Fisheries and natural resources are at the heart of push to boost industry in PNG

 

Although smaller than its petroleum, mining and agricultural sectors, Papua New Guinea industry and manufacturing are major contributors to the nation’s revenue base, and hold significant potential for future investment and development.

Manufacturers face several challenges, including high transportation, utilities and security costs, import dependency, currency depreciation, a foreign exchange shortage and land acquisition difficulties. However, the country benefits from a wealth of natural resources that hold considerable potential for value-added processing, most notably in the fisheries and agriculture segment. Long-term industrial development should also support investment in construction materials and petrochemicals, a crucial step in government efforts to reduce imports and build up a robust local production base. Despite delays to the opening of a dedicated marine industrial park that is expected to attract new manufacturing investment in the country’s powerhouse tuna industry, the sector’s growth potential is highlighted by the recent announcement that Chinese investors are set to invest nearly $4bn in new industrial parks near the country’s border with Indonesia. This is expected to pave the way for diversified long-term industrial and manufacturing growth, enabling PNG to expand its non-mineral export base, and encouraging new investment in labour-intensive businesses.

At A Glance 

PNG’s modern industrial development began during the 1990s with the Industrial Development (Pioneer Status) Act, which was introduced to create a legal framework for industrial development policies in the country. The act gave pioneer firms investing in PNG manufacturing and processing activities a five-year income tax break. The establishment of the act saw an influx of new investment, with a total of eight pioneer certificates issued in 1997 and 1998.

Today, PNG’s manufacturing sector is considerably smaller than energy, mining and agriculture, consisting largely of food and beverage manufacturing, food canning, tobacco processing and furniture making. Growth has been steady, however, and in June 2014 the Department of Trade, Commerce and Industry (DTCI) reported that the total value of the manufacturing sector rose from under PGK300m ($95.1m) in the early 1990s to surpass PGK1bn ($317m) for the first time in 2006, before hitting PGK1.4bn ($443.8m) in 2009 and PGK1.6bn ($507.2m) in 2011. Its share of GDP peaked at just over 10% in 1989, and stood at around 6% in 2011, according to data from the DTCI.

Consumer Products 

Major manufacturers in the market include Coca-Cola, which produces BU-branded products, Nestlé, food company Goodman Fielder, plastic and consumer goods manufacturer KK Kingston, Laga Industries, Lae Biscuit Company, New Britain Palm Oil, Paradise Foods, Ramu Agri-Industries and Trukai Industries. According to the Asian Development Bank (ADB), small-scale engineering, metal processing, clothing and other light industries are also present in the market, although these segments remain relatively small. The bank notes that the majority of manufactured products in PNG are targeted exclusively to the domestic market, except for tuna processing, which has become a major export segment in recent years.

Strategic Development 

Although the country has not established a dedicated industrial development strategy, industrial targets are included in the PNG Vision 2050 long-term economic development plan. Targets include establishing an Industrial Technology and Development Institute, as well as an industrialisation master plan to guide long-term development. The master plan focuses on developing an economic corridor and a national export-import bank, along with a stabilisation fund for revenues from non-renewable resource sectors, to channel money into education, health, communication, utilities infrastructure, and law and order. It also targets the development of a robust manufacturing sector, noting, “Opportunities exist in food production for the domestic market, high-value export crops, developing import-competing industries, plantations and forestry… Downstream agro-industries, small-scale and light manufacturing, ecotourism, and the service industry are also good prospects.”

Recent Growth 

The Bank of PNG (BPNG) reported that manufacturing sales rose by 23.6% in the second quarter of 2016, following a 3.9% decline in the previous quarter. The pick up in manufacturing was driven by increased sales and production of tobacco products, alcoholic drinks, processed tuna, general consumable goods, steel fabrication, chemicals and paints. Despite this positive growth, the BPNG noted that manufacturing sales fell by 7.4% in the 12 months to June 2016.

Gradual improvements to commodities prices are expected to keep the manufacturing sector on a steady growth path in 2017, with the BPNG reporting that the country has benefitted from a recent increase in commodities prices. The weighted average kina price of export commodities, excluding liquefied natural gas, jumped by 10% year-on-year in the third quarter of 2016, despite an 11.6% decline in the weighted average kina price of mineral exports such as copper and crude oil. Agricultural, timber and marine product export prices rose by 5.6% in the same period. This led to a PGK240m ($76.1m) balance of payments surplus during the first nine months of 2016, compared to a PGK394m ($124.9m) deficit during the same period in 2015.

