New legislation in PNG raises concerns about protectionism

While Papua New Guinea is one of the most open developing economies in the world, with low tariffs, national treatment for foreign investors, bilateral investment treaties and few closed sectors, new policies could be introduced that would make the environment less liberal and welcoming. So far, the status quo remains and companies are free to invest in and sell into the country as before. However, the rhetoric is heating up, and some steps have been taken that indicate changes could be on the way.

Fully Deregulated

In some ways the country is a model economy for foreign investors. There are issues with security and bureaucracy, but PNG is one of the few countries where a non-local can come straight in and start a bank, phone company or supermarket, in most cases only having to gain the same approvals that are required of a citizen.

This is something that executives in Port Moresby agree contributes to making the country such an attractive place to do business. “It is a fully deregulated telecoms market. Anyone can walk in,” said Sundar Ramamurthy, the CEO of bmobile. “Nobody prevents anyone from starting a mobile company.”

Even the processes that must be undertaken at the Investment Promotion Authority are seen as relatively benign. While some of the hurdles for registration are subjective – for example, whether the company is good for the country – and the many required steps usually take longer than advertised, legitimate companies are allowed into the country without a problem. The case of A-Tel is a good example. In 2013, it received a licence to operate as a mobile phone company. It never did start providing service in the country, but its management said that the process was simple and straightforward. “We met the requirements asked of us and approval was granted,” Gulam Mahmud, the vice-president of Awal, A-Tel’s owner, told the local press.

Path to Protectionism 

However, recent signs indicate that the country could be on a path towards selective protectionism. In August 2013, an amendment was added to the PNG Takeovers Code 1998 that introduced a national interest test to the process. Under Rule 27A, the Securities Commission is now authorised to prevent a takeover if it believes that the acquisition is not good for the country.

A wide range of transactions are potentially covered by the amendment. This includes full takeovers, partial takeovers, acquisitions that require shareholder approval, and a number of other smaller reportable transactions, according to Norton Rose. The law firm said that listed companies, companies with more than PGK5m ($1.9m) in assets, 25 shareholders and 100 employees, and any company that may have met these thresholds in the recent past, are subject to the rule. What is not defined so clearly is national interest. Norton Rose believes that the regulators will be fair in their use of the rule, and will include factors such as loss of control to a foreign party and job loss when considering whether national interest is at stake.

Impact 

The act has already been used to thwart a major transaction. In 2013 Kulim Malaysia was prevented from increasing its shareholding in New Britain Palm Oil from just under 50% to majority. The reasons given were loss of control, reduction of liquidity in the shares and loss of jobs. Kulim eventually sold out to Sime Darby, which made a successful offer for control of the company in 2015. This use of the act was accompanied by significant comments from officials. Richard Maru, the minister of trade, commerce and industry, said in public remarks at the time that he felt as though too much of the economy is controlled by foreign interests.

Other potentially protectionist measures have also been observed. In 2013, a transaction that would have resulted in Fiji National Provident Fund owning 40% of bmobile, and Vodafone Fiji managing the company, collapsed. While technical issues were cited by some sources, others noted that the government may not have wanted so much of a state company to be in the hands of foreign interests, according to published comments by the US State Department.

Comments by public officials have also indicated a tendency towards limiting foreign participation. In 2013 the government discussed reducing foreign ownership in local media companies, with all except one outlet being majority controlled by international investors. In 2014 the prime minister said in public comments that Special Agriculture and Business Leases would be reviewed and illegal licences revoked, noting that foreign interests had used them as a way to gain control of Papua New Guinean land.

SME Policy

Perhaps most worrying is the discussion of the creation of a new small and medium-sized enterprise (SME) policy. It has been under consideration for some time and details have been sparse, but indications are that it would be highly restrictive, and would be aimed at getting more business into the hands of Papua New Guineans.

In February 2015 the minister of commerce laid out the basics of the draft to the country’s parliament. He said that all businesses with less than PGK10m ($3.8m) – he did not say whether that was capital, sales or profit – will have to be locally owned, and that all foreigners who own and run businesses of this type will have to leave the country within three years. The minister suggested that these businesses would be purchased by local interests.

Limited Effect

Local observers say that while the policy seems to indicate a threat to legitimate foreign businesses, the reality might be less worrisome than first thought. The concerns are largely over small Chinese-owned trading shops that are perceived to be a threat to PNG’s tabletop businesses. Most of these shops are unlicensed and illegal in any case, and can be shut down under the existing laws.

Observers also point out that few other foreign companies would be classified as SMEs, and that the law would probably be of greatest concern to small resorts and dive companies, which might be able to receive dispensation with the help of the Tourism Promotion Authority.

The SME law should only become a problem if is followed by serious structural changes in the way the country approaches foreign investment. The worry is that the government will begin to shift the emphasis from investment promotion to investment screening. Rather that simply examining foreign investors to weed out the bad ones, it might set up bureaucratic systems to judge them based on a larger, less transparent industrial policy. If the politicians become technocrats and micromanage foreign investment, critics believe that it could limit international participation in the economy, and leave some sectors and sub-sectors underinvested.

Resource Nationalism 

The other trend that has foreign investors concerned is rising resource nationalism. It has become a major issue in places like Indonesia and Mongolia, and the fear is that PNG will begin to enact laws that will make investment in the extractive industries more difficult and expensive. The PNG liquefied natural gas and Total natural gas deals have proceeded relatively smoothly so far, and this suggests that PNG will not choose a more combative path. However, there are other indications that the mood could be changing.

In 2013 the government nationalised OK Tedi, the country’s largest mine. While the situation was complex – the asset was owned partly by the government and partly by a fund created for the benefit of the people of the region – it was done on the grounds that the mineral assets of the country belong to the people, and that this fact can justify a takeover. Some analysts worry that this thinking could leave all resources projects at risk of similar fates. The legislation that allowed the government to take control of OK Tedi “would undermine investor confidence at a time when a number of very large investments are on the horizon”, according to public comments made by the former prime minister, Mekere Morauta.