Papua New Guinea requires significant investment in infrastructure. Deloitte’s Lutz Heim examines the opportunities and challenges in this sector.

Lutz Heim

PNG’s infrastructure needs a substantial and urgent upgrade, in anticipation of increased stress and after a number of years of underinvestment, particularly during the lean years before 2004, and this is recognised by government and business alike. PNG policy makers have been working to address the massive investments needed in sectors such as roads, ports, power generation and telecommunications.

It is clear that the investment required is well beyond the Government’s current capacity to finance, particularly in light of the government’s open statements that they require hundreds of millions of US dollars to invest in the PNG LNG project to maintain their equity in the project. The Government has enlisted the support of various donor agencies such as AusAid, the European Union, Asian Development Bank and the International Finance Corporation in various projects but the scope of the investment required is still massive and may be beyond reach.

Changes in policy required

If the required infrastructure investments are to be made then some fundamental changes are required and the policy makers have recognised this. The government has been grappling with the concepts and challenges posed by various forms of Public Private Partnership (PPP) but no clear operating model for these has surfaced. It is likely that the more successful partnerships will take account of the PNG preference for retaining ownership of its assets, at least in part. It is also likely that projects that can carry their own external financing will have a greater chance of success.

New cranes on Port Moresby’s dock © PNG Ports

One of the hindering factors has been the inability of the PNG state-owned enterprises (SOEs) to unilaterally find the capacity to vigorously pursue the required initiatives. For this reason, the Independent Public Business Corporation (IPBC) [the umbrella organisation which manages SOEs on behalf of the Government] has taken up a lot of the planning initiatives required. Even so, the construction of major infrastructure projects in key areas has been demonstrably slow and certainly not at the pace the Government or business would like to see. A snapshot of the position at the moment seems to be as follows.

Roads

It is difficult to maintain existing roads in urban centres let alone build new ones. The nation’s life line, the Highlands Highway, stands to be the beneficiary of increased government budget allocations plus the benefit of an extended tax credit but this would not appear enough to ensure its longer term viability.

Ports

Ports are still a logistical bottleneck despite increased attention and hard work in recent times. The ADB is assisting in a substantial improvement and expansion of PNG’s busiest port, Lae.

Power

Power is likely to be the subject of government restructure to assist in substantial additions to generation capacity, which are essential for new resources projects and necessary social development, but which the government is unable to fund. Ultimately, PNG’s ageing transmission and distribution structure will also require upgrade.

Telecommunications

PNG internet costs are some of the highest in the world and constitute a severe drag on development. SOEs [Telikom PNG and Bemobile] in this sector are struggling commercially and deregulation has not brought consumers substantial benefits.

A huge job ahead

2012 is an election year in PNG and that usually doesn’t bode well in terms of the timeliness in government decision-making, both at the political and the bureaucratic levels, where a slowdown is often seen. There is clearly a huge job to be done by the SOE’s and IPBC but it may be that PNG will have to wait until the elections are over to get any real traction on these projects.

The long term continued stability of the PNG fiscal and legal investment base will also be critical to PNG, as will be a serious and successful upgrade of the delivery of government services.

Lutz Heim is Senior Partner at Deloitte PNG.

RECENT DEVELOPMENTS IN INFRASTRUCTURE AND TRANSPORT

• In its December 2011 budget, the PNG Government made its largest allocation ever for development, including K180 million for the 2015 Pacific Games, K187 million for the development of PNG’s 89 districts, K170 million for infrastructure and other projects related to the PNG LNG project, K231 million for roads (including the Highlands Highway), K44 million for water and sanitation programs and K41 million for rehabilitation of hospitals.
• In early 2012, the Asian Development Bank announced contracts for road improvements in the Highlands region worth US$120 million.
• The PNG Government has flagged the creation of an Independent Infrastructure Authority to oversee investment in the country’s infrastructure.
• A portion of PNG’s new Sovereign Wealth Fund, to be created from the revenues from major resource projects, will be allocated to the recapitalisation of PNG state-owned enterprises. According the Minister for Public Enterprises Sir Mekere Morauta, the funds ‘will be used to steer public enterprises towards a more sustainable path, while at the same time facilitating the entry of private sector providers.’
• PNG Ports recorded a 46% increase in volumes through its ports in 2011. In response, the state-owned enterprise is commissioning new harbour cranes, introducing a new terminal operating system and extending Lae’s Berth 3.
• PNG’s Independent Public Business Corporation signed the $285 million Lae Port Development Project civil works contract with China Harbour Engineering Company Ltd in March 2012, with $150 million funding from the Asian Development Bank.

This article first published in Business Advantage PNG 2012/2013