Papua New Guinea businesses looking for investment from super funds or banks must show they have sound governance systems in place. That was the view of super fund managers, bankers and advisers at the recent Papua New Guinea Investment Conference in Brisbane.

Nambawan’s Paul Sayer (left) and David Brown (middle) stress the importance of good governance. Source: BAI

Paul Sayer, Chief Executive Officer at Nambawan Super, said good quality governance—the oversight of an independent board, proper lines of reporting, protection of minority shareholders’ interests, and effective auditing—is critical when assessing an investment.

He claimed that ‘good returns come with good governance’, adding that it is especially important for companies that have had a sole owner.

‘If you have someone who has held their hand over a business and then, all of a sudden, they say “Right, we need governance, you need to report to directors what is going on”—can you transition through from that small business mentality?’

Sayer said companies that have gone through the process of developing strong governance should get access to capital.

‘There will be a ‘much more professional institutional investor market in PNG.’

‘We are expecting those people to run their businesses.

‘They need to be able to report; take the shareholders voice and deal with it.’

Quality control

David Brown, Chief Investment Officer at NasFund, agreed that sound governance is essential for companies looking to raise capital.

‘We need somebody to drive the bus and report within a governance framework.

‘That is standard business practice anywhere else—so there is that quality control.’

Looking forward 10 years, Brown said there will be a ‘much more professional institutional investor market in PNG’.

‘There is a lot of value in having people with that experience on your boards.’

He believes the investment environment will be ‘less idiosyncratic … more institutional in its approach—and it is more a governance approach.’

Brown said it is important that investors have ‘good minority protection with a shareholders agreement and governance protection.’

Foreign investors

Westpac’s Kip Hanna. Source: Westpac

Kip Hanna, Westpac’s Pacific Regional Head, said the emphasis on governance is an aspect of the management of risk. It is especially important for foreign investors.

‘It is similar to many emerging markets where you have got a higher level of risk and a broader range of risks—you have governance risks.

Hanna pointed to the importance of using ‘valuable PNG insiders’ who have been working in the market for a long time and would make good board members.

‘There is a lot of value in having people with that experience on your boards, who are able to guide you through, particularly if you are new to PNG.

‘There are large amounts of available funds to invest.’

‘It is really [important to] get your governance right.

Domestic investors

KPMG’s Zanie Theron. Source: KPMG

Zanie Theron, Managing Partner at KPMG, observed that there are ‘large amounts of available funds’ to invest in profitable companies.

‘What they are looking for is a going concern but also looking at their governance and financial administration systems.’

Theron said if the companies are well governed, investors are prepared to pay above market valuation—five-to-six times Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA).

‘Over the last two years, the downturn in the economy has put a lot of pretty strong companies under pressure.

‘If they can be profitable in a weak economy, they have the potential for a large improvement as the economy improves.’

Theron warned, however, that a high percentage of organisations in PNG lack sound corporate governance structures, especially when it comes to internal audits.

John Vivian, Papua New Guinea Resident Representative for the International Finance Corporation (IFC), said governance is an area the organisation focuses on when providing support to PNG business.

‘The super funds stress that good governance is absolutely paramount.

‘That is certainly an area where we put a lot of effort into improving.’