Pa­pua New Guinea’s econ­omy finds it­self in a hia­tus, ahead of what will be a wa­ter­shed mo­ment its eco­nomic his­tory—de­liv­ery of its first gas ex­ports. In his an­nual ap­praisal of busi­ness con­di­tions in the Pa­cific na­tion, An­drew Wilkins talks ex­clu­sively to

Business Advantage Papua New Guinea - - Contents -

Pa­pua New Guinea’s econ­omy finds it­self in a hia­tus, ahead of what will be a wa­ter­shed mo­ment its eco­nomic his­tory— de­liv­ery of its first gas ex­ports. In his an­nual ap­praisal of busi­ness con­di­tions in the Pa­cific na­tion, An­drew Wilkins talks ex­clu­sively to some of PNG’S top ex­ec­u­tives.

Over the past decade, Pa­pua New Guinea has achieved, and con­tin­ues to achieve, eco­nomic growth that would be the envy of most coun­tries. How­ever, its econ­omy en­ters 2014 in a hia­tus, with the con­struc­tion of the mas­sive US$19 bil­lion Exxonmo­bil-led PNG LNG gas project now in its fi­nal stages.

The rev­enues from this project, which has been the ma­jor driver of eco­nomic growth over the past four years, will trans­form the coun­try, de­liv­er­ing an ex­pected 21.2% leap in gross do­mes­tic prod­uct in 2015 alone.

Un­til then, how­ever, busi­ness is hav­ing to live with re­duced econ­omy ac­tiv­ity.

Out­stand­ing growth

‘Growth has been as­tound­ing in the last five years,’ af­firms Garry Tun­stall, Chief Ex­ec­u­tive Of­fi­cer of Pa­pua New Guinea’s largest su­per­an­nu­a­tion fund, Nam­bawan Su­per. ‘That has re­ally been about the PNG LNG project largely, and the in­fra­struc­ture that’s re­quired to sup­port it, as well as other in­vestors then see­ing the op­por­tu­nity to de­velop and build com­mer­cial and res­i­den­tial prop­erty.

‘I think the coun­try still will grow, but we have seen an eas­ing of sup­port for res­i­den­tial hous­ing prices and rentals. We’ve seen com­mer­cial rents start­ing to ease off a bit too.’

‘Ev­ery­one has been ben­e­fit­ting from su­per-nor­mal prof­its over the last three-to-four years. It does revert to a norm, but that norm is still higher than many other coun­tries in the re­gion,’ says Robin Flem­ing, Chief Ex­ec­u­tive Of­fi­cer of PNG’S largest bank, BSP.

Wayne Dor­gan, Man­ag­ing Direc­tor of PNG’S largest in­surer, Pa­cific MMI In­sur­ance, agrees:

‘There’s been a con­trac­tion, but we’re still well ahead of where we were … nev­er­the­less, our bud­gets for the next 12 to 36 months will be con­ser­va­tive.’

As well as a down­turn in con­struc­tion ac­tiv­ity, lower yields and prices for soft com­modi­ties such as cof­fee, co­coa and palm oil have af­fected PNG’S dom­i­nant ru­ral econ­omy, re­duc­ing re­tail rev­enues by 20% or more in some in­stances.

While some of the im­pact of lower com­mod­ity prices was ame­lio­rated in the sec­ond half of 2013 by a rapid de­pre­ci­a­tion of the kina, that in turn has put pres­sure on PNG’S man­u­fac­tur­ers, who have found them­selves pay­ing more for im­ported in­puts.

Fol­low­ing Prime Min­is­ter Peter O’neill’s 2013 ‘year of im­ple­men­ta­tion’, 2014—to re­peat a phrase used by David Pur­cell, out­go­ing Chief Ex­ec­u­tive Of­fi­cer at Ela Mo­tors—will be a ‘year of con­sol­i­da­tion’.

Gov­ern­ment stim­u­lus

Buoyed by its great LNG ex­pec­ta­tions, the PNG Gov­ern­ment has stepped in to keep the econ­omy tick­ing over.

In Novem­ber 2013, PNG’S Trea­surer Don Polye an­nounced the coun­try’s largest-ever bud­get of K15.1 bil­lion (US$5.93 bil­lion). At the same time, he an­nounced a sec­ond suc­ces­sive bud­get deficit.

‘It main­tains the mo­men­tum of the 2013 bud­get, fo­cus­ing on

in­fra­struc­ture, health, law and or­der, ed­u­ca­tion and the dis­tricts [sub-pro­vin­cial ar­eas],’ notes Paul Barker, Ex­ec­u­tive Direc­tor of in­dus­try think-tank, the In­sti­tute of Na­tional Af­fairs. Nei­ther is the deficit con­sid­ered fool­hardy in busi­ness cir­cles. ‘It’s a rea­son­able, nor­mal thing to do,’ ob­serves Richard Bo­rysiewicz, Group Gen­eral Manager of BSP Cap­i­tal, the stock­broking and funds man­age­ment arm of Bank of South Pa­cific.

