Papua New Guinea makes efforts to diversify trade and forge new global partnerships

Papua New Guinea’s international profile received a boost when it chaired the APEC forum in 2018, an event that culminated in the APEC Leaders’ Summit in Port Moresby in November of that year. During the meeting, leaders from some of the world’s largest economies congregated in the capital to discuss a host of regional issues. While the business climate is hampered by regulatory obstacles and a shortage of land for development, the high-profile geopolitical event gave the island nation a chance to showcase its maturing economy and areas of untapped potential to more than 20,000 visitors from 21 APEC member states throughout the course of the year.

Natural Resources 

Given the fact that PNG is home to lucrative natural resources – with significant deposits of oil and natural gas, copper and gold, as well as an abundance of timber, fertile agricultural land and tuna-rich waters – foreign direct investment (FDI) inflows have been largely concentrated in the extractive industries. The single-largest investment in the country to date is the $19bn PNG LNG project, which began commercial operations in 2014 and is led by US oil giant ExxonMobil.

In April 2019 PNG’s second-largest investment was provisionally agreed upon when a memorandum of understanding between leading stakeholder Total and its partners ExxonMobil and PNG’s Oil Search was signed with the government, defining the key terms of the gas agreement for the Papua LNG project. Valued at $13bn, the project is expected to build two liquefied natural gas (LNG) trains, each generating 2.7m tonnes per year. Papua LNG will be developed in synergy with the existing PNG LNG project, which also plans to add a third train. Combined, these plans will eventually double existing LNG output to around 16m tonnes per annum. Following an official review of the agreement ordered by Prime Minister James Marape, the government made an announcement in early September 2019 that the project had been cleared for implementation; however, Total had yet to publicly comment.

Despite the benefits of these extractive projects, PNG’s economy remains vulnerable to external shocks due to an over-dependence on commodities. What is more, a legacy of ineffective land policies, high operating costs and a shortage of foreign currency have hindered investment. “PNG presents a wealth of opportunities, but true economic diversification can only be achieved if more land is made available,” Douveri Henao, executive director of the PNG Business Council, told OBG.

However, with a host of major new mineral projects on the horizon and growing interest from investors in China, Australia, Japan, New Zealand and the US, there are reasons to expect an uptick in FDI and development assistance, provided the government remains open to, and transparent in, its dealings with foreign partners.

Trade

PNG has signed several multilateral trade agreements, including the South Pacific Regional Trade and Economic Cooperation Agreement, the Melanesian Spearhead Group Trade Agreement and the Pacific Island Countries Trade Agreement. The country has also signed an interim Economic Partnership Agreement (EPA) with the EU.

PNG’s current account features a substantial surplus. According to the country’s central bank, Bank of PNG (BPNG), total exports were worth PGK33bn ($10bn) in 2018, up 3.8% from PGK31.8bn ($9.6bn) the previous year. Imports, meanwhile, have varied from 10% to 30% of total GDP since 2010. According to market estimates from the Asian Development Bank (ADB), PNG’s current account balance was $5bn, or 23.3% of GDP, in 2018. This figure is expected to fall to 22.5% in 2019 and to 18.5% in 2020. Meanwhile, BPNG data recorded a current account balance of PGK20bn ($6.1bn) in 2018, up by 17% compared to PGK17.1bn ($5.2bn) in 2017.

Exports 

Despite a temporary halt in production due to the 7.5-magnitude earthquake in February 2018, the value of LNG exports rose in 2018 on the back of higher energy prices. According to BPNG figures, LNG export revenue reached PGK12.8bn ($3.9bn) in 2018, an increase of 22% compared to PGK10.5bn ($3.2bn) in 2017. However, crude oil export revenue totalled PGK927.5m ($281.3m) in 2018, down 28.7% from PGK1.3bn ($394.3m) in 2017. Because of the earthquake, upstream production failed to meet initial estimates. Some 4m barrels of crude oil were exported in 2018, down 45.2% from 7.3m the previous year. The volume of LNG exported in 2018 reached 8.9m barrels, representing a decrease of 18.3% from 10.9m barrels in 2017.

