PNG works to overcome transport bottlenecks

Despite Papua New Guinea’s low ranking in the World Bank’s “Doing Business” survey, it regularly draws foreign capital in the billion-dollar-a-year range. The country is attractive for a number of reasons. It remains one of the most liberal economies in the developing world, offering national treatment and few restrictions on investment. It is also blessed with abundant natural resources. The country has size-able deposits of copper, oil, gas and silver, as well as significant tracts of saleable lumber. On the trade side, it is an open market with low tariffs.

Overall, PNG generates good numbers in terms of trade and investment. Despite falling close to a trade deficit in 2013, after more than a decade with a surplus, the situation has rebounded since, with the trade surplus rising from a low of PGK101m ($38m) in the second quarter of 2013 to PGK1.71bn ($647m) in the third quarter of 2014, its highest level since 2011. The country still has a deficit in services, running at over PGK7bn ($2.65bn) a year, but even that started to moderate towards the end of 2014, coming in at PGK768m ($291m) in the third quarter, compared to PGK2bn ($757m) a year earlier.

Balancing Act

The trade and current account balances have been helped considerably by the end of imports for the construction phase of the PNG liquefied natural gas (LNG) project, and by the slowing of the economy. Food and live animal imports were down by 55% year-on-year through the third quarter of 2014, while fuel imports fell by 27% and the import of machinery was down by 51%.

In the export category, ground was lost in the minerals sub-category, where the total dropped by 18% between 2010 and 2013. Other sub-categories have remained stable, with agricultural exports rising to recent highs in the third quarter of 2014. Forest product exports remain strong as well.

Open & Free 

PNG is open to foreign investment and is fairly liberal compared with some regional neighbours and global peers. Freedom House rated it as “partly free”, which is better than a number of wealthier and more developed countries (Thailand, for example, is in the “not free” category).

It also scores better in some sub-categories than other partly free countries nearby, such as Indonesia and Malaysia. It ranks fairly low on the Heritage Index of Economic Freedom, at 137th, but scored well in the sub-categories of trade freedom, monetary freedom and labour freedom.

In its “2013 Investment Climate Statement”, the US State Department said, “The government of PNG welcomes foreign investment and the country has a liberal investment regime.”


PNG’s legal system is based on British Common Law, and many of the structures that were in existence at the time of independence remain. It recognises the judgements of some foreign courts, including those of the US and the UK. It is also a signatory to various conventions and accepts practices related to international arbitration.

PNG has bilateral investment treaties (BITs) in force with Australia, China, Germany, Japan and the UK. It has also signed one with Malaysia, but that treaty is not yet in force. Significantly, it has neither a BIT nor a tax treaty with the US. Unlike other countries, such as Indonesia, Australia and Mongolia, PNG has shown no signs that it plans to disregard, selectively apply or abrogate its BITs.

PNG accepted the basic tenets of the Washington Consensus, and has been lowering tariffs for more than 15 years under its Tariff Reform Programme. It initially cut the intermediate rate from 30% to 15% between 1999 and 2006, and took the prohibitive rate from 55% to 40%. The intermediate rate was further reduced to 12.5%, and was scheduled to fall to 10% in 2015. Tariff reduction is a key policy initiative and was enshrined in PNG’s Medium Term Development Strategy 2005-10.

Restrictions & Limitations

Despite the open environment, some restrictions do exist. For the most part they are minimal or simply administrative. Several sectors and some small-scale business are limited to purely local participation. Only PNG citizens can process coffee, manage real estate, transport freight and rent out equipment.

Cultivating vegetables worth less than PGK50,000 ($18,900) a year, raising poultry of the same sales value, gathering wild forest material and hunting or collecting of insects, shells or feathers are also reserved for Papua New Guineans. A range of very small-scale retail is restricted, including selling from stalls, cars and markets, and the selling of handicrafts, carvings, pottery and paintings.