‘The to­tal size of the deficit is K2.3 bil­lion (US$1.02 bil­lion), which is about 5.9% of GDP,’ notes Aaron Bat­ten, the Asian Devel­op­ment Bank’s Coun­try Econ­o­mist for PNG. ‘I think they’ve done quite a com­mend­able job to keep spend­ing at that level, which is gen­er­ally sus­tain­able by PNG stan­dards.’

The holy grail of in­fra­struc­ture

In­fra­struc­ture is seen as cen­tral to the coun­try’s fu­ture devel­op­ment and fi­nally there ap­pears to be at least some money to pay for it. Around K2.7 bil­lion (US$1.06 bil­lion) has been bud­geted for in­fra­struc­ture in 2014, and plans have been an­nounced to cre­ate an In­fra­struc­ture Devel­op­ment Author­ity to over­see its devel­op­ment.

With Busi­ness Ad­van­tage In­ter­na­tional’s an­nual PNG 100 CEO Sur­vey (see page 10) in­di­cat­ing that un­der-per­form­ing state-owned util­i­ties are the num­ber one chal­lenge fac­ing PNG’S largest busi­nesses, re­form in this area is clearly well over­due and wel­come.

Of course, public money alone can’t be ex­pected to fi­nance all of the coun­try’s in­fra­struc­ture needs, and PNG’S in­sti­tu­tional in­vestors say they would rel­ish the op­por­tu­nity to in­vest fur­ther in the in­fra­struc­ture sec­tor.

cer­tainty and the ca­pac­ity to ex­er­cise con­trol which need to be in place to en­able the pri­vate sec­tor to take risk and par­tic­i­pate be­yond be­ing a sup­plier or con­trac­tor or lender re­ly­ing on the State’s credit—the whole ar­chi­tec­ture needs to be worked out. In­fra­struc­ture is a com­plex as­set class.’

Stub­bings be­lieves in­vest­ment will flow once the right cer­tainty and con­trol fun­da­men­tals are in place, and sees PNG’S state-owned en­ter­prises as at­trac­tive op­por­tu­ni­ties for pri­vate sec­tor in­volve­ment.

In early 2014, the gov­ern­ment flagged the par­tial pri­vati­sa­tion of na­tional air­line Air Ni­ug­ini to help fi­nance an up­grade of its fleet. Mean­while, state elec­tric­ity com­pany PNG Power is ac­tively part­ner­ing with pri­vate sec­tor power sup­pli­ers to aug­ment its own en­ergy out­put. The Gov­ern­ment has also re-cap­i­talised mo­bile telecom­mu­ni­ca­tions com­pany Bemo­bile.

The im­prove­ment in the way state en­ter­prises are be­ing run, un­der more ex­pe­ri­enced and qual­i­fied boards, has been no­ticed.

‘State-owned en­ter­prises are ac­tu­ally get­ting cleaned up,’ ob­serves Pa­cific MMI’S Wayne Dor­gan. ‘Th­ese busi­nesses will start op­er­at­ing as busi­nesses.’

Some un­ease about re­forms

The po­lit­i­cal sta­bil­ity that fol­lowed the elec­tion of the broadly pro-busi­ness O’neill Gov­ern­ment in Au­gust 2012 was gen­er­ally wel­comed.

While the Gov­ern­ment has taken steps through leg­is­la­tion to en­sure that po­lit­i­cal sta­bil­ity is main­tained, it has also ini­ti­ated a num­ber of re­views of im­por­tant ex­ist­ing leg­is­la­tion—no­tably, PNG’S long-stand­ing Min­ing Act and the tax­a­tion sys­tem.

While such re­views in­evitably en­gen­der at least some feel­ings of un­cer­tainty (busi­ness is also steel­ing it­self for the re­sults of a re­view of PNG’S min­i­mum wage), the re­views are tak­ing place against a back­ground of gov­ern­ment deal­ings with in­vestors, which have cre­ated what one se­nior min­ing in­dus­try source has called ‘a feel­ing of un­ease’.

Port Moresby’s Ela Beach is the site of sev­eral res­i­den­tial and ho­tel de­vel­op­ments, in­clud­ing the ex­pan­sion of the Ela Beach Ho­tel and the Wind­ward Apart­ments.

An­drew Wilkins

An Aus­tralian Fed­eral Po­lice­man pa­trols down­town Port Moresby. Un­der an agree­ment with the PNG Gov­ern­ment, Australia is sup­ply­ing up to 50 po­lice of­fi­cers to PNG to help tackle the coun­try’s law and or­der prob­lems.

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