Despite recent weakening in sales, the long-term outlook remains positive

Given the country’s long history of trade, industry and manufacturing, some of the big names in Papua New Guinea today, such as Paradise Foods, Pacific Industries, WR Carpenter and SP Breweries, have been around for decades. BNG Trading was founded so long ago, in 1924, that it predates the creation of the Territory of New Guinea – its name is an initialism for British New Guinea. While much of the country’s industry has been dependent upon natural resources strengths – coffee roasting was started in PNG in the 1930s – it is also true that manufacturing and processing were undertaken to meet domestic demand. However, conditions within the country have become more challenging of late. Due to the decline in the number of jobs related to the PNG liquefied natural gas (LNG) project and the subsequent slowing of economic growth, as well as weak global resources markets, industry in PNG has had a challenging year, according to Port Moresby-based executives. “There’s been a significant decline in consumer product and manufacturing activity,” said David Doig, the general manager of Moore Printing.

Consumer spending has weakened and businesses have been reporting flat or lower sales. The secular trend is good, however, and manufacturers remain positive. Over the long term the country will benefit from growth in the resources sector and related foreign investment, and consumer demand will rise along with it. Industry is also evolving. New businesses are being developed, while existing businesses are improving their operations. The country is quickly changing, and with it so are its consumer and manufacturing sectors.

From Construction To Production

PNG LNG has certainly helped the economy, and the construction phase of the project has contributed to the revival of the fortunes of the nation and its industries. Still, in 2013 and early 2014, the project had a destabilising effect. While it employed as many as 16,000 people during the construction phase, during the production phase the number of directly employed will drop to around 600. This fall has been hitting the country’s economy. Growth in construction dropped to 12% in 2013 from 24% in 2012, while that in retail and wholesale trade fell from 20% to 5%. GDP expansion slowed to 5.1% in 2013, down from 8% in 2012 and 9% in 2011, according to Asian Development Bank (ADB) data.

These difficulties have required companies to closely look at costs and undertake some retrenchment. Across the board, manufacturers, traders and services companies have had to reassess their operations and adjust to account for the new realities. However, this may be just a lull before better times. When the PNG LNG project starts to increase production, GDP is expected to spike. The ADB forecasts GDP will rise by 6% in 2014 and 21% in 2015. The growth is also seen coming with moderate inflation and lower pressure on wages. In the production phase, the money will enter the economy indirectly through the government rather than directly via workers. During the boom, companies were finding it hard to fill positions, faced demands for higher wages, especially from skilled workers, and struggled with job hopping. As a result of the PNG LNG project, expectations became unrealistically high. Now, however, they are coming back into line with productivity, and companies are able to focus more on building rather than maintaining.


Still, some companies are in expansion mode. Food manufacturer Goodman Fielder was finishing up a snack plant in Lae in early 2014, according to Business Advantage. Lae-based manufacturer Prima Smallgoods invested PGK40m ($16.3m) in upgrading its manufacturing operations recently – and the firm is considering exports – while Frabelle, the tuna canner, is upgrading its manufacturing facilities in the city. Meanwhile, Paradise Foods, an 80-year-old firm, which is 100% locally owned, has made major investments over the past two years in a bottling line for Pepsi (which the firm reintroduced to the market in 2012) and in a chocolate factory. Nestlé is also investing $9.5m in its manufacturing factory in Lae to boost production by 30%, according to Business Advantage, while another Lae-based manufacturer, KK Kingston, is consolidating its Lae operations into one, new facility. The firm is also introducing new products, including new paper products and washing powder.

