The economy of Papua New Guinea is dominated by its large, labour-intensive agriculture sector and extractive industries, which are mainly focused on oil, liquefied natural gas (LNG) and various mining activities, including gold copper and silver. The manufacturing sector remains small, generally contributing around less than 2% of GDP, and is largely made up of food, soft drinks, beer and canned goods. Aside from its tuna canneries, the country’s manufactured products are targeted almost entirely at the domestic market. In the past the sector’s expansion has been limited by several issues, including infrastructure gaps and the high cost of labour relative to productivity. As a result, the sector’s contribution to overall GDP has remained flat in recent years.
However, several plans are now in place to address this. While the adverse economic impacts of the Covid-19 pandemic are set to hamper worldwide growth figures for the year, PNG’s plans to increase the prevalence of small and medium-sized enterprises (SMEs) operating in the country’s formal economy should help to diversify growth in the country and boost employment over the medium to long term. PNG’s SME Master Plan 2016-30 has identified several areas of the country’s economy where successful SME development will provide significant downstream value added to the country’s natural resource assets. Another major initiative in place is the government’s focus on accelerating the development of the country’s special economic zones (SEZs). Several specialised zones earmarked for investment in the coming years have the potential to provide a significant boost to regional economic activity, and incentives have been put in place to attract both local and international investors to add value across the agricultural, fisheries and light manufacturing segments.
Structure & Oversight
PNG’s industrial policy is formulated and overseen by the Department of Commerce and Industry (DCI), which is also tasked with guiding the country’s broader economic development and fostering growth in the local manufacturing industry. It is responsible for expanding the role of SMEs across the economy, with a main pillar of the DCI’s Corporate Plan 2018-20 aimed at increasing the contribution of SMEs to national GDP and creating jobs for locals. The DCI works in close collaboration with various state and non-state entities, including the Small and Medium Enterprises Corporation, and the National Institute of Standards and Industrial Technology, the latter of which is responsible for setting technical standards and conformity assessment schemes, and works to improve to improve productivity and reduce technical barriers to trade. Elsewhere, the Industrial Centres Development Corporation works to attract investment to the local manufacturing sector, although its importance is expected to soon be eclipsed by the establishment of the SEZs Authority.
The Independent Consumer and Competition Commission (ICCC) is the country’s main regulator and consumer watchdog. Its chief objective is to enhance the welfare of consumers in the country, promote industry conduct and standards, and protect consumers’ interests regarding the price, quality and reliability of goods and services. The commission derives its authority from the ICCC Act of 2002, which is aimed at encouraging a fair and competitive environment and ensuring industries can invest effectively. In addition it carries out a number of other administrative duties related to price and industry regulation. PNG is currently working with the Asian Development Bank (ADB) to update ICCC legislation. This should see the scope of its authority broadened, including in the field of mergers and acquisitions in the country.
Performance & Size
According to data from the ADB, PNG’s economy grew by 4.8% in 2019, up from the -0.8% recorded in 2018. Negative growth is forecast again in 2020 as a result of the economic slowdown caused by the Covid-19 pandemic. In June 2020 the ADB forecast full-year GDP growth of -1.5%, before rebounding to 2.9% in 2021.
The manufacturing sector’s impact on the country’s economy is relatively low; following growth of 3.7% in 2016, it grew at just 1.9% in 2017, the most recent year for which full figures are available, according to the 2020 budget report, published at the end of 2019. In both 2018 and 2019 the sector’s contribution was projected to grow by 3%, while 2020 was expected to see growth of 3.5%. The 2020 figures, however, were released prior to the outbreak of Covid-19 in the first half of 2020 and did not take into account the adverse economic impacts associated with the pandemic in the first half of 2020. The sector’s contribution to the country’s overall GDP growth has remained flat in recent in recent years, accounting for 0.1% of overall GDP growth in 2016 and 2017, and was projected to have remained the same in 2018 and 2019.
Employment in PNG’s manufacturing sector grew by 4.6% in the first half of 2019, according to the 2020 budget report. Positive employment growth was also recorded in the financial, businesses and other services segment, up 8.5%; retail, up 4.2%; and agriculture, forestry and fisheries, up 1.9%. However, employment figures in the transportation, and building and construction sectors were down 11.3% and 6.4%, respectively, over the same period.
The government has been working to broaden the industrial base of the economy in recent years, adopting strategies to reduce reliance on natural resources and move into higher value-added processing industries that can help diversify the economy and create employment. The process has involved significant efforts to boost SME activity and develop SEZs that could enable this growth. Successfully broadening the country’s economic base will be key when it comes to securing future prosperity. “Economic diversification will set the country on a more reliable growth path that is not reliant on extractives sectors,” Ed Weggemans, managing director at SP Brewery, told OBG.
