Advantages ahead: Strong core segments and burgeoning ones present opportunities

With a wealth of natural and mineral resources complemented by a rapidly expanding labour force, Papua New Guinea possesses the crucial building blocks required to develop its fledgling industrial base into a strong economic contributor. After years of robust growth, and with substantial new revenues on the horizon, the time to purse the government’s aim to increase the manufacturing sector’s GDP contribution to 30% may be at hand. Much of the country’s industrial activity already focuses on its strengths. For example, ocean life supplies a growing seafood processing sector, while the lush environment provides sustenance for the expanding agricultural export industry.

OPPORTUNITIES: While PNG currently possesses only limited downstream processing facilities for its substantial mineral and petroleum resources, the massive investments totalling tens of billions of dollars provide ample opportunities for local business participation.

After exporting minerals and petroleum, PNG’s nextlargest revenue generator is its agricultural industry. In the first half of 2011 export proceeds from agricultural and other related exports, including palm oil, amounted to PGK1.79bn ($851.86m), or 21.4% of the total export value of PGK8.35bn ($3.97bn), according to the central bank. Driven by the tuna canning industry, exports of marine products reached 34,100 tonnes in 2010, worth some PGK114m ($54.25m). Other manufactured products include beverages, building products, food, handicrafts, furniture, industrial chemicals, plastics, packaging, paint, textiles and personal care products. Moreover, because so many goods are imported, manufacturing opportunities abound for a range of products not currently produced domestically.

Employment within the manufacturing sector has grown at an above-average rate, increasing from an index base level of 150.4 in the fourth quarter of 2007 to 179.6 in the third quarter of 2011, according to data from the Central Bank of PNG. Over the same period of time, the average index for all employment went up at a significantly slower rate, from 134.1 to 160.4.

FOOD & BEVERAGE: One of PNG’s most established manufacturing subsectors, the food and beverage industry is hitting its stride as consumption continues to grow across nearly all demographics. The industry has been among the most successful when it comes to import substitution by widely distributing products nearly every Papua New Guinean can afford. This success is now translating into a wave of investments, including new factories and expansion plans, which should boost production capacity and profits.

The Lae Biscuit Company, which makes a number of different biscuits for the domestic market has recently completed construction on a new PGK65m ($30.93m) factory in Lae. The company has announced plans to expand its Port Moresby facility as well.

The country’s oldest food manufacturer, Paradise Foods, has also embarked on an upgrade for its two production plants in Port Moresby and Lae, including an investment worth $6m in new warehouse facilities during 2010. Two of PNG’s national superannuation funds – the Nambawan Superannuation Fund and the Defence Force Retirement Benefits Fund – hold a combined 20% in Paradise Foods, with the remaining stake owned by local businessmen.

Coca-Cola Amatil has also upgraded both of its PNG operations in Lae and Port Moresby with a new PGK 4m ($1.9m) CO plant in the former and a new PGK30m ($14.27m) bottling facility in the latter.

Similarly, SP Brewery, PNG’s dominant beer producer, recently completed a PGK91m ($43.31m) expansion programme initiated in 2008. The development includes a new production plant in Lae as well as a new PGK6.8m ($3.24m) Gordons Raw Material Warehouse in Port Moresby, inaugurated in September 2011. SP Brewery’s largest shareholder is multinational beer producer and distributor Asia Pacific Breweries.

CASH CROPS: Apart from the local market, other food manufacturing opportunities are present in processing and exporting of PNG’s vast array of agricultural resources. These include refining existing cash crops like coffee (by increasing roasting and grinding capacity) and cocoa (by producing downstream products like cocoa liquor and cocoa butter) as well as spices, albeit to a more limited extent. Some other partnerships being explored include the production of foods using palm oil, such as chocolates, as both palm oil and cocoa are produced in abundance locally. A small number of biofuel production projects are also being developed.

The tobacco segment is another area that presents opportunities and is very much open to competition. According to Rashid Ahmed, the general manager of British American Tobacco, “Numerous attempts from overseas proprietors to enter the market have been made in recent years; however, interested companies have found that to have a successful entry to the market requires long-term commitment to PNG.”

FISH FOOD: Providing 10-17% of the world’s tuna fish supply in any given year, according to data from the National Fisheries Authority, PNG is home to one of the world’s most productive fisheries. But with only 20% of the catchment (some 700,000 tonnes in 2010) processed in PNG itself, the sector’s downstream segment has ample room for expansion.

Because PNG producers have acquired the timeconsuming and costly safeguard policy statement certification, they are allowed duty-free and quota-free access to the lucrative European market. This market is crucial for domestic operations, which are unable to compete on cost with other regional seafood producers due to higher production and logistical costs associated with doing business in PNG.