Red Tape

The bottlenecks most relevant to international investors are bureaucratic. Under the Investment Promotion Act 1992, all foreign investors must receive a certificate from the Investment Promotion Authority (IPA). The foreign entity may locally incorporate and register as a subsidiary or register directly. IPA certification is supposed to take 35 days, but can take up to six months. For private companies, any change of control of more than 10% of the shares must be reported to the IPA, and any change in business activity must be reported.

The review is highly subjective, with the IPA judging whether the investment is good for the country. It looks at whether the proposed activity will create jobs and increase tax revenue, and considers the experience and history of the investor, the technology that will be transferred and the impact on the environment. The IPA does, however, assist foreign companies by providing free advisory services, and its aim is to encourage international participation.

Central bank approval is also required. The Bank of PNG is mainly concerned with making sure that the terms of financing from foreign partners and the cost of inputs from foreign suppliers are fair. When money is borrowed from overseas, the leverage of debt to equity should be kept within a 5:1 ratio.

The central bank also places restrictions on the transfer of funds out of the country. Outward remittances, other than those related to trade, of over PGK500,000 ($189,000) a year must be reported to the central bank, while any over PGK50,000 ($18,900) a year must be reported to the Internal Revenue Commission for a tax clearance.

The US State Department notes that while there are no restrictions on sourcing foreign currency, the bureaucratic obstacles involved can be material. Paperwork for tax clearances is extensive, processing can take weeks and the cost of conversion can be high. Since the central bank narrowed the trading spread in 2014, banks have been reporting a shortage of foreign currency.

Business Environment 

The general business environment can be a major impediment to investment. In its “Doing Business” survey, the World Bank ranked PNG 133rd out of 189 countries in 2015.

It rates poorly in a number of areas that are of great importance to international investors. In terms of starting a business, it was ranked 130th. According to the World Bank, it takes 53 days to establish a company in the country, as opposed to 34.4 in the East Asia and Pacific region, and 9.2 in the OECD.

In the enforcing contracts category, it was 181st for two years running; the cost of enforcing a claim is on average 110% of the claim. In Transparency International’s 2014 Corruption Perception Index, PNG was ranked 145th out of 175, after Laos, Kenya, Guinea, Ukraine and Uganda. Neighbouring Indonesia is 107th, while Australia is 11th.

Electric Shock

Some existing investors say that the cost and unreliability of basic services hinder investment and expansion. Power is expensive and inconsistent, with companies complaining that they face frequent blackouts and brownouts.

The 2013 price list from Power PNG indicates that the price per KWh for general supply customers was PGK0.987 ($0.37). While that is quite competitive for the Pacific region – the price of electricity in the Solomon Islands has been as high as $0.88/KWh – it is substantially higher than in other larger nations. Malaysian rates are no higher than $0.15/KWh, for example. Investors – especially those in manufacturing – cite other high costs in the country, such as telecommunications and transportation, and say that the government lowered tariffs without making a corresponding investment in infrastructure.

Lack of security especially takes a toll on foreign investors. Because of theft and violence, they have to make significant investments to keep property and people safe, building fences, hiring guards and transporting workers to factories or offices on company-owned buses. While the issue of law and order has become a focus for the government, business leaders say that the situation on the ground indicates that crime remains very much a problem and an impediment to foreign investment.

Looking Up

Progress is being made in addressing some of the problem areas. The IPA has developed and introduced an online platform that may make the processing of investor paperwork faster and more efficient. The system allows for business and association name searches, applications for foreign enterprise certification, registration as an overseas company and the updating of records.

The IPA is hopeful that the online services will help PNG improve its ranking in the “Doing Business” survey. While the system was introduced in December 2013, its use was delayed due to the lack of necessary parliamentary approvals.

Despite the difficulties of investing, PNG is a favoured destination for international capital. Over time, investors have realised that it is one of the most promising destinations globally. It is resource rich yet at the same time an open democracy in a relatively stable region. For countries that are in need of resources but wary of the troubles in Asia, the Middle East and Africa, PNG is a good target.

