Papua New Guinea's development plan lays course for industrial growth

Already major contributors to the nation’s revenue base, Papua New Guinea’s industry and manufacturing sectors hold significant potential for future investment and development. As such, the administration of Prime Minister James Marape remains devoted to a course that will encourage and protect businesses while working towards a reduction in the national import bill. This policy serves to both hedge against the boom-and-bust cycle of the resource economy, and avoid the ongoing issues the country has faced in obtaining foreign currency by replacing imported inputs with domestic produce. “The government has recognised the importance of the manufacturing sector, and without a favourable import regime the sector would not exist,” Stan Joyce, former managing director of local beverage company South Pacific Brewery, told OBG. “As a proportion of GDP the sector represents somewhere between 7-9%, but the flow-on effects and opportunities are enormous.”

Meanwhile, the country’s extractive economy is recovering from a 7.5-magnitude earthquake that struck in February 2018 in Hela Province, effectively shutting down ExxonMobil’s $19bn PNG LNG project. Despite the significant setback, however, the segment is tipped for resurgent growth as several new landmark projects get under way.

Structure & Oversight 

PNG’s industrial policy is determined by the Department of Commerce and Industry (DCI), which is tasked with guiding the country’s wider economic development and trade position, and incubating local enterprises in the manufacturing industry. The DCI works with other state or quasi-state bodies, including the National Institute of Standards and Industrial Technology of PNG, which sets technical standards and conformity assessment schemes, and works to improve productivity and reduce technical barriers to trade; the Industrial Centres Development Corporation, which attracts investment to encourage local manufacturing; and the Small Business Development Corporation, which supports small and medium-sized enterprises (SMEs).

PNG’s Independent Consumer and Competition Commission (ICCC) is the country’s principal economic regulator and consumer watchdog. The ICCC oversees licensing, corporate governance and industry regulation in a wide variety of sectors. A key duty of the ICCC is to administer the ICCC Act of 2002, which is aimed at encouraging a fair and competitive environment and ensuring industries can invest effectively. In October 2018, for example, the ICCC adjusted maximum retail fuel prices to account for fluctuations in import parity prices of petrol, diesel and kerosene. The commission also launched an investigation in July 2018 into Paradise Company’s acquisition of Laga Industries from the PNG-headquartered Steamships Trading Company. The ICCC alleges that neither of the parent companies involved in the deal made an attempt to seek clearance or authorisation before completing the deal. However, according to the ICCC Act, this is not necessarily illegal unless the merger harms competition.

Furthermore, PNG is working with the Asian Development Bank (ADB) on an overhaul of the ICCC Act, which will likely be drawn up in 2020. The measure should allow the ICCC more leeway in being able to independently investigate and penalise misdeeds, as well as initiate the process for mergers and acquisitions. The trend is for individual industries, such as energy and petroleum, to be given their own regulating bodies, shifting the ICCC’s position to one of overall multi-sector regulation and consumer protection.

Industry Groups 

The primary private sector representative body is the Business Council of PNG, though regulators like the ICCC work alongside a number of industry associations. Key groups include the Investment Promotion Authority (IPA), which guides investment in agriculture and the extractive industries; the private Manufacturers Council of PNG, which promotes downstream processing; and the Independent Power Producers in PNG (IP3) industry group. David Burbidge, chairman of IP3 told local media in March 2019 that it “proactively engages with legislators, government officials, planners, regulators, PNG Power and the Business Council of PNG as part of our initiative to achieve energy security in PNG”.

Investment 

PNG is currently considering reforms to investment regulation, resulting in consternation among the business community. A key area of contention is a proposed Foreign Investment Regulatory Authority (FIRA) bill, which, if passed, would significantly change how foreigners can invest in PNG. The bill’s main features include creating a new regulatory authority to take over functions from the IPA, reserving all investments below PGK10m ($3m) for PNG citizens or businesses that are at least 50% PNG-owned, and expanding the number of activities that may only be conducted by local firms. Existing businesses would be given three years to comply with new regulations. The bill targets an influx of new businesses, primarily in remote parts of PNG, which are thought to be operating informally, in effect stifling local SMEs and depriving the Treasury of much-needed tax revenue.