In addition to unhindered access to European markets, downstream seafood processors are also eligible for government benefits, including import duty exemptions on capital items, materials and equipment for construction, an abolished export tax on fish and fish products, and a rebate on fuel excise equivalent to PGK0.03 ($0.015) per litre.

Maximum output of the country’s three tuna processing facilities registered a combined capacity of 520 tonnes per day as of 2011, according to data from the PNG National Fisheries Authority. These include a plant owned by Madang-based RD Tuna with a maximum output of 200 tonnes per day, the 120-tonnes-per-day Frabelle plant based in Lae and the 200-tonnes-per-day-capacity South Seas Tuna plant, which is based in Wewak. All three plants produce fishmeal and cooked loins, with the Frabelle and RD Tuna facilities also operating canneries.

PROCESSING PLANTS: Looking to capitalise on the plentiful tuna harvests, five processing plants are planned for PNG with a total combined capacity of 1150 tonnes per day, more than double the country’s current output. The largest of the facilities will be operated by Majestic Seafoods Corporation, which is constructing a 350-tonnes-per-day tuna cannery at the Malahang Industrial Centre (MIC) in Lae at estimated cost of $80m. The project is a joint venture between Thai Union and two Philippine firms, Century Canning and the Frabelle Fishing Corporation.

The MIC will also be the future home to a $50m, 300-tonnes-per-day capacity cannery built by the Zhoushan Zhenyang Deep-Sea Fishing Company as well as a $23m, 150-tonnes-per-day capacity plant owned by the International Food Corporation, which already operates a mackerel cannery on the site. An additional $15m tuna cannery is being built by Nambawan Seafoods and will have a total daily capacity of 150 tonnes. Lastly, Niugini Tuna is planning a $27.5m, 200-tonnes-per-day cannery at the Pacific Marine Industrial Zone, which is being developed as a new seafood processing centre starting in 2015.

These five projects are projected to bring PNG investments of nearly $200m and directly employ some 17,250 workers and a further 43,125 indirectly. By committing to these large-scale cannery projects, seafood companies are gambling that the country will not only process more of its own stocks, but also become a regional centre for tuna processing in the South Pacific.

LIGHT MANUFACTURING: Like other economic sectors, multibillion-dollar resource investment projects are sending ripples throughout the construction materials and light manufacturing sectors. “The most significant factor in the growth in demand is the construction industry boom, which is driven indirectly by the PNG liquefied natural gas (LNG) project,” Derek Hunter, the director of Steel Industries, told OBG.

Light manufacturing is a primary subsector in the country, although local players find it difficult to contend with regional rivals due to relatively high wages compared to other Asian nations with plentiful labour supplies. Industry competition has been increasing, with incumbents such as Steel Industries and Atlas Steel PNG now joined by international players like the China Railway Group, which recently signed a deal with Steamships Property, a prominent developer.

Local industrial supplier and light manufacturer KK Kingston has also benefitted directly from the resource boom. In early 2012 the firm inked a deal to supply LNG upstream partner Hides Gas Development Company with KK Kingston products. Michael Kingston, the general manager of the firm, told OBG the company had been experiencing double-digit growth over the past five years, much of it driven by the LNG project.

TIMBER: With more that 3.5m ha of active concession areas, PNG’s wood processing and manufacturing sector has plenty of room to expand given the amount of timber felled per year. Through the first half of 2011 PNG exported 1.57m cu metres of raw logs, up from the 1.30m cu metres shipped over the same period in 2010, according to data from the central bank.

“While the vast majority of timber exports from PNG are in the form of logs and sawn timber, there is plenty of room for the development of more downstream activities and added value to the products before they are exported,” Mike Janssen, the managing director of Cloudy Bay Sustainable Forestry, told OBG.

The downstream sector consists of some 40 sawmills for sawn timber, roughly 25 furniture making and joinery shops, one plywood factory and one woodchip mill, according to PNG’s Investment Promotion Authority.

One of the more successful wood-based businesses is Cloudy Bay Sustainable Forestry, which manages a 148,900-ha selective logging site with an annual allowable harvest of some 60,000 cu metres to supply its sawmill and production facility. That plant produces a wide variety of products, including furniture, kitchen units and prefabricated homes and offices.

Rimbunan Hijau Group is PNG’s largest wood product exporter and manages concessions in East and West New Britain, Gulf, Milne Bay, and the Western provinces. The firm also has substantial downstream operations, including four sawmills and production lines for sawn timber, kiln drying, veneer and plywood.

The long-established PNG Forestry operates one of the country’s only viable timber farms, growing primarily Hoop, Klinki and Caribbean Pine to fuel its timber and plywood factories. The company is in the process of attaining a Timber Legality Traceability Verification and other international certification standards to gain access to Western markets with stricter requirements.

