Non-mineral policies bolster SMEs and promote a balanced economy in PNG

To date, Papua New Guinea has dealt with its economic challenges relatively defensively. It has instituted deep spending cuts to get the budget balanced, maintaining or increasing outlays only where vitally necessary. While the results have been impressive in terms of absolute numbers, the response is conventional. PNG has remained economically liberal and open, and it has largely stayed on the same path for decades. However, in the face of economic headwinds, the country is considering more creative solutions to immediate and long-term problems. Fundamental changes in the economic structure are being contemplated.

Non-mineral Emphasis 

For some time, efforts have been made to develop a more balanced economic base. The extractive sector is of great importance and the commitment to it remains, but the encouragement of other sectors is seen as an increasing priority. The central bank is a chief proponent of boosting the non-mineral side of the equation. It advises, for example, the continued focus on infrastructure and the revival of agricultural extension programmes. It has also called for the promotion of exports, import substitution and development of downstream processing, suggesting a real policy shift.

Prime Minister Peter O’Neill is advocating efforts to boost specific sectors as well. He told the Australia PNG Business Forum and Trade Expo in Port Moresby in May 2017 that PNG performed admirably in the economic downturn – better than some other resource-rich countries – as it has been able to maintain positive growth and keep inflation low. But he wants to make the economy more resilient so it can hold up better as it goes through future boom-and-bust cycles. He would like to see the country broaden its industrial base and diversify into production of more value-added products. Development of the fisheries segment is one priority, and he has called for a review of the agreements with companies active in PNG waters and would like to see an adjustment to the practice of discounting vessel days. To get the discount, the fish must be processed onshore, as is called for in the original state agreements on the practice. He believes if the agreements are properly enforced, 16,000 jobs can be created. Logging and agriculture are two other sectors where he advocates a move up the value chain. He is also a proponent of developments in tourism.

Some observers note that most of the economy’s potential is outside the sectors that have to date been the focus of the government’s attention: oil, gas, logging, fishing and industrial agriculture. The argument is that these side activities actually represent the majority of the economy, while the export-related sectors are but a small fraction of the whole. According to the NEGO Act Now, in 2017 studies into rural livelihoods showed that while customary land is highly productive, the actual output is not accurately measured. Some 1m families may produce a total of PGK40bn ($12.7bn) in value a year, much more than was produced by the sectors that receive the bulk of the government’s support.

Broad Policy 

Beyond isolated initiatives and broad themes, the government has developed a comprehensive vision for development: the SME Policy 2016 and Masterplan 2016-30, published in March 2016. Under the plan, the government sets out bold goals to be met by 2030: increase the number of small and medium-sized enterprises (SMEs) from 49,500 to 500,000; boost formal employment from 290,000 to 2m; reduce unemployment from 84% to 49%; increase local control over the formal economy from 10% to 70%; bolster the contribution of SMEs to GDP from 10% to 50%; and expand per capita income to $9600 from $2000.

The policy includes a list of initiatives. Some are quite typical and not at all surprising, such as training. Some are particularly bold. In the banking sector, the document calls for intervention in the market to encourage the support of smaller enterprises, a review of banking fees and the creation of a Credit Guarantee Corporation. Merging the National Development Bank and the People’s Micro Bank is also recommended, with the surviving entity to be licensed as a commercial bank.

If the policy is implemented, the Department of Lands will make properties available for use by SMEs, and for the creation of economic corridors, incubation centres and special economic zones. A five-year tax holiday has been proposed for start-ups, as well as a reduced tax for SMEs and tax cuts for corporations supporting SMEs. A review of tariffs is on the list.

Specific initiatives under the plan include the introduction of a price stabilisation fund for cash crops, the establishment of a fishing company as a public-private partnership and the formation of special economic zones, starting with the Sepik Special Economic Zone. Incubators will also be created, following the Malaysian model. Businesses involved in scientific or technical fields will be provided with incentives to work with SMEs, while foreign airlines will be encouraged to enter the country, and visa policies will be reviewed. Bulk wholesale buying for SMEs is also set to be considered, and the writing of national franchise legislation has been recommended.

Some of the proposals are seen as being somewhat nationalistic in nature. These include the formation of a Foreign Investment Review Board, the publishing of a Reserved Activity List (RAL), the creation of national content legislation and the establishment of a national tender board to make sure that purchases under PGK10m ($3.2m) are awarded to local businesses, and that at least 50% of larger construction contracts are subcontracted locally.

All retail establishments with less than PGK10m ($3.2m) in turnover will also be reserved for citizens. In addition, the plan mentions imposition of an export tax on unprocessed commodities, with uncut log exports being banned in 2020.

Defining SMEs 

The policy provides a definition of an SME. A micro-company has less than PGK200,000 ($63,400) of annual sales, fewer than five employees and less than PGK200,000 ($63,400) in assets. A small company is one with more than PGK200,000 ($63,400) in annual sales but less than PGK5m ($1.6m), fewer than 20 but more than five employees if in manufacturing, construction or engineering, assets of more than PGK200,000 ($63,400) and less than PGK5m ($1.6m). Medium enterprises have more than PGK5m ($1.6m) in turnover, or assets, but less than PGK10m ($3.2m), and will have fewer than 100 employees.

The RAL has a sliding scale for participation. For companies on the list with under PGK10m ($3.2m) of sales or initial investment, and fewer than 50 employees, 100% local ownership is required. For firms with sales or investment between PGK10m ($3.2m) and PGK20m ($6.3m), a joint venture with 51% local ownership can be formed. For those with an investment of over PGK20m ($6.3m), equity can be foreign owned.

Critics say that while the aims of the initiatives are good, the methods may not be ideal. They believe that the policy is protectionist. The better solution, it is argued, is to support small companies with positive incentives. The concern is that the policy, given the uncertainty and potential bureaucracy it creates, will scare off foreign investors at a time when their capital is most needed. “At the end of the day, if you are chasing people away instead of inviting them in, the whole country loses,” Clarence Hoot, acting managing director of the Investment Promotion Authority, told OBG.

Foreign Aid 

The government is also becoming more proactive in terms of foreign aid, seeking to alter traditional modes of engagement for the sake of the economy. In March 2016 PNG requested that Australia, which provides almost 70% of the country’s development assistance, directly fund PNG’s health, education and infrastructure, rather than committing funds to many smaller programmes and initiatives. The amount in question totals an estimated A$550m ($414.1m). Australia has not provided direct support to the country since the 1990s. It is being argued that if the method of delivery is changed, the funds will have a more direct impact. An ongoing concern is that aid is not always effective, as it often goes towards paying contractors and for expensive technical assistance.