Chinese Involvement

The country remains very much favoured by its traditional investors – su ch as Australia – but it is increasingly a target for new players. China, for example, is becoming a major participant. In 2012 the Export-Import Bank of China offered PNG PGK6bn ($2.27bn) of soft loans, and a total of PGK10bn ($3.78bn) has since been mentioned in the press. Much of the money is committed to the building of infrastructure.

Chinese enterprises are very active in a number of projects and sectors. China National Electric Equipment Corporation received an engineering, procurement and construction contract in 2008 worth $26m for a hydropower plant for PNG Power. China Harbour Engineering is building the Tide Terminal in Lae, while China Railway International and China Machinery Engineering have been contracted to build roads in the Highlands.

Nickel & Mine

The most significant Chinese investment so far is Ramu Nickel. The $2.1bn project, which is located in Madang and includes a mine, a refinery and a pipeline, was started in 2008. It has been controversial since the beginning. In 2009, during construction of the project, at least four people were killed as Chinese workers and Papua New Guinean protesters fought. The mine was shut for three days in August 2014 after villagers attacked the site, and in December 2014 arrests were made in connection with damage at the site.

MCC Ramu – a subsidiary of a number of Chinese companies, including the Metallurgical Corporation of China – owns 85% of Ramu Nickel’s shares. Mineral Resources Development Company, which represents the interests of both the state and the landowners, has a 6.44% stake. RNL, a subsidiary of Highlands Pacific (a PNG-incorporated resources company), owns a further 8.56%. RNL was responsible for the initial exploration and feasibility work.

In addition, China has become a significant buyer of LNG and a major participant in all aspects of LNG delivery. China Petroleum & Chemical Corporation (Sinopec) is one of the four firms with long-term purchase contracts from the project. The ship Papua, custom-built by China Shipping Group, Sinopec and Mitsui OSK Lines specifically for PNG LNG, arrived in port in early 2015 to load its first supply. In total, Chinese interests will build four LNG carriers.


The Japanese are also becoming increasingly interested in the country. In terms of official assistance, the country has been financing a number of projects. The Japan International Cooperation Agency committed PGK26m ($9.8m) in 2013 to refurbishing the Madang Town Market. It has been engaged in technical cooperation to assist the National Capital District in improving waste collection, and that will run through 2017. A new project in 2015 involves assisting the Conservation and Environment Protection Authority in its efforts over the next five years. In addition, in early 2015 Japan offered the Pacific islands collectively a total of $450m in aid for assistance with environmental disasters, waste management, renewable energy and clean water.

Official contacts have been frequent in recent years. In May 2015, PNG’s prime minister, Peter O’Neill, met with his Japanese counterpart, Shinzo Abe, in Tokyo. Among other things, they discussed direct flights between Japan and Rabaul, developments in fisheries and infrastructure investment. This meeting followed Abe’s visit to PNG in July 2014, while a PNG investment summit was also held in Japan in 2014. However, Japan is playing catch up with other nations that are more active in the country.

Private Party

Private sector activity within PNG is considerable, and more companies are looking to invest and trade. Japan has two of the four major long-term purchase contracts, and was the recipient of the first exports from the PNG LNG project.

In 2012, Mitsubishi Corporation reached an agreement with Canada’s Talisman Energy regarding nine of the latter’s onshore natural gas licences in Western Province. The value of the transaction was around $240m, and will give the Japanese corporation an approximate 20% stake in the assets.

In 2013, Sojitz reached an agreement with PNG’s government to conduct a feasibility study on a gas chemical manufacturing project that would utilise the country’s natural gas supply.

According to reports in the local press, Japan’s ambassador, Morio Matsumoto, said in early 2015 that a number of Japanese companies are interested in getting more involved in the petrochemicals sector in the country. These include Mitsubishi Corporation, Sojitz, Marubeni and Itochu.

In addition to China and Japan, other countries have been active, and their investments in PNG suggest significant optimism. In late 2014, Sime Darby, the world’s largest producer of palm oil (both by market value and by land controlled), acquired London-listed New Britain Palm Oil (NBPOL) for $700m. NBPOL is the largest private employer in PNG, and has almost 30,000 ha of palm oil plantations. Analysts quoted in the media said that it was an interesting deal for the Malaysian firm because large land banks are currently difficult to find. The assets are also higher yielding on average than plantations in Malaysia.

