Building on the momentum generated by the successful launch of the Papua New Guinea Liquefied Natural Gas project, the government continues to take the lead on stimulating construction activity in PNG, with various opportunities across the board – from ports and road projects to a range of residential and commercial developments – open to both domestic and foreign companies for participation and investment.
Budgeting Too Build
The construction and launch of the $19bn PNG LNG project in 2014 was expected to create an immediate and significant spike in the country’s GDP, along with a long-term rise in export-led revenue. Until recently, it seemed that this scenario was beginning to materialise. According to the Asian Development Bank (ADB), in 2014 the country’s GDP grew by as much as 13.3%. This trend was not to last, however. In 2015, despite government forecasts of record growth of 15.5% – driven by the beginning of LNG exports – GDP grew by a less-robust 9.9%, and the ADB has now predicted that PNG’s economy will grow by only 4.3% in 2016 and 2.4% in 2017.
The recent deceleration is mostly due to an unexpected reduction in government revenues, caused by the sustained drop in global oil and gas prices, which necessitated alterations to budgetary priorities. Stricter foreign exchange policies by the Bank of PNG (BPNG) in 2014, which led to a shortage of dollars, and the cancellation of a bond issue in late 2015 also worsened the situation, as there was less hard currency for imports.
However, despite challenges, there are still reasons to be optimistic about the macroeconomic environment. Hydrocarbons prices have stabilised, while it turns out that PNG LNG has some of the cheapest energy development costs in the world, suggesting that the project will do well regardless of global market conditions. PNG’s “Mid-Year Economic and Fiscal Outlook Report” for 2015 stated that major expenditure commitments in the 2015 budget, as outlined in the national Medium Term Development Plan, would continue to be delivered, including key infrastructure projects, such as roads and bridges.
Driven by increased activities in the construction sector, among others, BPNG’s latest available economic bulletin – for the final quarter of 2015 – forecast total non-mining GDP to grow by 3.4% in 2016 compared to 2.4% in 2015. However, in line with falling revenue projections, the government was forced to further reduce expenditures in its 2016 budget. Despite formerly being considered a priority, transport and infrastructure spending was cut by 36%, a reduction that can only have negative effects on the construction sector unless private sector investment grows. Indeed, the prospect of greater involvement from private investors is not unlikely, as the sector has shown a lot of interest in building PNG’s various transport, infrastructure and property development projects.
Labour Fluctuations
More than 40 companies are listed as construction and engineering organisations in PNG, according to the Commonwealth Network. The country’s key professional organisations in the sector are the Institution of Engineers PNG (IEPNG) and the PNG Institute of Architects. With the aim of encouraging and leading continued development of the engineering profession, the IEPNG collaborates with the South Pacific Engineers Association.
During its peak construction phase, the PNG LNG project employed around 16,000 workers. In 2011 census statistics placed the number of people employed in the construction sector at 61,010, or 3.6% of all employed Papua New Guineans. However, now that the project is complete, only a few hundred workers are needed to operate it.
According to BPNG, the level of employment in PNG’s construction sector declined by 3.8% in the fourth quarter of 2015, compared to a fall of 10% in the previous quarter. The decline was attributed to downsizing which followed on the heels of the completion of road projects in Kavieng and Buka, and the end of a number of building projects in the National Capital District (NCD). BPNG reported that, overall, in 2015 employment in the construction sector decreased by 3.3%.
A Key Sector
Despite the workforce reduction, the World Bank expects a slight recovery for the construction sector, predicting non-mining GDP growth in PNG of 2.9% in 2016. Indeed, the sector is increasingly being relied upon to help diversify PNG’s asset base and increase employment. According to the World Bank, strengthening PNG’s institutional and physical infrastructure capacity by constructing electrical, telecommunications and transport infrastructure is essential to growth, especially private sector-led growth.
BPNG reported that construction sector sales increased by 35.6% in the third quarter of 2015, reversing the previous quarter’s 3.4% decline. The growth was attributed to the continuation of construction work at the Hubert Murray Sports Stadium, the Paga Point Ring Road and the Kimbe wharf project, as well as work being carried out on several complexes and residential property developments in the NCD. In the year to September 2015, construction sector sales rose by 117.6%.
Business Climate
Improving the ease of doing business in PNG is important to attracting private sector investment in the sector, as well as the overall economy. In the 2016 edition of the World Bank’s “Doing Business” report, PNG ranked 145th out of 189 countries overall. While this represented a fall of 12 places from the 2015 edition of the report, in which PNG ranked 133rd, the country performed significantly better in the dealing with construction permits category, rising from 141st place in 2015 to 127th. PNG’s ranking for two other indicators – the number of procedures investors are required to complete (17) and the average number of days to obtain a permit (217) – were unchanged from 2015.
