PAPUA NEW GUINEA’S ECONOMY

The Papua New Guinea’s economy has shown itself to be remarkable resilient since the commencement of the current global financial crisis. Political stability, consistent Government surpluses and a period of sustained GDP growth have combined to put the economy in position to weather the worst of the storm.

There are significant investment and service provision opportunities in PNG’s resources sector, most notable around gold and liquefied natural gas. It is this increasing diversity of PNG’s economy that makes it so attractive for foreign direct investment.

Strong local demand is driving building and construction activity, opportunities for public-private partnerships are emerging and the on-shore tuna processing industry continues to receive more investment.

INVESTMENT

Papua New Guinea’s enormous and largely untapped natural resources offer excellent investment opportunities.

Coupled with the Government’s positive attitude to foreign investment through the granting of incentives and concessions, and the recognition of the private sector’s important contribution to the economic growth, it is clear why many international companies have invested in Papua New Guinea.

Investment Priorities

The Government places a high priority on the development of mining and petroleum projects even though this sector is relatively well-developed. There are huge opportunities for investors to establish businesses to provide support for the growing number of such large-scale projects.

Some of the priority economic sectors offering investment projects with good potential for investors include:

  • Agriculture - production and processing;
  • Fisheries;
  • Forestry;
  • Manufacturing; and,
  • Tourism - large and small ventures.

 

Specific Industries

Some of the specific projects offering good potential for investors (on a joint venture basis) include:

  • Poultry farming and processing;
  • Processing of spices;
  • Coffee production and export;
  • Seafood processing and export;
  • Food production to replace imported goods;
  • Canneries;
  • Timber management/production and export;
  • Building materials and furniture production;
  • Rubber production;
  • Garment and footwear production;

 

The manufacture of a wide range of basic necessities (e.g. processed food, paper and wood products, metal and glass products); Printing Services; and Contractual Cleaning Services.

Information on Investment security and regulatory guideline please visit the PNG Investment Promotion Authority website www.ipa.gov.pg

Information on taxation, customs and excise can be obtained from the following websites:

 

Investors may wish to expand or diversify their business activities. In such cases, the terms of their certificate may be varied by lodging an application for variation on the prescribed form.

Taxation Developments & Incentive in PNG

The Government is continuing to encourage and facilitate future environment. It has embarked on awareness programs to inform stakeholders of the existing tax concessions available. These include concessions for minerals explorers, concessions for manufacturing, investment and export of certain goods manufactured in PNG, and incentives for promotion and development of tourism in PNG.

Tourism Incentives

In 2007 the Government introduced a confessional taxation rate of 20% in respect of income derived by a taxpayer solely from a new or substantially improved large-scale tourism facility.

Manufacturing Plant

Expenditure on new buildings of the housing of industrial plant, or for the storing of raw material or finished products also qualifies for the 100% accelerated depreciation.

Export Market Development

Certain expenditure is uncured on export market development for goods manufactured in PNG or for promotion of tourism in PNG, a double deduction is allowed for those costs.

Export Incentives for Manufacturers

Taxpayer who export certain qualifying goods manufactured by them in PNG are entitled to an income tax exemption of 100% of export sales made prior to the last day of the 3rd year following the date export sales were first made.

Agriculture, Fishing & Tourism

Expenditure on new plant or articles in respect of agricultural production, commercial fishing activities, and boats and ships used solely as dive/snorkelling boats qualifies for a 100% accelerated depreciation deduction.

Human Resources

“If you have a trade in PNG, then you are basically guaranteed a job”.

Mining and Petroleum

While natural gas is getting most of the headlines, there is plenty of other activity in PNG’s mining and petroleum. Judging from the record attendances at the December 2008 10th PNG Mining and Petroleum Conference in Sydney, Australia, interest in PNG’s resources sector has never been stronger.

While exploration for non-precious metals has slowed, as ‘juniors’ seek to conserve their capital for the moment in the economic cycle when commodity prices start to rise again, there are several major mining projects continuing in PNG regardless of the current global situation.

Government Incentives for Mining & Petroleum

There are a number of incentives for the resource sector, including a tax rate of 30% for certain petroleum projects, dividends paid from petroleum or gas income being exempt from income tax and dividend withholding tax, and interest paid by a resource project to a non-resident lender being exempt from income tax and interest withholding tax.

A double deduction is available for certain minerals exploration expenditure and al development expenditure on a mining project can be deducted on a 25% diminishing value basis.