While the FIRA bill was revoked shortly after it was put before Parliament in February 2019, the Marape administration is reportedly considering reviving it to boost the level of local business ownership, despite opposition within the community. Rio Fiocco, president of the Port Moresby Chamber of Commerce and Industry, told OBG that the chamber had recommended that then-Prime Minister Peter O’Neill drop FIRA in favour of a revitalised IPA, as the bill would crush a thriving market of joint-venture SMEs. “The best course of action would be for the IPA to work with the relevant authorities to conduct joint inspections to ensure businesses are operating legally, while giving the IPA the budget it requires,” Fiocco said.

Another factor impacting investment decisions is the difficulties firms often face in accessing a reliable supply of skilled labour. “Education and skills are key to making PNG an attractive destination for investment,” Partha Sarathy, executive director of construction materials firm PICSA PNG Group, told OBG. “The education system as a whole needs improvement. There should be elite institutions for employers to tap into for skills. The success of any economy is at least partly dependent upon the quality of its human resources.”

Performance 

Although estimates vary, in a July 2019 report, the World Bank forecast that GDP growth would reach 5.6% in 2019, marking a considerable recovery from the 0.5% contraction experienced in 2018. The recovery will be driven by an estimated 10% expansion in the resources sector, which comprises renewable resources such as the agriculture, forestry and fisheries sectors, as well as extractive industries such as mining, quarrying, and oil and gas. In 2018 resources comprised a combined 46.4% of GDP.

According to the Bank of PNG (BPNG), the central bank, at the end of 2018 the total value of merchandise exports had risen from PGK31.8bn ($9.6bn) in 2017 to just over PGK33bn ($10bn). Of this, exports of agricultural, forestry and marine products accounted for 14% of the total, while extractive sector exports – two-thirds of which are crude oil and liquefied natural gas (LNG) – made up for a little more than 84%. World Bank data suggests domestic banks expanded lending to the agriculture sector by 31% in 2018, but scaled back credit for the manufacturing, finance, transport and communications sectors, leading to a 0.6% contraction in loans to the non-resource economy, which is tipped to grow at a more modest 2.2% in 2019.

According to BPNG, manufacturing sales in the first nine months of 2018 rose by 20.5%, lifted by higher production in tinned tuna and steel products, as well as a recovery in the output of refined oil and petroleum products at Puma Energy’s Napa Napa refinery. The supply of raw materials for the refinery from the Southern Highlands and Gulf fields were temporarily cut off in the wake of February 2018 earthquake.

The construction sector grew by an estimated 2% in 2018, according to the World Bank, supported by new housing and a 10% acceleration in government-backed construction spending. In the first nine months of 2018 BPNG reported that construction sales had dropped by 55.5%, as several important projects moved towards completion in the National Capital District around Port Moresby, including the new Nambawan Plaza luxury apartments, the redevelopment of the Loloata Private Island Resort and the Motukea Wharf Project. However, some local stakeholders are concerned that the government’s reliance on funding provided by China’s Belt and Road Initiative is eroding PNG’s domestic construction base, as loan agreements often stipulate the use of Chinese contractors and labourers.

The mining sector’s sales fell 9% over the year to September 2018. This was attributed to lower production and export of copper from the Ok Tedi mine, falling Chinese demand for nickel, and a decline in gold production from the Lihir gold mine in New Ireland Province. Contrary to falling sales in the mineral sector, employment was up. While total employment in PNG increased by 1.8% in 2018, it fell by 0.9% when excluding the mining sector, according to BPNG. This was mainly due to a 19.3% surge in job demand in the fourth quarter of 2018, driven by the recruitment of workers for drilling and LNG-related recovery work. Construction employment rose by 3.8%, followed by manufacturing at 0.5%. The non-extractive economy is expected to show stable average annual growth rates over the 2019-21 period, with manufacturing set to grow by 3.5% per year, followed by the services, agriculture, forestry and fisheries sectors, all at 3%.

