Investment ‘needed’ to arrest decline

Institute of National Affairs executive director PAUL BARKER explains how businesses have been affected by the downtourn in the Papua New Guinea economy. MARK HAIHUIE reports

AN obvious decline in the economy started in 2014 with the conclusion of the construction phase of the PNG LNG Project coinciding with a drop in global prices for most major commodities, Barker said.
“Since then most commodity prices, including oil and gas, plus copper, have recovered firmly and Ok Tedi recommenced production and exports after a brief halt, partly associated with the 2015 to 2016 drought,” he said.
“So by early 2018 one might have expected that, with exports running at K25 billion, strongly boosted by the LNG exports which commenced in 2014, the economy would be in firm recovery by now.
“However, although there is clearly some continued construction, particularly on the fringes of National Capital District and some other centres, the overall economy, including well established and more reliable tax-paying businesses, remain subdued.”
Barker said this was partly due to the lack of any major new investment and also by the limited capacity of the State to continue borrowing and sustaining a fiscal stimulus.
“And particularly by the currency uncertainty and lack of foreign exchange which undermine capacity not only to trade, but also for businesses to access needed inputs for investment and operations, and creating also a disincentive for further investment, while firms assess the currency risk, notably where and when the decline of the kina will level out.”
Barker noted how the Highlands earthquake in February imposed a further economic shock, halting production and exports for different durations at four major resource projects.
This was made worse by the earthquake, related but also politically and frustration-linked disputes and disruption in Southern Highlands and Hela, he said.
“The general principle of a sound fiscal regime for resource project investment entails a mix of tax on profits, combined with some royalties or ‘production-sharing’ arrangements, which enable the State (which owns the resource), including provincial authorities and the identified landowners project affected communities to receive some revenue up front associated with production.”
This revenue would be even ahead of profits being earned, but not on an excessive basis that would that would discourage investment.
“Unfortunately, unlike earlier resource projects, PNG’s more recent generation of resource projects have included generous tax and related concessions and incentives, as well as major direct public investment in the resource projects themselves, which have tended to defer the receipt of revenue and deflected public expenditure, as well as enabling foreign exchange to be retained offshore, rather than being promptly remitted back to the source country of the exports,” Barker said.
“Clearly, the apparent lack of transparency in the process, and its agreements, has tended to add to the uncertainty and undermine the capacity even of PNG’s fiscal and other financial institutions to forecast, and to provide the needed assurance and actual revenue and foreign exchange required by the wider market to stimulate the market, economic activity and broader-based investment.”
Despite the challenges brought on by the resulting lack of foreign exchange, notable investment developments have been occurring over recent months and years, Barker said.
“Some were even stimulated by the lack of foreign exchange such as in the field of import replacement, notably for production of sorghum and other stock-feed in Morobe to reduce the dependence on imported feed, which has been costly and to a greater extent unavailable in recent times.
There are other economic activities funded by development partners under some combination of grants and concessional or less concessional loans.”
The tough economic times have had even long-established businesses assessing their strengths and weaknesses with notable commercial happenings in recent months being indicators of this.
“Many have been driven into loss making situations in all or some of their operations, some brought on by adventurous, if perhaps untimely, major new investments, which were debt-financed, made before the recent economic downturn,” Barker said.
“So, some firms have been downsizing, laying off employees or selling off components of their business and consolidating around their core businesses or more successful components. Therefore, we’ve seen a retailer selling off its cinemas, a firm largely based on property and transport selling off its food processing to another firm that specialises in such activities, a bank moving out of retail banking, and others just closing down some components.
“On the other hand, some other firms are seeing opportunities to build up their capacities and perhaps see a bargain that they can merge productively into their wider operations and plan to sustain and even build up some of these businesses over time.
“The economic downturn is seeing some shakeup, but in some of the businesses, at least, it might herald preparation for a rebound
when times pick up again, as is hoped for.
“This will come as part of the business cycle, perhaps with sustained commodity prices, but also perhaps with the eventual remittance of revenue and foreign exchange back to PNG and with new businesses formalising or investing in established ones but also launching new ventures.”
Barker said this was dependent on government making increased progress in addressing other major investment constraints like crime, poor transport, power and communications infrastructure and corruption.