Government Investment

There is also growing optimism about investments being made by the government. The country is highly focused on infrastructure development and will be building more roads (see Transport chapter), establishing the National Transmission Network for fibre-optic connectivity and undertaking improvements in Port Moresby in anticipation of the 2015 Pacific Games. The vast Lae port expansion project, which is 70% funded by ADB loans, is expected to be completed by the end of 2014 (see Transport chapter). The Lae-Nadzab Airport road project was started in 2013, and a 40-year-old power cable running from Lae to the airport was replaced in early 2013 after burning out and causing power outages at the airport and along the route. It is hoped that the concerted efforts by the government will result in better transportation and communications links and a lowering of related costs. Companies involved in importing, building materials, construction and technology also anticipate an increase in business as these government-led initiatives get under way.

More generally, the government plans to develop four economic centres across the country. Port Moresby will become a centre for finance, Lae for manufacturing, Mount Hagen for agriculture and Kokopo for tourism. It is financing a $238.5m stimulus package to create 500,000 new businesses and 2m jobs by 2050. While the programme is aimed at encouraging local businesses, as 90% of the formal economy is (according to state officials) foreign-owned, it is expected to have an impact on the economy as a whole.

Minimum Wage

Talks on worker pay have borne some fruit. After a meeting in late 2013, only its fourth since 1992, the minimum wage board asked the government to approve a raise in the hourly minimum wage from BGK2.29 ($0.93) to PGK3.20 ($1.30), a 40% increase. This was endorsed by the prime minister’s cabinet in June 2014, and went into effect July 3 for all companies operating in PNG, though there is a three-month grace period for the agriculture sector and businesses that are struggling to pay their employees.

The PNG Trade Union Congress welcomed the news. It said statistics indicate that, while corporations have done well over the past two decades, wages have not kept pace. According to the union, 12.1% of national income now goes to wages, from around 40% as late as the 1990s. A 7.5% pay raise given to state employees in late 2013 has motivated the unions. Not all are thrilled, however. “[The new minimum wage] will put significant pressure on all business, particularly companies like the big security companies and plantations with a high number of employees,” Ron Seddon, president of the Port Moresby, told local media.

While the higher minimum wage could hurt companies in PNG – by raising costs without raising productivity – it could help boost spending. The resources boom has already led to a surge in consumption, especially in 2012. With higher worker pay, much of this may return to the economy via domestic consumption.

Focus On Priorities

The general drive for efficiency is helping some businesses. Companies that deal in products and services that save time or money are seeing increasing sales as the slowing of economic growth has made cost and time savings a priority.

Those involved in IT, for example, are noting an uptick in demand for solutions that help clients better manage their books and identify opportunities and waste. Innovative offerings not directly IT-related are also in demand. According to Moore Printing, its new online printing services – which make the designing and production of business cards quicker and cheaper than when done manually – is proving popular. “Companies are looking for cost savings because they don’t have the business,” said Doig.

Law and order-related sales are also on the increase. In addition to basic security services, companies are looking for ways of thwarting scams. They are paying specialised firms to conduct investigations and buying computer systems to better track invoicing and payments. With large resources-related projects in need of guards, increasing law and order problems, the Pacific Games (2015) and the APEC summit (2018), the sector has doubled in size to 460 firms and 25,000 guards, according to public comments made by Paul Kingston Isari, CEO of the PNG Security Industries Authority.

The volatility of the kina has been mixed for domestic industry. The country’s currency lost more than a quarter of its value in 2013, which made domestically manufactured products more competitive against imports. At the same time, however, it also increased the cost of imported materials, putting pressure on manufacturers to raise prices.

The Challenges

PNG is a nation with various conditions that challenge the development of industry. First, labour is relatively expensive. The minimum wage is higher than that in Myanmar, Cambodia, Vietnam, Indonesia, many parts of China and some parts of the Philippines, and close to the minimum wage in Thailand and Malaysia, according to recent research by the Philippine National Wage and Productivity Council. Meanwhile, according to the World Bank and the PNG Manufacturers Council, productivity in the country is low. As a result, PNG is also vulnerable to imports from cheaper, more productive countries.

To a great extent, the physical environment makes the development of a domestic industrial base difficult. PNG is a country of islands, challenging terrain, dense jungle and thick vegetation. Products, components and labour cannot be moved around easily and transportation costs can be very high.