Resourcing Resources

PNG’s mining and petroleum sector offers a wealth of opportunity for service providers to sector, including mining equipment hire, logistics, personnel recruitment and relocation services, surveying, catering and IT services.

AGRIBUSINESS

Agriculture is still the main source of employment for about 85% of Papua New Guineans. While the majority of this activity takes place in the informal sector, in recent times PNG’s farmers have developed significant capacity in cash crops.

Background

PNG has two distinct climates: the hot, humid lowland and coastal areas, and cooler highlands. Both deliver constant stable growing conditions. Vitally, rainfall can be relied upon and droughts are almost unknown. The quality of the soil is also a bonus. The rich loam and lack of intensive farming methods mean the soil maintains all the nutrients necessary to cultivate a broad range of crops and raise stock. Importantly, these low-tech farming practices and the lack of pesticides and artificial fertilizers mean PNG can position itself as a leading organic producer at a time when global demand for such products is growing very strongly.

Pure Agribusiness

Another interesting company is Trukai Industries, whose major shareholders are Rice growers Australia and the PNG Government. It produces 1.2 million tons of sweet potatoes, 300,000 tons of taros, and 200,000 tons of bananas per year, while its Trukai Farms division keeps approximately 5000 head of Brahman cattle in the lush Markham Valley, northeast of Lae.

Trukai is very much an agribusiness, operating a large, modern rice processing mill in Lae. The mill was recently upgraded to conform to Australian standards and operates 24 hours a day. It supplies most of PNG’s substantial rice requirements and exports to the Solomon Islands and even neighbouring Australia. PNG grow little of its own rice, so the most of the raw material originates in Thailand.

Commodities

Palm oil: This has been the star if the PNG agribusiness sector of late, spearheaded by NBPOL, whose success in East New Britain has encouraged others to follow suit. Palm oil is cholesterol-free and can be used in foods, cosmetics, soaps, printing inks and a bio-fuel. Worldwide demand has almost doubled in the past decade, and it is now the second-largest source of vegetable oil after soya.

Coffee: PNG’s coffee industry is worth over US$150 million annually to the country’s economy. A lack of intensive farming distinguishes the PNG coffee industry - about 85% of the coffee comes small-hold farms. With organic coffee increasingly in vogue, this is becoming a selling point. There is a focus on developing speciality markets, including under the Fair Trade organic brand. The main export markets are the USA and the European Union.

Sugar: While PNG’s sugar output is dwarfed by neighbouring Australia, producer Ramu Agro-Industries nevertheless supplies all of the local market’s requirements and exports throughout the South Pacific. Sugar by-products, such as molasses and ethanol, are also produced.

Other exports: They include coconut products, beef, vanilla, cocoa, kava and bananas.

Areas with significant growth potential: These include beef cattle, cashew nuts, cocoa, coconut/copra, oil palms, root crops (cassava, sago, and sweet potatoes), and rubber as well as tropical fruit/vegetables.

MANUFACTURING

Papua New Guinea’s manufacturing sector continues to grow due to a stronger domestic market and more export demand. PNG’s manufacturing sector has grown at about 6% per annum over the past decade. According to Chey Scovell, CEO of the Manufacturers Council of PNG, this is largely due to ‘major reform initiatives such as SME (small and medium enterprise) � friendly policies, tariff adjustments, as well as regional trade agreements.’

Broad-based Sector

Locally produced fast-moving consumer goods include noodles, beer, soft drinks, ice-cream, paint, toothpaste and soap, while PNG’s output also stretches to furniture, prefabricated buildings and cement. The country’s manufacturing centre is not the capital Port Moresby, but Lae, which is also home to the country’s largest port. Manufacturers based there include large international firms such as Nestle and Orica; as well as major local companies such as Trukai Industries, Laga Industries (part of the Steamships group) and Lae Builders and Contractors (furniture, including for export).

Incentives

There are certainly many incentives for foreign manufacturers to produce in-country in PNG, stemming from the Government’s desire to promote import substitution (the production of goods locally rather than relying on overseas supply). Whilst the duty on imports can be high, tax relief on inputs is often available to those who elect to manufacturer onshore.

Strong Domestic Market

PNG’s domestic market is large in South Pacific terms, which gives it a scale advantage and provides opportunities to export goods to smaller neighbouring markets. Japanese-owned PNG Taiheiyo Cement and Australia’s Orica (which manufactures paint under the ‘Dulux’ brand in PNG) both export elsewhere in the Pacific.