Another useful indicator of the regulatory environment in PNG is the World Bank’s overall distance to frontier (DTF) score. This indicator measures the distance between an economy’s performance and the best performance possible, or “frontier”, which is derived from the performance of all economies and covers the entire sample of 36 indicators. PNG’s DTF score improved slightly between 2015 and 2016 – from 50.67 to 50.74, out of a possible 100 – while its DTF score for dealing with construction permits also increased – from 62.44 in 2015 to 62.73 in 2016.
Private Engagement Policies
Key strategies which may improve the business environment in PNG are outlined in the national Medium Term Development Plan 2 (MTDP2), covering 2016-17, and include expanding the private sector’s access to capital, especially for investment in the construction, manufacturing, extractive and agriculture sectors. In line with this, and as part of wider reforms to increase private investment in the delivery of infrastructure services, in September 2014 the government endorsed the Public Private Partnership (PPP) Act. Until recently, the lack of a formal and transparent process for evaluating and processing PPP projects had hindered their advancement. The new act detailed the establishment of a PPP centre to assist in developing, tendering and carrying out PPP projects.
Implementation of the act is being supported by the ADB, with some funding being funnelled through its Pacific Private Sector Development Initiative, which is co-financed by the ADB and the governments of Australia and New Zealand.
Capital Makeover
With PNG ready to host several upcoming high-profile international gatherings, including the 2018 APEC leaders’ summit, various plans are under way to build new roads and housing in the country’s capital, Port Moresby, as well as a project to relocate the Motukea terminal away from Fairfax Harbour, situated in Port Moresby’s central business district (CBD). In addition to making the city more liveable by easing traffic congestion and extending growth boundaries away from the CBD, the large-scale renovations are also designed to promote the city’s standing as a capital on the world stage. Moreover, a number of large-scale commercial developments rolling out in the capital will also serve to bolster the city’s international reputation.
Road Links
Working toward this, the city and the PNG government are spending more than PGK400m ($136.5m) on the construction of four major roads. The road works, part of a plan to expand the city’s boundaries into suburbs and new economic zones, are expected to physically transform the city, according to Powes Parkop, governor of the NCD, speaking to local media in September 2015. The governor said that he expected the road projects would help transform Port Moresby into “a real capital in the Pacific.”
The contracts for two of the road projects – a 14-km, four-lane road from the 6 Mile neighbourhood to Bautama on the Magi Highway, and a 3-km, four-lane road and 9-km, two-lane road from the Taurama bypass to the Magi Highway – were awarded to two locally-based companies: Global Constructions, for PGK119.5m ($40.8m), and Hebou Construction, for PGK160.2m ($54.7m). The remaining two contracts, worth PGK80.2m ($27.4m) and PGK37.2m ($12.7m), were awarded to China Harbour Engineering Company (CHEC) and US firm Phoenix Builders, respectively, for the construction of a 4.7km, four-lane road to connect Tokarara to the Hanuabada by-pass or Koura Way and a 5-km, two-lane road from Gerehu to Parliament House or Magani Crescent.
Mixed-Use Projects
Meanwhile, new developments in the country’s commercial property sector, including several shopping and mixed-use projects, are also being built through PPPs and joint ventures with foreign participation. One such project, a PGK60m ($20.5m) shopping centre, is set to open in Port Moresby’s Koki suburb. Managed by the Malaysian-owned company Kitogara, the development will be built by Petro Pipe Construction Company. Daniel Hii, project manager at Kitogara, said during a ground-breaking ceremony in November 2015 that the first phase would include two double-storey blocks to house 20 shops, forming the retail and commercial centre for the area, plus office space. The project – Kitogara’s first commercial development – is scheduled to finish by February 2017.
Work is also ready to commence on a PGK800m ($273.1m) mixed-use development, also in Port Moresby, in 2016. Under a PPP signed between Korean Palace Construction and PNG’s National Housing Estate Limited (NHEL), 10 high-rise buildings and a shopping mall will be built in the Moresby South district. The joint venture company, Korea Niugini Housing, will begin construction sometime in 2016 at Gabutu. This will be NHEL’s second construction project, the first one being the construction of 48 housing units at Tokarara.
High-End Housing
Port Moresby will soon have a major new housing project, catering to the demand for higher-end accommodation. The Touaguba Hill Paradise apartment project, located in a prime area of the capital, comprises three nine-storey buildings targeted at high-income local buyers and foreign investors. At a ground-breaking ceremony in June 2016, the developer, NPL Development, said the PGK90m ($30.7m) project would be ready by June 2018.
Another construction project that is expected to substantially encourage economic growth and development in the nation’s capital is the relocation of Motukea Port from Fairfax Harbour in the CBD, as part of a plan to develop Port Moresby into an economic centre for trade.
