Falling demand and commodity prices coupled with rising production costs challenge industry in Papua New Guinea


Often overshadowed by the extractive industries, Papua New Guinea’s industrial manufacturing, downstream processing and value-added sectors in fact serve as the largest formal employer in the country and continue to attract investment in spite of fiscal challenges presented by the current operating environment. Beyond employment, sustained long-term growth of the industrial sector in PNG will be crucial for the country to steer clear from the long-running negative consequences associated with “Dutch disease”, which is incurred from relying too heavily on mining and energy. Developing local industry to offer more import replacement goods is also essential to eventually lowering the cost of goods and services.

Domestic Driver

To date, the majority of manufacturing companies operating in PNG have focused largely on the domestic market, with the principal goods produced including beverages, building products, food, handicrafts, furniture, industrial chemicals, plastics, packaging, paint, textiles and personal care products. Despite this, many of PNG’s goods are still imported, and although this means that alternative opportunities abound for a wide variety of products not currently produced, the current inward-focused strategy has made the manufacturing sector highly susceptible to the vicissitudes of the domestic economy as it is largely dependent upon local demand.

In the manufacturing sector as a whole, sales declined by 6.3% in the third quarter of 2015 compared to an increase of 4.7% in the second quarter the previous year, according to the latest available data from the Bank of PNG (BPNG). This drop was mainly attributed to lower sales of tobacco products, food and beverages, and the lower value of tuna exports due to a fall in international prices. The contraction brought overall manufacturing revenues to a 17.6% decline for the year to September 2015.

Employment within the manufacturing sector has grown at a rate roughly equal to the national average, increasing from a total of 150.4 in the final quarter of 2007 to reach an all-time high of 200.5 in the first quarter of 2013. Employment then receded to 177 in the final quarter of 2015. Over the same period of time, the average index for all employment increased at a similar rate from 134.1 to 162.9.

Fluctuating Demand

The boom and bust cycles that have characterised the economy of PNG over the past few years as a result of its heavy reliance on exporting natural resources, such as natural gas, minerals and agricultural commodities, have also sent ripples through the industrial sector. Starting in 2010, when the PNG Liquefied Natural Gas (LNG) project began pumping capital into the country, domestic demand for goods soared. Manufacturers responded by ramping up output while also supplying new, higher-end goods to the market as spending power increased. This trend persisted until 2013, when domestic manufacturing sales experienced their last annual sales increase of 8.9%. After this point, the winding down of capital expenditures associated with the LNG project, along with a corresponding decline in commodity prices, led manufacturing sales to drop by as much as 10.2% in 2014 and continue on a downward trend in the following years.

The resulting depreciation of the kina against other benchmark currencies has also affected manufacturing in different ways. The relative costs of imported inputs for everything from heavy machinery to plastic bottles increased quickly, driving up production costs and inflation. Simultaneously, advantages usually gained in the export market by a depreciating currency were minimal due to a lack of domestic capacity to fully capitalise on the opportunity. “Even with the price of agriculture commodities rebounding and the kina depreciating, there was not a lot to export because the industry has not made a substantial enough recovery to capitalise on this yet,” Chey Scovell, director of the Business Council of PNG, told OBG.

The depreciating kina had another significant effect on the industrial sector when the government decided in late 2014 to essentially ration the amount of foreign currency available to pay bills on international transactions. Since the end of 2014 the change in exchange rate and ensuing decrease in the supply of foreign currency has had a major impact on all manufacturing operations in PNG, which depend upon the import of raw materials for their operations. Manufacturing schedules have been thrown for a loop as the time it takes banks to clear foreign currency payments can now vary between four weeks and five months, depending on the priority ranking given to each category of imported goods. Money transfers for medicines and baby formula, for instance, were given priority over payments for other products deemed less important, such as non-critical inputs for various manufacturing activities. “It is increasingly difficult for businesses like KK Kingston to obtain foreign currency as and when we need it,” Michael Kingston, CEO of Lae-based manufacturer KK Kingston, told the local press in June 2015. “I expect foreign exchange liquidity to continue to tighten, and the waiting list for forex orders to continue to grow. This liquidity crunch presents major challenges for every business operating in PNG.”


Although limited, most of the country’s current industrial export activity is already focused on capitalising on its natural strengths. PNG’s bountiful ocean life supplies a growing downstream seafood processing sector, while rich hardwoods provide raw materials for sawn timber and furniture producers, and the lush environment and fertile soil provide sustenance for the growing agricultural export industry. While PNG currently possesses extremely limited downstream processing abilities for its substantial mineral and petroleum resources, basic processing does take place in-country at PNG’s oil refinery as well as in the gasification process of the PNG LNG project.

Apart from the primary export earners of minerals and petroleum, PNG’s next-largest revenue generator is the agricultural industry. In 2015 export proceeds from agricultural and other related exports, including palm oil, amounted to PGK2.3bn ($785.2m), 10.9% of the total value of PNG exports of PGK23.1bn ($7.9bn), according to BPNG, compared to 12% in 2014. Marine products, driven by the tuna canning industry, exported PGK466.1m ($159.1m) worth of product in 2015, an increase of 31.3% from 2014 as a result of combined growth in the volume and price of exports.

