Papua New Guinea’s construction industry continues to face challenges, says Frank McQuoid, Chairman of manufacturer Steel Industries. But others say it is on the edge of a boom that will extend beyond the resource sector. David James examines both sides of the story.

Port Moresby’s Waterfront is Steel Industries’ flagship project. It was built between 2010 and 2012 and is the largest structural project in terms of tonnage (400MT of steel) and value undertaken by the company. Credit: Steel Industries

‘I wish I could be very bullish about the steel sector of PNG,’ says McQuoid, whose company, Steel Industries, is a Port Moresby-based fabricator, merchandiser and distributor of steel products.

‘But unfortunately I believe we will do very well to hold our own for the near term with the very real possibility of seeing a further decline.’

McQuoid points to a number of factors that he believes have held back domestic production in steel.

These include an overvalued kina and ‘the policy of allowing importations duty free on all of the major projects and a vast majority of the medium-sized projects.’

Tariffs

Steel Industries’ Frank McQuoid

He believes that if the central bank would allow the market to set the value of the kina and if a modest, legally-mandated, 10 per cent tariff was applied to all imported fabricated steel, there would be a ‘dramatic’ change.

‘In 2018, we saw the passing of the National Procurement Act in Parliament, with implementation proceeding on 1 April 2019.

‘This has effectively denied 25 per cent of the total market to foreign-controlled fabricators.

‘Since there is no nationally-owned company capable of providing services, this element of the market will be forced to proceed offshore, with government agencies or statutory bodies importing their requirements.

‘Alternatively, there could be room for a national middle-man. However, this will only increase costs of domestic production and lead to a new form of corruption.

‘We do not think that this policy was thought through very carefully.

‘The Investment Promotion Authority (IPA) is reviewing the Restricted Activity List which, as previously proposed, would deny business opportunities to many foreign owned enterprises.

‘We are hopeful that the IPA will use common sense in any new policy.’

A positive outlook

A more bullish view has been proposed in the report PNG Economic Outlook, published by ANZ.

‘We believe the positive cyclical change Papua New Guinea is about to experience will start with a boom in gas and mining investment, in particular mine construction, plant and equipment and infrastructure investment, exploration spending, investment in computer software and R&D,’ the report says.

‘The construction upturn will not be confined to the resource sector.

‘The PNG government plans major investment to upgrade, renew and build the nation’s transport and utilities infrastructure.

‘As government finances improve on the back of a stronger economy, and especially after the PNG LNG debt is fully repaid in mid-2020s, it will be in a stronger position to fund investments.’

The report says the ‘once-in-a-generation’ mining and civil construction boom could last for all of the next decade.

‘Exports will list sharply once new projects are completed and capacity is lifted at existing mines.

‘PNG is set to record strong real GDP growth rates for most of the next decade.’

Treading carefully

McQuoid is sceptical of such forecasts, however. He says that the pundits forecasting robust growth in PNG are basing their forecast on the assumption that the Wafi-Golpu and Papua LNG projects will proceed.

‘The general economy is rarely mentioned, because it has remained fairly stagnant due to the lack of any meaningful connectivity between the general economy and the resource sector.

‘Looking at recent history, GDP grew at 2 per cent in 2016 and 2017 and less in 2018 due to the earthquake.

‘Population is growing at 3 per cent per year and employment is showing a decline of approximately 3 per cent per year.

‘These are not very good statistics and I am sure that we can, and should, be doing much better.

‘Let us all hope that there will be a turnaround fr 2019 even if it is a modest turn for the better.’

McQuoid says that, despite the difficult conditions, the shareholders of Steel Industries are investing for the long term.

‘We have recently made a major investment in procuring land adjacent to our operation allowing us to make an expansion of our operation by some 30 per cent.

‘We are further investigating procurement of new technology that can be incorporated into our operation offering solid gains in productivity.’