Papua New Guinea: Construction eyes new horizons

The construction sector in Papua New Guinea (PNG) has enjoyed rapid growth in recent years. The industry, worth just PGK265.6m ($126.38m) in 1994, is now one of the economy’s largest contributors to GDP, valued at PGK4.81bn ($2.29bn) in 2011. But while annual growth has averaged 17.9% since 2007, there are troubling indicators of an overstretched economy.

With economic growth projected at 8.9% this year, PNG stands to mark 12 years of uninterrupted economic expansion, thanks in part to the $15bn ExxonMobil-led liquefied national gas (LNG) project, which has helped to push the country through the worst of the global financial crisis.

While this growth has allowed PNG to begin the climb out of the lower-income economic bracket, its journey has been hampered by continued challenges from inadequate infrastructure and a workforce with insufficient skills. These bottlenecks have, ultimately, cascaded costs throughout the economy and the construction sector.

Absorbing millions of tonnes of material, the LNG project has caused inflationary spikes in costs. Industry executives report a 25% increase in cement prices over the past few years and PNG’s sole domestic producer, Japanese-owned PNG Taiheiyo Cement in Lae, has not been able to meet demand. This has led some construction firms to import supplies, swallowing the 15% import tariff imposed by the government.

While reliable statistics on commodity price increases remain elusive, the ramifications are clear in base housing construction costs. Estimated at PGK2000 ($952) per sq metre by PNG’s largest national superannuation fund (NASFUND) in 2010, costs have spiked to PGK5000-7500 ($2379-3569) per sq metre, according to a June 2011 analysis from Westpac, an Australia-based bank.

Such increases have only exacerbated protracted and pre-existing housing shortages across PNG, pricing many new developments outside the reach of the lower and middle-income brackets, where they are needed most. At present, around one-third of Port Moresby’s population resides in slums and semi-permanent dwellings.

However, some resources may be freed up soon. Esso Highlands, a subsidiary of ExxonMobil, commenced drilling on the first of its planned wells in July, and the project is on course to be finished by 2014. Once the project is complete, resources such as labour and material will be freed up, thus relieving many of the current inflationary pressures. Some firms have already reported a reverse migration of labour and technical personnel as individual construction projects are concluded, bringing expertise and skills to the sector. While this remains the exception rather than the rule, government predictions also support a cooling of the sector, as the economy emerges from this period of change and growth.

Yet there remains plenty of work ahead. The sector’s cooling contribution to GDP growth, from 3.7% in 2011 to an estimated 0.2% in 2014, is more indicative of new sectors firing up than any large-scale cessation of activity. With the government relying on forthcoming LNG revenues to fuel a wholesale reformation of the national economy, the construction sector remains firmly at the forefront of national development planning.

Working to the PNG Vision 2050 national plan, the government has already embarked on an ambitious four-decade roadmap to transform PNG’s urban centres and national infrastructure. PNG’s roads, ports and airports are all the subject of intense repair and new construction efforts, funded both centrally and by donor support, which will help reduce transport costs for the construction industry.

Investments in transport modalities, worth PGK24.65bn ($11.7bn) to 2015 alone, are expected to provide economic growth of 12.6% by 2030. While this poses its own challenges to the capacities of many domestic firms, the government has already opened the door to international firms that have been quick to stake a claim in the local market.

Elsewhere, plans for urban regeneration penned by the Office of Urbanisation have already set out an ambitious blueprint for 28 critical urban centres by 2030, including five “mega-cities” with populations of more than 1m people. A response to continued urban migration across PNG, developers have already moved to tap opportunities in expanding commercial and residential demands.

With current construction efforts centred on mid- to high-range specifications, the conclusion of the LNG project’s construction in 2014 is widely anticipated to precipitate a sea change in market demand. This redress will turn the construction industry’s attention toward the middle to low-end demands.