Development Plan 

Introduced under former Prime Minister O’Neill, PNG’s Medium-Term Development Plan (MTDP) 2018-22 serves as a detailed guideline to major infrastructure and industrial investments across a range of sectors. Key projects stipulated under the MTDP 2018-22 include the rehabilitation of the Highlands Highway – which serves as the country’s primary logistical artery – over a 10-year period. In January 2019 the PGK3bn ($910m) project was awarded to the Metallurgical Corporation of China, China Wu Yi and the China Harbour Engineering Company by the ADB. Other transport infrastructure commitments include an expansion of the road network from 8740 km as of 2018 to over 12,000 km by 2022, as well as upgrades to a number of wharves, ports and airports.

Also highlighted in the MTDP 2018-22 is the extractives sector, which is also set to be buoyed by major proposed investments. These include the $13bn Papua LNG project led by France’s Total, and a $3bn expansion of ExxonMobil’s PNG LNG development. There is also potential to leverage downstream opportunities. For example, since 2017 the government has been in talks with Japanese companies ITOCHU and Sojitz to build petrochemical facilities near Port Moresby that are able to convert natural gas into methanol.

On the mining side, Newcrest Mining signed a memorandum of understanding with Harmony Gold in December 2018 for the development of the $2.8bn Wafi-Golpu copper and gold mine in Morobe Province, although progress on the project has since stalled amid a changing outlook on the extractive industry from the Marape administration (see Mining chapter). Nevertheless, China-owned miners PanAust and joint venture partner Highlands Pacific are pressing ahead with a $6bn-7bn Frieda River Project after having completed a feasibility study, though the copper and gold development still requires $739m of government or third-party investments in road, airfield and ports upgrades to make the project feasible. Lastly, Ramu NiCo Management is reviewing a planned $1.5bn expansion of its Ramu nickel and cobalt mine.

Challenges 

While mineral developments hold the potential to propel industry growth, prospects remain tenuous due to ongoing disputes over landownership and government reviews of relevant laws, notably the Mining Act 1992. For now, it is unclear to what extent the Marape administration will upend previous regulations on foreign investments, though the prime minister has repeatedly stressed he would respect all deals his predecessor signed that adhered to legal regulations. For example, for many months the future of the Papua LNG project was uncertain, but in September 2019 the government officially announced that the project had been cleared for implementation.

Accurate data on foreign direct investment (FDI) flows is difficult to obtain in PNG, but the UN Conference on Trade and Development’s “World Investment 2018” report noted that divestment accelerated from $40m in 2016 to $200m in 2017 as a result of policy uncertainty and foreign exchange (FX) controls. According to the IPA, in 2017 the top-five countries investing in PNG were China, Australia, Malaysia, Singapore and the Philippines. Long-term IPA data shows that between 2008 and 2017 the sectors receiving the most FDI by value were mining and petroleum, with 25%, followed by energy (16%), construction (12%), manufacturing (8%), and catering and hospitality (8%).

SEZs 

The development of special economic zones (SEZs) is identified in the MTDP 2018-22 as a primary means of increasing revenue and creating wealth. In March 2019 officials approved the Ihu SEZ in the Kikori District of Gulf Province, which is home to 18trn cu feet of undeveloped proven gas reserves. The multi-stage project is expected to generate 50,000 direct and indirect jobs. The first five-year phase is projected to cost PGK5bn ($1.5bn), after which the zone will begin generating annual revenues of up to PGK12bn ($3.6bn). The zone will comprise a number of parks dedicated to the development of the petroleum, technology, forestry and marine industries, as well as a deepwater port, an airport, hotels and resorts.

In July 2018 Sanduan Province, on the border with Indonesia, was also identified as an area that would benefit from an SEZ designation, with an eye to developing Vanimo as a major commercial port, along with new wharves at Wewak. In an interview with local media, Richard Maru, the then-minister for national planning and monitoring, said that as part of the MTDP 2018-22 the state could provide PGK10m ($3bn) to start development on the project, with a focus on providing key infrastructure support including roads, power and sanitation facilities, and wharves. The plan includes the creation of an economic corridor along a new Momase international highway, between the thriving agri-business centre of the Markham Valley and Watarais, crossing the border into Indonesia.

