Challenging, disparate geography and low population density have created a unique set of challenges for Papua New Guinea’s transport industry. Costs are high across all three major modes of transport, and a lack of connectivity presents a serious challenge to doing business outside of Port Moresby. The country’s recent construction boom in the lead up to ExxonMobil’s $19bn liquefied natural gas (LNG) project has not been as beneficial to public spending as initially anticipated, and budgetary shortfalls caused by low global commodities prices and a macroeconomic slowdown have significantly affected delivery of planned new transport upgrades. Public spending on transport is set to further contract every year until 2021 as a result.
Come On Board
This creates considerable new opportunities for private sector players, as PNG and its international development partners edge towards launching new transport projects under a public-private partnership (PPP) framework. Projects, including a proposed new international passenger terminal at Port Moresby’s main international airport, are planned for delivery using a PPP model, raising hopes that future large-scale transport projects could benefit from private investment. Beyond PPPs, international lenders have also been actively investing in rehabilitating and upgrading transport networks, including the Highlands Highway, one of the country’s most important arterial roads, which should help stabilise transport costs in 2017 and 2018. Completion of the Lae Tidal Basin project and a new port at Motukea Island have also raised hopes of boosting competition in the international maritime shipping segment.
At A Glance
Roads, ports and airports meet the bulk of PNG’s transport demands, and the government continues to play an important role in managing transport systems. The country’s national transport network – which covers all infrastructure managed by the central government – comprises 8738 km of national roads, 22 ports and 27 airports, as well as air and marine navigation and communications infrastructure, all of which are owned and operated by the central government. In total PNG’s national and provincial infrastructure includes 22,000 km of roads, 46 airports, 450 airstrips, with 16 of the 22-government managed ports considered major sea ports.
Several government agencies oversee transport development in PNG, including the Department of Transport (DoT), which is responsible for transport infrastructure policy and planning. The DoT works closely with six separate government agencies in formulating new policy, including the Department of Works and Implementation (DWI), the Civil Aviation Safety Authority (CASA), the National Maritime Safety Authority, PNG Ports Corporation (PNG Ports), the National Roads Authority (NRA) and the National Road Safety Council. The CASA operated as the Civil Aviation Authority until 2015, when it was split into three separate entities: the CASA; the National Airports Corporation (NAC), which manages the country’s airports; and PNG Air Services. One of the largest departments in PNG, the DWI is responsible for road improvements and rehabilitation, while the NRA is tasked with roads maintenance.
PNG faces a unique set of challenges in transport sector development. Spanning 600 islands and 5150 km of coastline across a total area of 462,840 sq km, the country’s geography is largely mountainous, with 63% of total land area covered in dense jungle and rainforest. High levels of precipitation and volcanic activity also make the country prone to natural disasters. Population density is low, fluctuating between 66 people per sq km in Eastern Highlands Province and just two people per sq km in Western Province. According to DoT figures, average density is 15 people per sq km, compared to 142 in Indonesia, 338 in the Philippines and 7807 in Singapore. Furthermore, PNG’s urbanisation rate stands at 13%, with the majority of the population not part of the formal economy and remaining rural-based and widely distributed. This further exacerbates transport challenges, and according to Asian Development Bank (ADB) figures, just 68% of the population lives within 2 km of access to an all-season road. Nelson Terema, CEO of the Papua New Guinea Road Traffic Authority, told OBG, “PNG needs to be brought up to international standards. That is what we are doing with the transport network, centralising, cutting bureaucracy and enabling companies to get work done.”
Much of PNG’s population is concentrated in the Highlands Region, and while Southern Highlands Province has one of the largest single provincial populations, it remains one of the least accessible in the country. The Papua Region, which includes the Western, Gulf and Central provinces, among others, is the least populated and home to some of the most challenging terrain, including large rivers with extensive coastal deltas. The Islands Region holds the second-highest population density outside of the Highlands Region, much of which is concentrated in coastal areas.
