High-cost highways: Logistics firms are trying to overcome operational challenges

While few in the transport sector expected Papua New Guinea’s transport modalities to adjust in time to the rapid acceleration in demand precipitated by the $15.7bn ExxonMobil-led liquefied natural gas (LNG) project, delays and cost increases estimated at between 40% and 60% by the World Bank, are the source of continued frustration. Capacity overloads throughout PNG’s transport sector have spread costs throughout the national supply chain, leading to significant inflationary pressures in some markets. Public and private operators have attempted to reduce their costs and increase operating efficiencies through independent and collaborative initiatives but to little effect. This has been felt no more acutely than in PNG’s principal port of Lae, which currently serves as the gateway to the Highlands Highway and the artery of PNG’s industrial heartland. Infrastructure shortfalls in PNG Port’s quayside facilities, alongside a shortage of berths, have led to delays in excess of a week to dock and onshore processing takes an average 2.8 days per vessel. While modernisation investments and initiatives are ongoing, most are aimed simply at addressing the system’s symptomatic shortfalls rather than their causes.

CUSTOMS: PNG Customs has been at the forefront of shipping and trucking firms’ angst quayside. Leading haulage firms on the Highlands Highway have complained that delays in administrative process have seen port charges of PGK2.20 ($1.05) per tonne per day handed down when they are unable to clear containers in the allocated four days. PNG Customs’ implementation of an express Customs duty fee of PGK250 ($119) for the same-day delivery of documents (or PGK30, $14, for 24 hours) has also done little to alleviate the growing levels of frustration and congestion. Several logistics firms have, in many cases, been required to invest additional resources in order to expedite the situation. “While we have seen a number of improvements at the ports in terms of efficiencies in our operations, this has been down to the investment of DHL personnel on the wharves, tasked with navigating the bureaucracies and coordination between the port authorities and Customs for the release of our containers,” Skerry Palanga, the Port Moresby branch manager and national operations manager for DHL Global Forwarding, told OBG.

CAPACITY: While sympathetic to companies’ frustrations, PNG Customs says there are deficiencies in both its institutional capacities, as well as the adherence to procedural obligations by shipping firms. “PNG Customs separated from the Internal Revenue Commission in late 2009, through an amendment to the Customs Act by the national Parliament. We are now engaged in rebuilding our internal capacities and working to achieving our core functions by implementing the Customs Service Plan 2010-12. Despite a 50-60% shortfall in staff, our revenue collection in 2010 was approximately PGK1.97bn ($937.52m), some 16% above target, whilst in 2011 we collected PGK2bn ($951.8m) plus,” Ray Paul, its acting commissioner, told OBG.

A complete roll-out of information and communications technology at Customs is ongoing under the Customs Modernisation Strategic Action Plan, building upon the introduction of the Automated System for Customs Data (ASYCUDA) electronic manifest systems in February 2010.

PNG Customs is still working to overcome delays, though it says some lags are due to shipper errors. “Cargo manifests must be submitted by ship operators to PNG Customs approximately 48 hours prior to berthing, which is facilitated by the e-systems currently in place, and is a legal requirement. Sadly, however, most shipping agents are not complying with this requirement and do not send their manifest on time. This leads to inevitable processing delays. The PNG Customs is working with shipping operators to address these concerns,” Paul said.

Rolling out container X-ray machines in Port Moresby and Lae in 2012, PNG Customs’ improvements are beginning to gain some traction, registering a 27% increase in revenue for the authorities year-on-year in 2010 and expecting to reach its PGK2.5bn ($1.2bn) revenue target in 2011. Moreover, cooperation with private firms is on the rise, with Steamships Trading Company introducing bonded warehouses in 2012 at its Lae and Port Moresby operations. A growing number of firms are utilising PNG Customs’ Advance Tariff Ruling scheme, which fixes commodity rates for three years on application.

A VITAL LINK: While the delays in ports have indeed contributed to increasing costs, the parlous state of PNG’s road network, specifically the Highlands Highway, and the destabilising market influence of the massive LNG project have caused overheads to spiral. The limited supply of road-haulage capabilities on the Highlands Highway has meant a significant growth period for operators on the 800-km route, which connects Lae to Enga and the Southern highlands, through Mount Hagen.

