Gas-fired growth: Despite constraints, expansion is expected to continue through 2014

In 2011 Papua New Guinea’s economy was expected to experience 8.9% growth, driven primarily by the development of the $15.7bn ExxonMobil-led PNG Liquefied Natural Gas (LNG) project and its knock-on effects in the construction and related economic sectors. Further growth in 2012 will represent 12 years of uninterrupted economic expansion, and PNG’s government expects this uptick will be sustained by construction industry activities linked to the LNG project as well as in commercial and residential stock.

Ambitious national development plans, an expanding commercial property sector and a chronic shortage of housing mean attractive opportunities for both foreign and domestic construction firms. However, PNG’s economy is facing significant capacity constraints, particularly in terms of materials and skilled labour, and the government anticipates that this will reduce the industry’s growth rate by as much as half in 2012.

GROWING COMPETITION: The construction sector has experienced a long upward trend, with average annual growth of 17.9% since 2007 and anticipated at 22% in 2011. The benefits of the LNG project underpin business expansion and increased investment in corporate infrastructure and operations. Yet higher prices (both wages and rentals) are expected as businesses compete for the limited pool of resources. As the government outlined in the 2012 budget, this is expected to reduce growth to around 9% in 2012.

A number of international construction, contracting and engineering companies are active in PNG, many of which have moved into the market to take advantage of the sector’s capacity shortfall, which has enabled firms to transition from contractors to developers. However, since the global financial crisis, the construction industry has also seen an influx of Western firms pursuing shorter-term strategies. These firms, tied to the weaker dollar and euro, have eroded the competitiveness of many Australian firms, which have enjoyed longstanding relationships in PNG. Construction executives have noted a five-fold increase in competition for major contracts in recent years. Foreign firms comprise approximately 40% of developers in the residential sector and 60% in commercial and industrial construction, according to the Department of Land and Planning (DLPP).

FOREIGN ROLE: In 2009 Australian firm Ausenco merged with PNG’s Kramer Group to form AusencoKramer. Curtain Bros Papua New Guinea, one of the largest construction companies in PNG, split its existing construction and building operations to establish a stand-alone building construction company, CB Builders, in 2010. CB Builders has pioneered land reclamation work, most notably in the development of Port Moresby’s (POM) Harbour City, with this having a significant effect on the city’s property market. This mixeduse development of offices, luxury apartments and retail space will be completed in 2013. CB applied the same methodology to the development of its 70-ha Motukea Island in POM harbour, now its national base of operations for its construction, engineering and maritime arms. Moreover, by securing state lease land, CB has managed to avoid customary land issues.

New Zealand firm Fletcher Morobe Construction is another major player, notable for its work on numerous property development projects in POM and across PNG. Other notable industry players include Ela Builders & Contractors, Hornibrook NGI and Goroka Builders.

BANK BACKING: The profusion of developers, both foreign and domestic, has been supported by the strong financial backing given to the construction sector throughout the global economic crisis. PNG was able to raise deposit and interest rates during the crisis by two percentage points, fuelling construction lending.

While there is much support of the property market’s long-term potential, much of the investment in the sector has been attributed to the lack of domestic alternatives, and in 2011 the IMF cautioned PNG’s financial institutions regarding their exposure to a market correction. While the IMF noted banks’ ability to withstand moderate shocks, lenders had started reining in holdings prior to the government’s projections for 2012. However, moves to mitigate future risk by redirecting investment have been slow, given the intricate web of collaborative projects, the gains to be made and the lack of alternative investment sources.

Superannuation funds Nambawan Super and the National Superannuation Fund (NASFUND) both reported a 10% and 7% share, respectively, in the country’s leading bank, Bank South Pacific (BSP), according to its 2010 annual report. However, 26% of listed investments in BSP’s 2010 annual report are properties or real-estate-related loans. The pervasiveness of real estate holdings in corporate portfolios has raised concerns over the full impact of a market correction, as supply is expected to reach the saturation point in 2012. Developers are beginning to see heightened risk ratings from PNG’s financial and real estate institutions (see the Real Estate overview).

