Homegrown solutions: Policymakers turn to fostering local industry growth and developing domestic alternatives to imports

The imposition of import tariffs in Papua New Guinea in recent years has had a broadly positive effect on local industry, both in terms of encouraging capital investment by manufacturing companies and ensuring the survival of existing industrial firms. However, the policy has also caused some supply-side constraints and raised questions about the country’s attractiveness to international investors. Until recently, PNG was one of the most open economies in the region – regularly scoring highly on the World Trade Organisation’s trade policy review, in line with its commitment to the World Bank’s Tariff Reduction Programme (TRP). However, a heavy reliance on imported consumer goods and an absence of investment and job creation at home prompted authorities to rethink the TRP. Measures were devised to nurture local industrial capacity and develop homegrown alternatives to imports. Tariffs were initially announced in 2017, before legislation accompanying the 2018 budget increased duties on 250 imported goods, and plans to reduce such fees on another 600 items were abandoned.

New Global Order 

Stakeholders in PNG had a number of complaints against the TRP. According to Chey Scovell, CEO of the Manufacturers Council of PNG, the TRP failed to take into account the reality that local producers often had to commit 20% of their spending on security, alongside much higher multiples than regional competitors for power and water. “US President Donald Trump’s protectionist policies brought the environment of worldwide free trade to a stop,” Scovell told OBG. “The tariff protections not only helped PNG businesses make it through a rough patch, but also to recapitalise.” Companies that completed recapitalisation include Coca-Cola, and local food distributors Pacific Industries and Paradise Foods, he added.

Protecting Industry

Tariff increases were undertaken in line with PNG’s Medium-Term Development Plan (MTDP) 2018-22, which targets reducing PNG’s reliance on food imports and extractives industry exports, while promoting local manufacturing and consumption. By 2022 authorities aim to bring the portion of agriculture, fisheries, processed timber, manufacturing and minerals exports to 60% of the country’s exports. To compare, in 2018 mining and petroleum accounted for 80% of total exports. In addition, the MTDP 2018-22 envisions replacing imports of rice, dairy, meat and fresh produce with domestically sourced alternatives, which will also help save scarce foreign exchange.

Examples of recent moves included a 25% import tariff introduced in April 2018 on milk and ice cream in an effort to support Innovative Agro Industries’ nascent Ilimo Dairy Farm. More recently, in January 2019 the tariff on white chocolate was doubled to 30% as Paradise Foods released a rebranded Queen Emma range of homegrown chocolate brands designed for both global and local markets.

In keeping with efforts to encourage onshore processing and canning, tariffs on canned tuna, skipjack tuna, Atlantic bonito and mackerel more than doubled under the 2019 budget. Scovell told local media in March 2019 that a rebate scheme designed to encourage fisheries companies to process their catch onshore had doubled processing output in just six months. The next step will be developing new cannery processing facilities, particularly as Chinese companies express interest in investing in the segment. “Three of the biggest canneries in the world are looking to supply the rest of the Pacific region from PNG,” Scovell told OBG.

Another levy that has met with some success applies to imported beverages, including a PGK3 ($0.91) per litre tariff on carbonated drinks, which has spurred numerous investments in domestic manufacturing and bottling. For example, in February 2019 Coca-Cola Amatil, which distributes beverages to Australia, New Zealand and the South Pacific, launched a PGK20m ($6.1m) polyethylene terephthalate plastics line in Lae, which is part of a PGK120m ($36.4m) commitment to improving the quality and sustainability of its domestic supply chain, including investment in staff training.

“The import tariffs have helped incubate small and medium-sized factories, as well as led to a general increase in employment opportunities,” Everett Chue, the general manager of Pacific Industries, told OBG. “That, combined with greater consumption of locally produced inputs, such as sugar produced by PNG’s sole supplier Ramu Sugar, has affected our volumes. Production has increased by 200% and employment is up 35%,” Chue added, saying that the company is planning to double capacity at its Rabaul factory. “Moreover, retail prices have remained stable or have dropped, leading to a win-win situation for both consumers and businesses, as well as the government in the form of higher tax revenues.”

Additionally, some of the biggest importers of soft drinks have now become manufacturers, giving rise to more than a dozen new bottlers of flavoured beverages, according to Scovell, while knock-on effects have benefitted several other sectors. “People are getting back into vegetable oil bottle blowing, cardboard manufacturers are on the up, and there are also some new corrugators,” he told OBG.

Other companies that have committed investments include Lae Biscuits, which opened a new noodle processing line capable of making up to 170 cartons of noodles per day, complementing the company’s existing two biscuit production lines. Leading regional food firm Goodman Fielder has also pledged to invest upwards of PGK500m ($151.7m) in a new flour processing mill, shielded by a tariff of 15% on flour and other baking inputs.

Capacity Concerns 

However, the tariffs have yet to serve as a boon across the board. Taxes imposed on polymers, for example, including plastic shopping bags, have come under question as PNG lacks capacity to produce them. “From an environmental perspective, a plastic bag tariff makes sense – and we fully support that – but there is also a tariff on paper products used to make grocery store paper bags,” Ian Clough, chairman of retail suppliers Brian Bell Group, told OBG. “We want to lead the market in the transition from plastic towards paper bags, so we have asked the government to reduce the duty on paper bag products.”

Another area which might benefit from more joint policy-making are the tariffs on finished timber products, which, alongside a proposed ban on log exports in 2020, are designed to nurture the homegrown industry. “The stepping stones to encouraging investment in the timber processing industry have not been properly thought out. For example, there is no tax relief for the manufacturers to encourage investment,” Clough told OBG. “We would be happy to buy locally, but the supply is not there, and that drives up prices, making it viable to buy imported timber even with the tariff, and the end result is higher consumer prices,” he added.

Recognising issues with certain taxes, a 2019 budget amendment to remove several items – including TVs, microwaves and other white goods – from a list of excisable goods was aimed at addressing policy discrepancies and reducing costs for consumers. Stakeholders also caution that more needs to be done to further level the playing field. “While tariffs were sufficient to prevent a number of businesses leaving the country, there needs to be progress on tax reform,” Scovell told OBG. “It has become too difficult for businesses complying with taxes and other administrative costs to compete with those operating on the margins of legality.”

Looking Ahead 

As yet, there has been no sign of retaliatory responses to PNG’s more protectionist stance from its major trading partners Australia, China and Japan, and the government escaped censure for its trade policies during its hosting of the 2018 APEC Leaders’ Summit. However, it stands to reason that a prolonged protectionist policy will eventually harm exporters, particularly as global conditions appear set to deteriorate amid the ongoing trade tensions between the US and China.

Looking ahead, the onus will fall on the Independent Consumer and Competition Commission, which oversees licensing, corporate governance and industry regulation, to ensure that tariffs do not lead to higher prices for consumers, and that businesses do not have free reign to hide behind duties as a means of quashing competition and investment. Ramu Sugar, which still benefits from a 30% tariff protection more than three decades after it was founded, provides an instructive example in the latter. Policymakers also need to ensure that the tariff regime functions despite ongoing problems that manufacturers have in obtaining inputs on global markets as a result of foreign currency shortages.