Papua New Guinea pushes for SME growth

The government of Papua New Guinea has rolled out a new plan to support small and medium-sized enterprises (SMEs) by improving access to finance and training.

Unveiled in February, the SME Policy and Master Plan 2016-30 sets out objectives to expand the economy and create employment outside of the main population and trade hubs.

The package, slated to receive PGK200m ($65m) worth of funding per annum, aims to create 2m jobs over the next 14 years. To achieve this, the number of SMEs is projected to increase 10-fold to 500,000, with local ownership of businesses targeted to rise from 10% to 70%.

SME inclusion

SMEs already make a major contribution to national output, accounting for 200,000 jobs and an estimated 10% of GDP, though these figures are likely much higher if the informal sector is taken into account. Longer term, the government aims to increase the sector’s share of GDP to 50%.

Integrating smaller businesses into the economy is the key to reducing PNG’s reliance on mining and energy, according to Richard Maru, minister of trade, commerce and industry.

“We cannot continue to rely on the extractive industry… and that’s why we have created this master plan to guide the SMEs towards the national objectives that we aspire to achieve in the next 14 years,” he said at the plan’s launch.

Fostering SME development should help mitigate the effect of the current downturn in commodity prices, which has squeezed government revenues and public spending.

Short on funds

At present, SMEs face obstacles to financing, including a lack of collateral and guarantees, and are often perceived as high-risk by commercial lenders.

Indeed, the level of attrition among small businesses remains high, with just 20% of SMEs in PNG surviving for five years or more, Peter O’Neill, prime minister, said last year.

As a result, SMEs count for a disproportionately small share of lending. For example, at Bank South Pacific (BSP), the largest bank in PNG, SMEs accounted for just 0.3% of the loan mix as of the end of 2015, compared to 20.2% for retail clients and 79.5% for corporate borrowers.

According to local media reports, 94.4% of SMEs in PNG have never received a loan and just 2.5% had benefitted from direct government assistance.

Unlocking lending

The government is flagging proposals on how to open fiscal doors to SMEs by encouraging public and private financial institutions to roll out services across all provinces.

Citing the example of Sri Lanka, Maru said banking legislation could be amended to mandate that banks dedicate a set level of capital to SME financing.

“All financial institutions must collaborate with the government to help provide access to finance, training and development for local SMEs,” he told local media in February.

Under such a scheme, banks licensed to operate in PNG could be obligated to direct a set percentage of their loan books to key sectors in need of support, such as agriculture, fisheries and tourism, Maru added.

For its part, the government has earmarked more than PGK65m ($21.1m) for SME credit in 2016, in addition to funding laid out under the SME master plan.

National Development Bank (NDB), meanwhile, has pledged to provide more affordable credit facilities to SMEs, as well as financial literacy training through a business incubation scheme. According to local media reports, however, a prior bid by the NDB to offer low-interest loans to SMEs was curtailed last year by a lack of adequate government funding.

As such, private sector involvement will likely be needed to achieve the country’s ambitious SME targets.

To that end, in February BSP announced it was backing government efforts to form public-private partnerships to provide access to finance and training, pledging PGK50,000 ($16,250) worth of support on top of the PGK37m ($12m) in SME loans offered last year.

Robin Flemming, CEO of BSP, told media in February that the bank now has between PGK80m ($26m) and PGK100m ($32.5m) in outstanding SME investment.

Education and training focus

Plans are also under way to work with educational institutions, non-state actors and the private sector to improve financial inclusion. In addition, the government hopes to amend the school curriculum to foster a more entrepreneurial culture at an early age.

However, such programmes will likely need a wide reach to achieve the desired impact. While most economic activity is concentrated in two of the country’s 22 provinces – Port Moresby and Lae – as much as 80% of PNG’s population live in rural and remote areas.

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