October 2012Chey Scovell (B.IntBus (Econ, PolSci), GDip Export Mgt [Griffith], GDip Govt & PubFin [ANU])

CEO, Manufacturers Council of PNG

The value of value adding: Turning Challenges into OpportunitiesRegional Policy Briefing no.9: Briefing series on Small island economies: from vulnerabilities to opportunities

Manufactures Council of PNG, who are we and what do we do? The Manufactures Council of PNG (MCPNG), is a non- profit organization formed in 1991

to promote the manufacturing and downstream process sector within PNG. The Council also plays an important role between the private and public sector and works

closely across business sectors and government to promote and strengthen manufacturing and value added industries in PNG.

Domestic manufacturing, according to various sources such as our Treasury, The World Bank, Department of Commerce and Industry, Bank of PNG and reputable private sector institutions, contributes between 6 and 11.5% of total GDP and employs more than one quarter of the nation’s formal work force. It also contributes to 13% of exports (this figure does not include processed mineral exports) - and would be much larger if it were not for the mining sectors continued strong growth.

The Council is committed to working with our government and other parties to provide the necessary supporting infrastructure to create an enabling environment for local manufacturing and downstream processing.

The Government of PNG has announced its intention to increase domestic manufacturing’s contribution to 30% of GDP by 2030. When considering the impact of the LNG project effectively doubling PNG’s GDP, this ambitious goal is perhaps the best sign-post for directions to best investments.

We use our brand “MADE IN PNG” to promote understanding of the importance of buying local.

Reforms

A decade of structural and policy reforms to address economic, social and governance issues has yielded mixed results for PNG. Donor funding is entrenched into all sectors of the PNG market and will likely continue for the foreseeable future.

With mixed results since Independence the government developed a fifty-year plan (Vision 2050) to achieve a strategic objective for PNG, which is to reduce our reliance on aid and mineral resources and aims to provide the right incentives to support the diversification of our economy.

Whilst holding great expectations of the LNG project, the government has begun to recognise that sole reliance on mineral and petroleum resources to achieve economic growth is not sustainable over the long term.

Technical trade related assistance is being sought by PNG to help further liberalise and diversify our domestic, regional and international trade.

With more than 90 districts in PNG, there is an abundance of programs targeted at SME and interest groups (eg women), with little to no managed coordination.

PNG as a leading Pacific economy is a major partner in regional reforms

Priority Areas for Investment Government policies target investment in the manufacturing sector, including downstream

processing of industrial goods such as clothing, textiles, foodstuffs and beverages, timber products, chemicals, plastic and paper products and motor vehicle parts.

Projects which reduce the cost of doing business – training to infrastructure. Also service sectors which are not reliant on ‘extracting’ a resource such as Tourism.

Favorable consideration is given to investments that contribute to economic growth (creates jobs, uses domestic resources, skills development, export potential) promotes regional integration and offers increased equity by PNG’eans.

Direct tax incentives apply to large and small business investments. These include tax credits for investment in manufacturing and primary production, reduced company tax rates, tax holidays and double tax income tax reduction for export market development costs in manufacturing. There are also specific taxation treatment arrangements made directly with the State in some major resource projects.

Unique opportunities also exist in several locations over the coming years as resource projects (mines) close and the local communities venture into more sustainable enterprises.

High cost, insufficient supply and attention to sustainability and green technology suggests Pacific region will be a key purchaser for greener energy.

Rapidly expanding populations whom can no longer sustain traditional subsistence lifestyles has given rise to the need to shift to wealth creation platforms (increased participation in economy)

The Challenges

PNG is an extremely high cost environment in which to undertake business, even in comparison to our PIC counterparts. This impedes investments and private sector development.

In 2012 PNG slipped again its its World Bank, Ease of Doing Business, indicators (down to 108 out of 183) In 2013 it climbed to 104, almost entirely on a 14pt increase in access to credit.

Inadequate trade related infrastructure, presents business opportunities for construction and consultancy services but is a major impediment and constraint for almost everyone else.