URBAN ISSUES: Such investment is critical to the infrastructure of PNG’s cities, particularly as the country continues to face a nation-wide trend towards urbanisation, fuelled by demand for services and employment. PNG is facing an historic shortage in housing, visitor accommodation, office space, and industrial and retail centres. POM’s own chronic shortage of affordable housing has left one-third of its population in slums and semi-permanent dwellings, circumstances that helped fuel a cholera outbreak in November 2010.

Yet supply and demand dynamics, particularly within key urban centres, have been disrupted by ExxonMobil’s entry to the market and its habit of spending top dollar on accommodation. While this has led to a spike in construction that has helped to compensate for a lack of property development in the past, it has not addressed the country’s overall needs. With the completion of the LNG development in 2014, the industry anticipates a rapid drop-off in demand, leading to an oversupply of high-end residential, hotel, commercial and office properties (see Real Estate overview).

COMMERCIAL: By 2014 property developer Nambawan Super anticipates over 2000 hotel rooms will be available in POM, a fourfold increase from 2007. The expansion of inventories has principally focused on existing hotels, although the 161-room Grand Papua Hotel, built by Steamships Properties and opened in 2011, was POM’s first five-star hotel to be built in over a decade. New hotels are in the pipeline, but the initial enthusiasm for top-dollar construction is being superseded by demand for mid-range options nationwide.

In line with the economic growth linked to the LNG project, construction of commercial properties has risen, notably in POM, Lae, Madang, Goroka and Mt Hagen – the LNG gateways and logistics hubs. Developments remain overwhelmingly mixed-use, combining retail, office and residential facilities, indicative of the property market’s uncertainty and varied demands.

PNLDP: In POM itself, the Office of Urbanisation’s National Urbanisation Policy (2010-30), in collaboration with the National Capital District Commission, has identified 14 districts for development under the Poreporena-Napa Napa Local Development Plan (PNLDP), shifting focus away from the city’s congested centre to outlying suburbs. The PNLDP was drafted in consultation with business leaders, government agencies, landowners and local communities to ensure POM’s sustainable development. The project will establish four new town centres: Siriho Junction, Gata Valley, Konebada and Napa Napa, and an industrial area extending west from the city to encompass the Napa Napa peninsula. Finalisation of plans for the Dogura, Poreporena, 8/9 Mile and town districts have reportedly been completed, but state funding has been slow to arrive.

The centre has seen limited development in recent years, but demand is now growing as companies have begun moving from dilapidated and poorly maintained buildings to more modern and more accessible locations. The PNG Health Department had even ordered the closure of several government office buildings in 2011 and 2012 out of concern over health risks.

Poor maintenance by tenants and developers is an important cost factor for many investors choosing between market segments, highlighting the reluctance to pursue affordable housing. NASFUND, for example, only recently hired a facilities manager to oversee its properties, following a decline in tenancy, rents and return on investments. The Health Department emphasises a strong regulatory environment administered by the DLPP and codified through the Physical Planning Act and Building Act. However, the fire department, Department of Environment and Conservation, Water and Sewage Authority, and municipal authorities are all involved in issuances of respective permits. Charges for the range of permits can reach approximately PGK1300 ($623), and the time for issuance ranges from 90 days to as much as a year, in some cases.

RESIDENTIAL: Residential property is perhaps the industry’s most dynamic segment, given the flurry of investment and profits in the upper end of the real estate market, while the lower end of the spectrum remains critically under-supplied. On the supply side, developers seek to continue growing the segment while maintaining the affordability of designs and sustainability of materials. However, the explosion in demand for high-end housing and apartments is already falling, ahead of the predicted 2014 drop-off, and developers are beginning to eye opportunities in mid-range housing construction that will accommodate the influx of migrants from the countryside.

Increases in material and labour costs, high inflation, rising income tax rates and the upward pressure on prices thanks to corporate spending at the high end have all contributed to pushing PNG’s middle and lower classes out of the urban centres and making them increasingly dependent on employer-provided housing. Homeownership has become increasingly difficult to achieve for many, according to the DLPP’s Sheila Sukwianamb, head of the group’s Policy and Planning Division. “To build on land, you must fully service it. The cost to do so used to be PGK5000 ($2380) per allotment; now it is at least PGK40,000-50,000 ($19,000-23,800) before you even put up a house.”