Processed timber is mainly destined for Australia, New Zealand and other countries in the South Pacific. However, local demand has also been spurred by the ongoing construction boom and resource projects. There is an especially strong demand for plywood and sawn timber at PNG’s mining and LNG operations.

Other potential sector opportunities identified by PNG’s Forest Industry Association include processing and exporting easily cultivated non-timber forest alternative products, such as eaglewood, sandalwood, rattan and medicinal plants. However, the association also notes the sector still faces challenges restricting growth, including high taxes and royalty payments as well as underdeveloped transportation infrastructure.

BEING PROACTIVE: As part of PNG’s medium-term development plan, the government is making concerted efforts to attract investments to value-added downstream industries that can create long-term employment opportunities. These include refining and petrochemicals operations in the oil and gas sector; canning and cutting fisheries plants; sawn timber, plywood, furniture and other wood products in the forestry sector; and agricultural processing and refining operations, including biofuels production.

One method the government is employing is the use of financial incentives specific to the manufacturing sector. Industrial plants not previously operating in PNG are eligible for increased depreciation – up to 100% of costs, with accelerated depreciation allowed for the first year of operation. There are also numerous incentives aimed at boosting exports, including an export sales tax exemption, in which profits from the export of qualifying goods are exempt from corporate income tax for the first three years of operation. This can be extended for an additional four years on any increase in profits over the average of the initial three years.

Double-deduction for export market development costs are also available for goods manufactured in the country, as well as a duty drawback rebate paid to exporting manufacturers when they export goods equal to the amount of duty already paid on the raw material. Finally, companies possessing a new manufactured product certificate are eligible to receive a wage subsidy for 15-40% of salaries paid for up to five years.

Firms may also be eligible for other general fiscal incentives depending on specific qualifying conditions. These include a double deduction for staff training of PNG citizen employees and a 150% tax deduction for approved expenditure undertaken on specific research and development activities. The manufacturers’ council is also promoting the industry through a variety of measures. One of the most important initiatives is the “PNG Made” scheme to promote consumption of locally produced goods (see analysis). To qualify for certification, manufacturers must prove at least 50% of a good’s production cost was incurred in PNG.

The country’s corporate income tax rate is set at 30%, as administered by the PNG Internal Revenue Commission, and the country has no capital gains, estate or gift taxes. Non-resident income tax is set at 48% and dividend withholding tax at 17%.

CHALLENGES: PNG’s industrial and manufacturing base has long taken a backseat to the agriculture, mining and petroleum sectors for a myriad of reasons. Local businesses are saddled with higher costs from the outset since PNG produces little in the way of basic raw material for most manufacturing.

This problem is further exasperated by the many import tariffs applied to such goods. Inadequate transportation infrastructure causes delays and raises costs across many stages of production, from shipping and storage to distribution. “To keep manufacturers operating within a competitive framework of costs the seaports of PNG have to improve," David Doig, the general manager of Moore Printing, told OBG. “This is especially so as port fees have been rising rapidly over the past two years, while service and delays have only gotten worse.” Electricity generation is also unreliable and costly, leading to a knock-on effect of increased costs for other goods.

LIMITED IMPACT: Government incentives have so far had only a marginal effect on attracting investors. The effects of tax breaks and other financial incentives are mitigated due to high production costs. While other incentive programmes may offer favourable electricity rates for qualified businesses, companies still endure inconsistent power fluctuations and blackouts that can slow production and damage equipment.

There are other secondary factors which contribute to the difficulty international firms have setting up shop. The construction of housing and workspace has lagged far behind the demand fuelled by the armies of foreign workers needed for large resource projects. As a result, residential and commercial rents are extremely expensive. Security is another concern, both financially – in terms of paying for protection – as well as for recruiting and retaining qualified employees.

Finally, large multinationals looking to set up shop in PNG must invest in the systems and infrastructure necessary along the supply chain to meet the strict standards of production and accreditation they bring with them from their home countries. These processes require a significant investment for local companies to achieve the environmental and health and safety regimes required to produce international brands.

OUTLOOK: Growth in PNG’s industrial and manufacturing sector is gaining momentum. While there are still a number of impediments to large-scale manufacturing, the country has found some initial success by focusing on its core competencies, such as its downstream food and agricultural industries. As investment dollars and resource revenues begin to trickle down through the economy there will likely be ample opportunities to satisfy a domestic market still largely dependent on costly imports.

In terms of future opportunities, PNG will likely look to capitalise on its inherent advantages in the agricultural sector by continuing to grow its food export industry. Endowed with staggering biodiversity, numerous opportunities exist not only in large-scale agricultural plantation output but also in research and development. Although still a few years off in terms of investment and development, a concentrated study into plant and animal life could lead to many spin-off opportunities, including production of goods ranging from pharmaceuticals, food additives and biofuels.