The majority of both the country’s export earnings and its GDP are derived from the extraction of minerals and energy products, with this segment accounting for roughly 20% of GDP annually since 2014, when the country began exporting LNG. PNG imports most processed food, clothing and footwear, as well as many of the necessary inputs for industry and commerce. However, government efforts and initiatives in recent years have been aimed towards developing several subsectors across the country that could help feed into economic growth moving forward.
The country’s SME Master Plan 2016-30 is aimed at increasing the number of SMEs operating across PNG, thereby diversifying the country’s economy away from its considerable reliance on extractive industries and spreading economic prosperity more evenly across the population. The plan aims to increase the number of SMEs operating in the country from around 49,500 in 2016 to nearly 451,000 by 2030, with the majority of these to be located in the provinces of Morobe, creating around 41,300 SMEs; Eastern Highlands, with 37,200 SMEs; Western Highlands, with 34,700 SMEs; Madang, with 31,1000 SMEs; and Enga, with 28,900 SMEs.
The government is also working to significantly boost the numbers of Papua New Guineans working in the formal economy. According to the master plan, the government is committed to allocating investment to facilitate downstream processing across the series of catalytic projects that have been identified across the country’s provinces. These projects have been identified as areas of potential growth and employment, selected through a series of consultative workshops and based on the natural endowments of each province, thereby giving each a competitive edge in the activities selected. A key target in selecting the different catalytic projects was to minimise the potential for conflicting industries in order to encourage maximum growth and optimal use of resources across PNG.
The onus will be on adding downstream value across several economic activities throughout the country. These include the development of industrial parks associated with mining, palm oil, limestone, horticulture, coffee and cocoa in Morobe Province; coffee, tourism, mushrooms, horticulture, floriculture and honey in Eastern Highlands Province; livestock, agriculture, coffee, services and horticulture in Western Highlands Province; fisheries, cocoa, copra, tourism, nickel and palm oil in Madang Province; coffee, poultry, mining and horticulture in Enga Province; tourism, palm oil, boat making, marine and agro-forestry in Milne Bay Province; hydropower, LNG, fisheries, palm oil and cocoa in Gulf Province; and LNG, food crops, livestock, forestry and coffee in Southern Highlands Province.
Key to the success of the different catalytic projects that have been identified will be the establishment of fully integrated value-adding processes in each industry, from upstream to downstream. This will maximise the potential for economic spin-off activities, and stimulate the growth of local SMEs over the course of the master plan until 2030.
With the intention of boosting the manufacturing industry the government announced it was suspending the 20-year Tariff Reduction Programme (TRP) in 2017. Introduced in 1999, the TRP was designed to reduce tariffs gradually to a blanket 10% across the different tariff categories. While 2019 was originally intended to mark the end of the programme, the government introduced rate increases twice since 2017, for a total of 323 tariff increases. In the most recent tariff revision, a larger amount of import categories was zero rated. The only categories to have their import tariffs remain unchanged or increased were those that could have been made in PNG efficiently and competitively.
While some of the tariff increases have not been wholly welcomed by all of the country’s key trade partners, they have had a significant impact on local investment, including from some of the country’s biggest manufacturers, which include Coca-Cola, Pacific Industries, SP Brewery and Paradise Foods. Investment has also been driven by manufacturers aiming to hedge against shipping disruptions and shortages of foreign currency by becoming more self-sufficient in inputs (see Economy chapter). For example, in recent years SP Brewery invested in producing starch using locally grown cassava, and it also established a flour mill in Lae.
Another example is Pacific Industry’s GoGo Cola, which launched in late 2014, using as many inputs as possible sourced locally, including sugar from Ramu Sugar and cardboard cartons from Amalpack, which are manufactured in Lae. Aluminium cans are currently unavailable locally and must be imported from abroad. In mid-2019, however, Pacific Industry entered negotiations with several overseas can manufacturers to bring their production onshore, although no announcement had been made as of July 2020. In addition to reducing the overhead costs for production, the move would help create an additional 500-1000 new jobs in PNG.
Although the extent to which the pandemic will slow down capital expenditure plans was not fully apparent as of July 2020, there has been significant expansion activity in recent years. For example, American Cola is in the process of building two manufacturing plants in the country, one in Port Moresby and the other in Lae. Lae Biscuits is another entity with ambitions for expansion, and currently has plans for a noodle manufacturing line. Meanwhile, food company Goodman Fielder has plans for a new flour mill. Elsewhere, Coca-Cola Amatil is also helping to drive investment and growth in the country’s manufacturing segment, and the company has been working on improving the power supply around its facilities and developing new systems including reverse osmosis for water treatment.