HIGH COSTS: Transport and port congestion, poor road infrastructure, a reliance on shipping and high fuel prices have all contributed to the recent rise in the price of materials. The price of cement, critical to construction, has increased by nearly 25% in the past five years. As imports are hit with a 15% tariff, the industry is largely reliant on the Japanese-owned PNG Taiheiyo Cement. Based in Lae, with a 200,000-tonne capacity Type 1 Portland cement plant, the firm controls the market, but has had difficulty meeting demand in the past.

Developers also point to rising infrastructure costs as a principle factor in the housing shortage. NASFUND’s former joint CEO, Rod Mitchell, explained in January 2010 that “land servicing costs, irrespective of the price of the land, are expensive. Services such as bitumen roads, electricity, sewage, fencing and water can cost anywhere between PGK65,000 and PGK80,000 ($31,000-38,000) per block.” These costs had pushed the housing project’s demographic from the working to middle classes, and the intervening two years have not been kind. Base housing costs of PGK2000 ($952) per sq metre, as quoted by NASFUND in 2010, jumped to a range of PGK5000-7500 ($2380- 3570) per sq metre – a 150-275% price increase – as presented in a June 2011 analysis by Westpac, a leading regional bank.

Prefabricated housing, which offers some relief from the dramatically rising costs, is popular in the local market, involving both local and foreign firms. However, many local buildings are made from untreated timber that may last only five years in the tropical climate.

While cement is popular due to its durability, in 2012 CB Builders became the first company in PNG to begin pre-cast cement housing production at its Moutekea Island facilities. Advance orders have already been placed ahead of full-scale production, but the firm is currently relying on cement imports from the Philippines via East New Britain and the most cost-effective designs have yet to be determined.

“Given the cost of land, roads and associated infrastructure, we have come to the conclusion that horizontal housing is simply not affordable to the mass market and just does not work. Accordingly, we are exploring the development of three- or four-storey housing units for PNG’s real estate market,” David Tilby of Costplan, a consultant to CB Builders, told OBG.

URBAN PLANNING: As PNG’s urban population continues to grow, such considerations are integral to the country’s urbanisation master plan, launched in 2010. The development of 2000 low-cost housing allotments across two pilot projects in POM is under way, but the Office of Urbanisation (OU) has grander plans for the development of 28 urban centres nationwide.

With projected populations of over 1m, POM, Lae, Wewak, Tari and Kokopo are designated “mega-cities” in the National Urbanisation Policy 2010-30. Nine “major cities”, including Madang, Goroka and Mt. Hagen, with projected populations between 500,000 and 1m, and 14 other cites considered to be of “special interest”, have also been marked for development. As focus points for infrastructure investment and urban planning, the government hopes that improvements in these cities will help stem the flow to PNG’s existing major urban centres. However, insufficient resources on the part of the government mean that PNG faces a long road. The OU’s first tranche of 500 plots are estimated to cost PGK12m-15m ($5.7m-7.1m), but the OU itself anticipates that housing is needed for another 250,000 individuals. The government hopes that the private sector will carry 90% of the future costs, but disagreements remain over whom should provide the necessary infrastructure to enable land development.

BUILDING THE FUTURE: A clear vision for such projects is imperative for the successful implementation of PNG’s Vision 2050 and the PNG Development Strategic Plan 2010-30 (PNGDSP). Launched in 2010, these plans put rehabilitation and the construction of new national infrastructure at the forefront. The government has committed substantial sums, and the first of four five-year Mid-Term Development Plans (MTDP1) has a planned budget of PGK37.26bn ($17.7bn), targeting 39 industrial, economic and multi-faceted sectors.

Government revenues from the LNG project and existing resource extraction industries are integral to this. According to PNG Vision 2050, the nation’s base GDP growth will go from PGK9.75bn ($4.64bn) in 2010 to PGK56.7bn ($26.98bn) in 2050 .

This will be funnelled through the Independent Public Business Corporation (IPBC), which was selected to represent the state’s 19.4% equity stake in the PNG LNG project.