The population is relatively small as well – around 7m people, according to World Bank data – and the population density is low at 16 people per square kilometre, compared with Thailand’s 131, Malaysia’s 89 and Indonesia’s 136. As a result, the country lacks the critical mass found elsewhere in the Asia Pacific region that would help it achieve the economies of scale possible in places such as China and Indonesia or even Malaysia.

Security problems also add to the cost of doing business. Business people say that the costs related to security are high. According to a 2013 survey by the Institute of National Affairs, 81% of businesses indicated that they were fairly to very highly affected by law and order problems, while businesses spent an average of PGK15,000 ($6098) annually on security systems and 55% employ security guards. In the survey, law and order problems were seen as the number-one hindrance to business and the most important issue the government should address.

Cost Of Doing Business

Other issues also affect business. Power is expensive and can be unreliable. PNG Power’s industrial rates as of May 2014 were PGK0.6321 ($0.238) per KWh, among the highest in the world. The charges are higher than rates in the UK, all US states and about the same as the EU average. Phone rates, while dropping, remain high. Infrastructure is poor and upgrades are slow in coming, making transportation more expensive than the challenging environment would justify.

According to the World Bank, bureaucratic inefficiencies make doing business in the country particularly expensive. In its “2014 Doing Business” survey, the World Bank ranked PNG 113th, down from 108th in 2013. It fares poorly in several categories: dealing with construction permits (165), enforcing contracts (168) and resolving insolvency (128). Overall, the country’s ranking places it behind the Philippines, Pakistan, Lebanon and Vietnam (though ahead of Indonesia). The country also rates poorly in Transparency International’s Corruption Perception Index 2013. It was ranked 144th out of 177 countries, tied with Nigeria, Iran and the Central African Republic.

Manufacturers say the cost of business issues are a significant problem for them because of the lowering of tariffs. PNG set out to aggressively liberalise its markets in the late 1990s as the government accepted and applied many of the basic tenets of the Washington Consensus: open markets, free trade and global competition. Tariffs declined from approximately 30% for intermediate rate goods to 15%, and then fell again to 12.5% in December 2011. They are scheduled to drop to 10% for many goods from January 2015. The implied bargain with industry was that as barriers were lowered, cost of doing business issues would be addressed. According to manufacturing executives, that has not happened. Tariffs were lowered and problems remained in the economy, or worsened.

Imports from China, Indonesia and Malaysia are particularly problematic. Simple economies of scale would make it difficult to compete with them. The factories in these countries are so large that they can manufacturer cheaper than the smaller factories in PNG as a result of efficiencies and per-unit fixed-cost reductions that come with size.

There have also been allegations that some companies in other countries receive built-in subsidies from their governments, while in some cases foreign companies may be selling their excess inventory into PNG at cost plus margin – essentially dumping. But dumping claims even in the most obvious cases are difficult to prove and would tie up significant resources in PNG. It would not be practical, nor would it be in the best interests of the country politically, to press such claims internationally. This has left the sector trapped between a rock and a hard place: tariffs are low, but not enough attention is being paid to the infrastructure and the business environment at home.

“[The tariff rate of] 12.5% is ridiculous,” said Paul Chue, the president of Pacific Industries. “Because of the market size, we can never compete.”

Push For Manufacturing

Local manufacturers have been vocal about the challenges they face and have been lobbying heavily to convince the government to take action on their behalf. While manufacturing may account for 9% of GDP, they point out that it was once 12% of GDP. Executives also note that manufacturing is countercyclical and sustainable – it holds up when commodity prices drop and it never runs out – and that manufacturing employs approximately 25% of the total formal workforce.

According to statistics provided by the Bank of PNG, employment in manufacturing has grown faster since 2002 than employment in all other sectors except construction. The sense is that the focus has been lost on manufacturing largely because of all the other opportunities in the country in recent years.