The export of metals continues to be a key pillar of the economy, with export sales increasing. Gold export sales rose by 13.4% to $2.6bn, copper by 0.2% to $584m and cobalt by 7.1% to $195m. In terms of total production, the petroleum sector fell by 10% in 2018, while the mining sector included an uptick in gold production of 3%. However, there was a drop in copper, nickel and cobalt production of 5.2%, 22.6% and 23.5%, respectively, according to the ADB. Figures provided by the ADB showed that agriculture, forestry and marine product exports experienced mixed performances in 2018. Total agriculture export values were lower than 2017 in real terms due to a decline in palm oil sales, but were still higher than 2015 and 2016. The total quantity of cocoa exports declined by 3.4%, although the total value of these exports increased by 15% to $69m in 2018. Coffee witnessed an uptick in the quantity and value of exports, with total sales reaching $158m in 2018, an 18.4% increase compared to the previous year. The export value of copra (dried coconut flesh) rose by 12.7% to $40m, while copra oil and palm oil declined by 21.3% and 18.3%, respectively, in real value in comparison to 2017. The export of logs accounted for $319m in revenue in 2018, up 7.4% compared to 2017. Marine exports declined by 39.8% in real value to $235m in 2018.

Trading Partners 

PNG’s principal trading partner in 2018 was Australia, accounting for 20.1% of exports and 34.2% of imports. Singapore, China and Japan were the next largest export destinations, accounting for 18.2%, 17.4% and 13.4%, respectively. China, Singapore and Malaysia were the next largest contributors to imports after Australia, accounting for shares of 16.6%, 11.1% and 8.8%, respectively.

According to the Australian Department of Foreign Affairs and Trade, total bilateral merchandise trade between the two countries amounted to A$5.8bn ($4.3bn) in 2018, making PNG Australia’s 20th-largest trading partner. Throughout 2018 PNG imported a total of A$2.2bn ($1.6bn) worth of products from Australia, with crude petroleum accounting for the largest share at A$237m ($175.1m), followed by civil engineering equipment and parts at A$123m ($90.9m), and meat at A$115m ($85m).

Australia imported a total of A$3.6bn ($2.7bn) worth of merchandise from PNG in 2018, the largest segment of which was gold at A$2.9bn ($2.1bn), followed by crude petroleum at A$540m ($399.1m); silver and platinum at A$47m ($3.7m); and coffee and substitutes at A$33m ($24.4m). Australia’s trade in services with PNG nearly reached the A$1bn ($739m) mark in 2018, with Australian exports of services to PNG totalling A$518m ($382.8m), while imports of services from PNG amounted to A$419m ($309.6m).

The EU, under the interim EPA, allows for dutyfree imports from signatory nations. As of September 2019 the agreement had only been ratified by PNG and Fiji. In 2018 the EU imported €1.3bn and exported €2.5bn worth of products from Pacific countries, while total trade between the EU and African, Caribbean and Pacific countries measured at €3.8bn. The US, meanwhile, exported $87m to, and imported $90.1m worth of merchandise from, the island nation in 2018.

Trade Policy 

Launched by the then-named Department of Commerce and Industry in August 2017, the National Trade Policy (NTP) 2017-32 aims to make PNG an internationally competitive, exportdriven economy. To achieve this target, a national trade office will be established to act on behalf of the government during trade negotiations with overseas partners, ensuring PNG benefits from cost advantages for products of strategic interest. The NTP aims to eliminate non-tariff measures to reduce costs and limit the application of export taxes and other restrictions, in order to encourage downstream processing and value-added activities. The wide-ranging policy seeks to create secure market access conditions by concluding World Trade Organisation-compatible trade agreements.

A key aim of the NTP is to double the manufacturing sector’s contribution to GDP and create jobs. To achieve this, the policy has made a number of sector-specific recommendations, including the establishment of special economic zones to promote the development of agricultural manufacturing industries. Another objective is to create sustainable growth in forestry by promoting downstream processing activities. In addition to the 3.1m-sq-km fishing zone – the second-largest in the South Pacific, yielding as much as 20% of the global annual tuna catch – the NTP is also calling for the establishment of marine industrial zones for fisheries. With PNG losing an estimated two-thirds of its potential downstream and value-added fisheries business due to a lack of domestic processing facilities, the establishment of marine industrial zones will be a key driver of industry growth. The NTP is also set to reintroduce trade defence legislation to protect local manufacturing industry against unfair trade practices such as dumping and subsidisation.

With the policy set to increase downstream processing and diversify exports and trade partners, the Department for National Planning and Monitoring expects exports of fish to rise by around 20%, palm oil by 19%, copra by 16%, coffee by 10% and cocoa by 7% during the period covered by the policy.

