OBG talks to David Cox, Managing Director, Steamships Trading Company

Interview: David Cox

In which of the non-petroleum and non-minerals sectors has the private sector shown the strongest performance over the past 12 months?

DAVID COX: In general, industries are growing, competition is increasing, property demand is very high and rental yields are rising continuously. Freight and shipping volumes are increasing and Papua New Guinea’s ports are becoming congested. Income levels have also improved, which has led to a rise in consumer spending. As a result both retail and the local manufacturing sectors have seen stable growth. The expansion has been quite significant; we have seen double-digit growth every year over the last five to six years. Within this though the manufacturing sector is not export-competitive and only expands because of local consumption, and the tourism industry is very small. While these individually are “nonpetroleum and non-mineral sectors”, it should be noted that their growth is still purely related to mining; the liquefied natural gas (LNG) project and major mining ventures are fundamental to development.

Given PNG’s GDP growth, I would suggest the only reason a business would underperform in these conditions is mismanagement. That said, doing business in PNG does have its difficulties. It is a fairly rugged and costly environment to work in. There are other challenges in basic infrastructure, such as health, education and transportation, so the private sector has to take over some of those responsibilities by providing housing and basic transportation. However, even with all this the rewards and margins are higher. If it’s profitable then nothing is impossible in PNG.

Which new sectors of the PNG economy could prove to hold the most rewarding opportunities for investors over the next few years?

COX: The country has a model for the next 10 to 20 years. If the strategies work out, the mining sector develops as planned, and the gas starts flowing, there will be enough money in the community to see the economy expand, especially beyond the capital. We can expect other regional centres like Lae and Madang to provide major investment opportunities. These are still in early industrialisation stages; with time we hope the emergence of downstream processing activities and other mineral resource-related sectors could bring added value to the economy. For the foreseeable future we are relying on the mining sector for infrastructure development, employment and local consumption.

Outside of the mining sectors, agriculture has great potential; for example, we have seen huge success in the palm oil industry. There is potential to do a lot more in the agricultural sector, although there are deeply rooted land ownership issues that limit the industry and can affect the entire economy. We have seen projects move to neighbouring countries because of these issues.

Having said that, we also need to be balanced and look at what is best for the nation as opposed to a group of individuals. Compromises have been made and a number of projects have begun. Given PNG’s relatively recent independence, modernisation should be left to its natural progression, not externally induced.

Are local private sector companies seeing a direct benefit from the PNG LNG project?

COX: The project is the driving force of the economy. It is now the biggest private sector employer and investor in the country and it has caused rents and property prices to rise. There are other mining projects that certainly complement the economy, but the LNG project is everything to the country.

Once the project comes online and starts delivering gas, there will be a significant reduction in its workforce.

However, a second LNG project and several other major mining projects are in the pipeline. Beyond the investment and construction phase we may see deflation in some areas of the economy, such as construction materials costs. Property rents would level off. However, salaries and salary expectations will remain quite high, so these are issues that will need to be managed, both by the companies concerned and by the government.