On the rebound
David James reports that things are looking up for PNG’s manufacturing sector.
Manufacturing in Papua New Guinea is comparatively small, but it is vital for the country. The sector only contributes about three per cent of Papua New Guinea’s GDP, but according to the Government’s ‘Medium Term Development Plan’ (MTDP) it employs about half of the people in the formal sector in the country.
A strong manufacturing sector is thus crucial for developing the economy and stimulating broadbased economic growth.
Most manufacturing in PNG is built off the country’s strength in agriculture and resource-based industries. The largest manufacturing export commodities are palm oil, processed tuna, copra oil, processed timber and refined petroleum and LNG.
The MTDP notes that “the promotion of the manufacturing sector’s contribution to economic output should have the highest impact on job creation”.
The National Government has adopted a strategy of broadening PNG’s industry base to reduce the impact of volatility in the resources sector. The aim is to move the economy from its dependence just on primary industries into higher value-added processing industries.
Chief executive of the Manufacturers Council of Papua New Guinea, Chey Scovell, believes that boosting PNG’s manufacturing industry is essential to achieve greater diversification in the economy. “The more value added you can do, the better. If you are talking agriculture, for example, value adding is critical.”
There have been moves to protect manufacturing in PNG better. According to a study by the Australian National University (ANU) ‘2018 PNG Economic Survey’, the 2018 budget introduced legislation that increased about 250 tariffs; 600 decreases were abandoned. “On average, the tariff increases were moderate (about 7 per cent), but there were some substantial increases,” the ANU report says.
Tariffs were increased on clothing, household and consumer items, and some processed food, such as ice cream.
Scovell says the changes to tariffs over the last two years have resulted in better protection for PNG manufacturers.
Better prospects in the oil, gas and mining sectors will affect manufacturing. The prospect of some big projects starting, such as the Total-led Papua LNG project, have got a lot of people excited.
“Those tariff reforms have resulted in significant investment, including re-capitalisation of existing manufacturers, like Coca Cola and Pacific Industries and Paradise Foods. There has also been a whole number of new entrants. American Cola, the soft drink brand, took up a chunk of the market.
“They are actually building two manufacturing plants, one in Port Moresby and one in Lae. Lae Biscuit Company is about to open up a huge noodle manufacturing line. We will have another big noodle manufacturer in PNG.”
Scovell says Goodman Fielder is also increasing its investments, including building a new flour mill.
Some companies are also experiencing natural growth in demand. For example, Vijay Kumar, general manager of Poly Allied Products, says the household market for his products is growing.
“The end-user is happy to use Poly Pipe instead of copper pipe for water supply. Mining sector demand is also going up.”
There are also examples of PNG manufacturing companies globalising their production. New Britain Palm Oil, PNG’s biggest palm oil producer and largest private employer, has a refinery in Liverpool, England. Almost all of the company’s output goes to the European Union.
It is not just tariff policies that have been altered. There have also been changes to subsidies that have affected manufacturing. The ANU report says in 2017, the PNG Government announced that all fish caught in PNG waters would have to be processed in PNG, and that its existing policy of subsidised fishing in PNG waters, in return for some processing, would be replaced by a rebate for fish processed in PNG.
Scovell says these changes have had a galvanising effect. “What happened in the past is that most of the fisheries located in PNG were a type of dual-structure business. They had a fishing company and a canning company and the subsidy was being applied to the fishing.”
Scovell says before the legislative changes, some companies used the subsidy to provide cheap fish to their overseas operations, only processing a small proportion of the catch – as low as three to five per cent. One exception, he says, was RD Tuna, which used to process about 75– 80 per cent of its catch in PNG in the peak season.
“Now, it is a rebate based on the volume that you produce – that you process (manufacture). Within six months we saw a doubling of the output on the process side and now we are seeing between two and three times (the pre-change subsidy level).
“They have gone from running one short shift a day to running two or three full shifts. Some of them have gone to almost 24-hour production. That has been a huge success, creating more labour and revenue.”
Erwin Ortiz, general manager of RD Tuna Canneries, says one challenge for the company is exporting to international markets apart from Europe. “This has been a recurring concern that we are determined to overcome,” he says. “Target marketing and niche promotions can be implemented to be able to attain our aim of a wider local customer base.”
Infrastructure shortcomings remain a challenge. Melinda Ragudos, general manager cannery, for Frabelle PNG Limited, says the road between the company’s facility in Lae and the wharf is in bad condition.
“Utilities are an ongoing challenge in terms of both reliability and price.”
But she says the company nevertheless remains committed to PNG. “We have raised our production levels this year and are planning to increase our capacity.”
Scovell says better prospects in the oil and gas and mining sectors will affect manufacturing.
He says the prospect of some big projects starting, such as the Total-led Papua LNG project and the proposed copper-gold mine Wafi-Golpu, have “got a lot of people excited, particularly in the construction and housing sector as well as the FMCG (Fast Moving Consumer Goods) sector”.
Scovell notes that, with the establishment of a ministerial oversight committee for these projects, progress has been sped up. The hope is that work will start on some of the resources projects towards the end of the year.
“That is going to be huge; it is some of the early spend. I am also buoyed by the fact that the government is saying there must be a heavy weighting towards local content, particularly on the early spend.”
He adds that he is “not hearing resistance” to using local providers, whereas with previous projects contracts were given to people outside the country.
Michael Kingston, chief executive of diversified manufacturer KK Kingston and an economist, believes PNG must be careful in the way it approaches resource booms.
He says resource-driven growth tends to coincide with an increase in the wealth gap between those who have and those who have not.
“In countries that develop using a different model – we can look to East Asia where manufacturing has been a driver and could equally be a driver in PNG – the approaches to development tend to be far more inclusive.
“In economies that have followed the path of import substitution industrialisation; followed by export oriented industrialisation; followed by domestic consumption driven growth, one usually sees a much more even distribution of rewards and economic benefits.
“My concern is that the boom that is going to happen with Wafi-Golpu and Total (the Papua LNG project) may make our government once again see dollar signs associated with resource-driven grwoth, and forget manufacturing and agriculture – which are the biggest employers in the country.
“The changes they have made to fostering manufacturing are long overdue. I hope that they continue to stick with those policies.”
Another boost to prospects in the manufacturing sector is the establishment of the Papua New Guinea Electrification Partnership (PEP) in the 2018 APEC meetings, which were hosted by PNG.
“One of the issues is you can build all the infrastructure, but how can you do it on a commercial basis? The PEP gives grants to build infrastructure even in areas where you don’t have the business case to justify financing it.”