Numerous capital expenditure plans are in motion at the firm including for new warehousing and office space. In addition the company is investing heavily in its human capital, and has established a supply chain academy in order to drive improvement in technical skills related to quality and lean manufacturing, as well as a sales academy that is aimed at improving sales, and customer service and relationships.
PNG has long been exploring the viability of developing SEZs as a means of driving economic diversification and manufacturing growth. In 2004 the Pacific Marine Industrial Zone was proposed as a centre for 10 tuna fishing and processing canneries, employing up to 30,000 people both directly and indirectly through ancillary businesses. However, developments have been halted due to electricity and water supply obstacles, as well as concerns revolving around the use of public funds, and the future of the project looks uncertain.
According to the Public Investment Programme 2020-24, presented in 2019 by Sam Basil, the minister for national planning, a combined total of PGK165m ($48.7m) will be allocated towards developing SEZs in the country over the five-year period. Approximately PGK150m ($44.2m) of this total will be allocated to the Department of National Planning and Monitoring, which is the body responsible for overseeing the development of SEZs in the Sepik Plains through a programme that began in 2018. The department will also oversee projects being developed in East Sepik, Manus, Madang and Gulf provinces. Meanwhile, the Department of Finance – which is overseeing the development of SEZs in various locations including Sepik, Sandaun and Baiyer Valley – has been allocated a total of PGK13m ($3.8m) over the five-year period. Additionally, the DCI has been allocated PGK2m ($590,000) between 2020 and 2024 for the development of an SEZ in Kikori, which is due to start in 2020, although timelines may be adjusted due to the disruption created by the Covid-19 pandemic.
The selected sites have large areas of land intended for agricultural and other industrial development, and all SEZs are aiming to build the necessary infrastructure to support the various business entities they are aimed at attracting, while also creating business environments that are conducive to both foreign and domestic investment. The authorities are hoping that the SEZs will provide a boost of momentum for the country’s manufacturing industry, and help to fuel SME creation while generating jobs for locals within the zones and in the surrounding regions. Foreign entities and investment should also spur the transfer of not only capital, but also technical knowledge and know-how, while also broadening the government’s sources of indirect tax revenues as the benefits of investment trickle down into the wider economy.
In December 2019 the country’s SEZ ambitions were given a significant boost, when Parliament passed the SEZs Authority Act. The act was certified in February 2020, although as of July it was still awaiting publication in the National Gazette, which would allow it to enter into force.
Once operational, it will repeal the Free Trade Zones Act of 2000 and the Industrial Centres Development Corporation Act of 1990. The act’s stated purpose includes the establishment of a single national framework for the coordinated establishment, development and operation of multi-use SEZs in PNG; the establishment of the SEZs Authority as the single national developer and regulator; a provision for the SEZs Authority to facilitate the creation, establishment, development, operation, maintenance and promotion of such zones; and to provide effective, efficient and timely government services to all businesses operating within the zones. The act also lays out the benefits and concessions available for businesses, including the waiving of income tax, Customs duties, excise duties and stamp duties for all investors or business establishments operating within an SEZ, any buyer of goods or products from a zone, or any goods or products produced within an SEZ. In order to be eligible for these benefits, the act lays out certain baseline parameters that need to be met including a minimum investment of A$10m, a minimum number of employees of 50 and a targeted 95% of Papua New Guinean employment.
With the Covid-19 pandemic set to significantly slow economic growth worldwide in 2020, PNG’s industrial sector can expect some headwinds, as the economy’s growth rate is forecast at -1.5%. However, growth is expected to return in 2021, with GDP set to expand by 2.9%, fuelled by higher energy demand as economies in the Asia-Pacific region return to full capacity. The authorities hope the industrial sector can benefit from the rebound and help to improve national self-sufficiency in areas such as food production, while boosting export revenues in the process.
Meanwhile, the plans in place to fuel the creation of SMEs across a wide range of industries through the potentially catalytic projects outlined in the country’s SME Master Plan 2016-30 bode well for future expansion. If successful, the plan will spur the emergence of downstream activities centred around the country’s wide variety of natural resources, which include, among many others, palm oil, coffee, cocoa, timber and nickel. In addition, the significant moves towards bolstering the development of various SEZs in 2019 in the shape of the SEZs Authority Act and other laws are expected to accelerate development in local manufacturing in the years ahead and, in the process, facilitate knowledge transfer and boost local employment.