Manufacturing vital to PNG

THE manufacturing industry contributes a lot to the national development, providing employment to thousands of people in the country. PNG Manufacturers Council chief executive officer CHEY SCOVELL explained to The National Business reporter MARK HAIHUIE what the industry is contributing to the national economy and some of the problems it is facing.

HAIHUIE:  What is the Manufacturers Council of PNG and the basis of its operations?
SCOVELL: The Council was formed in 1991 to be an advocate for local manufacturers and downstream processors.  It objectives are to assist members and protect their interest, assist in the promotion of their products and to promote the sector as a whole. The council has been a major contributor to the development and growth of PNG through our participation and contribution on the development of government policy, implementation of policy and regulations, facilitating expansion and investment, and in the absence of any cohesive strategies or policy by government, on trade or industrial development. The council has assisted and cooperated with officials on trade and industry development. Similar to the role other associations play, the council also represents the specific interests of local manufacturers and downstream processors on numerous boards, committees and organisations – whose operations have an impact on the business of our members.  The council has also supported other important associations such as the Rural Industries Council, Customs Brokers Association, plus a number of community and NGO organisations such as the City Mission, PNG Women in Business, BAHA, and Business Coalition for Women and the Informal Youth Sector Association.
HAIHUIE: How is the council funded?
SCOVELL: Unlike many other non-profit associations, the councils’ operations are funded solely by the annual subscriptions of our members. Despite the enormous workload and contribution, our association like a number of others has not, nor does receive support from development partners or others.  This is not a complaint, rather a note to remember when questioning our ability to engage and contribute across a wider array of platforms.
HAIHUIE: How is the manufacturing industry important to PNG?
SCOVELL: Put simply, manufacturing and downstream processing are the key to our social and economic aspirations.  Neither our national interest nor goals will be achieved through growing fruits and vegetables nor do extracting natural resources alone. We must value-add them.  It’s good to note that our government has shifted its emphasis to building value-added export industries. Outside of the public service, manufacturers provide the greatest number of long-term employment opportunities. Manufacturers are the second highest contributors to superannuation and contribute the most GST, payroll and company taxes to the State (an anomaly as extractives generally get many concessions). The process of value-adding is where the wealth is created.  Countries like the Philippines and Thailand generate over 30 Billion Kina per annum adding value to our fish resources. This dwarfs the contribution of every sector (including the extractives) in PNG alone.  How many millions of dollars have the countries that receive our round log exports made?  How many millions of dollars are made by the companies that operate on cheap energy – which is actually our exported LNG?
HAIHUIE: The decrease in foreign exchange has made it more difficult for import-oriented businesses to pay for the expenses.  How has this affected the manufacturing industry? Are their peculiarities unique to the industry with regards to forex issues?
SCOVELL: The foreign exchange shortage has hurt businesses and people. Full stop. It has increased prices (driven inflation) and reduced business activity. Some of our members have had to cut production and reduce staff numbers.  Manufacturers are no more or no less immune to the issue.  On some occasions over the past 28 or so months, the council has taken exception to and questioned the prioritisation of access to foreign exchange by the Central Bank, giving priority to imported bottled water over resin to manufacture bottles with which to fill with vegetable oil, detergents, spices, rice and water. It has frustrated our membership. That being said, a decision has to be made on how to manage the impacts of a bottoming-out of commodity prices. A decision was made and manufactures like all others are dealing with it. Things have been made worse with poor Treasury projections. But these are all issues in the past, we must look forward. This crisis has supported our call to arms to buy local, to buy PNGMADE. We have lost market share to imports which this crisis has made even cheaper and more readily available.  We have called on the government, businesses and medium to high wage earners to help PNG during this time by making the choice to buy and use local. This has of course been to varying degrees of success. A particularly large blow has been the entry of the Chinese SOE construction firms. Yes, they may initially seem to be much cheaper than all the previous players, but they have put almost nothing into local businesses.  When companies such as Global, L&A, LBC, Fletchers or even the NZ outfit Hawkins won projects, they sourced many things from local businesses. They have headquarters you can visit, training facilities you can see, a large ratio of local employees – all things these new players don’t have.  It’s not often publicly acknowledged but the tremendous shift of contracts to the Chinese SOEs has also contributed to the foreign exchange issue as we’ve effectively exported much of our Kina.
HAIHUIE: What are the main impediments to the manufacturing industry PNG?