After over 100 years of Port Moresby using the harbour as a trading hub, the port is set to be moved to Motukea Island, about 12 km from the capital. In July 2014 PNG Ports Corporation acquired the PGK725m ($247.5m) Motukea Port from the Curtain Brothers, which had equipped the island with facilities capable of accommodating oversized PNG LNG equipment, ship maintenance and construction facilities.
The relocation of the port is also expected to open up numerous opportunities for construction companies to bid on redeveloping the existing port site in Port Moresby, as the capital’s former port area seems set to become a massive construction zone for the next several years. The government is hoping to complete the port’s relocation by 2018, in time for the APEC meeting.
LAE Port Renovations
Another port currently undergoing construction work is the port at Lae, which is the capital of Morobe Province and the second-largest city in PNG. Positioned at the terminus of the Highlands Highway and with easy access to the islands, Lae Port is considered PNG’s largest and most important, handling about half of the country’s exports. To help boost its economic potential, officials have targeted it for modernisation in preparation for increased levels of containerised trade. Financing for the project has been supplied by the ADB, Kumul Consolidated Holdings (KCH) – which was formerly known as the Independent Public Business Corporation and is in charge of managing state-owned assets – the Organisation of the Petroleum Exporting Countries Fund for International Development, and the PNG, Japanese and Swedish governments.
Increased Capacity
The first of two phases of the upgrade were completed by CHEC in 2014 at a cost of PGK809m ($276.2m). The port’s capacity for cargo throughput was increased through the installation of new facilities, such as a wharf, berth, container yard and deep harbour, which is suitable for large container-carrying vessels, as well as new terminal buildings and storage areas, roads, drainage and utility services. Additionally, two new container berths for the Lae Tidal Basin have tripled the port’s capacity.
After the phase one works were completed, an independent third party found evidence of major structural defects regarding the integrity of the sea wall slope protection. Contractor Korea Engineering Consultants was the supervising consultant responsible for reviewing and approving designs and construction works carried out in phase one. Remediation works to repair the problem could cost an estimated PGK200m ($68.3m), an expenditure that will be borne by CHEC. In the interim, the port is operating normally, according to officials at KCH.
The second phase of the redevelopment, which is estimated to cost around PGK300m ($102.4m) and is expected begin construction before the end of 2016, will include the addition of a second berth, with the capacity to accommodate two vessels of up to 200 metres in length, as well as a new industrial park. Designed to be built in two phases, the first phase of the Huon Industrial Park project, which is estimated to cost around PGK258m ($88.1m), will comprise the base for a new mineral export facility, as well as a storage area for dry bulk materials, wet cargo and feed stocks.
Development of the Huon Industrial Park was scheduled to commence sometime in 2016, but at the time of writing there was no information publicly available about the progress of awarding construction contracts for the project.
Powering Growth
Progress is also being made in the challenge of supplying electricity to PNG’s growing population and power-intensive industrial projects through the development of the country’s hydroelectric segment, which offers significant potential. Plans are going ahead to build a 180-MW hydroelectric plant called Ramu 2 through a PPP. The government tendered the project in 2015 through KCH, which owns the national utility, PNG Power. Once awarded, the chosen developer will co-finance, build, co-own, operate and sell capacity and energy to PNG Power under a 25-year power purchase agreement.
Located on the Ramu River, 1-km downstream from the existing Ramu 1 plant, Ramu 2 will serve the load centres of Lae and new mining developments in Morobe. The plant will be composed of three 60-MW Pelton turbines, a 34-metre dam with a 562.5-metre gross head (the difference in height between the water intake and tailrace levels) and a 7.4-km headrace tunnel. Ancillary works are set to include a 30-km, 132-KV transmission line. Once completed, Ramu 2 will triple the amount of electricity supplied by the Yonki Dam from 93 MW to more than 270 MW.
Although construction threatens to displace entire villages, traditional landowners will have equity in the project. KCH has been tasked with making the required land available for construction and operation, while licensing will be provided by the PNG Department of Energy and tariffs approved by the Independent Consumer and Competition Commission, the economic regulator.
Choosing A Partner
KCH is carrying out phase one of a three-phase transaction management process, seeking expressions of interest from qualified development partners for the PPP. The assessment process of the three proposed partners – Chinese firms Sinohydro and Shenzen Energy, and a South Korean consortium of Posco Daewoo, Korea Western Power, Daelim Energy and Hyundai Engineering – is ongoing. KCH issued a request for proposal from the three candidates in May 2016, with a closing date of October 2016. It is scheduled to announce the preferred partner in December 2016 and to close the financial arrangements in early 2017. Work on the project is pegged to begin sometime during that year.
Social Housing Supply
In December 2015 the government endorsed a plan for the construction of 40,000 units to counter PNG’s substantial lack of social housing. Under the scheme, the state-owned National Housing Corporation, which is overseen by the minister for housing and urbanisation and the National Executive Council, is preparing to build units in three separate neighbourhoods across Port Moresby.
