Papua New Guinea has entered 2013 with a new government in place, a major gas project nearing completion and some ambitious development goals, reports Andrew Wilkins.

Port Moresby Harbour, viewed from ‘Town’. Steamships’ multi-storey
office and marina development—which will open up the waterfront to
the CBD for the first time—is under construction in the foreground.

The Independent State of Papua New Guinea, the Pacific’s largest and most populous economy, has now completed a decade of positive economic growth, peaking in the last two years at around 10% GDP growth per annum.

Having successfully navigated its way through national elections in mid-2012, it now looks set for a period of consolidation. Economic growth is expected to slow (to 4.5% in 2013), and political attention is shifting to the bottlenecks and impediments that are holding the country back.

Political stability restored

A new government led by Prime Minister Peter O’Neill was elected in August 2012, providing a welcome return to political stability after a period of constitutional uncertainty. The stability has been consolidated by a new law extending the period before a new government can be challenged by a vote of no confidence to 30 months.

The O’Neill Government, seen as broadly pro-business, has since made a series of strong commitments: to the reform of state-owned enterprises, to increased support for indigenous business and, crucially, increased expenditure on education, health and much-needed infrastructure.

Indeed, its National Budget for 2013—at K13.03 billion (US$6.22 billion), the largest in PNG’s history—will go into deficit by K2.6 billion (US$1.2 billion) in order to fund additional expenditure in these crucial areas. It is expected that the nation’s future earnings from resources projects will cover any shortfalls over the next few years. In addition, the O’Neill Government has negotiated a K6 billion (US$2.86 billion) loan with the Export-Import Bank of China to help fund its investments in roads and ports.

‘I’ve an open mind on the deficit,’ says Garth McIlwain, a former banker who is Chairman both of national airline Air Niugini and finance company Credit Corporation. ‘PNG’s fiscal position is not onerous, although you wouldn’t want the deficit to go on continuously.’

The year of implementation

Prime Minister O’Neill has been keen to emphasise the ‘can do’ approach of his government, suspending overseas travel for ministers and bureaucrats while declaring 2013 ‘the year of implementation’.

‘It’s slowing down a bit but you don’t want to be too cautious. If anything, I think the view is it’s the time to invest ahead of the curve.’

An increased amount of government expenditure will be disbursed not at a national level or through PNG’s 20 provinces but at the lower district level of government—a response to concerns that the benefits of PNG’s resources boom have yet to reach many ordinary Papua New Guineans.

How far can PNG go?

Construction of the US$19 billion ExxonMobil-led PNG LNG gas project will be completed in 2014 and, anecdotally, there is already evidence of a slowdown, as construction tasks are completed. Indeed, Peter Graham, Managing Director of ExxonMobil subsidiary Esso Highlands, has flagged demobilisation of the PNG LNG project workforce as a major challenge for his organisation over the coming year.

This slowdown is reflected in recent Bank of Papua New Guinea figures, which reported a slowing of employment growth in the September 2012 quarter, although employment growth of 7% in the previous 12 months was encouraging. (Only about 15% of Papua New Guineans work in the formal sector.)

‘There is a mild stabilisation in the market currently, nothing more,’ notes David Purcell, Chief Executive Officer of local Toyota subsidiary, Ela Motors. ‘There will be a decline but when and by how much remains to be seen.’

Any decline is certainly not deterring Ela Motors’—and many other larger companies’—investment plans. The company is building a new service centre in Lae, and new training and pre-delivery centres in Port Moresby, with demand so high that most vehicles are sold before they are taken into inventory.

Eugene David, who heads Pacific operations for global food manufacturer Nestlé, explains the thinking of many of PNG’s larger companies:

‘It’s slowing down a bit but you don’t want to be too cautious. If anything, I think the view is it’s the time to invest ahead of the curve.’

Other sectors compete for resources

Another reason for slower economic activity was the considerable drop in the prices of commodities such as coffee and palm oil in 2012, combined with sluggish demand from Europe and North America, which affected export revenues for PNG’s agricultural and forestry sectors in 2012.

While the Coffee Industry Corporation expects 2013 to be a better year, there is concern among many business leaders we talked to for the 2013 edition of Business Advantage Papua New Guinea that PNG’s success in minerals is overshadowing the need to develop other sectors of its economy. Manufacturers and agribusinesses, for example, have struggled to compete for skilled workers and other resources in a business environment where the costs of doing business are already high.

‘Markedly greater attention is needed than over recent years to safeguard and improve the prospects of domestic agriculture,’ observes Paul Barker, Director of industry think-tank, the Institute of National Affairs.

One non-mineral industry sector that is moving ahead in spite of the many challenges is onshore fish processing, with thousands of jobs being created along PNG’s northern coastline.

Pizza to go

In addition to cranes on Port Moresby’s skyline and previously unheard-of traffic jams, another feature of PNG’s recent economic boom has been the emergence of a monied and aspirational middle class.

‘The market is definitely changing,’ confirms Mahesh Patel, Chairman of CPL Group, which experienced a ‘healthy increase’ in its bottom line performance in 2012. Having introduced PNG’s consumers to Port Moresby’s first multiplex cinema and the Boncafé chain of coffee shops, Patel has plans to launch PNG’s first pizza chain, and to open both a second cinema and a showcase supermarket in Port Moresby’s Waigani suburb.

CPL is one of a number of retailers expanding and upgrading their operations, with PNG’s only shopping mall, Vision City in Waigani, significantly expanding its list of tenants since opening in 2010. Where once service was ‘one size fits all’, PNG’s banks too have developed premium services to cater for a more prosperous customer base. Another indicator of an expanding consumer market is the rapid growth of PNG’s first and only credit bureau.

Challenges facing business

As our annual PNG 100 CEO Survey reveals, operating in PNG is not without its challenges. Security and law and order are ongoing problems. According to Chris De Silva, Chief Operating Officer at G4S Secure Solutions (PNG), crime in PNG is typically opportunistic rather than organised and the security situation has neither deteriorated or improved in the past year. It is hoped that initiatives like Port Moresby’s Safe City project, which will see cameras installed in key parts of the capital over the next three years, may improve the situation.

The PNG Government itself has announced a major new initiative to deal with another issue affecting businesses in PNG—corruption. An anti-corruption task force, Task Force Sweep, has been in operation for the past year while the Government has announced plans to establish a ‘well-resourced’ Independent Commission Against Corruption in 2013.

Well-placed for the Asian century

Even if growth slows somewhat, PNG is still looking a good bet.

‘I’m optimistic,’ said Mike Smith, Chief Executive Officer of ANZ during a February 2013 address to the Port Moresby Chamber of Commerce and Industry. ‘Not only because of the size of the opportunity in resources and agriculture and the opportunity this presents for sustained economic growth and improved living standards, but also because I sense there is also an increasing focus on the major issues PNG needs to overcome to ensure it takes advantage of the Asian century.’

This article first published in the 2013 edition of Business Advantage Papua New Guinea, PNG’s annual business and investment guide, which is published this month. Andrew Wilkins is Publishing Director of Business Advantage International.