Michael Penrose, General Manager, British American Tobacco, on the advantages of local manufacturing

Michael Penrose, General Manager, British American Tobacco

There is a significant opportunity available in Papua New Guinea to begin growing and using local tobacco. Based on our experience in Fiji, where up to 400 smallholder farmers are engaged in tobacco production, we know that local produce can substitute for imports of raw materials and have a considerable impact on the local economy, as well as be in line with the government’s economic diversification strategy. If we look to Fiji as a benchmark, where we currently produce some 400 tonnes of grown tobacco per year, it is obvious that PNG has great comparative advantages including a much bigger territory, greater geographical diversity and better availability of land, which goes hand-in-hand with tobacco production.

Currently local tobacco (commonly known as brus) is grown throughout PNG. The challenge for the industry is to determine how to transform a cash crop into a commercial one, and how to leverage what the farmers are already doing in order to produce a crop that is acceptable for commercial production. From our experience, we know that this is possible, provided that we can work in cooperation with the government, which would be instrumental in facilitating local farmer participation, in addition to bringing the necessary infrastructure to remote areas. If investors can subsidise some of the upfront costs, owing to the fact that you can achieve two to three harvests in 12 months, farmers can produce their crops without the hassle of securing hard-to-get loans from financial institutions. This model has been successful in other countries.

We have carried out a variety of crop analyses in several locations in PNG and are providing a benchmark for quality and yield per hectare. The results to date have been encouraging, and it would not be too much of a stretch to think that in the medium term PNG could produce around 300 tonnes per annum for domestic use. From an industrial point of view, the sustainability of the tobacco industry in PNG is heavily dependent on a consistent and predictable excise regime. Over the long term we are focused on further growing our local contribution as mentioned through local tobacco growing, which also matches the government’s ambitions of economic diversification and job creation in the agriculture sector. The support received so far by the national government, specifically from the agriculture and trade departments, has been encouraging.

Given the nature of our products, we support and encourage regulation as long as it is sensible, workable and evidence based. The current Tobacco Act requires updating; however, we firmly believe that any proposed legislation should be widely consulted on with interested stakeholders. Such policies can have a significant impact on the way we operate our business and we believe this makes us a legitimate stakeholder in the legislative process.

Illicit trade is the other worrying problem affecting the local industry, as smuggling through the frontier with Indonesia has increased exponentially over the years. Whereas in 2005 the illicit trade amounted to 30m cigarettes, it is now estimated to have reached 200m cigarettes per year, representing 17% of the total market. Not only is the trade illicit because the state receives no tax on the sales, but it also increases the health threat, considering that there is no control over what is imported. We estimate that the government is losing up to PGK100m ($40.6m) per annum through unpaid excise and duties, as well other taxes such as corporate tax that would be due if these rogue traders were operating legitimately.

We have been working closely with PNG Customs as well as the local police in an effort to monitor the market. The work PNG customs have undertaken to date should be commended, as it has resulted in several illegal product seizures around the country. Resourcing remains an issue but there is definitely political will there to tackle this issue.

Notwithstanding this, we acknowledge that the fight is not an easy one in a country such as PNG.


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The Report: Papua New Guinea 2014

Industry chapter from The Report: Papua New Guinea 2014

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