Port Moresby has tended to benefit from significantly more investment in roads and infrastructure than remote rural areas. In October 2016, for example, Port Moresby City Hall reported that PGK1.27bn ($402.6m) had been earmarked for road construction in the capital city, with officials reporting that several major projects had been completed or were close to completion, including PGK28m ($8.9m) of upgrades on the 7 Mile Road to Jacksons International Airport (JIA); PGK77m ($24.4m) in upgrades between Erima and 9 Mile Road; PGK63m ($20m) spent on the link between 6 Mile and 7 Mile Road; PGK86m ($27.3m) in roadworks in the Gordon Industrial Area; PGK119m ($37.7m) in upgrades between the Port Moresby Grammar School and 6 Mile Road; and the PGK160.2m ($50.8m) 6 Mile roundabout between Dogura-Bautama. The PGK160m ($50.7m) Kumul Flyover had also been completed. With connectivity between resource-rich rural areas, Port Moresby and larger ports remaining extremely limited, transport costs in PNG are some of the highest in the Asia-Pacific region (see analysis).
The government has launched several strategies that aim to improve transport networks, boost connectivity and support economic development, although public spending on the sector has contracted in recent years and will likely continue to do so until 2020. Long-term transport development goals are encapsulated in the country’s National Strategic Plan, or Vision 2050, which was published February 2010 as an economic development framework. Vision 2050 identified service delivery, development of human capital and wealth creation as top priorities for the country, with the expansion of transport services underscoring all of these goals. The sector-specific goals of Vision 2050 include construction and maintenance of high-quality transport networks, which will allow the country to develop new economic corridors and improve trade volumes; extension of the country’s national road network and improvements to highway connectivity; development of paved airstrips across the country; and increasing the number of jetties and wharfs across all coastal provinces.
The PNG Development Strategic Plan (PNGDSP) 2010-30, released months after Vision 2050, aims to increase the country’s share of national roads in “good” condition from 28.7% in 2010 to 100% by 2030, in addition to tripling the network’s length to 25,000 km. Under this strategy, priority highways include the Highlands, New Britain and Buluminski highways, as well as the Koroba-Mendi and Pogera-Togoba roads. The PNGDSP also targeted construction of “missing link” roads, including a coastal line connecting Aitape and Vanimo, a highway linking Madang to East Sepik from Bogia to Angoram, and a highway connecting Gulf Province to Southern Highlands Province, between the Kerema and Kopi roads.
With an estimated 59% of the country’s population dependent on sea transport, the PNGDSP also targets tripling the number of routes served and vessels serviced by 2030, as well as upgrades across the country’s ports network. This would also reduce international turnaround times at ports in Lae and Port Moresby from an average of three days to one. The PNGDSP found that just seven out of 22 national airports met international safety certification standards in 2008, and it targets boosting compliance to 100%. Finally, the plan includes upgrades at 10 regional airports, enabling them to handle large jets.
National Transport Strategy
Roads development was the most important priority under the National Transport Strategy (NTS), which was released in 2013. This plan includes a prioritised list of transport investments, and calls for clarification of institutional roles, increased public capacity and detailed cost-recovery mechanisms for new projects. According to the ADB, the NTS identified national road maintenance as the top transport priority for PNG. Policy goals under the strategy include bringing 95% of the population within easy reach of all-weather transport infrastructure, providing transport access to 95% or more of arable agricultural land, and establishing well-planned and regulated traffic networks and urban public transport systems in major cities. These targets are unlikely to be met with public spending alone, however, after oil and commodities price dropped in mid-2014, which has significantly affected revenue.
Ups & Downs
National government funding for transport grew rapidly in the years to 2014 as activity at the PNG LNG project ramped up, driving resource-derived GDP growth to 93.1% in 2014, according to the IMF. ADB figures show PNG’s 2014 budget for transport was about $1bn, and additional funding from overseas development assistance and international lenders brought the budget total to nearly three times the amount allocated in 2011, with roads comprising 82% of total investment, followed by the maritime and aviation segments with 9% each. The bank found that challenges in accessing financing for new projects had improved, although implementation capacity had stalled by 2014 and risen to become a significant challenge for the sector spending.
