Papua New Guinea: Industry earmarked for major reforms

After 12 years of consecutive growth, Papua New Guinea (PNG) started the new year by focusing its attention on facilitating a broader and more inclusive model for driving the economy forward. While PNG’s recent fortunes have been fuelled by the $19bn Exxon Mobil-led liquefied national gas (LNG) project, completion of the construction phase is set to change the economic dynamic this year by halving annual growth to an anticipated 4%.

The government plans to use the slowdown as an opportunity to accelerate the rolling out of national development projects and wider economic reform initiatives, with the agricultural sector and small and medium-sized enterprises (SMEs) to be given priority.

PNG’s industry has enjoyed several years of meteoric growth, benefitting both directly and indirectly from the LNG project. However, the construction, transport, storage, manufacturing and communication, and wholesale and retail trade sectors all face a considerable downturn this year. The about-turn may bring challenges but it should also help to cool overheated industry sectors and ease related pressures for the government, allowing central resources to be allocated in a more equitable manner.

The 2013 budget, which was announced in November last year, has a central role to play in steering PNG’s economy onto a different track. Valued at PGK13bn ($6.26bn), it is the country’s largest budget to date and represents a figure of around PGK1800 ($867) per person. The overwhelming majority of funds will be directed towards developing core services, including health care, education and law and order, as well as infrastructure.

Channelling investment into essential services is regarded as key to fulfilling the ambitions laid out in the national vision, “Wawasan 2050”, and helping resource-rich PNG to avoid the pitfalls of “Dutch disease”. The government will also be looking to generate greater private sector involvement, which it views as crucial for enabling longer-term, sustainable economic growth beyond LNG and mining.

With 90% of PNG’s formal economy owned by international firms, Prime Minister Peter O’Neill has moved to begin redressing the balance by placing local SMEs squarely at the forefront of his plans for national economic development. The budget contains the first PGK80m ($38.2m) disbursement of an SME-specific $238.5m stimulus package that is expected to create 500,000 new businesses and 2m new jobs by 2050.

The ambitious plans will be used to fund a raft of incentives and tax concessions for PNG-owned businesses, while also ensuring that only international companies approved and registered by the foreign investment review board can trade in the country.

Further restrictions on foreign businesses remain under consideration and the government is also reviving the hugely popular, 100% government-funded “stret pasin business scheme”, which provides business training for PNG’s citizens. The scheme will help nationals access affordable credit by offering them interest rates at 6%, down from 22%, through the National Development Bank (NDB).

In another move, the government has pledged to review the Companies Act 1997, the Independent Consumer & Competition Commission (ICCC) Act, the Coffee Industry Corporation (CIC) Act and the Extractive Industries Transparency Initiative (EITI), in a bid to build confidence and trust between the extractive industries and local businesses.

Speaking at the budget’s November launch, the Minister of Treasury, Don Pomb Polye, said the overhaul was intended to create “a conducive investment environment by addressing the impediments to doing business in the country”. The measures form the basis of the coalition government’s populist socio-economic blueprint, the Alotau Accord.

PNG’s industry remains dominated by the informal sectors, especially its well-established agricultural industries that are located in rural areas. However, a combination of global market fluctuations and adverse weather patterns led to poor performances in 2012 in production of staples such as coffee, cocoa, palm oil and copra, despite previous strong track records.

Over the coming months, the sector should also begin to see the benefits of 2012’s Productive Partnership in Agriculture Project (PPAP), aimed at expanding the cocoa and coffee industry by building capacity and improving market access.

PPAP forms part of a wide-ranging government strategy aimed at extending industry reach. With industry often facing limitations and forced to pass the cost of providing and maintaining essential services onto both foreign and domestic customers, the government has earmarked one quarter, or $1.4bn of the national budget, for a radical overhaul of national infrastructure.

While the ambitious plans will take time to implement and complete, the government expects PNG’s SMEs to be among the first to reap the rewards of its initiatives.