International investors are drawn to new developments in PNG

Papua New Guinea is in the process of restructuring its state sector in order to make it more efficient and to finance necessary capital expenditures. A wide range of options are being explored, from public-private partnerships (PPPs) and privatisations to an extensive rejigging of national assets.

For international investors, the steps being taken may offer considerable opportunities. PNG is contemplating making equity and partnership stakes available in some key assets, while potential strategic partners and passive investors may soon be able to participate in the management of large, vital and growing sectors of the local economy.

PPP Centre & Beyond

In late 2014 the Public-Private Partnership Act was passed unanimously by the National Parliament, after five years of drafting and preparation. Under the act, a PPP Centre will be established, which will be an unincorporated statutory organisation, and a series of deals will be lined up for outside participation.

The centre will have a number of responsibilities and will act both as a facilitator of deals and in a governing role. It will work with the various public bodies and encourage them to consider using a PPP structure to develop their operations. It will advise in the creation of PPPs and evaluate PPP proposals. It will also coordinate implementation, help build the necessary capacity, compile reports, and publish guidelines, rules and procedures.

The PPP Centre will have certain powers that it can exercise in carrying out its duties, and some are considerable. It can require public bodies to provide information, it can conduct inspections of potential PPP sites, and it can charge fees and hire consultants. The centre will be structured in such a way as to ensure independence and accountability. The chief executive officer will be appointed by the head of state, but a number of procedures must be followed to avoid the appointment of underqualified individuals. The position will have to be publicly advertised and a merit-based assessment will have to be carried out. A financial report must be published every half year and an annual report every year.

Qualifying Projects

The act defines what sort of projects may be considered for PPP arrangements. The list is comprehensive and includes much of the country’s core infrastructure. Electricity generation, transmission, distribution and supply, in addition to dams for generation and the distribution of gas, are qualified for PPPs. A wide range of transportation facilities and systems are on the list, such as runways, air traffic control, passenger terminals, railways, roads, bridges, tunnels and ports.

Fixed and mobile telecoms are up for PPP consideration, as are long-distance, internet, satellite and broadband services. Other areas open to PPPs are housing, industrial estates, sports facilities, prisons, hospitals and schools. There are some notable exclusions: mining, oil and gas, and all projects below a “referral threshold” of PGK50m ($18.9m). Many activities may be undertaken under the law, such as design, construction, finance and the operation of facilities for more than five years.

Early Options

The Institute of National Affairs (INA) has identified a number of early targets for PPPs. Jackson’s International Airport, the country’s gateway in Port Moresby, is one. The INA says that a PPP partner could expand and modernise the terminal building and operate it for a number of years, while ownership would remain with the state. The partner could also develop land around the airport.

The institute also mentioned Lae Port and hydropower projects as possible early options for PPP efforts, and said that performance-based road maintenance contracts could also work.

According to the INA, the key to getting PPPs right is the proper structuring of the contracts, so that the deals have attractive enough terms to draw bidders without making the resulting infrastructure too expensive for the end users. The International Finance Corporation notes that poor structuring has led to the failure of PPPs globally, especially when risk is not properly shared between parties.

The Asian Development Bank (ADB), which helped in the drafting of the law, said that it is significant in that it will allow the country to leverage the resources it has and do more with less. It will also allow for a transparent bidding process and could result in more foreign investment, as the assets are of interest to both strategic and financial partners, and the process has the potential to be clear, straightforward and open. The ADB will continue helping PNG in the implementation of the law.

Privatisation

The country is also looking to carry out straight privatisations by selling stakes in government corporations. It is thought that spinning off shares of state-owned enterprises (SOEs) could help in several ways. By introducing outside owners, the companies will benefit from input from relatively independent parties, which can improve management and reduce waste. Most importantly, the privatisations will bring in much-needed capital. As it stands, PNG does not have the available funds to sufficiently modernise its SOEs.

Research suggests that changes are definitely needed in the SOE sector. In its study, “Benchmarking the Performance of State-Owned Enterprises in PNG”, the ADB found that while the companies themselves are some of the most profitable in the Pacific region, their performance has sometimes come at a great cost to society, in terms of subsidies and in poor service and delivery.

“With the additional funds they are able to get upgraded and more recent infrastructure ... with better technology and better management skills,” the prime minister, Peter O’Neill, told Radio New Zealand. “This will produce some efficiencies in many of those businesses, which will mean that the consumer, the travelling public and of course the consumer of electricity will have a better service rendered to them.”

National Carrier

The first company up for privatisation is Air Niugini. The flag carrier is seen by the prime minister as providing a good basic service, and having a good reputation internationally, but it is also in need of additional investment to enable it to reach its potential and expand its operations. The plan is to sell 49% of the company. Critics point out that past attempts to bring strategic partners into the carrier failed to attract decent bids. There is also concern that as a purely commercial enterprise, Air Niugini may have to drop unprofitable routes and charge more for tickets, making it difficult for the average Papua New Guinean to fly.

Power 

The other early target for privatisation is PNG Power. This is an especially interesting asset as the company is in need of management expertise as well as significant capital investment, while the country needs a more reliable power supply.

A state of emergency has been declared and a solution must be found. In March 2015 the company’s board of directors was suspended and its operations were taken over by the Ministry of Public Enterprises. Minister Ben Micah said that the police or the military could be used to collect unpaid bills. Telikom is expected to be next, largely because it suffers some of the same challenges as PNG Power.

The parties involved have assured the public that they are not about to undertake a wholesale privatisation of all SOEs, and that policies will be developed to bring in outside shareholders in a measured and productive manner. Public resistance is high, and challenges will be met if it is perceived that the privatisations will lead to the loss of national assets, or if the interests of the country are compromised. The last time the country attempted mass privatisation, more than a decade ago, only one company – Papua New Guinea Banking Corporation – was successfully sold into the market, in 2002.

The potential opportunities for international investors are considerable, given the nature of the assets owned by the state, and the intense need for capital and expertise. Every major sector has government participation. In total, the government owns 14 SOEs. In addition to the assets under consideration for sale, the list includes Water PNG, Motor Vehicle Insurance (which also owns Pacific MMI), bmobile, Post PNG, PNG DataCo, National Petroleum Company PNG, National Development Bank and Eda Ranu, Port Moresby’s sewage company.

Public Sector Reshuffle

In the background, the entire public sector is set to be restructured in terms of the way the shares are owned, held and controlled. The Independent Public Business Corporation will be disbanded and the corporations it owns will be transferred to Kumul Trust. Mining assets will be moved to Kumul Mining and petroleum assets will be moved to Kumul Petroleum.

The hope is that the creation of the new organisations will lead to greater efficiency and transparency, and will allow the state-owned sector to function along the lines recommended by the ADB.