Facilitating Trade

In addition to the sought-after European markets, which import canned tuna and palm oil, among other goods, PNG-based manufacturers now export a diverse array of wares to other Pacific Island nations, including the Solomon Islands, Vanuatu, Fiji, East Timor, Guam, Tonga, Samoa, Tahiti and others. Goods in demand include processed foods, construction materials and business supplies.

PNG is signatory to a number of trade agreements which facilitate the flow of goods to and from the sector, creating both beneficial and challenging conditions for various industrial segments. These include a handful of international and region-specific agreements allowing reduced- and zero-tariff access to markets across the world.

One of the most significant international agreements granting access to European markets is the PNG-EU Economic Partnership Agreement, which allows domestic companies duty- and quota-free exports from PNG along with liberalising 88% of EU imports (excluding the most sensitive economic sectors, such as meat, fish, vegetables, furniture and jewellery). This remains one of the more beneficial arrangements for the agricultural and fisheries sector as goods would otherwise be subject to a 24% tariff on agricultural imports into EU member states.

Other regional trade agreements include the South Pacific Regional Trade and Economic Cooperation Agreement, which provides duty-free market access for exports from PNG and other Pacific Islands Forum countries into Australia and New Zealand; the Pacific Island Countries Trade Agreement, agreed among the 14 Pacific Islands Forum countries; the Melanesian Spearhead Group Trade Agreement; the PNG and Australia Trade and Commercial Relations Agreement; the Pacific Agreement on Closer Economic Relations (PACER) and the newer PACER PLUS, for which negotiations remain ongoing.

While these trade agreements provide the manufacturing sector with both sales opportunities and increased competition abroad, the onging issue of cheap imports and other counterfeit and contraband products entering the market continues to impede sector growth. Such products, a number of which enter the country unaccounted for, pose not only unfair competition for domestic producers but also significant health risks from those products which may not adhere to quality and safety regulations.

Logistical Challenges

One of the primary causes of the often prohibitively high production costs for companies wishing to engage in manufacturing operations in PNG is the lack of efficient infrastructure. Inadequate transportation networks country-wide often cause delays and cost increases across many stages of the value chain, from the importation of raw materials and storage of inputs to the distribution of goods. The notoriously rugged terrain, tropical climate and widely dispersed population of PNG provide substantial challenges to the transport sector as it struggles to keep pace with increased traffic and consumer demand brought on by rising economic growth.

In spite of the recent infrastructure investments made by both the government and donor organisations, improvements to the country’s logistical chains have been somewhat slow to translate into more efficient movement of goods and lower production costs. This is partly due to enduring weak links and bottlenecks along the supply chain as well as the uneven implementation of projects.

Electricity generation is also unreliable and costly, often requiring manufacturers to make investments in back-up generation capabilities, which has the knock-on effect of increasing costs that are then passed on to the consumer. While some new power generation has come on-line in recent years, the country’s primary energy supplier – the state-owned PNG Power – which is responsible for generating, transmitting and distributing the majority of PNG’s electricity needs, has historically lacked the ability to fund all the upgrades necessary to ensure a stable power supply at competitive rates.

Policy Debate

Apart from the below-par physical state of the transport network, the country’s strict cabotage laws are also a source of frustration for local businesses that incur significant shipping and logistical costs, even to move products around inside the country. With limited available land options due to the lack of reliable transport, even where geographically possible, shipping remains the only viable option, and businesses are thus held as captive consumers. As a result, internal shipments can often cost more than shipping to and from foreign countries.

The issue remains controversial, with opposing viewpoints arguing their case for either the continuation of policies to protect local jobs or the abolition of the system to encourage competition. The government continues to back the existing system on the grounds that it creates a substantial number of local jobs in the marine industry, including stevedores, cargo handlers and seamen, along with a carry-over into other industries, such as marine insurance. If foreign-flagged vessels manned by foreign crews backed by foreign financing were to enter the market, proponents argue, the entire domestic industry and its supporting businesses could dry up almost entirely.

Although the prospect of opening up the sector to foreign competition has been studied and projected to substantially lower domestic shipping and logistics costs nationwide, the government’s position to date remains steady in its view that the protection of the maritime industry trumps the benefits gained from increased efficiency in the sector.

In addition to high logistics and infrastructure costs, the manufacturing sector is also facing challenges from labour costs, which have been increasing steadily over the past few years. After a long period of stagnation, the country’s hourly minimum wage was bumped up from PGK2.29 ($0.78) to PGK3.20 ($1.09) in 2014 and then to PGK3.36 ($1.15) the following year. Another rise for the third year running is scheduled for the summer of 2016, when the wage will rise to PGK3.50 ($1.19). Although this does represent a sizeable increase (53%) over the past two years, the vast majority of employers in urban areas already paid wages higher than the minimum. Education remains a priority as well for many employers. “Training and reforming the national curriculum are essential in order to have more adequately skilled graduates who are therefore more employable,” Ashok Kumar, chairman of local firm Badili Hardware, told OBG.