DEVELOPMENT CORRIDORS: The government and the construction industry must contend with a number of challenges ahead of the scheduled completion of the LNG project in 2014. Poor planning and maintenance, insufficient competition, waste of central and provincial funds, weak monitoring of contracted work and frequent landowner disputes have all contributed to the deterioration of PNG’s infrastructure. Access to utilities and services is considered below international standards, even for a developing country, and the government acknowledged in the Vision 2050 roadmap that infrastructure is in need of “urgent rehabilitation, prioritisation and sustained support”.

As such, and with direct implications for the construction sector, the government has prioritised road, maritime and air transport, as well as utilities (power, water, sanitation, and information and communications technology) in rural and urban communities. The PNG government identified 10 areas in disadvantaged regions to be developed into economic corridors under semiautonomous corporate bodies, offering tripartite trade hubs for land, sea and air services. The Border Development Agency (BDA), controls four: the Border Corridor (Western, Southern Highlands and Sandaun Provinces), South Coast Corridor (East New Britain and West New Britain), Solomons Corridor (Autonomous Region of Bougainville) and the Free Zone Corridor (Manus, New Ireland, East and West Sepik).

The Economic Corridor Implementation Authority (ECIA) administers the Petroleum Resource Area Economic Corridor (comprising the Southern Highlands, and parts of the Enga, Gulf, and Central provinces), Central Corridor (Central, Milne Bay, Oro and Morobe), Madang-Baiyer-Karamui-Gulf Corridor (Madang, Simbu, Gulf and Western Highlands), Morobe-Madang Corridor, Enga-Sepiks Corridor (Enga and East and West Sepik Provinces), and the Momase Corridor (including Madang and East and West Sepik).

FUNDING COMPETITION: The government intends to fund $9.5bn of the MTDP1 expenditure on road, maritime and aviation infrastructure through direct financing, tax credits, grants and other fiscal commitments; it expects that foreign direct investment and foreign aid will finance the remaining $2.4bn needed.

Both the BDA and ECIA will enjoy semi-autonomous status throughout the development process, including management of their own budget. However, poor institutional capacity is a common roadblock in PNG, and corruption remains an obstacle to future development.

PNG struggles with the twin issues of corruption and transparency, and the legal system has only been able to address the problem in a limited fashion. Industry executives told OBG that it can be difficult guaranteeing that contracts for public works obligations are honoured and that their disbursements are delivered in a timely manner. The sheer size and revenue involved in these projects means that companies are able to underwrite the costs, but maintaining transparency will be a key challenge to the implementation of forthcoming public works. The government has recognised that the rehabilitation and reinforcement of public institutions’ capacities will be integral to its development efforts, and cabinet-level approval is now required for development contract procurements in excess of $3m. Under the IPBC Act, government-owned enterprises must also secure authorisation from the minister of finance for amounts over PGK1m ($475,900).

This may reinforce transparency, but the industry remains wary of the measures, so donor-driven construction and public works are the forerunners in funding the rehabilitation of local infrastructure. The Asian Development Bank (ADB), Australian Agency for International Development, the World Bank and Japanese International Cooperation Agency have all made considerable commitments (see Transport chapter).

THE LONG ROAD: When the country committed to the LNG development project, the impact of the process on the labour force and the capacities of private and public institutions was not immediately apparent. According to the PNG Medium-Term Development Plan, landowner companies (Lancos) accounted for 75% of the LNG workforce in 2011 and will remain the base for much of PNG’s forthcoming rural development, which will focus on upgrading the road network. Over 65% of roads are in poor conditions, and thousands of kilometres have not seen maintenance in years. The road rehabilitation budget is meant to receive $10.08bn through 2015, which will finance the sealing of 2500 km of 16 national priority roads, congruent with the development corridors, and 1000 km of national roads. However, the Department of Works must first work to rebuild internal capacities following a 20-year hiatus of operations since the privatisation of road maintenance contracts and an exodus of skilled personnel to the LNG project. A scarcity of contractors led to poor market competition and substandard work that the DoW had neither the funds nor executive powers to resolve. In 2011 the government reassumed responsibility for national road repair, an industry that was privatised in the 1990s. Although the government will receive support from the Japanese government, it will be a decade before the government is sufficiently equipped to undertake the task in full. In the interim, the government will be dependent on contract developers, donor support and army engineers to maintain and construct key roads, such as on the 700-km Highlands Highway road network (see Transport chapter). “It has been a challenge for the government to ensure good working order for its road network, given the lack of consistency in maintenance funding over the past several decades,” explained Ganiga G Ganiga, the ADB’s project implementation officer (infrastructure) at the PNG Resident Mission. “There are about 7598 km of national roads and about 10,000 km of provincial roads. The government is working with the ADB through an investment programme to rehabilitate and maintain roughly 2500 km of the identified Highlands core road network over the next 10 years.”

