While 2013 was a quiet year for most of Papua New Guinea’s manufacturers, they remain positive about future prospects, as Business Advantage PNG’s exclusive survey of the sector reveals.

Workers in Lae packaging rice for the domestic market. Credit: Trukai

There is no question that Papua New Guinea’s manufacturers – which account for about 9% of the country’s GDP – have been caught up in the general downturn in the country’s economy, with a combination of lower investment in the mining and petroleum sectors, lower commodity prices and a stronger currency slowing growth and reducing domestic demand.

S P Brewery’s Stan Joyce

‘Business and demand across our manufactured products and imported industrial equipment is significantly down on previous years,’ Michael Kingston, General Manager of Lae-based K K Kingston says. Jaime Martinez, General Manager of Coca-Cola Amatil in PNG, also reports that overall demand is down, ‘in part due to the economy and in part due to competition.’

‘We’ve seen a flattening off of rice imports over the last four months,’ observed Gregory Worthington-Eyre, Chief Executive Officer of Trukai Industries, at the end of 2013, although he noted, it’s ‘still 30% up on what it was five years ago.’

Confidence remains

So, after five years of unprecedented growth, driven in part by the construction phase of the massive ExxonMobil-led PNG LNG project (now close to completion), PNG’s manufacturers are looking forward to more modest rates of return.

However, there is certainly still significant confidence in the economy’s prospects.

‘We remain confident that there are growth opportunities in the market, but they will not be as they were over the last five or six years,’ says Stan Joyce, General Manager of the country’s main brewer, S P Brewery, echoing the comments of many. He notes a slowing down in the demand for premium products-a sign that Papua New Guineans are tightening their belts in the short term and returning to staples.

That’s certainly the observation of Peter Tannahill, General Manager in PNG for flour milling company, Goodman Fielder.

‘We’re probably holding up not too badly, to be honest,’ he admits. ‘We’re closer than many other food manufacturers to being a basic commodity-rice and flour would be seen as the staple part of the Papua New Guinean population. So we probably haven’t seen the real extraordinary spikes or peaks that some of the more discretionary products have had when there’s been a bit more disposable income around.’

‘We are reliant on commodity prices,’ explains David Peate, Managing Director of snack food manufacturer, Paradise Foods. ‘Our customers are rural people who get their money from cash crops and we only have access to their disposable income. So, when commodity prices are down, disposable income is affected and gets smaller and smaller. So, there’s less money to be spent on luxury goods like processed food.’

High costs

K K Kingston’s Michael Kingston

With revenues lower, there has been renewed focus on the high costs associated with manufacturing.

‘Doing business in PNG is expensive,’ says Paradise Foods’ David Peate. ‘For example, we have expensive and unreliable utilities, which force companies to provide their own backup systems, and security costs are high. In addition to this, ingredients and input costs are high.’

The cost of moving goods around the country is also a major impost, with roads often in poor repair.

‘The Highlands is our second major market after Port Moresby and transport companies are having to increase prices in order to recover the increased costs to them for running trucks up and down the Highlands Highway,’ notes Coco-Cole Amatil’s Jaime Martinez.

‘The cost of logistics and the time it takes to move product around this country, and Lae, is far too high,’ agrees Trukai’s Gregory Worthington-Eyre.

It’s not just goods that need to be moved around either; the poor road network is also used by workers trying to get to work each day-one reason many companies provide their own transport to and from work.

Manufacturers also note the hidden cost of employing workers who lack the necessary skills.

‘Skill shortages, specifically a lack of qualified tradesmen, is a big issue for us,’ says K K Kingston’s Michael Kingston.

Falling kina

With many inputs imported from overseas, the decline in the value of the kina in the second half of 2013 has only increased many manufacturers’ costs. Indeed, Manufacturers Council of PNG Chief Executive Officer, Chey Scovell, has described the weaker kina as a ‘real kick in the guts’ for local manufacturers.

‘If we don’t have proper manufacturing facilities here in the country, it’s a big risk for the population’

On the other hand, manufacturers that rely on local produce for their inputs have actually seen their produce become more competitively priced in the last few months.

Manufacturers are also nervously watching the outcome of deliberations to decide a new minimum wage in PNG—deliberations that at the time of writing were still in progress. Currently just K2.29 an hour, an increase in the minimum wage will directly affect bottom lines at a time when revenues are falling and costs are already high.

‘Reduce the cost of doing business and then we can afford a wage rise,’ says Manufacturers Council chairman, Murray Woo.

Falling tariffs

One thing most manufacturers agree on is the need to maintain current import tariffs. These have already fallen by around 80% since the1980s as PNG has tried to meet and exceed World Trade Organisation and other trade treaty obligations. APEC’s stated aim of abolishing all tariffs by 2020 is a further dark cloud on the horizon.

‘If the market was open slather, I don’t know how many local businesses would survive,’ says Paradise Foods’ David Peate.

‘We don’t want tariffs to come down anymore,’ states Murray Woo, Chairman of the Manufacturers Council of PNG [MCPNG]. A compromise, he suggests, might be to reduce only tariffs on goods PNG does not produce itself.

MCPNG Chief Executive, Chey Scovell, has pushed government to develop a model in which further reductions are tied to improvements in the business environment, such as improved trade-related infrastructures and the removal of red tape, and the reduction of charges in cost of regulatory changes.

Flow-on benefits

Many manufacturers would like to see government do more to alleviate the many challenges they face, emphasising the tremendous benefits a local value-adding sector provides to the country.

Employment is just the start, as Trukai’s Gregory Worthington-Eyre explains:

‘We employ 1,000 people. You have the wantok system in PNG, where there’s a standard of one person supporting ten people. So, there’s 10,000 people who rely just on Trukai. If you take all the services and the distribution, shipping, stevedoring, packaging, transport, warehousing-there are tens of thousands, probably 40,000 to 50,000 people that would rely on us.’

Viewed in this way, the effect of having major employers such as S P Brewery, Coca-Cola Amatil, Nestle, Lae Biscuit Company, AkzoNobel and Goodman Fielder in the country is all the more significant.

Then there are the contributions employers make: On-site skills development, training and education, healthcare, community programmes. Lae Biscuit Company, in common with many manufacturers, supports a number of community and sporting groups. And then there’s the support for small local businesses, which supply goods and services to manufacturing operations.

‘Wherever possible, we source locally,’ says Laga Industries’ Paul Robinson.

There’s also the issue of food security.

‘If we don’t have proper manufacturing facilities here in the country, it’s a big risk for the population,’ says Prima’s Adrian Chow. ‘You have to have diversity of supply.’

S P Brewery’s Stan Joyce sums up neatly why PNG needs a manufacturing sector more than ever.

‘If you don’t have a manufacturing sector in Papua New Guinea, what would we look like? Obviously, if you just had a sales office here, you wouldn’t have the 4000 employees that we have now. And they wouldn’t be spending money in the community.’

This article was first published in Made in PNG 2014.