In spite of these challenges and slower fiscal growth, firms are taking the opportunity to improve business practices in anticipation of becoming more profitable once demand growth returns. “One benefit of the economic downturn is that companies have become more efficient in their operations,” Scovell told OBG. “When the economy picks back up again, these companies will already have the framework in place to keep these fixed and variable costs lower.”

Widening The Base

The PNG constitution is unique in some aspects in spelling out the state’s obligation to pursue shared benefits for the entire population. Long hailed as a panacea for high unemployment and widespread poverty, the expansion of small and medium-sized enterprises (SMEs) across a range of sectors is hoped to create a new wave of business owners, fuelling the domestic economy and the expansion of the recently arrived middle class, while diversifying the economy away from extractive industries. The authorities have enacted various laws and regulations over the years to bolster SMEs to varying degrees of success, with the majority of recent efforts focused on the broad-based development of sector. These have included financial assistance and education programmes as well as protective restrictions setting aside certain industries for PNG nationals only, with the intention of shielding the domestic market from large international competitors.

Some of the more recent promotion efforts have come as late as February 2015, when Parliament passed the PNG SME Corporation Act. The act jump-started a new, more aggressive approach to growing the SME sector, with a particular focus on locally owned businesses. While the legislation itself had little immediate tangible impact, apart from replacing the former Small Business Development Corporation with the new Small to Medium Enterprise Corporation, it did pave the way for a new master development plan, including policy shifts prioritising a reinstatement of the “reserve activities list” (RAL), which outlines the types of businesses that are reserved for Papua New Guineans.

New SME Policy

More concrete details of the new policy direction emerged over the next year, culminating in the SME Policy 2016. The proposed legislation includes a Master Plan 2016-30 and a Master Plan Summary 2016-30, all unveiled by the government in March 2016. Like previous plans to bolster SMEs, the policy calls for more money for the development of these ventures, along with training and other benefits to support and grow the SME sector, create new employment opportunities, achieve sustainable economic growth outside the resources sector and achieve a fair and equitable distribution of wealth through majority citizen ownership of business activity. The SME Policy 2016 also sets ambitious targets for the sector to achieve by 2030, including increasing the number of SMEs from 49,500 to 500,000, raising formal employment from 290,000 to 2m, reducing unemployment from 84% to 49%, increasing citizen control over the formal economy from 10% to 70%, raising the contribution of SMEs to GDP from 10% to 50% and growing per capita income from $2000 to $9600. According to the policy, SMEs are defined as having both assets and an annual sales turnover under PGK10m ($3.4m) and less than 100 employees.

As laid out by the government during a National Development Forum in April 2016, the updated RAL contains no fewer than 31 industries, broken down further to include hundreds of broadly defined subcategories, covering everything from growing tree crops and poultry farming to IT services and telecoms companies. In the future, industries included on this list will be required to be 100% owned by PNG citizens, meaning that any foreign owner of businesses in these sectors will be mandated to divest themselves of their businesses to local ownership. Regardless of the SME definition, foreign-controlled large business engaged in an activity that has a turnover greater than PGK15m ($5.1m) and more than 200 employees will still be prohibited from conducting business in one of the reserved activities, as either a primary or stand-alone ancillary activity. In addition to the fully owned activities, the RAL also includes another 11 activities which have been identified as requiring a minimum 51% ratio control by PNG citizens.

In its current format – and depending on how strictly and broadly it is implemented – the new regulations could have wide-reaching consequences across a range of industries. “All these regulatory changes by the government now are scaring a lot of investors and creating a lot of uncertainty,” Sir Brown Bai, chairman of the Rural Industrial Council, told OBG. “People are very unsure of what is going to happen here, and the companies I represent are very nervous about all these actions.”

While many aspects of the law remain unclear, such as what qualifies a person as a PNG citizen, naturalised citizen or a foreigner, or the means in which fair market value for businesses will be determined or what the divestment timetable will be, greater clarification is expected when the policy undergoes its first reading in parliament sometime in 2016.


In spite of turbulent times for domestic manufacturers, there remains significant optimism for the long-term outlook of the sector. Expected future revenue from the PNG LNG project, along with more impending capital intensive projects – such as the development of the Elk-Antelope gas discoveries through the PNG LNG project and the Wafi-Golpu and Frieda river mines – are expected to boost investment and demand in the short and medium term.

Many of the opportunities for future industrial and manufacturing growth will centre on import replacement across all manner of value-added goods, from food products to construction materials, although companies will be forced to increase efficiencies until the larger problem – high production costs associated with inadequate infrastructure – is addressed.

The final shape of the government’s new policy for SMEs will also have significant bearing on the industry for both foreign and domestic players, as well as in shaping the future investment climate for PNG.

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The Report: Papua New Guinea 2016

Industry & Retail chapter from The Report: Papua New Guinea 2016

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