Investment 

Total FDI stock amounted to $4.5bn in 2018, with an FDI flow (inward minus outward) of $335m compared to negative $180m in 2017, according to the UN Conference on Trade and Development’s “World Investment Report 2019”. The increase in FDI during 2018 was due to the ratification of the Trade Facilitation Agreement in March 2018 – which aims to simplify and speed up Customs procedures in signatory countries – as well as a focus on renewable energy development. While Australia has long been a leading trade and investment partner for PNG, Malaysia was the largest investor in PNG in 2018, with some 200 Malaysian firms operating across a variety of sectors.

Challenges 

PNG ranked 108th out of 190 countries in the World Bank’s “Doing Business 2019” report. While a lack of foreign currency and the frequency of natural disasters highlighted the fragile nature of PNG’s economy in 2018, investors have traditionally had to grapple with high operating costs, a lack of capital equipment, poorly funded state utility firms, security concerns, corruption and difficulties sourcing skilled local labour, resulting in many companies recruiting staff from outside PNG.

In addition to these constraints, existing laws do not allow direct foreign ownership of land, and investment in several key sectors is restricted. Investors remain wary of PNG’s history of regulatory uncertainty and a relative lack of transparency. However, while these long-standing issues have proven difficult to eradicate, policymakers are eager to provide security and incentives for foreign investors.

There have also been a series of legislative developments, which have been met with concern in business circles. Notably, the Foreign Investment Regulatory Authority (FIRA) bill was submitted to the Parliament in January 2019. In addition to expanding the number of business activities restricted to national enterprises, the bill also aims to replace PNG’s existing Investment Promotion Authority with the FIRA and, if passed, will require that all investments below PGK10m ($3m) be reserved for enterprises that are more than 50% domestically owned.

The business community noted that bill could act as a hindrance to existing and future FDI projects. “As originally drafted, the FIRA bill could have significantly inhibited foreign investment in PNG,” Ed Wilkinson, first secretary at the Australian High Commission in PNG, told OBG. “While the bill was presented as a way to increase opportunities for local business, it could have had a very negative impact on the economy more broadly.” Indeed, reports emerged in March 2019 that the legislation would be shelved, although by September 2019 it was unclear whether the government would reattempt to pass the bill in the future.

The call to reserve small businesses for locals was amplified in the second half of 2019, with Richard Maru, then-minister of national planning and monitoring, telling Parliament in July of that year that 90% of businesses were owned by foreigners. “Papua New Guineans need a reserved space, or what is called an incubation space, for their companies to start up and grow,” Maru told Parliament.

While the withdrawal of the FIRA bill was considered a positive development, there remains unease about the introduction of new restrictions on foreign participation in the economy. The Reserved Activity List was under review as of July 2019. However, even the business community agrees that something must be done.

Incentives 

Driven by the PNG Chamber of Commerce and Industry, a number of trade incentives have been adopted in recent years to assist investment in export-oriented industries. As it stands, there is a 10-year income tax exemption for new businesses in 41 designated development areas, including agriculture, construction, hotels, restaurants and manufacturing. In addition to these incentives, profits from value-added manufactured exports including canned foods, confectionery, dairy, glass and paper products, and wooden furniture are all exempt from tax for the first four years of operation. Investors are also entitled to receive accelerated depreciation of 100% deduction for new industrial plants with a lifespan exceeding five years.

 

Outlook 

After a challenging 2018 characterised by a foreign currency shortage and a major earthquake, significant investments are in the pipeline with the potential to rejuvenate trade activity. However, with a new government trying to secure maximum benefits from extractive projects, and overseas investors trying to operate under challenging international market conditions, PNG finds itself at an important crossroads. While there is the potential for greater trade flows in the years ahead, demand for PNG-made merchandise will be influenced by growing geopolitical competition. For the foreseeable future, PNG will depend greatly on its existing principal trading partners, though relationships forged during APEC meetings bode well for future diversification efforts and new trade routes.

With major extractive initiatives set to bring in an excess of $10bn FDI in the coming years, PNG’s economy is expected to grow by 3.1% in 2020, provided the government does not impede investors. While foreign investments across new and existing mines are set to boost production and increase government revenue, concerns over proposed legislative changes have the potential to negatively affect key projects. As such, it is essential to find a middle ground that balances the needs of investors with the desire of the government to ensure extractive projects generate sustainable, long-term benefits.

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The Report: Papua New Guinea 2019

Trade & Investment chapter from The Report: Papua New Guinea 2019

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