The sector is simply looking for a level playing field so it can hold its own against larger neighbours, some of which may engage in actual subsidy. If the business environment were better, more jobs would be created and that would mean more satisfied citizens for the politicians and more tax revenue for the government. The economic activity would help take the edge off the commodity cycle and result in more value added being left in the country. The manufacturers say that the situation is becoming dire in the case of some products, with the build-versus-buy calculation beginning to favour the latter and brands that have existed for decades in the country starting to see that it may make more sense to import rather than produce.

Manufacturers are doing their bit to support the sector. The Manufacturers Council of PNG has been running the “Made in PNG” campaign for three years, annually highlighting goods that are produced locally in a publication. Companies that qualify display the Made in PNG logo. In the 2014 publication, a number of success stories and case studies were featured. According to the publication, with domestic capacity to manufacture products such as coils and leaf springs at a PNG Springsmiths facility in the southern Highlands – products which are often needed because the rough roads make frequent replacement necessary – there is no need to wait for parts to come in from overseas. The publication made other arguments in support of domestic manufacturing. It stressed the number of people employed and supported directly and indirectly by manufacturers, noting that because of the – wherein housing is considered the property of the family or group – it is not uncommon for one worker to support 10 people. Food security was discussed as well. It is easier to control purity and quality of products from a firm or factory in PNG, it was argued, than it is to police products coming from factories overseas.


Businesses that are able to overcome the challenges usually thrive. They are able to deliver goods and services relatively free of the intense competition found in more developed markets, the various complexities on the ground acting as barriers to entry. Though some of the costs of doing business are rising beyond historical averages, especially in terms of safety and security, many of those who are established report good margins and good opportunities. Optimists believe that investments and efforts made now will pay off as PNG LNG and other resources projects begin to contribute to the state coffers.

Meanwhile, in the tradition of its East Asian neighbours, given PNG’s natural strengths, considerable progress can be made in selling internationally. The country has great comparative advantages in terms of its climate, soil, culture and development which can be used to create products that are highly competitive and valued in developed economies. Recognising the potential, PNG Coffee Corporation is stepping up efforts to market in Europe, eying more trade fairs and exhibitions there in an effort to boost competitiveness.


The retail sector is evolving as well, though as with manufacturing it has faced some difficult times in recent years. The local press has reported a 15-20% drop in retail sales in 2013, as the end of the construction phase at PNG LNG resulted in a fall in consumer spending. But at the same time, retailers have noted that the secular trend remains good – the decline in sales came off very high levels.

More importantly, the retail sector appears to be developing fast both in terms of consumer habits and retail establishments. The growing middle class, much of which is employed in minerals-related enterprises, is becoming more demanding in terms of product quality, price and environment. They are looking for an international experience and are no longer interested in shopping in small, general goods stores. “PNG citizens are increasingly demanding a wider selection of quality goods, and the retail sector is becoming more and more competitive as a result,” James Lau, managing director of Rimbunan Hijau PNG, a group of companies with interests in forestry, timber processing, palm oil, media, retail and property, told OBG.

The retailers are starting to meet this type of demand. In recent years, shopping malls have sprung up around the Port Moresby. RH Hypermarket at Waigani opened in 2010, Vision City followed in 2011, while the Waterfront Foodworld opened the year after. These outlets are modern and host a wide range of tenants offering the full gamut of goods, international and local. They are also competitive in terms pricing, which has helped stimulate demand in the sector.


While the growth in sales has slowed in industry and retail, the long-term outlook is good. When returns from PNG LNG’s production phase begin to feed through to the economy, the sectors are expected to recover and those who have invested in their businesses will benefit. More importantly, manufacturers and retailers are set to gain from a transformation of the local economy. Higher demand, the growing middle class, increased competition, and the development of more and better infrastructure will reward those who are there to supply the right products and services and who are prepared to evolve with the economy.


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The Report: Papua New Guinea 2014

Industry chapter from The Report: Papua New Guinea 2014

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