Pacific countries like Papua New Guinea are increasingly becoming critical grounds for geopolitical competition, leading to higher investment from international partners, particularly in infrastructure. Business Advantage PNG speaks to the Lowy Institute’s Senior Research Fellow Dr Meg Keen about what that means for PNG’s development and for business.

The inauguration ceremony of the Bank of China Representative Office in Papua New Guinea on Thursday, June 1, 2023 by Prime Minister Hon. James Marape and Bank of China Chairman Mr. Ge Haijiao. Credit: Prime Minister’s Media Office

International development partners have more than doubled their spending in the Pacific region since 2008, accompanied by a growing preference for infrastructure projects, according to “The Great Game in the Pacific,” a recent report by Australia’s Lowy Institute, .

Donors contributed US$4.88 billion in grants and loans to the Pacific in 2021, compared to US$2.1 billion in 2008. The number of individual donors – comprising countries and multilateral institutions – increased from 31 to 82 in the same period.

Papua New Guinea – the largest Pacific Islands economy – was by far the largest recipient each year, with its share ranging from 28 to 38 per cent of the total.

“Hardly a week goes by without a new initiative by Australia and others — involving more aid, more loans, or more defence cooperation — to counterbalance China’s deepening reach”

While infrastructure, education and health all received similar levels of funding from 2008 to 2012, development spending on infrastructure has since surged. Donors spent an average of US$804 million per year on infrastructure projects between 2013 and 2021, almost 50 per cent more than the combined amount of funding for education and health.

“There has been much more investment in telecommunications, roads, ports and hospitals, but education and health spending have flatlined. That is not good news for human productivity or development,” Dr Meg Keen, Senior Research Fellow in the Lowy Institute’s Pacific Islands Program and one of the report’s three authors, tells Business Advantage PNG.

“There’s also been a change in who is investing. It’s not just Australia, China, the US and Japan – many others are engaging and that gives the Pacific more options. The multilateral development banks have greatly increased their investments in the region too. And they say more increases are in the pipeline.”

Geopolitical competition drives spending

These trends have largely been brought about by the increasing geopolitical competition between major powers in the region, according to the Lowy Institute report.

“Hardly a week goes by without a new initiative by Australia and others — involving more aid, more loans, or more defence cooperation — to counterbalance China’s deepening reach into key sectors such as policing and telecommunications,” the report’s authors say.

They explained that donors were prioritising infrastructure projects for their “highly visible and politically impactful” nature, which helped to enhance influence and access in the region.

For example, “Australia, the United States, Japan and China are vying to finance strategic infrastructure such as undersea internet cables and telecommunications networks, but investments in cybersecurity and online safety are not keeping pace. This creates vulnerabilities for government and business.”

Although Australia, the United States, Japan and New Zealand are all donors to the PNG Electrification Partnership, Keen said Australia and the US work in more of a “complementary” than a “coordinated” manner in PNG and the Pacific.

“The PNG electrification project is a joint project but there is no single implementation process. In other sectors like education, health, women’s issues, even defence, engagements are complementary at best, but not cooperative. This results in many different reporting structures and programs, straining limited Pacific capacity and creating challenges for businesses that apply for development contracts,” she said.

The US interest in the region is “largely driven by geopolitics,” Keen says, “Australia has a much deeper, larger, more integrated engagement in PNG and the rest of the South Pacific. Australia has been around for a very long time, it has very deep roots and diverse business relationships.”

Australia contributed US$17.1 billion of the more than US$40 billion in total international development funding to the Pacific between 2008 and 2021.

Although China contributed a much smaller US$3.9 billion, the report’s authors said the participation of its state-owned companies in projects funded by multilateral institutions such as the Asian Development Bank has given it high visibility in the region.

Private sector involvement

An increase spending on development aid, especially in infrastructure, is likely to benefit the private sector in PNG. Indeed, PNG’s private sector has a “critical” role to play in helping to deliver infrastructure and other development projects, according to Keen.

But she warns that it was up to the government to create the right environment for business to get involved in development.

“The cost of doing business remains high. For example, banking fees, tariff structures and materials. Further, much more needs to be done to strengthen and clarify regulations relating to social protection, environment and landowner obligations to increase certainty and social support for business activities. These have to be right not only to attract business but also so that the public feels its interests are being protected,” she says.

“Without greater business certainty, clearer government regulations, and public confidence, the private sector won’t blossom and aid dependency reduce – and that’s a real problem for sustainable development.”