Challenges 

Developing local manufacturing is a critical element for broader macroeconomic expansion. The Manufacturers Council of PNG (MCPNG) reported in August 2016 that manufacturers are the second-highest contributors to superannuation, and the largest single contributors to sales, payroll and company taxes to the government, eclipsing contributions made by the country’s extractive sector, which benefits from a range of concessions.

However, industry stakeholders have noted that the manufacturing sector’s expansion has faced several obstacles, including a shortage of skilled labour, complicated regulations, high utility and transportation overhead costs, and low productivity, creating significant challenges for new investors. “PNG is an expensive place to do business. Elsewhere in South-east Asia you can buy a 15-kg bottle of liquefied petroleum gas for $15, but here it costs PGK150 ($47.60). The same goes for many imported products, which are often re-exports from other economies and hence very expensive. More local industry and manufacturing is required,” Michael McWalter, a PNG-based petroleum expert, told OBG.

According to the MCPNG, the main challenges facing manufacturers are: land acquisition difficulties and the limited availability of long-term land leases; unreliable and expensive utilities; poor and costly government services; and high investment risk. The council reported that manufacturers in Indonesia pay an average of two cents per KW of electricity, compared to the 47 cents paid in PNG, while water and sewerage costs are between four and six times higher in PNG than in other Asia-Pacific markets. New electrical capacity is urgently needed, as industrial energy demand is forecast to rise at an average annual rate of 4.4% until 2035, when it will hit 1.9m tonnes of oil equivalent (toe), up from 600,000 toe in 2010. According to investors, 15% of a company’s overhead costs are spent on security expenses, compared to less than 1% in more developed markets.

Forex Troubles 

Depressed global commodities prices, the Ok Tedi copper mine’s 2016 shutdown (see Mining chapter) and subdued macroeconomic growth have also negatively affected manufacturing and industrial development, causing a chronic foreign exchange shortage since mid-2014, which has driven up business costs for the import-dependent manufacturing sector. Businesses have reported significant delays in receiving new shipments paid in kina, while the central bank has implemented a forex rationing programme that has faced criticism from manufacturing stakeholders.

“If you pay for something in kina, you get the product in four or five months. If you pay for it in a foreign currency, you’ll get it in a few weeks,” Chey Scovell, CEO of the MCPNG, told OBG. “The central bank’s forex prioritisation is also a problem. There are Chinese companies out here that get something like $8m or $9m each month for imports of things we really don’t need, and then you have local factory owners who are about to shut down because they can’t buy sheet metal.” This has significantly affected recent growth, with the Department of Treasury reporting that the manufacturing sector expanded by 2% in 2016, against earlier projections of 4%. The slowing in growth was largely attributed to increased competition from lower-priced imports as well as lack of foreign currency availability.

Silver Lining 

There could be some upsides to the forex shortage for the manufacturing sector, however. In February 2017 Frank McQuoid, chairman of steel fabricator Steel Industries, told local media outlet EMTV that a difficulty in accessing foreign exchange had created a situation where PNG-made goods were becoming increasingly attractive to local businesses.

The MCPNG also noted that fast-moving consumer goods, which are comparatively well-represented in the manufacturing segment, had experienced surging demand throughout late 2016 and early 2017, especially given currency depreciation – the kina has lost around 35% of its value against the dollar since 2012 – which had previously driven up the cost of imports. According to the council, the metal trades industry now holds 20% of the domestic market, with annual growth of between 10% and 15% anticipated in the next few years.

Tuna Power 

Fisheries growth has also been robust in recent years, with the tuna industry becoming one of PNG’s most significant non-mineral export earners. According to a 2013 report by the Pacific Tuna Forum, roughly 18% of global tuna stock is located in PNG’s 2.5m-sq-km Exclusive Economic Zone (EEZ), with tuna processing rising to become a significant manufacturing growth driver in recent years.

An estimated 750,000 tonnes of tuna is caught each year in PNG’s waters, which equates to a raw value of approximately $1.5bn, although most of this is taken to other countries for further processing. The MCPNG reported that countries such as the Philippines and China add an estimated PGK30bn ($9.5bn) to their own economies annually by processing raw tuna exports that come from PNG. The PNG Fishing Industry Association (FIA) reported that fisheries in the country generated over PGK1bn ($317m) in export revenues in 2016, an increase on 2015 figures, with the association targeting a goal of PGK3bn ($951m) annually in the future.

