The security industry is changing to address the threats to business

The Pacific Islands’ largest economy, PNG also poses the largest security challenges to doing business. Security firms operating locally estimate the cost of doing business in PNG is some 30% higher than neighbouring markets, excluding property, but the economic cost of insecurity is far higher. “A significant improvement in law and order (…) would help create a vibrant private sector and more job opportunities, driven by the expansion of small and medium-sized enterprises (SMEs),” the IMF wrote in its 2013 Article IV consultation on the country. While a vibrant market for private security has developed to cater to larger businesses, the incoming government has placed the highest priority on law and order since it came to power 2012, naming it one of the five key development enablers. Although the above-average returns on investments in PNG have long justified the risks, improving law enforcement and reforming oversight of private firms will be key to supporting the development of businesses.

Key Bottleneck

While the large investments associated with the construction of the liquefied natural gas (LNG) project generated strong demand for security, recourse to private contractors is widespread in PNG. A 70-question private-sector survey covering 136 companies conducted by the Institute of National Affairs (INA) and the Asian Development Bank (ADB) published in June 2013 found law and order concerns to be the single most important challenge to doing business in PNG. Some 81% of respondents were “fairly to very affected” by insecurity and 46% organised security for the transport of their personnel. A full 36% of those surveyed said business and investment decisions had been affected by security issues. This marks some improvement, however; as the report notes, “There appears to have been a reduction in the level of ‘highly to very highly affected’ business respondents between 2007 and 2012, with markedly more defining themselves as ‘fairly affected’.”

The survey found that 79% of businesses employed security staff, and security firms estimate only 55% of firms outsource their security rather than employing guards directly. Serious crimes most often cited as risks in the survey include, in order, property theft without force, break-ins, misappropriation of funds or petty theft by employees, kidnapping of staff and arson. made publicly available, larger private security firms build their own database of figures, pooling data through the Port Moresby-based Security Professionals Association. Vehicle theft and car-jackings account for around half of crimes faced by private firms, while public fighting and armed holdups, particularly of cash-in-transit (CIT), account for a third, according to estimates by several security firms. Crime rates have typically risen in the beginning of the year before tuition payments (abolished since 2013) and ahead of public holidays. Banks are a key source of demand: while Bank of South Pacific operates its own security for CIT in Port Moresby and Lae, it outsources security for more remote locations like other banks like ANZ, Westpac and Maybank, with security contractors typically insuring the first PGK5m ($2m) of funds. “The nature of threats is changing and becoming more sophisticated,” Dale Smith, the director of Guard Dog Security Services, told OBG. Increasingly frequent attacks include the theft of confidential documents and the targeting of foreign businessmen carrying gold and currency. Meanwhile, the winding down of construction on the LNG project have raised crime concerns. “There will be fewer contracts associated with large projects as PNG LNG construction is concluded, but we have started to see a spike in petty crime in the meantime,” said Smith.

Market

The number of operators has continued to grow faster than demand, rising from 336 firms in 2012 to 467 in 2014, according to the Security Industry Authority (SIA). These range from larger foreign-affiliated and locally owned firms to smaller, less formalised operators. “While there are over 400 private security companies in PNG, not all of them are active or licensed,” said Smith. “Only around 60-80 of them are serious.”

The Department of Labour and Industrial Relations estimates the sector is the country’s third-largest employer, after agriculture and public service, employing over 20,000 people nationwide, according to the SIA. However, the large number of players competes for a still-limited market, estimated at roughly PGK550m ($223.6m), according to security professionals in the absence of formal figures. “Private security is a very low-margin business in PNG, so you really have to drive volumes to be sustainable,” Smith told OBG. “You are doing well if you are achieving 6% rates of return.” Given thin margins, firms respond swiftly to changes in demand, with ANZ reporting in its February 2014 Asia-Pacific layoffs at two of the larger security firms in the first half of 2013, responding to the conclusion of key projects.

Structure

The market is dominated by a dozen larger groups, led by Guard Dog, part of the locally owned Dalco Group, which has expanded from its Lae base to operate nationwide over the past two decades. It has formed two security joint-ventures with landowner groups participating in the PNG LNG project – with Hides Gas Development Company in the Southern Highlands and with Laba Holdings near Port Moresby. Other landowner groups like Anitua have formed their own wholly owned security ventures. Three of the larger operators are foreign-held: British-owned Corps Security and G4S as well as Australian-owned Security Plus. The latter has grown through acquisitions in PNG, buying Protect Security and Securimax in the early 1990s before attempting to buy Corps Security in 2011, a move blocked by the Independent Consumer and Competition Commission. G4S was awarded the security contract for the Australian-run asylum-seeker detention centre on Manus Island, but it was transferred to Trans-field following riots in January 2014.

Strengthening Oversight

The SIA, established in 2006 under the 2004 Security Protection Act, acts as the regulator by licensing firms and granting permits to guards. In practice, however, the regulator’s capacity has been stretched by the rapid growth in number of operators. Although the 2004 act requires the SIA board to include three representatives from industry, the regulator has not issued clear guidelines for licensing and permitting. While the Security Protection Act has proposed amendments to the legal framework, the SIA has proposed raising the permit fee from PGK20 ($8.10) to PGK100 ($40.70) per guard to bolster its capacity, alongside the PGK3.5m ($1.4m) it receives from government budget. “We have long pushed for reform of the 2005 act, particularly to resolve ambiguities between licences and permits granted by the SIA and to establish criteria for training and obtaining licences,” Smith told OBG. “It is unlikely such reforms will be enacted in the short term, however.”

Law Enforcement

While revisions of rules for private security would raise standards, the government is focusing on investing in public law enforcement capacity both in new equipment and training. A key element of the Alotau Accord, following the turbulent 2012 elections and unrest in the Defence Force, included extensive rebuilding programmes for both the army and the 4500-strong Royal PNG Constabulary. After raising spending on law and order by 7.9% to PGK1.12bn ($453.7m) in the revised 2013 budget, the Medium-term Fiscal Strategy will gradually increase spending to PGK1.32bn ($538.2m) by 2017, according to the Treasury. The plans include recruiting and training an additional 480 police officers a year until 2017, as well as the building and modernisation of housing and offices.

Following strong growth of budgeted investments in hard assets in 2013, the 2014 budget earmarks PGK273.4m ($111.1m), or 27% of additional funds for law and order in 2014, to staff training and pay increases, according to the World Bank. Village court officers are set to receive their first pay raise in 24 years, with total allocations reaching PGK38.5m ($15.7m), according to the World Bank. The Defence Force and the Correctional Service will also recruit new personnel in 2014, 400 and 150, respectively.

Yet, as with other public investment programmes, “The capacity of the central and regional government bureaucracies to direct spending effectively and efficiently remains a key challenge,” Standard & Poor’s stated in its January 2014 ratings update. In the Treasury’s 2013 “Mid-Year Economic and Fiscal Outlook” published in August 2013, only 38% of spending on law and order, or PGK426m ($173.2m) of a budgeted PGK1.12bn ($453.7m), had been disbursed.

While public law enforcement remains in need of further upgrades and modernisation, a dynamic private security industry has emerged to meet the needs of larger investors. Public upgrades to the Royal PNG Constabulary, Defence Force and Correctional Service should help improve conditions for both individuals and SMEs. In parallel, private companies have tabled proposals to overhaul the oversight of the private market to level the playing field and raise standards among private contractors. While smaller than more established security markets such as Nigeria or Kazakhstan, private security in PNG is developing to address the evolving threats to investments, both foreign and domestic.