“The Highlands Highway serves to connect the main population centre of PNG to the global economy. It also connects some of the significant projects that are now happening in that part of the world, including the LNG project. It is an absolutely vital link for the country and the future growth in prosperity of the highlands will depend on improved access in and out of it,” said Tom Owen, the chief operating officer for logistics at the Steamships Trading Company, explaining the route’s significance to PNG’s economy overall.

Road haulage executives reported a growing prioritisation of LNG contracts, particularly among subcontractors, which has fed shipment delays of one day to one week. For loose cargo, small hauliers have also been demanding handling fees of PGK10,000 ($4759). Firms have reportedly little option but to pay or face delays of up to one month. “Over the past two years, we have seen market rates increase by around 5%, and rates increases by most lines have become much more frequent, now at six-month intervals,” Palanga told OBG.

Price hikes such as these have also been fed by the predominant one-way haulage business, as rates have had to subsidise vehicles’ return journeys. However, with the project’s construction scheduled for 2014, a large market correction is expected.

“Since the LNG project first began in PNG, the number of units operating on the Highlands Highway has increased to approximately 250,” Dave Howell, the general manager of trucking at landowner freight haulage firm TransWonderland, told OBG.

“However, once the project comes on-line in 2014, there will be a marked reduction. We have heard talk, although unsubstantiated, of an estimated 80% drop in LNG sector activity, and it is inevitable that a number of players will drop out of the haulage market.” Other indicators support Howell’s prediction, but ahead of the project’s completion, operational costs continue to be passed on to the customer.

OPERATIONAL COSTS: With unpaved inclines of 24 degrees and passes above 3000 metres, the Highlands Highway is perhaps PNG’s most challenging, if lucrative, route for hauliers. Yet most modern shipping vehicles are unsuited and trucking firms are required to upgrade trucks to handle the local conditions, which can cost in excess of PGK1m ($476,000) and add another four tonnes in weight.

With trucks topping 49 tonnes dead weight and average loads of 25 tonnes per truck (although many hauliers double up trailers) the impact on both the road and vehicles is debilitating. The operational life span of rigs, typically Kenworths and Hinos, is between just four and 10 years, and fuel consumption is an estimated one litre per km. This has contributed to PNG’s rates for cargo transport, which are the highest in the world, at around $0.35 per km.

Surging global fuel prices have contributed to hauliers’ increased costs, and they are now facing a limited supply of vehicles that can run on PNG’s Euro 3 category fuels, as manufacturers are now switching to Euro 4 and 5 specifications. Hauliers report dwindling vehicle supplies from manufacturers with little recourse, as an upgrade of Port Moresby’s Interoil refinery would be as politically risky as financially prohibitive for the economy. This has required some firms to run higher-specification engines on lower-grade fuels, further increasing inefficiencies and pushing maintenance costs even higher.

LANDOWNER CONFLICTS: Despite a concentration of service centres at Mount Hagen, Mendi, Hides and Moro, support on the Highlands Highway is otherwise scarce and hauliers regularly face landowner demonstrations. Roadblocks are somewhat common on the highway and some groups are reported to have even removed bridge reinforcements. “It has become a cultural thing that if a vehicle stops, villagers think it is their right to loot it and demand PGK1000 ($476) for the return of the truck, and meanwhile the local police do nothing,” said Gilbert Delaney, the manager of East West Transport.

With local police units often under-resourced or constrained by clan affiliations or conflicts, elite police mobile squads – supported by ExxonMobil but solely under the control of the Special Services Directorate – provide some assistance on the highway, but resources are extremely limited.

NEGOTIATION: Attempts among hauliers to negotiate set rates with landowning groups received added impetus in the past year as costs have continued to spiral, but no agreements have been reached, even with the support of the Department of Works. Firms operating on the highway do so in an increasingly mercenary environment, Howell explained: “Charges extracted by these landowner groups have increased significantly over the past three years and escalate as you travel westward. Some firms now report combined monthly payments of anywhere up to K15,000 ($7139) to these groups.”

However, the promulgation earlier in 2012 of the Integrated Land Groups (Amendment) Act is widely expected to defuse issues that have surrounded the leasing of land from PNG’s indigenous landowner groups, which control 97% of the territory.

Against this backdrop, road conditions continue to deteriorate on the Highlands Highway despite government and donor support. While conditions are likely to improve post-2014, the challenges faced by PNG’s hauliers represent substantial burdens that the industry and the economy as a whole will need to address to sustain growth in the coming decades.