PNG is also a member of the Parties to the Nauru Agreement (PNA), a group of South Pacific countries that control waters where 50% of the world’s skipjack tuna are caught. PNG, the Solomon Islands, Tuvalu, Kiribati, the Marshall Islands, Nauru, the Federated States of Micronesia and Palau are PNA members.

EU Exports 

Under an economic partnership agreement signed with the EU in 2011, PNG has duty-free access to EU markets, including exports of processed fish to the bloc from any vessel fishing outside its territorial waters, effectively exempting the country from EU Rules of Origin requirements.

The EU is one of PNG’s largest tuna markets, and fisheries products comprised the second-largest share of exports to the EU in 2016, at €110m, or 16.1% of the total, behind €502m of agricultural exports. Fish exports to the EU have declined in recent years, however, dropping from €139m in 2013 to €111m in 2015. With EU exports moderating, industry regulator the National Fisheries Authority (NFA) is seeking new markets, with the Middle East, China and other Asian nations earmarked as potential export targets.

Processing 

Investment in new tuna processing facilities has been steady, and several new plants have launched in recent years, including four in Malahang, located near the city of Lae. These included the PGK80m ($25.4m) Majestic Seafood tuna canning plant, which opened in June 2013. The development was followed by separate facilities owned by South Korean companies Dong Wong and Nambawan Seafoods, and China’s Haili Sheng. Lae is also home to canneries owned by Malaysia’s International Food Corporation, as well as the Philippines’ Frabelle Fishing. RD Tuna, the country’s largest tuna canner, also opened a cannery in Madang in 2014. The new plant is expected to be the centrepiece of PNG’s long-planned Pacific Marine Industrial Zone (PMIZ), a fisheries-oriented export and processing area, which officials hope will host 10 tuna canneries, along with related port facilities and other businesses.

Domestic Demand 

The PMIZ development could play a fundamental role in helping the country meet rising domestic tuna demand. Despite steady investment inflows, the FIA reported in February 2017 that PNG still imports more canned tuna than it exports. Data from FY 2012/13 revealed that the country exported 35,000 tonnes of canned tuna, against 40,000 tonnes of imports, making development of value-added processing a priority for PNG’s manufacturing sector. The 110-ha industrial zone will be complemented by an additional 115 ha of residential and commercial space, providing employment for up to 30,000 people and generating revenues of $2bn to $4bn annually once operational. In April 2016 the Ministry of Trade, Commerce and Industry issued a construction commencement order to China Shenyang International Economical and Technical to commence work on the PMIZ.

Under development for over a decade, the project has faced delays and cost overruns, while landowners and environmental groups have also protested against the development, arguing that it fails to offer any benefits to the local community. In March 2017 local media reported that the EXIM Bank of China, which signed an agreement to finance 78% of the PMIZ project, had seen its budget rise from PGK300m ($95.1m) to PGK494m ($156.6m), and that additional financing was being sought. Authorities had planned to open the PMIZ during the first half of 2017, but the opening date is now expected to be later in the year.

Restrictions 

While in the past PNG’s tuna industry required greater value-added processing capacity, government policies to address the issue have met with mixed results and reactions from stakeholders. For example, in September 2015 authorities announced plans to prohibit tuna fishing vessels from operating in the country’s archipelagic waters unless the catch was processed in PNG, with the target of processing 100% of EEZ tuna domestically in the coming years. However, according to a report published by Undercurrent News, industry stakeholders raised questions about the viability of the new regulations, which were criticised as being unfavourable to local industry, as export growth to the EU was expected to flatten. There were fears that the additional regulations could provide tuna producers from other countries with an export advantage in relation to processing costs.

The report stated that countries such as the Philippines, Vietnam, China, Ecuador, Ghana, Senegal, the Seychelles and Mauritius are more capable of selling processed tuna to the EU at lower prices than PNG, where the cost of processing yellow fin tuna can be up to $400 higher than in some competing markets. Stakeholders also raised concerns that tuna fishers would become a captive market for local processors and buyers, which would put them at a disadvantage when negotiating their contracts.

