Papua New Guinea’s economy finds itself in a hiatus, ahead of what will be a watershed moment its economic history—delivery of its first gas exports. In his annual appraisal of business conditions in the Pacific nation, Andrew Wilkins talks exclusively to some of PNG’s top executives.

Port Moresby’s Ela Beach is the site of several residential and hotel developments, including the expansion of the Ela Beach Hotel and the Windward Apartments. Credit: Kramer Ausenco

Over the past decade, Papua New Guinea has achieved, and continues to achieve, economic growth that would be the envy of most countries. However, its economy enters 2014 in a hiatus, with the construction of the massive US$19 billion ExxonMobil-led PNG LNG gas project now in its final stages.

The revenues from this project, which has been the major driver of economic growth over the past four years, will transform the country, delivering an expected 21.2% leap in gross domestic product in 2015 alone.

Until then, however, business is having to live with reduced economy activity.

Outstanding growth

‘Growth has been astounding in the last five years,’ affirms Garry Tunstall, Chief Executive Officer of Papua New Guinea’s largest superannuation fund, Nambawan Super. ‘That has really been about the PNG LNG project largely, and the infrastructure that’s required to support it, as well as other investors then seeing the opportunity to develop and build commercial and residential property.

‘I think the country still will grow, but we have seen an easing of support for residential housing prices and rentals. We’ve seen commercial rents starting to ease off a bit too.’

Papua New Guinea in brief

Population:  7.167 million (2012, source: World Bank)

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Capital:  Port Moresby

Surface area:  463,000 sq km

People:  Melanesian, Papuan, Negrito, Micronesian, Polynesian

Time zone:  GMT +10 hrs

Business language:  English

Political status:  parliamentary democracy

GDP:  US$15.65 billion (2012)

GDP growth:  6% (2014 projected, source: Asian Development Bank)

Inflation:  7.5% (2014 projected, source: Asian Development Bank)

Currency:  PNG kina

Major industrial  sectors:  mining, crude oil petroleum refining, palm oil, coffee, plywood and wood chip production, construction, fisheries, tourism, manufacturing

Exports:  oil, gold, copper ore, logs, palm oil, coffee, cocoa, seafood

Major export markets:  Australia, Japan, Philippines, China

Imports:  machinery and transport equipment, manufactured goods, food, fuels, chemicals

Major import markets:  Australia, Singapore, China

World Bank Ease of Doing Business Ranking 2014: 113 out of 189 economies

‘Everyone has been benefitting from super-normal profits over the last three-to-four years. It does revert to a norm, but that norm is still higher than many other countries in the region,’ says Robin Fleming, Chief Executive Officer of PNG’s largest bank, BSP.

Wayne Dorgan, Managing Director of PNG’s largest insurer, Pacific MMI Insurance, agrees:

‘There’s been a contraction, but we’re still well ahead of where we were … nevertheless, our budgets for the next 12 to 36 months will be conservative.’

As well as a downturn in construction activity, lower yields and prices for soft commodities such as coffee, cocoa and palm oil have affected PNG’s dominant rural economy, reducing retail revenues by 20% or more in some instances.

While some of the impact of lower commodity prices was ameliorated in the second half of 2013 by a rapid depreciation of the kina, that in turn has put pressure on PNG’s manufacturers, who have found themselves paying more for imported inputs.

Following Prime Minister Peter O’Neill’s 2013 ‘year of implementation’, 2014—to repeat a phrase used by David Purcell, former Chief Executive Officer at Ela Motors—will be a ‘year of consolidation’.

Government stimulus

Buoyed by its great LNG expectations, the PNG Government has stepped in to keep the economy ticking over.

In November 2013, PNG’s then-Treasurer Don Polye announced the country’s largest-ever budget of K15.1 billion (US$5.93 billion). At the same time, he announced a second successive budget deficit.

An Australian Federal Policeman patrols downtown Port Moresby. Under an agreement with the PNG Government, Australia is supplying up to 50 police officers to PNG to help tackle the country’s law and order problems.

‘It maintains the momentum of the 2013 budget, focusing on infrastructure, health, law and order, education and the districts [sub-provincial areas],’ notes Paul Barker, Executive Director of industry think-tank, the Institute of National Affairs.

Neither is the deficit considered foolhardy in business circles.

‘It’s a reasonable, normal thing to do,’ observes Richard Borysiewicz, Group General Manager of BSP Capital, the stockbroking and funds management arm of Bank of South Pacific.

