OBG talks to Geoff Cundle, Managing Director, Steamships Trading Company

Interview: Geoff Cundle

Is it time for diversified conglomerates in Papua New Guinea (PNG) to expand or consolidate?

GEOFF CUNDLE: Over the next couple of years, we expect a deceleration in most economic activities as the country feels the pinch from completion of the PNG liquefied natural gas (LNG) construction phase. The export of both hard and soft commodities, which has been growing on the back of China’s exceptional demand, is also expected to slow. The corporate landscape will, in our view, go through a period of consolidation in the short to medium term as it adjusts to market realities.

We should not forget that PNG is more than Port Moresby. The effect of low commodities prices, especially for palm oil, cocoa and coffee, has been felt mostly in rural areas, while confidence at the port city of Lae has somewhat dissipated as the Wafi-Golpu mining project has been deferred. The cargo tonnage coming through PNG's port, which is one way to quantify this trend, has slowed considerably from mid-2013.

That said, we are used to these sorts of peaks and troughs in PNG, having operated here for more than 95 years. Confidence in the market remains positive despite more challenging conditions in the short term. The contrast is stark with two years ago, when we had the twin benefits of high commodities prices and spinoff effects from the Exxon-led LNG project. We have returned to more "normal” market conditions, having enjoyed a nice surge, so we should not get too despondent. It is a good time to keep one's powder dry for interesting opportunities as the market adjusts.

What structural adjustments are needed to sustain the market, especially in critical areas like transport?

CUNDLE: The 2014 national budget puts a strong emphasis on infrastructure, something that was long overdue. While Port Moresby has a lot more shiny buildings and cars now than in the past, outside the capital the physical infrastructure situation has gone backwards. The risk associated with the budget, of course, is that the government may not be able to carry out all of the projects it plans. Capacity to execute remains an issue for PNG. We feel, however, that the budget is a major step in the right direction. With new gas projects planned to come on-stream in the medium term, the government can step in to fill the gap following the LNG construction phase by accelerating investments in the growth enablers, especially infrastructure, law and order, education and health.

China, where I worked a long time before returning to PNG, has shown that investing ahead of the curve can pay dividends in the long run. For all the differences between the two markets, PNG can learn from this. China has redefined its economy by investing in infrastructure, especially housing and transport. This helped encourage domestic consumption as its export competitiveness waned. The drift towards urbanisation seen in China in recent years is also likely to occur in PNG, though perhaps to a lesser extent. Overhauling service infrastructure in the cities should therefore be a national priority. The Chinese administration had good foresight to predict what was coming, and the government of Prime Minister Peter O’Neill is signalling that it similarly understands the need to upgrade infrastructure to meet the demands of a growing economy. The early signs from the government are positive.

To what extent could public-private partnerships (PPPs) help achieve the government’s goals?

CUNDLE: A key factor in drawing private sector involvement through PPPs is political stability. This the current administration has so far provided. So I do see more opportunities for the private sector in the future, especially if the government keeps reaching out to firms with a record of executing capital projects in PNG.

Still, what lies ahead for PPPs is not entirely clear. The government has been talking lately about protecting certain industries, or introducing legislation to ensure that takeovers are in line with national interests. These sorts of propositions send mixed signals and can create uncertainty among local and foreign businesses.