With regard to agriculture, the Sepik Plains SEZ in the Yangoru-Saussia District will focus on chicken, grain, cocoa, meat and eggs, with local firm Innovative Agro Industry leading private investment, and electricity company PNG Power and the Department of Works and Implementation assisting with infrastructure. However, follow-up investments after this initial PGK30m ($9.1bn) outlay have yet to be disclosed.

The MTDS 2018-22 also posits that the Pacific Maritime Industrial Zone in Madang Province will be completed by 2022. While the O’Neill administration signed off on a $168m loan from Export-Import Bank of China to finance the development of marine processing infrastructure, including 10 canneries, the project still needs to bring local landowners and community leaders onside in order to continue progress.

Foreign Currency 

The government has started resolving long-standing issues in obtaining the foreign currency necessary to conduct business on international markets. In September 2018 PNG successfully raised $500m through a maiden foreign sovereign bond issuance in September 2018, attracting primarily US investors to 10-year notes with a yield of 8.375%. However, despite recent improvements in the FX supply, the shortage of foreign currency remained the top concern for business leaders in the most recent OBG Business Barometer: PNG CEO Survey, which was published in June 2019 (see Trade & Investment chapter).

“The FX situation has improved a lot – trading now takes one or two weeks rather than up to two months, but that does not account for dividends,” Fiocco told OBG. “Companies are not declaring dividends, and there is some PGK2bn-3bn ($606.6m-910m) waiting to be paid back,” he said, adding that multinationals are consequently fearful of a devaluation of the kina. Businesses also continue to report problems related to a limited supply of FX, with regional beverage distributor Coca-Cola Amatil telling Reuters in November 2018 that FX restrictions made it challenging to import materials such as sugar and aluminium tins.

Such issues are prompting companies to reinvest in new factory lines and substitute imports with homegrown products. For example, South Pacific Brewery, PNG’s largest brewer and part of the Heineken group, switched from importing malt to producing its own starch from locally sourced cassava, creating a new fruit punch drink, Pawa Punch, in the process. Commenting on the issue, Greg Baker, group sales and marketing manager at local import and distribution firm BNG Trading, told OBG that the company was investing in greater freezer storage for storing finished goods, while seeking to offset FX problems by entering Pacific Island markets.

Infrastructure Issues 

While the MTDP 2018-22 addresses the country’s logistics issues by identifying new plans to build rail and road capacity, issues implementing large-scale transport projects abound. The 10-year renewal project for one of PNG’s main arteries, the Highlands Highway, is only likely to see 10 km of new tarmac laid at Mount Hagen Airport in 2020. Businesses have also reported problems with shipping around the coast of PNG as a result of infrastructure gaps, supply-side constraints and a lack of competition as two shipping companies, Consort Express Lines and Bismark Maritime, hold a duopoly on trade. “The result is that everyone has to carry more stock in case of delays, because 60% of distribution goes through coastal shipping,” Brad Barlow, general business manager for PNG at Nestlé, told OBG. “The government could allow international shipping lines to service coastal ports, but current local regulations do not permit them access.”

Ian Clough, chairman of Brian Bell Group, told OBG that there had been some teething problems after South Pacific International Container Terminal took over the running of operations at PNG’s two major ports at Lae and Motukea, but that these quickly settled down. “Within PNG shipping remains challenging, with the costs of sending a container locally similar to that of a much further destination,” he told OBG. “It can still take weeks as the ships only travel when full.”

Outlook 

After several years of commodity price swings there is genuine optimism that manufacturers operating in PNG are set to capitalise on the return of big resource projects. However, given PNG’s domestic market’s small size and the logistical difficulties in bringing goods to export, it remains a challenge for local manufacturers to find stable demand for products. Efforts to nurture downstream processing in agri-business will benefit from the increased demand from international project workers, but their longterm success depends on unlocking export avenues. There is cautious optimism that PNG’s manufacturers are set to capitalise on an imminent resource boom.

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The Report: Papua New Guinea 2019

Industry & Retail chapter from The Report: Papua New Guinea 2019

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