Fishing for Compliments

Tuna is another resource getting a lot of attention internationally. PNG controls 14% of the world’s catch, and has an agreement with the EU that allows for duty free export of processed tuna to the bloc.

As a result, there is significant interest from foreign companies, and as of 2014 half of the canners in the country were foreign. Frabelle is Philippine, and South Seas Tuna Corporation is controlled by interests from Taiwan, the Netherlands and PNG. International Food Corporation is owned by Malaysian investors. Nambawan Seafoods, owned by investors from the Philippines and Taiwan, is set to open in late 2015. Majestic Seafood opened in late 2013. It is owned by Thai and Philippine investors. Other international players coming into the market include South Korea’s Dong Wong and China’s Haili Sheng.

US investors, who have been quiet in PNG outside of ExxonMobil’s investment in PNG LNG, are also becoming more active in the country and showing interest in increasing exposure. Significantly, General Electric said that it would be opening an office in Port Moresby. While the diversified conglomerate has been doing business in PNG since 1952, it wants to increase its presence. Its executives have mentioned working with international lenders to help PNG improve its power generation capacity.


Optimism about foreign investment has increased since the completion of PNG LNG. The project got started in 2008, with actual work beginning in 2010 (though discussions had started as early as 2004). It did face a good deal of trouble along the away. The rise in the kina resulted in an increase of the total budget by 20% to $19bn. Landowner disputes and workers disputes plagued the project.

However, despite the difficulties, PNG LNG was completed on time and production started in April 2014, with the first shipment delivered in May. Exxon-Mobil is now seeking to expand its project with the development of P’nyang field. The fact that such a large and challenging project could get finished, and within the original time frame, suggests that PNG might be an appropriate place for international investors to make significant commitments.

The experience of ExxonMobil with PNG LNG greatly contrasts with the experiences of others in countries such as Mongolia, where delays and disputes have all but stopped major projects in the extractive sector. “It was positive because a major was able to complete a project in PNG,” said Philippe Blanchard, the managing director of Total E&P PNG. “We are attracted to PNG because of the potential, and we are willing to enter PNG for the long term.” In March 2015, France’s Total gained approval to be the operator of PNG’s Elk-Antelope field. Oil Search disputed whether its partner in the project, InterOil, was allowed to invite Total in as an investor.

In February 2015, the International Court of Arbitration of the International Chamber of Commerce ruled that Total’s purchase of a 40.1% participation interest in the petroleum retention licence 15 permit (which covers the area in question) was legal and could not be blocked by Oil Search. After the ruling, Oil Search said it would not appeal and would work with Total towards development of the field.

Total said that while PNG LNG set a helpful precedent – and while the mood is good and goodwill exists between international investors and their local counterparts – it must proceed with care, and ensure that what it does in the country makes sense in the long term. In particular, it said that with the fall in the prices of natural resources globally, the oil major will have to run the project on a tight budget, and this may mean compromises on what it can afford to do and pay. In light of the changes in circumstances, this project is likely to progress somewhat differently to the last project by a major.

“We know that there are huge expectations,” said Blanchard. “We have to explain that we cannot do everything. And we don’t want to do things that are not sustainable or things that are one shot; we want to make sure that what we do is useful.”


PNG is in a good position when it comes to trade and investment. With a large resource project completed and another going ahead, it has set the right tone and has a good pipeline of activity. More major projects could follow, and importantly smaller investors and non-resources investors are starting to see the potential of the nation. If the country can begin to address its “Doing Business” challenges, and not allow its legitimate concern for small local businesses to degenerate into blanket nationalism, investment should carry on growing and the overall numbers should continue to improve.

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The Report: Papua New Guinea 2015

Trade & Investment chapter from The Report: Papua New Guinea 2015

The Report: Papua New Guinea 2015

The Report

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