The government’s plan, the Affordable Land and Housing Programme, is facilitated by the Office of Urbanisation, coordinated by the Department of National Planning, and will be rolled out in partnership with the Department of Lands and Physical Planning, the National Housing Corporation, and the National Research Institute, as well as magisterial services and the civil registry.
In the beginning, 5000 affordable and durable houses will be constructed at Durhan Farm in 8 Mile, followed by more units at NRI and Gerehu 7A. The additional social housing is earmarked for civil servants but will be available to other Papua New Guineans as well. According to Paul Isikiel, minister for housing and urban development, who spoke to local press in December 2015, a significant lack of housing in Port Moresby has so far meant that thousands of government workers are being forced to live in substandard conditions.
Private Investment
Following on from this, in July 2015 the government announced that 100 affordable houses would be built in 7 Mile, near Jacksons International Airport. The contractor, Amode RCS PNG, is a 50-50 joint venture between Australian firm Amode and Anitua Group, which is a landowner company based in the New Ireland Province. The PNG government has allocated PGK200m ($68.3m) to the housing project, with funds provided by China Exim Bank. The first set of house and land package units at the estate are priced at PGK400,000-500,000 ($136, 548-170,685). When completed, the estate will encompass several compounds with recreational amenities, such as parks and swimming pools.
According to Joe Webb, managing director of Amode, the 7 Mile project will act as a “launch pad” for similar projects elsewhere in PNG. Webb told local media that Amode RCS PNG’s on-site workforce included expatriate specialists, working together with up to 100 local workers. He said that once trained, the local workers would be able to transfer their skills to other projects across the country. The joint venture has its own construction company, which has secured the rights to its building system for the rest of PNG.
On The Road
In addition to building housing, infrastructure improvements and extensions are also an important part of the government’s development plans for the next several years. For this, aid and funding are being allocated by two main agencies: the ADB and the World Bank Group. The ADB’s four-year roads strategy for PNG includes upgrading or rehabilitating 400 km of core road network in the Highlands region, allocating contracts to the private sector for the long-term maintenance of 800 km of national highways and rehabilitating 15 national bridges.
Meanwhile, the World Bank, via the International Development Association and together with the PNG government, has funded a $157m Roads Maintenance and Rehabilitation project that runs from 2014 to 2021. Its primary goals are to pilot an integrated maintenance programme for the Hiritano Highway and improve the quality, condition and safety of priority roads.
Other projects under way in 2016 include a government project to reconstruct 67 km of road from Malalawa to Kerema town, with the building work being undertaken by Dekenai Constructions. Work on phase two of the PGK5m ($1.7m) project was well under way as of March 2016, and when finished is expected to shave time off the six-hour journey between the two towns.
New technology may also be transforming how PNG’s roads are constructed. Australian road construction company Global Road Technology’s “spray-on roads” liquid polymers and cold in-place recycling technology are being used to create so-called instant roads in some of PNG’s most populated regions. After the technology was successfully tied and tested in one PNG road project – the Napa Napa Refinery – in February 2016 the company was said to be in discussion with the PNG government and local companies to expand its work in the country. It has forecast investments of more than A$300m ($220.9m) in projects across PNG between 2016 and 2019.
Building Education
In Ialibu, a town in the Southern Highlands Province, local landowners have agreed to the use of their lands for the construction of Western Pacific University (WPU), a state-owned institution focused on technology. The government paid PGK15m ($5.1m) to the landowners, the Pekai-Aluwe tribe of Ialibu Pangia, to use 19 ha of their land, a disused airstrip and adjoining tribal land. The construction of the university marks a significant step forward for the government, as limited access to higher education marks a substantial challenge for the country. It has also been touted as an important economic investment for a region that has missed out on the benefits brought by oil and gas projects.
The first phase of construction, which began in March 2016, is estimated to cost around PGK42m ($14.3m) and is set to finish by 2017. Managed by the Royal Melbourne Institute of Technology, the university will enrol 3000 students in the first intake, although it expects to reach a peak enrolment of 6000 students, taken from PNG and the Pacific region. The airstrip adjoining the development will be upgraded to accommodate larger aircraft and move people to and from the university.
Outlook
In recent years, budgetary constraints have made private sector engagement in the construction sector increasingly key. In recognition of this, the government has taken steps to improve the business environment, most notably through the passage of the PPP Act and the recent raft of projects allowing for private participation. Going forward, it will be important for sector leaders and the government to maintain this momentum.
Other factors may also help stimulate sector growth. More affordable housing units, for example, should ease the accommodation issues facing domestic labour, while high-end residential developments may serve to attract foreign players to set up operations in PNG. The ports and roads projects also promise to buoy construction activity over the short and medium term, improving connectivity, and helping the country on its way to becoming a trading centre in the Pacific region.
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