General conditions are difficult, and some areas of administration and law can cause things to progress at a slow pace. The US State Department’s 2016 Investment Climate statement noted that the country “appears to have a liberal investment approach”, but then goes on to detail the many issues that make the country less open than it first seems.

The situation may become more complex. While a series of positive reforms have been pursued over the years, with some recent efforts having had a significant impact, the country is increasingly contemplating solutions to economic problems that are at odds with liberal economic principles and seem like a step backwards. It is not certain if many of these solutions will be implemented, but the international investment community is watching with interest.

Mixed Commitment 

PNG is a place of contradictions. It is decidedly pro-business and a country noted for economic and political liberty. In the Cato Institute’s Human Freedom Index, it is number 74, ranking it ahead of Mexico, Thailand, Laos and Malaysia. In the Freedom in the World rankings in 2017 released by NGO Freedom House, PNG received a score of 64, with 100 being the best and zero the worst. That is slightly lower than Indonesia’s 65, but higher than Malaysia’s 44, Thailand’s 32 and Myanmar’s 32. However, beyond broad and basic freedoms, the situation in PNG does not rate as well. The essentials are there, but follow through is weak. In the Heritage Foundation’s Economic Freedom Index, the country ranks 152 in the world. In the World Bank’s Doing Business survey 2017, PNG was number 119 overall. It did particularly poorly in some of the categories that are important to investors. The country was 164 in the trading across borders category, with the cost of imports, exports and document compliance being very high. In the enforcing a contract category of the survey, it was ranked 170th (from 169th a year earlier). In terms of resolving bankruptcy, it is ranked at 137th, with an estimated recovery rate of 25 toea on the kina. Millennium Challenge Corporation’s results are mixed. While the country receives a passing grade on trade policy, freedom of information, political rights and civil liberties, it fails in a number of key areas, such as effective government, rule of law and land rights.

By The Book 

The laws pertaining to foreign investment are simple and suggest that the process is straightforward, but some degree of uncertainty exists. Companies must be certified by the Investment Promotion Authority (IPA) a subjective and sometimes slow evaluation. The IPA looks at the appropriateness of the investment for PNG, the record of the investor, the potential for job creation, the amount of revenue that will be generated for the government, and possible technology and skills transfer.

The country’s central bank, the Bank of PNG, must approve all foreign investments and requires that all persons sending more than PGK50,000 ($15,850) overseas a year have received a tax clearance.

However, historically foreign investors have been welcomed, and most of the problems they have faced have less to do with law and more to do with the general environment in the country. Crime, against individuals and property, is one of the greatest impediments. Because of the police force’s limited capacity, foreign businesses cannot trust it to respond quickly and efficiently, so money must be spent on private security. In the Economist Intelligence Unit’s Global Liveability Index 2016, Port Moresby ranked 136th of 140 cities in the survey. While the country is generally stable, incidents of political violence also occur, and can be disruptive.

In one of the most thorough studies on the subject, the World Bank reported in 2014 that crime in PNG remained high. Robbery and assault were most prevalent, appearing to be on the increase. The bank did note, however, that the rates of crime varied around the country. Port Moresby and Lae were seen as hotspots, while other parts of the country were found to be considerably safer. It attributed the recent upswing at least in part to rapid changes in society and in the economy.

The crime rate is an impediment to business. In the World Bank report, more than 80% of companies surveyed said that it influenced their decision-making process. A full 84% of those surveyed said that they paid for security, with more than two-thirds employing private security staff. The study also noted the indirect, long-term impact of crime. It reduces mobility for both staff and clients, while making it difficult to create an environment of trust in the workplace.

The country gets policing support from Australia and is increasingly seeking assistance from private security companies and other countries, such as Indonesia. More advanced capabilities are needed ahead of the APEC Leaders’ Summit in November 2018, and the country is looking far and wide for parties that can provide the relevant services. However, these efforts have been controversial, and it has been suggested by politicians opposing the moves that the Australian police be used exclusively.

Changing Tone 

In recent years, a change in tone regarding international investment has been noted. At the official level, the government’s words and actions suggest a slow break with well-established practices. PNG is considered business friendly, but observers note that there are some events, opinions and initiatives that call into question its commitment to openness.

In 2013 the Takeovers Code was amended so that acquisitions could be blocked on national interest grounds. The criteria used to determine what constitutes national interest and what constitutes a threat to it are highly subjective, which raises the possibility that the law could be used unfairly under the appearance of protecting domestic industry.

According to the Investment Promotion Act expropriation of foreign property is prohibited, but in 2013 the Ok Tedi Mine was nationalised. The US State Department reports that the consensus among observers is that this was a special case. While it is technically a nationalisation, the net effect was neutral in terms of shareholding: it was indirectly held by the people of PNG before the transaction, and owned by them afterwards.

In early 2017 the IPA started targeting foreign companies that operate in PNG using proxies. This allows companies to avoid having to apply for foreign certification. The percentage of shareholding and management control will be examined to make a determination.

New Acts 

Laws and policies are being considered that could restrict foreign activities in the country. A possible amendment of the 1992 Mining Act is raising some concern in the sector. Among other things, the revised law would cover mandatory government shareholdings and the interests of landholders; two vital components of any resources deal. Industry observers say that the amendments could result in a doubling the production levy and a change in the governance of the sector. They add that the draft is being developed without full consultation with all the stakeholders, and that this could have damaging consequences.

Prime Minister Peter O’Neill has said that the amendments will seek to balance the interests of all parties and be good for the country as a whole. However, prominent politicians have said that the law as written gives too little to the people who most deserve to be rewarded. Some legislators are calling for significant changes in the way that PNG is paid for its resources, so that it is guaranteed a profit and can maintain control of the assets. Former Prime Minister Sir Julius Chan has suggested giving all subsoil rights to the landowners.

A change in the Land Act of 1996 under a proposed amendment bill is also being watched closely by foreign investors. According to a draft, companies that are majority owned by foreign interests will not be able to lease state land, and all state land leases held by foreigners will end 30 years from the signing of the bill. The proposed legislation also ends the practice of granting special agricultural and business leases, and urban development leases. The small and medium-sized enterprise (SME) policy has prompted concern. Some investment elements are positive. It calls on the government to encourage the participation of foreign airlines and for the creation of special economic zones. However, it also highly restricts foreign activity in wholesale and retail businesses, and mandates a review of tariffs.

An expanded Restricted Activities List will be reintroduced that will limit foreign ownership in a wide range of areas. It is extensive and includes: the growing of tree crops, export of cash crops, poultry farming, fast food, catering, provision of many types of security services, airport services, tyre repair, media and communications, and land freight services, according to PwC.

While the SME policy does not limit participation in most extractive activities, the construction sector and large-scale retail, it does note that there is foreign dominance in these areas. In the case of construction companies that win government contracts, it is required that half the work be handed over to local companies.

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The Report: Papua New Guinea 2017

Trade & Investment chapter from The Report: Papua New Guinea 2017

Cover of The Report: Papua New Guinea 2017

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