Local brewer SP Brewery (SPB) announced early in 2008 it would invest K90 million (US$31 million) in a staggered three-year project to expand production at its breweries in Port Moresby and Lae by about 50%. The company is owned by local investors, including Nambawan Super Ltd, and international stakeholders, including well-known brewer Asia Pacific Breweries (Tiger Beer/Heineken).

FISHERIES

PNG’s fisheries sector has come a long way over the past 12 years, with significant new foreign investment in the pipeline.

 

  • PNG accounts for 10% of global tuna catch
  • Onshore processing commenced in the mid-1990
  • Significant new foreign investments pending

 

PNG’s Exclusive Economic Zone covers 2.4 million square kilometres and accounts for a hefty 10% of the world’s tuna catch. It used to be dominated by ‘distant water’ fishing companies. Such foreign fleets simply paid a comparatively small fee for the privilege of fishing in PNG’s waters and then took their catch home with them. Clearly, the country was missing out on a major opportunity to add value onshore.

Preferential Access to EU

In 1997 the PNG Government encouraged a major Philippine group R D Tuna to set up a processing plant in the northern town of Madang.

Most of R D Tuna’s production is exported to the European Union under PNG’s tariff-free access arrangement. The company also sells the popular Diana and Dolly brands in PNG and the rest to the Pacific. The European Union is the biggest consumer of Pacific tuna and recently made conditions more favourable for the importation of PNG tuna.

Frabelle’s Big Plans for Lae

Other companies have since followed suit; most notable is another Philippine company, Frabelle Fishing Corporation, which has established its own processing facilities in PNG’s industrial hub of Lae. Ironically, Frabelle is itself one of those ‘distant water’ fishing companies, but in recent times it has come to see the benefit of settings up local operation in PNG. In fact, it is now planning a second, distinct plant in Lae, on a much large scale than the first. Its US$25 million investment, in partnership with two other Asian investors, will enable it process 350 tons of raw tuna a day and employ up to 6000 people. Its first stage was completed before the end of 2010.

Pacific Marine Industrial Zone

PNG continues to process a small portion of its tuna onshore. To encourage more onshore processing in the fisheries industry in PNG, and to support its export-driven industry strategy, the PNG Government has considered and approved a US$33 million investment in a pacific key industry players. The industrial park would include a fish market, cold storage facilities, an ice making plant and improved port facilities.

It would boost revenue and industry capacity tenfold, and act as regional tuna transhipment and processing hub for the Western and Central Pacific. The PNG Government has already invited the eight countries that are parties to the Nauru Agreement - which between them control 20% of the world’s tuna catch - to participate in the park.

FORESTRY - A GROWING BUSINESS

Of all PNG’s export-focused sectors, it is arguably forestry that was hit most immediately by the global downturn. Low global prices for logs and reduced international demand for building materials of kinds meant a dramatic drop in exports in the last quarter of 2008.

According to the PNG Forest Industries Association, raw log exports - which go to countries as diverse as Japan, China, Taiwan and Vietnam - fell by about 16% in 2008, from 2.9 million cubic meters in 2007 to 2.4 million. Exports of processed wood also experienced a drop of around 100%.

Adding Value

In spite of the slowdown, it certainly hasn’t been all doom and gloom across the forestry sector. For many of those adding value to timber, and supplying PNG’s construction boom, business has been brisk.

‘We had our best year in 27 years in 2008,’ notes Tony Honey, Managing Director of PNG Forest Products Ltd, a company with 100% focus on value-added plantation timber. PNG Forest Products produces prefabricated houses, dressed timber, plywood and veneers from its own pine plantations. It exports to Australia, but also has large customers in PNG’s mining, agribusiness, construction and government sectors.

Vertical Integration

PNG Forest Products and Lae Builders and Contractors Ltd are both examples of significant shift towards vertical integration in the forestry sector. ‘A lot of companies are increasingly vertically integrated, from plantation to export,’ notes Bob Tate, Executive Officer for the PNG Forest Industries Association (PNGFIA), which represents the bulk of log exporters and timber processors in PNG.

This integration is being actively encouraged by the PNG Government, which is keen to see the positive impact on employment and rural development that downstream processing can deliver. The former Minister for Forests, Honourable Belden Namah signalled to stop raw log exports from new timber concessions from 2010 in a bid to make downstream processing the norm.