SCOVELL: a) Access to land – manufactures build factories and often farms and supporting infrastructure (feeder roads etc).  They are long-term investors. They need access to secure affordable land on terms extending at least 99 years.
b) Very poor and very expensive utilities – we all know we pay lots for water and power and we all know in Papua New Guinea these services are unreliable. But for a manufacturer, it’s about relativity. Our competitors pay between 5 and 25 toea for a kw of energy. In PNG we pay almost 100 toea.  In PNG we pay more than four times the average for water and four to six times the average for sewerage.
c) Poor and costly government services – in the absence of budgetary support, there has been an alarming trend for government agencies to increase or create fees and charges. In the few years since its inception, PNG Ports is making more than two thirds of its revenue from storage fees. These fees were to increase efficiency. What we have seen is the opposite.  If PNG Ports makes K30 million in storage fees, guess what happens?  We the people of PNG pay that K30m in our daily shopping or it prevents employers from giving a pay increase.
d) high investment risk – is a combination of the above factors, and takes into consideration the law and order issue. To put it in to context again, a local manufacturer will have as much as  to 15 per cent of their overall expenses on security, whereas an overseas company would spend less than 1 per cent. A major investment risk is also political and policy stability.  Government policy should be formed in consultation with all stakeholders and considered by the NEC and parliament, investment risk is high when agencies or ministers launch policy independently and by surprise.
HAIHUIE: What strategies can the Government employ to make the industry more conducive to operate in?
SCOVELL: Addressing the impediments is the key.  There are of course many other things that need to be done in conjunction such as improving our human resource development (education and training), social support systems, market access. There is no denying that after 35-plus years of neglect, there has been massive year-on-year investment into improving and building much-needed infrastructure. It will be five or more years before these investments improve our competitiveness.  This Government is also trying to reform the public service mechanisms. These efforts too shall take time.  What we can do more of now is improve the support to existing players as they struggle in their interim period, there needs to be a single minded focus on the ways in which we can reduce the cost of doing business and increase competitiveness.
HAIHUIE: How can manufacturing in PNG remain competitive while production costs remain relatively high?
SCOVELL: Simply they can’t, but it’s not the best question to ask. The question might best worded as how can we maintain and attract manufacturers while production costs are high.  There are three elements here.
Firstly there is the acknowledgement and commitment of buyers (Government, business and consumers) to support local business. We are all burdened by the high cost of doing business. Giving money to a Chinese business for a prefabricated house made in China should be completely and utterly discouraged. Buying locally made housing will create jobs in PNG. It will create space for many SMEs. I can’t see any reason for any of us to have bottled water, cream biscuits or hard biscuits made in China, Indonesia or Fiji on our meeting tables or in our homes.  The second element is to level the playing field. The fact is that many of the countries in which the cheaper products originate subsidise and support their industry and exporters.  PNG has the ability to level the playing field, we simply need to do it. Third, to focus on increasing our capacity for production and assist current and potential exporters by finding the right markets and building a value-add proposition.
HAIHUIE: The import of low quality products at cheaper prices is an issue for manufacturing companies.  How has this issue affected the industry?
SCOVELL: We are all burdened by the high cost of living and businesses are burdened by the high cost of doing business. The reality is many of our people earn insufficient funds to live a decent life.  As a member of the last Minimum Wages Board, it was heart-wrenching to learn how many workers are unable to provide three balanced meals a day for their families.  If less than 400,000 of our eight million people are earning fortnightly wages, how much harder are our settlers and villages doing it?  They don’t have the luxury to pay K20 or more for a bucket at Brian Bell. They will buy one for K4.50 at a trade store.  Asking or expecting our people to stop buying all cheap products is not realistic, but we can ask them to change some of their purchasing habits. We also need to get the big spenders, the corporate spenders, and the people with medium to large incomes to lead the way. These small changes will create big changes.
HAIHUIE: There is a huge reliance on the mining and petroleum sector for contributing the most to the country’s Gross Domestic Product. In terms of manufacturing, what are your views of this dependency and has it affected the industry?
SCOVELL: Firstly the extractive sectors are also value-adding. Lihir does not export rocks to be crushed and processed. They export a product that is 98 per cent or 99 per cent refined. The LNG is not opening a tap from the well directly to the ships.  They too create jobs and benefits are put into our communities through employment.  I think the negative connotations with the extractive sectors is in the translation of the wealth generated by these sectors to improve livelihoods for our people.  The sector isn’t to blame. It is those who were responsible for delivering these benefits.  If we listen carefully to all sides of politics and leaders in the public service, this is what they are talking about. This is their focus and it’s also the expectation of our people – allowing individuals to feel the benefits of the wealth generated.  Local manufacturers and indeed many other businesses such as hotels, banks, lawyers, and property developers have all benefited from the extractive sector. We have provided them goods and services, they are complementary. Extractives aside, there is a need to increase the level of activity in sectors that are independent and untied to the extractive sector. As mentioned earlier, our council and members believe we should focus on building price making sectors. If we are value-adding our coconut products, coffee beans, sago, kaukau (flour, starch, ready to eat), we will create enormous wealth in our country.  Industry doesn’t need the Government to focus on these specific elements. They don’t need to target sectors, we don’t need an SOE leading the way, what they need is platforms conducive to investment.  The large Sepik plans project will be driven by secure and affordable land title and having roads and ports to use. It will be even more successful when they have access to reliable and affordable energy.  We just need to keep doing what we’re doing and make sure that we take all possible steps to ensure businesses are not faced with new and additional costs.