Vessel Day Scheme 

The changes, which came into effect in 2016, are in addition to the Vessel Day Scheme (VDS) regulation, which places restrictions on PNG’s tuna vessels from fishing in the high sea areas of the Eastern Pacific, or in areas beyond PNA water. In 2010 PNA member states agreed to adopt the VDS, an integrated management system aimed at controlling fishing efforts by limiting the number of days a vessel can spend fishing, rather than implementing weight-based catch quotas on fishing crews. The VDS records detailed catch data from vessels and independent fisheries, subsequently allowing authorities to track the quantities of fish being caught in certain locations, while also helping to monitor illegal fishing. In April 2016 Transform Aqorau, the PNA’s chief executive, announced that the group had agreed to keep the VDS scheme, reporting that since full implementation of the system, fishery revenues had risen from $60m annually to an estimated $400m in 2015.

Sustainability 

Despite the economic benefits, the VDS has faced some criticism. Although the US is a member of the South Pacific Tuna Treaty, an agreement which ratifies the VDS system, US authorities have increasingly pushed to roll out a catch-based quota system in place of the VDS, which US trade representatives argue is fairer for all companies fishing in PNA waters, and would strengthen the industry against major South-east Asian export competitors.

In January 2016, following complaints from Tri Marine, Dongwan Industries and the South Pacific Tuna Corporation, the US announced it would withdraw from the South Pacific Tuna Treaty. While this decision was reversed in March 2016, PNG tuna industry stakeholders have increasingly argued against VDS. In March 2017 the FIA told local media that the government should focus on fostering revenue growth under a quota system rather than continue with the VDS.

Nonetheless, VDS compliance could be important for the country as it moves to expand its tuna exports; the European Commission gave PNG a “yellow card” warning in June 2014 for not doing enough to combat illegal fishing, putting the country at risk of trade sanctions on its EU fisheries exports. The yellow card was lifted in 2015, but sustainability remains a key priority for tuna stakeholders, as evidenced by the March 2017 announcement from NFA managing director John Kasu, who told local media that the authority was moving to establish surveillance and monitoring stations in Vanimo, Wewak and other coastal towns as part of efforts to crack down on illegal fishing.

Export Diversification 

With regulatory uncertainty challenging growth, and the industry awaiting the completion of the PMIZ, industrial stakeholders are increasingly focusing on diversifying the development of export-oriented industries to enable PNG to capitalise on its resource wealth.

The development of new industrial parks looks likely to be an important component of export diversification. Although PNG passed a Free Trade Zone Act in 2000, subsequently enabling the establishment of export-oriented developments that offer incentives to investors engaging in new projects, the country has yet to build a robust portfolio of industrial parks. Major developments at present include the PNG Dockyard in Port Moresby, the AES-owned Ravuvu Industrial Park, and a planned business zone as part of the Lae Port Development Project, with the second phase of the project on hold as of mid-2017.

New Industrial Park Development 

Perhaps the most significant recent development for industrial stakeholders was the December 2016 announcement that investors from China’s third-largest city, Shenzhen, had signed a memorandum of understanding to build two new industrial parks in West Sepik, near the Indonesian border. The estimated project budget is $3.8bn, and includes plans for one park dedicated to fisheries, timber-product processing, cassava and tropical spices, which will be built adjacent to an industrial park offering facilities for Shenzhen-based companies to produce steel, cement and other industrial products. The Shenzhen development coincided with an announcement that investors from China’s Fujian province were close to signing an agreement to build a “furniture city” at a yet to be announced location. Meanwhile, planned resource-extraction projects are also expected to stimulate growth. “If it comes on-line, Papua LNG will be a watershed for industry and the whole country,” Takeshi Abe, former CEO of Ela Motors, told OBG.

Outlook 

While the manufacturing and industrial sector, like the broader PNG economy, is dealing with the challenges of subdued macroeconomic growth, currency depreciation and low commodities prices, development of new labour-intensive manufacturing ventures could accelerate significantly in the coming years. New investment in West Sepik’s industrial parks should support decentralised manufacturing expansion, boosting the country’s production base and generating new export growth at a crucial time. Together with the PMIZ, these parks and other investments should support stable mid-term manufacturing growth, with new value-added tuna processing to continue augmenting government coffers and export receipts in the future.

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The Report: Papua New Guinea 2017

Industry & Retail chapter from The Report: Papua New Guinea 2017

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