OBG talks to Keith Fletcher, Managing Director, Fletcher Morobe Construction

Interview: Keith Fletcher

What public-private partnership (PPP) opportunities exist for infrastructure and construction?

KEITH FLETCHER: The government has been promoting PPPs in various sectors. A good example is the development of the land surrounding the airport, which use a PPP framework whereby the government supplies the land and private partners provide the capital. PPP projects are available in various segments, including in the infrastructure development of airports, seaports, highways and roads. However, if we look at the construction of roads and highways, it is difficult to see how the private partner will make money, because charging for roads will not work in PNG. Nevertheless, PPP schemes will develop in civil works such as power plants, water supply, sewer networks, etc.

How strong is demand at the moment, and what are the prospects going forward?

FLETCHER: For the last five years, we have had business come to us. There is a lot of work that still needs to be done. My feeling is that for another two or three years, the demand will continue. As builders, we are not soliciting new business at the moment, and this is the nature of the market that we see in PNG. However, I believe we are now at the peak of the real estate cycle, and we are seeing prices slowly levelling off and starting to come down. Perhaps we have another three years of moderate growth ahead of us. We have certainly seen good times, and I believe they are behind us in this cycle.

Which real estate market segments represent significant opportunities for investment?

FLETCHER: Developable land in Port Moresby (POM) is scarce and expensive, and decent tracts of land are difficult to come by. These factors increase project costs significantly. For example, Steamships Trading, who has been here for almost a century, has been landbanking for a long time, and up until recently there was no demand to develop anything in PNG.

With the emergence of the liquefied natural gas (LNG) project, the country’s entire market changed and companies began developing. Now Steamships Trading has a huge advantage because it is developing from a low-cost base.

As for developments that are still needed in POM and that have demonstrable potential, the high-end residential market and hotel sector have room for moderate growth. The progress of the LNG project has clearly had a significant impact on the sector as several hotels are already being built. There are also development opportunities in the low-income residential and low-cost hotel sectors. Warehouses are in short supply as well, so there are plenty of opportunities even though land availability will restrict how that segment can grow.

Scarce land availability has been an obstacle for growth and response to demand. One way to resolve this is to work with the local landowner groups on customary land. The challenge when working with such groups, however, is trying to understand who actually owns the land. The government is now recognising the land shortage and is trying to help in discussions with landowner groups. There are some areas in POM where land is available, but unfortunately the lawlessness and crime in those areas is a deterrent to many people.

How are price spikes and fluctuations effectively managed in PNG’s construction sector?

FLETCHER: There are two types of construction materials that we source locally – concrete and timber; the remaining materials are imported. Price spikes and extreme fluctuations are passed on to the developers as the work is priced. Developers must understand that doing business in PNG is probably at least 25-30% more expensive than in similarly developing countries. The only other challenge is how the kina exchange rate affects the sector. Any adverse movement in the kina has a dramatic impact, especially on large projects.