At the same time, global oil prices plummeted from around $115 per barrel in June 2014 to less than $50 in early 2016. They remained around the $50-per-barrel mark in June 2017. PNG, which derived 77.3% of exports from petroleum and mineral resources in 2014, according to the IMF, has been significantly affected by the oil price collapse, as well as a concurrent contraction in global commodities prices, which had an impact on copper and agricultural production. The IMF reported that real GDP growth fell from a high of 7.4% in 2014 to 6.6% in 2015, contracting again in 2016 to reach 2.5%. Although the IMF expects growth will rebound to 3% in 2017, budgetary shortfalls are expected to significantly limit public spending on transport until at least 2020.
Indeed, in the 2017 national budget total expenditure is expected to fall by 3.5% compared to 2016, with transport set to receive 6.7% of total spending. In an analysis of the 2017 budget, accountancy and auditing firm Deloitte reported that transport spending fell by 12.5% in 2017 to PGK897.1m ($284.4m), compared to PGK1.03bn ($326.5m) in the 2016 budget. Transport spending is projected to contract further in the coming years, dropping by 1.1% to PGK887.2m ($281.2m) in 2018, 5.6% to PGK837.1m ($265.4m) in 2019, 2.9% to PGK813m ($257.7m) in 2020 and 1.3% to PGK802.4m ($254.4m) in 2021. By Deloitte’s estimates, public expenditure on transport will be 22.1% lower in 2021 than in 2016.
The ADB reported that misalignment between transport agency budget submissions and Cabinet-approved budget results has led agencies to rush implementation of unfamiliar projects. Tendering delays, cost escalation, private sector construction capacity, training, governance, security issues and geography also present challenges. On top of this, the government has made limited progress in introducing viable cost-recovery models. The NRA, for example, recoups just one-sixth of its annual maintenance requirements through fuel taxes each year. The ADB reported that community service obligations have forced PNG Ports and other state-owned transport authorities to cross subsidise loss-making activities, which has been counterproductive to their financial health.
Better redistribution of central government funds to lower tiers of government could also help. The 2017 budget will see provincial allocations rise by 11.9% to PGK3.99bn ($1.3bn), up from PGK3.57bn ($1.1bn) in 2016. However, the ADB reported that provincial road management capacity remains insufficient, with the DWI expected to play a more prominent role in managing lower-level government roads moving forward.
With public expenditure on transport projects forecast to be significantly constrained over the medium term, the private sector is set to benefit from new investment opportunities across the board. After launching a comprehensive review of the country’s existing PPP framework in 2012, the National Executive Council (NEC) moved to reform PPPs in the country with the PPP Act, which went into effect in 2014. Built on the NEC’s 2008 National PPP Policy, the act introduced a regulatory framework for the procurement and delivery of infrastructure facilities and services under a PPP model. Section 14 of the PPP Act calls for the establishment of a PPP Centre that will support the government in attracting, advising and assisting public sector entities with new PPP projects, with the centre required to be involved in all stages of project investment. The PPP Act also requires a relevant public body to conduct a prescribed initial assessment at the start of the PPP procurement process, which will include project details and value, as well as its viability under a PPP model.
Advancement of new PPPs has faced multiple challenges since 2014, however, and in a February 2017 analysis the Pacific Legal Network reported that while the PPP Act has been passed and certified, there had not been a gazette notice to confirm it is in force and it was thought to be under review in early 2017. Some PPPs have moved forward regardless of the legal uncertainty, including a planned PPP by Kumul Consolidated Holdings (KCH) in the utilities segment (see Energy chapter). However, the Pacific Legal Network reported that growth in major infrastructure projects besides KCH’s portfolio has remained stagnant, while the PPP Centre has not yet been established.
PPP development is slated to accelerate in the coming years, as the government and its largest infrastructure development partner, the ADB, move forward on a major new aviation project. Development of a robust aviation network has been an important policy priority since the mid-1980s, when the government launched the Planning and Budget Strategy 1988-92, which included pillars emphasising civil aviation and tourism industry development. What was then the Department of Civil Aviation, Culture and Tourism launched a five-year plan to improve Port Moresby’s JIA during this time, with the country already home to 480 airport facilities, including airports and temporary runways, of which 20 are linked to JIA.
