While the number of Chinese businesses in Papua New Guinea has increased significantly over the past two decades, more recently direct investment from China has flagged. A pioneering new study is taking a closer look.

Credit: The Asian Foundation

An ongoing study by researchers attached to the non-for-profit Asian Foundation is taking a closer look at Chinese companies in Papua New Guinea.

The study has identified 48 large Chinese enterprises which have arrived in PNG in the past two decades. The majority are government-owned: 19 by the China’s national government, while a further 10 are owned by a Chinese regional or provincial government.

The presence of so many Chinese state-owned enterprises is understandable, according to Huiyuan Liu, Research Officer at the Development Policy Centre in the Australian National University in Canberra, who is part of the study.

‘Due to corporate reforms, [Chinese] SOEs [state-owned enterprises] are largely profitable … and market oriented. SOEs, especially the large central SOEs, are better supported and regulated,’ she told a recent conference co-hosted by the Development Policy Centre and the University of the South Pacific.

According to the study, 50 per cent of these larger Chinese companies are concentrated in PNG’s construction sector, ‘with an intense competition among Chinese enterprises’.

A further 15 per cent are concentrated in energy, while just under 15 per cent are focused on resources (fishery, forestry and mining). The remaining 20 per cent is divided between retail and trading and other sectors such as real estate, telecommunications and financial services.

Investment and loans

Although the presence of Chinese companies in PNG has grown, even before the COVID pandemic there have been lower foreign direct investment (FDI) flows from China into PNG.

‘All sources of funding started to decline before the COVID-19 pandemic,’ Liu told the conference.

‘[Chinese companies] are increasingly aware of the business risk of operating in PNG.’

While she said it was unclear exactly why, there are a number of possibly explanations.

‘Perhaps it’s due to disbursement in assets; perhaps negative interest in earnings, PNG’s subsidiaries paying back loans to its investors, or declining interest in PNG as a global investment destination,’ she speculated.

From 2010 to 2019, China was PNG’s second largest donor in concessional loans, which had a focus on transport, energy, agriculture and fishing.

Chinese companies, however, are now more aware of the risks of operating in PNG, which could explain why the funding has started to decline, Liu explains.

Possible explanation of the decreasing engagement of Chinese companies in PNG. Credit: The Asian Foundation

Challenges

Some current challenges Chinese companies face in PNG are mismanagement, political uncertainty, lack of funding, land disputes and geopolitical interventions, according to Sandra Kraushaar, Director for The Asia Foundation in the Pacific Islands.

She told the same conference that ‘facing so many issues is not welcoming for the Chinese companies.’

Companies such as CSVIC, which is involved in the Pacific Marine Industrial Zone funded by China’s Eximbank and the PNG Government, have cited political uncertainty and lack of funding as issues affecting its performance.

Zijin Mining, which has a stake in the Porgera gold mine joint venture, has also cited political uncertainty. Shenzhen Energy, the company behind the Ramu 2 Hydropower project, also mentions political uncertainty and mismanagement.

‘There’s a lot of media attention going to Chinese companies, especially when they do something wrong,’ says Kraushaar. But ‘many companies have taken positive action using remedial and preventive measures.

‘Chinese companies are responding to local demands by improving local working conditions and many Chinese companies are taking legal action through domestic and international channels.’

Ultimately, suggests Kraushaar, Chinese businesses are motivated by commercial profitability and therefore have interests similar to businesses from any other country.

‘It is in Chinese companies’ interest to enhance PNG’s governance, to maintain a non-fraudulent and sustainable rule-based business environment,’ she added.