PORT CALLS: The 70% ADB-funded expansion of PNG’s second-largest port, Lae, the principal gateway to the Highlands region, experienced cost increases and a two-and-a-half-year delay in relocating residents from the new development site. The project’s initial estimated cost of $150m in 2007 was re-evaluated and raised to $330m in 2012 following input price increases and the devaluation of the dollar. An additional $89.12m was committed by the ADB in November 2011. This has pushed the project past its 2014 scheduled completion date, but in May 2012 the Chinese Harbour Engineering Company was awarded a $285m contract to build a new tidal basin and multi-purpose berth. Chinese Harbour will be working alongside the Korean Engineering Consultant Corporation throughout the project’s anticipated 30-month construction phase. Alongside the rehabilitation of 200 jetties, the expansion of Lae port is just one of 16 ports and harbours scheduled for improvements prior to 2030. The redevelopment of Lae port is expected to create 54,000 jobs across both formal and informal sectors. POM’s Fairfax Harbour and Madang are top priorities, and the government has budgeted $649.8m through 2015. The project is a cooperative endeavour between the government and PNG Ports, the Department of Transport, IPBC and the National Maritime Safety Authority (NMSA). Leading property developer Steamships Trading Company has also recently undertaken a complete redevelopment of its coastal wharf in POM, offering 200 metres of quay face and 20,000 sq metres of laydown for project customers. Although attention has focused on cargo capacities, there is a growing cruise industry as well, with construction of new passenger facilities under way (see Tourism chapter).

Aviation is of tertiary importance in the budgetary allocations, given its relatively low passenger and cargo traffic. Instead, more attention is focused on rehabilitating the runways, taxiways, aprons and passenger terminals at Jackson’s domestic terminal, as well as airports in Wewak, Hoskins, Gurney and Mt Hagen.

POWER TO THE PEOPLE: Equally ambitious to the road rehabilitation programme is the government’s goal of providing electricity and clean water to 70% of PNG’s population by 2030, and 100% by 2050. Today, between 10% and 39% of the country’s inhabitants have access to electricity and clear water. As such, the development goal requires large-scale public works that may provide the opportunity to sell power to neighbouring Indonesia and Australia via an “Electricity Super Corridor”. Such a corridor will depend upon and strengthen PNG’s strong gas, geothermal and hydropower potential. Renewable energy is a government priority, and the Purari River in Western Province, the Brown and Vanapa rivers in Central Province, Gumini in Milne Bay and Kimidan on New Ireland have all been flagged for potential hydroelectric power development.

A $945m hydropower project on the Ramu River west of Lae is already in its initial building phases. The project is being undertaken via a partnership between IPBC and PNG Energy Developments, a 50:50 joint venture between PNG Sustainable Developments and Origin Energy of Australia. The three-phase project will increase generation from 45 MW to between 180 and 240 MW, providing more reliable energy to industry.

While localised expansion has been ongoing since 2006, PNGDSP now expects 10.5% annual growth, largely supported by local power generation projects. ADB’s $120m Towns Electrification Programme will fund the construction of six renewable energy power plants and transmission systems by PPL, to connect with provincial centres by 2014. Two 3-MW power plants are in their initial phases at Divune in the Northern Province and Ramazon in the Autonomous Region of Bougainville.

OUTLOOK: While the construction sector is stretched by the LNG project, strong growth is expected in coming years. The conclusion of the project’s construction phase represents a second boon to the sector in which it can expect marked reductions in material prices, an influx of qualified and experienced personnel and a new tranche of projects. Private sector involvement remains integral to national development roadmaps, given the limited public resources, and these projects will remain key revenue generators for the upcoming 20 years.