Although the capital’s airport has been the country’s primary aviation hub since commercial services began in PNG, many of its facilities are out-of-date and often run well above capacity. The airport has handled more than 1.5m domestic and international passengers annually in recent years, despite a design capacity for just 400,000 passengers.
The airport in Port Moresby underwent an expansion project in advance of the country hosting the 2015 Pacific Games, which saw its existing international terminal extended by 20 metres to the south-east and 30 metres to the north-west. New passenger-handling systems were also installed, reducing the average processing time from between seven and 10 minutes to just three minutes. However, with the JIA still operating above capacity and international passenger volumes rising, the government is seeking to build a new international terminal there. Announced as a transaction services advisory agreement between the ADB and NAC in February 2017, the project will be the first of its kind for the ADB in both PNG and the Asia-Pacific region, and is one of the country’s first large-scale transport PPP projects.
Perhaps more significantly for near-term aviation development, PNG is moving forward on the ADB-backed Civil Aviation Development Investment Programme, which was launched in 2009 to rehabilitate five airports, and upgrade safety and navigational infrastructure across seven additional regional airports. The programme, which is split into three tranches, recently launched its third tranche, which includes a $248m facility. Tranche two projects are almost completed, according to the NAC, putting the country well on track towards meeting it aviation safety goals for 2030 (see analysis).
As international passenger numbers have risen, government aviation stakeholders in PNG have come under increased pressure to further liberalise the sector. Recent market entrants have complained that new codeshare agreements stand as a significant obstacle to market entry, even as national carrier Air Niugini moves to expand its domestic and international service offerings.
Air Niugini was established in 1972, with the government of PNG originally holding a 60% stake, followed by Trans Australia Airlines (TAA) and Qantas Airways, each with a 12% stake. Ansett Australia, another Australian airline which folded in 2001, held the remaining 16%. Air Niugini carried 350,000 passengers during its first year of operations in 1973, and underwent its first fleet upgrade in 1975, launching international services to Brisbane, Manila and Hong Kong in the same year.
In 1976 the government acquired TAA and Qantas’ stakes in the company, followed by Ansett’s stake in 1980. The country’s second PNG-based carrier, PNG Air, began as a charter services company in 1987. Its major shareholders include the Mineral Resources Development Company and the National Superannuation Fund. Low-cost Air Niugini subsidiary Link PNG, launched in 2014, focusing on domestic services.
Air Niugini Expansion
In February 2016 Air Niugini announced it had ordered four Boeing 737 MAX8 aircraft at the Singapore Airshow, adding to its fleet of Boeing Next-Generation 737s and 767-300ERs. The new aircraft are expected for delivery in 2020. With much of the country inaccessible via roads, Air Niugini has played a critical role in maintaining domestic connectivity, offering service to 25 domestic airports and launching Link PNG. Air Niugini has also expanded its own international services in recent years.
In June 2016 the carrier entered into a codeshare agreement with Solomon Airlines and Air Vanuatu on routes to Honiara, Port Vila and Port Moresby, and the following month it began operating a second weekly service to Tokyo’s Narita International Airport. Services to Australia expanded further in October and November 2016, when Air Niugini increased frequencies from Port Moresby to Cairns and Sydney, respectively, and in December 2016 the airline launched services to Chuuk and Pohnpei in Micronesia. More recently, in March 2017, the PNG carrier launched domestic services between Mount Hagen and Wewak. In the same month, it opened a new service to Townsville in Australia. According to PwC, figures from the Department of Treasury show that PNG’s transport, storage and communications sector grew by an estimated 4% in 2016, with the expansion of international and domestic flights cited as a major driver of this growth.
Although services have been expanding, aviation costs remain elevated in PNG, and the ADB reported that international air traffic in the country is very expensive, noting that Air Niugini’s unit cost on Asian routes is 2.5 times more than other inter-Asian flights. Unit costs (per passenger per nautical mile) are the most expensive in the Asia-Pacific region on flights to Australia, exacerbating already high transport costs in the maritime and roads segments (see analysis).