Sustainability & Legality

PNG’s forestry industry has attracted significant criticism for unsustainable practices - criticism the PNGFIA feels is large misplaced. Timber for export is now being certified. Saban Enterprises in Milne Bay Province (a subsidiary of Malaysia’s R H Group, a major timber producer in PNG) has already successfully completed an internationally recognized Timber Legality & Traceability Verification (TLTV) program audited by the Swiss-based SGS Group, and Tate says two more producers are about to commence the program. More timber than ever is now coming from plantations, and the PNG’ Government is also encouraging replanting of previously logged areas.

PNG’s Competitive Advantage

Like other commodities, the key to PNG’s continued success in forestry will be in its ability to attract further investment by remaining internationally competitive. One major advantage for PNG’s producers is the low real labour cost in PNG, which is up to 50% lower than that of Russia and the Far East.

PNG’s forestry producers also benefit from the wealth of accumulated data on tree species and land types produced by the Lae-based Forest Research Institute.

More information can be obtained from the following websites:

 

TOURISM

Papua New Guinea is one of the world’s most naturally beautiful countries. Soaring mountain peaks, unspoiled beaches, lush rainforests, unique flora and fauna and the cultural richness of the people combine to make Papua New Guinea an increasingly popular destination for tourists.

There is already a well-established infrastructure catering successfully for many types of visitor packages but the potential for expansion and improvement is limitless.

The Government has targeted tourism as a priority area for the economic development of the country and for the creation of employment opportunities at rural and urban levels. With the kina at a more reasonable level of exchange since its devaluation and float, Papua New Guinea’s many enchanting and remarkable destinations can be within the sights and budgets of many adventurers.

Papua New Guinea Tourism Promotion Authority

The development and expansion of tourism in Papua New Guinea is assisted by the PNG Tourism Promotion Authority (PNGTPA), a statutory organisation established by the Government. The PNGTPA is well equipped with substantial industry knowledge to respond to tourism enquiries. Its activities are mainly directed at the marketing of Papua New Guinea as a tourist destination and as a safe location for hospitality investment.

In line with other development policies, the Government continues to ensure the cultural, social and environmental resources of the country are safeguarded and investment in tourism may attract some degree of interest from the relevant agencies, including, among others, the Department of Environment and Conservation.

The PNGTPA is currently promoting new investments in major tourism facilities, such as large-scale resorts. Appropriate packages including financial incentives for investors are available. Planning guidelines and suitable sites have been identified and investors are keenly sought to develop these projects.

The PNGTPA continues to identify new project areas and potential support businesses which cater for tourists. It arranges pre-feasibility and feasibility studies for certain projects. It will also work closely with other agencies to assist in identifying business partners - local or foreign - if necessary, and assist in the licensing and registration clearances with local authorities for your project.

The range and availability of training in the hospitality industry is gaining momentum in Papua New Guinea. The Government encourages the development of facilities which will help to train the local workforce. It also welcomes overseas training opportunities and encourages local employers to improve training techniques to enhance the skills of their staff.

PNG’s tourism and hospitality sector continues to experience sustained growth, encouraged by a more competitive aviation sector, and there are significant opportunities as well in agriculture, forestry, services and manufacturing.

Further details and assistance can be obtained from the PNG Tourism Promotion Authority and/or the PNG Investment Promotion Authority.

Information on places of interests and all other activities visit www.pngtourism.org.pg.

Tourism Incentives

In 2007 the Government introduced a concessional taxation rate of 20% in respect of income derived by a taxpayer solely from a new or substantially improved large-scale tourism facility.

MANUFACTURING PLANT

Expenditure on new buildings of the housing of industrial plant, or for the storing of raw material or finished products also qualifies for the 100% accelerated depreciation.

Export Market Development

Certain expenditure is uncured on export market development for goods manufactured in PNG or for promotion of tourism in PNG, a double deduction is allowed for those costs.

Export Incentives for Manufacturers

Taxpayer who export certain qualifying goods manufactured by them in PNG are entitled to an income tax exemption of 100% of export sales made prior to the last day of the 3rd year following the date export sales were first made.

Agriculture, Fishing & Tourism

Expenditure on new plant or articles in respect of agricultural production, commercial fishing activities, and boats and ships used solely as dive/snorkelling boats qualifies for a 100% accelerated depreciation deduction.