PNG enters a new industrial era

PNG is at a very interesting stage of development right now. There is massive potential in plain sight with the commencement of LNG shipment, while a strong period of growth is now finished following the construction phase.

Even though the potential for PNG is huge, we are currently in a holding pattern in some respects as we wait for revenues to start flowing.  And even when these do commence in earnest, there is a lack of expertise at many levels to ensure they are deployed effectively.

The most common issue I hear raised in the business community is around the speed of payments. We see a huge variation in the way different government departments pay for contractors or services, particularly in the construction area.

There’s a lack of payments infrastructure but if this is addressed and solved, we could start to see a much healthier domestic economy.

What we’re seeing in Australia, particularly in the mining services space that makes up such a big part of PNG’s domestic economy, is that a lot of companies thought the good times would last forever.

PNG companies need to ensure they keep a disciplined eye on their costs at all times. It’s the all too common reality, however, that when revenues explode, so does the bottom line.

But particularly in an economy like PNG, where many of the services and infrastructure needed to support the economy are still developing, there is an even greater need to run operations that are agile and prepared to sustain shockwaves – whatever these may be.

The commencement of the LNG project had undoubtedly broad positive economic impacts but these also came with some negatives.

The skilled labour that was working in the public sector, say for PNG Power or the Eda Ranu, was drawn away from these jobs to higher paying employment opportunities during the LNG build up.

Beyond that, many more locals were employed within the project and gained valuable ‘learning by doing’ technical skills upgrading.

Now, as construction completes, only a small subset of these workers are being kept on project and the vast majority will be looking to enter back into the local labour market.

For PNG, diversification, more than anything, is the most critical component of stable growth.

Reliance on extractive industries leads to a volatile growth path of booms and busts. Development of manufacturing and additional agricultural industries will be a key next step on the road to development.

Broadening the base will buffer shocks to the economy. Prolonging the life of large infrastructure projects will be a key tenant of a medium term growth strategy and also signal to investors care is being taken over the long run.

This is an edited transcript from a speech given by Mark Baker, CEO ANZ PNG, at the Australia – PNG Business Forum in Cairns on Monday, 19 May. 

Grant Mitchell, director at Port Jackson Partners and author of ANZ insight 4 also spoke at the forum on the ‘Bold Thinking’ view of a future PNG:

The resource sector has built wealth, of course, but also contributed activity and skills. The revenue received by government and businesses can be reinvested into infrastructure and agriculture – helping to create long term stability from short term successes. Infrastructure underpins opportunities in all sectors. This development model is supported by economic theory and the experience of other resource rich nations.

A successful future PNG would have placed itself much closer to the head of the queue for resource sector investment than it is at present.

When the Fraser Institute asks investors to rank the attractiveness of PNG’s resources sector against 95 other countries, it comes 73rd. However, when asked to imagine PNG with best practice policy settings, investors rank it third in the world.

This modern PNG will also, I think, benefit from improvements in the way resources companies themselves think about their contribution to host economies. This change will include an increased focus on building a lasting skills legacy.

This is one area where, right now, the will of many companies exceeds their skill – but many mining companies I see are trying to close this gap. Increased transparency and attention given to projects in PNG are assisting in this process.

We see a future PNG with a track record of prioritising the highest benefit infrastructure first, an appropriate level of involvement from world class private sector participants, including through privatisation, all achieved via a powerful and independent reform body.

Finally, the PNG we imagine will have achieved its ambitious agriculturetargets. This achievement would include, for example, a fivefold increase in palm oil, coffee and cocoa revenues.  It will have done so by allowing ambitious entrepreneurs, investors and producers to find and exploit attractive agribusiness opportunities.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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