Although Air Niugini entered into a codeshare agreement with Qantas in 1987, market competition had been extremely limited until 2006, when the then-Department of Transport and Civil Aviation announced it would open up the market to new airlines, reporting that Air Brunei and Singaporean budget carrier Tiger Air had expressed interest in launching services to PNG.
Recent market entrants include Virgin Australia, which launched services to Port Moresby from Brisbane under a codesharing agreement with PNG Air in 2008, and Philippines Airlines, which commenced services between Manila and Port Moresby three times a week in late 2015. Despite these positive developments, lack of competition remains a problem for PNG’s aviation sector, as evidenced by a recent legal battle between Air Niugini, Qantas and Virgin Australia. In July 2016 Qantas announced the company would end flights between Cairns and Port Moresby owing to low demand, moving instead to a daily service between Brisbane and Port Moresby. The new service used Boeing 737-800s, while the previous Cairns-Port Moresby service had flown on Q400 turboprops. Qantas submitted an application to the International Air Services Commission (IASC) to shift its Cairns route to a codesharing agreement with Air Niugini. The two airlines were also set to codeshare on the Brisbane-Port Moresby route, while Qantas planned to maintain its existing codeshare on Air Niugini’s Sydney-Port Moresby service.
Virgin Australia filed a separate IASC submission calling for the proposed agreement to be rejected, and arguing that if approved, the agreement would be the “single most significant barrier to entry on the PNG route”. In response, Air Niugini warned it would have to withdraw from Sydney and downgrade its Brisbane service to narrow-body aircraft if it did not receive support from Qantas as a codeshare partner. In October 2016 the IASC said it would be too difficult to draw conclusions about likely market outcomes under either scenario, announcing it would approve the free sale codeshare arrangement for a trial period on the Brisbane and Sydney routes. The commission plans to conduct a review once traffic and financial data for the 12 months up to December 31, 2017 are made available for assessment.
With highway and air connectivity gradually improving, the government is also hoping to enhance maritime connectivity in a bid to upgrade its transport network. The Lae Tidal Basin and Motukea Island projects should significantly improve capacity and efficiency at the country’s two most important maritime hubs, although lack of competition in international shipping, depressed commodities prices, foreign exchange challenges and a global shipping industry slowdown will likely continue to challenge the sector. PNG’s port sector includes 22 declared ports, of which 16 are managed by PNG Ports. Facilities in Lae, Port Moresby, Madang, Kimbe and Rabaul offer the necessary infrastructure to receive international traffic.
In resource sectors, such as forestry, petroleum, mining and agriculture, some private companies have established port facilities, such as Avenell Engineering Systems’ 180-metre private wharf and boat ramp, which opened at the Ravuvu Industrial Park just outside of Port Moresby in 2013. PNG Ports-operated docks handle an estimated 90% of international ships calling at the country’s harbours, as well as roughly 80% of international and domestic cargo. Ports in Lae and Port Moresby account for over 70% of throughput, with Lae alone handling half of total throughput and more than 60% of international and coastal trade, as it connects to the vital Highlands Highway, which serves an area home to over 40% of the population. Around three-quarters of PNG’s provinces have direct access to the coast, and an estimated 60% of the population lives along 6500 km of coastline and waterways, with extremely limited access to roads, making the port sector particularly critical for PNG’s economy. However, the ADB reports that ports in Lae, Port Moresby and Kimbe are the only ones in PNG Port’s portfolio that operate on a cost-recovery basis, while the remaining 13 national ports incur consistent losses.
Maritime Shipping Conditions
The ADB further reported that international shipping costs in PNG are among the most expensive in the Asia-Pacific region due to low levels of competition. This has negatively affected the investment climate, with the World Bank’s “Doing Business 2017” report finding that PNG ranked 164th out of 190 economies in the trading across borders category. According to the World Bank’s survey, border compliance costs for exports average $675 in PNG, compared to the East Asia and Pacific average of $402, while documentary export compliance takes an average of 96 hours, compared to 73 hours in the Asia-Pacific region.