‘The total size of the deficit is K2.3 billion (US$1.02 billion), which is about 5.9% of GDP,’ notes Aaron Batten, the Asian Development Bank’s Country Economist for PNG. ‘I think they’ve done quite a commendable job to keep spending at that level, which is generally sustainable by PNG standards.’

The holy grail of infrastructure

Infrastructure is seen as central to the country’s future development and finally there appears to be at least some money to pay for it. Around K2.7 billion (US$1.06 billion) has been budgeted for infrastructure in 2014, and plans have been announced to create an Infrastructure Development Authority to oversee its development.

With Business Advantage International’s annual PNG 100 CEO Survey indicating that under-performing state-owned utilities are the number one challenge facing PNG’s largest businesses, reform in this area is clearly well overdue and welcome.

Of course, public money alone can’t be expected to finance all of the country’s infrastructure needs, and PNG’s institutional investors say they would relish the opportunity to invest further in the infrastructure sector.

‘We’d like to see appropriate investment opportunities in infrastructure,’ says Andrew McGrath, General Manager Finance & Investments at superannuation fund, Nasfund. ‘But they’d have to be opportunities that stack up.’

Notwithstanding a slump in sales in 2013, there has been considerable investment in PNG’s retail sector over the past few years, as retailers have rushed to meet the needs of PNG’s rising middle class.[/caption]
To effectively involve the private sector will take time, however, as Troy Stubbings, Managing Partner at KPMG in Port Moresby, explains:

‘The Government is working to put the building blocks in place but there are key requirements in regard to long term regulatory certainty and the capacity to exercise control which need to be in place to enable the private sector to take risk and participate beyond being a supplier or contractor or lender relying on the State’s credit—the whole architecture needs to be worked out. Infrastructure is a complex asset class.’

Stubbings believes investment will flow once the right certainty and control fundamentals are in place, and sees PNG’s state-owned enterprises as attractive opportunities for private sector involvement.

In early 2014, the government flagged the partial privatisation of national airline Air Niugini to help finance an upgrade of its fleet. Meanwhile, state electricity company PNG Power is actively partnering with private sector power suppliers to augment its own energy output. The Government has also re-capitalised mobile telecommunications company Bemobile.

The improvement in the way state enterprises are being run, under more experienced and qualified boards, has been noticed.

‘State-owned enterprises are actually getting cleaned up,’ observes Pacific MMI’s Wayne Dorgan. ‘These businesses will start operating as businesses.’

Some unease about reforms

The political stability that followed the election of the broadly pro-business O’Neill Government in August 2012 was generally welcomed.

While the Government has taken steps through legislation to ensure that political stability is maintained, it has also initiated a number of reviews of important existing legislation—notably, PNG’s long-standing Mining Act and the taxation system.

While such reviews inevitably engender at least some feelings of uncertainty (business is also steeling itself for the results of a review of PNG’s minimum wage), the reviews are taking place against a background of government dealings with investors, which have created what one senior mining industry source has called ‘a feeling of unease’.

The forced acquisition in 2013 of PNG’s largest mine, Ok Tedi, from its majority owner without compensation raised eyebrows at home and abroad, while the failure of the Government—even after arbitration—to keep to its agreement with Nautilus Minerals over its Solwara I undersea mining project puzzled many.

Meanwhile, the Minister for Trade, Commerce and Industry’s personal intervention to amend the Takeover Code and thus prevent Kulim Malaysia from acquiring a majority stake in New Britain Palm Oil Limited also came as a surprise.

With the government also flagging the introduction of a list of business activities reserved solely for Papua New Guineans, and a foreign investment review board, there are some concerns about its attitude towards overseas investment.

Indigenous participation

Underlying much of the government rhetoric in this area is the laudable desire to see greater Papua New Guinean participation in the domestic economy.

While landowner companies have emerged as a successful new class of indigenous business, only a vibrant SME sector will provide adequate employment for PNG’s fast-growing population. Indeed, the country’s national long-term blueprint—Vision 2050—aspires to have 70% of business in local hands by the middle of this century. As President of PNG’s Indigenous Business Council, Sir Nagora Bogan, observes, this might require the creation of 500,000 small businesses.

Andrew Wilkins is Publishing Director at Business Advantage International. This article was first published in the 2014 edition of Business Advantage Papua New Guinea, published this month.