Border compliance costs for imports is even more expensive, at $810 on average, compared to the regional average of $436, while documentary compliance for imports takes 120 hours and costs $425, compared to the regional average of 71 hours and $128. Local businesses have been affected by these costs, as it means inputs, which must largely be imported, are more expensive. Peter Langslow, managing director of Steamships Trading Company, told OBG, “Manufacturing here is hard, but not unlike other developing nations. You have to provide for yourself and make it happen from an operational perspective. Beyond that, you must consider the main issue is gaining foreign exchange to pay your suppliers since we must import the raw goods to manufacture.”
High shipping-related costs can be partly explained by rapid growth in maritime trade since the early 2000s. For example, container traffic from Lae rose by 78% between 2001 and 2005 alone, from 13,395 twenty-foot equivalent units (TEUs) to 23,811 TEUs, according to the most recent available figures. More up-to-date figures from the World Bank show total international container throughput in PNG followed the same trend, jumping from 295,286 TEUs in 2010 to 337,118 TEUs in 2012 and 382,301 TEUs in 2014.
Port Capacity Constraints
This has led to severe capacity constraints and extended dwell times; in 2005 operators waited an average of 210 days for a berth in Lae at a cost of $8000-15,000 per delay. And lengthy dwell times have driven many operators to introduce congestion charges. In a September 2016 report, APEC stated that the average dwell time at Lae was 3.67 days, meaning that moving agricultural produce from the Highlands to Port Moresby takes an average of seven to 10 days. Vegetables are taken to Lae from the Highlands Highway in 20-foot containers on open-back trucks, a two- or three-day journey, before being transferred to shipping containers and moved to Port Moresby by sea. The journey from Lae to Port Moresby takes 48-52 hours. The government has undertaken two projects that should significantly improve congestion and efficiency at ports.
Lae Tidal Basin
The first of these works was phase one of the Lae Tidal Basin project, which was completed in December 2014. The PGK809m ($256.5m) project was built by the China Harbour Engineering Company and co-funded by the ADB and the government. Works included dredging a 700-metre-long, 400-metre-wide marine tidal basin, with a 13-metre draught, as well as a 240-metre wharf capable of supporting quay cranes and container vessels. The berth’s maximum loading capacity is 50,000 tonnes, and its adjacent container yard is 60,700 sq metres.
The project has run into difficulties since opening. Although PNG Ports announced plans to select an international company to manage the port, a key step towards improving efficiency and boosting private sector participation, an operator had not been selected as of mid-2017. In February 2017 Charles Abel, minister of national planning, called on PNG Ports and KCH to select an operator as soon as possible in order to fully realise the benefits of the new facility. Structural defects discovered during phase one of the project had also delayed the launch of the second phase in early 2016, according to local media reports. Phase two is expected to include a second 240-metre berth and an extension of the facility’s existing international container wharf.
International shipping could also benefit as the country upgrades port facilities in Port Moresby. Operations at the existing Port Moresby port are set to shift to Motukea Island in the near term, which could help bring new international competition in as efficiency improves. The island’s 106-ha development site covers steel fabrication facilities, a dockyard and wharves, including two Panamax berths, with each offering a 212-metre quay line and 13-metre draught at low tide, a significant improvement over existing facilities. In February 2017 PNG Ports announced that 36% of pile-driving work for Motukea Island’s new international wharf had been completed, after ground broke in September 2016. According to Waqa Bauleka, chief infrastructure officer of PNG Ports, the new wharf will be complete by October 2017, offering a 250-metre quay and gantry crane tracks, as well as storage facilities. Fairfax Harbour’s existing international wharf will also continue to serve international customers until the new wharf begins operations.
Improved facilities and a deeper draught should help improve efficiency and could act as an important catalyst to attracting new competition in international shipping. Combined with ongoing improvements to the Highlands Highway, and upgrades at JIA and regional airports, these enhancements will help stabilise chronically high transport costs, spurring new investment and long-term economic growth.