The high cost of doing business is also intensified by widespread political and official corruption and an inefficient public service. The PNG government has ratified the UN Convention against corruption and supports an independent Ombudsman Commission, a number of its long and medium term plans identify the need to weed out corruption and improve service delivery.

Productivity is low by comparison to our main competitors (Asia, ANZ).

The Challenges

Access to land, customary land rights constrains access to tenable land for economic use.

Law and order issues inflate the cost of doing business and adversely affects tourism industries in particular.

The scale of the LNG project and other major resource projects in-line present a real threat of Dutch Disease. Fiscal management will likely exacerbate continued neglect of infrastructure and services.

Economic growth and development is largely hindered by inadequate state-owned entities. A WTO report (WT/TPR/S/239) noted that SOE deficiencies include the high cost and unreliable supply of public utilities, law and order problems resulting in high security and insurance costs, high road and maritime transport costs and associated inadequate networks and services.

Low literacy levels, absence of business and organizational management skills coupled with traditional structures presents significant barriers to ‘commercial’ development.

The Challenges

Tyranny of distance – high transportation costs

Reliance on fossil fuel energy production.

Managing supply – foreign concepts: commercial quantity, consistency and redundancy

Finding the right markets – many programs target exports (pacific brand, coffee, vanilla), whilst the same economies have a very high level of FMCG imports.

Coordinating the activities of donors, government and across all levels (local, national, regional) and to ensure outcomes for those most disadvantaged.

Capacity constraints – gaining accreditation. Some of the most successful case studies would not have been achieved within existing frameworks, and also lack the capacity to attain accreditation.

Playing fair – competing with subsidised industries, large companies in the PICs struggle to compete, the only advantage for SME is access to informal market but they are kept there.

Government Policy and Inheritance Deterioration of the transport infrastructure to an extent where it is now a costly exercise to

rehabilitate the existing facilities to cater for the increased traffic brought about by the recent increase in economic activities, particularly at the ports of Lae and Port Moresby.

Land reform and land owner management are major impediments to the maintenance of roads, in particular the highlands highway network.

Congestion Facing serious port congestion due to increased ship calls, declining infrastructure and poor

stevedoring efficiency exacerbate the problem. PNG PCL estimates port occupancy at over 90% on its main wharves, international industry standards call for increased berths when occupancy reaches 65%.

Efficiency Domestic surveys have continually shown PNG stevedoring productivity to be well below

industry averages and charges to be well over. PNG PCL estimates poor efficiency of stevedores cost our economy more than K20,000 per day, an estimate that was supported by many manufacturers.

Airline services are are costly by comparison and are subject to frequent delays.

Affordability Which bite first? Many of our ports are not fit for purpose and indeed of repair. Current

construction boom has significantly inflated the cost for civil works. K2-3 billion requirement to give build an acceptable platform

The cost of shipping, air transport and road freight in PNG is considered to be well above ‘competitive’ rates.

Dilapidated infrastructure and high crime ‘grossly’ inflate the cost for road freight.

Land Availability Inability of the State and private sector to secure tenable land. Slow progress of reforms, only

outweighed by concerning trends of unrealistic expectations and stability of landowners.

Industry Cooperation Industry falls into two distinct categories, one being the end users and the other being the

participants. End users bear the brunt of all inefficiencies and plans for expansion by way of charges. Despite significant market advantage, access to capital and land, participants have not matched their commitment to improve service with their profits.

“Well maintained transport infrastructure

is essential for the efficient flow of produce to markets and for the

flow of consumer goods and services to village

communities. It is widely accepted that the

decline in the quality of PNG’s transport

infrastructure has had a major adverse impact on service delivery and the capacity of Papua New Guineans to earn cash

incomes. Increased transport costs arising

from deteriorating infrastructure are

reflected in reduced smallholder returns for

cash crops and increased prices for

basic consumer goods such as rice and tinned

fish.”MTDS 2005-2010 pp35

Opportunities (broad)

In the face of adversity local industries, and whilst sitting on a brink of viability, continue to have stellar performance year on year.

Servicing the constraints is profitable. Law and Order issues has created a boom for security related enterprises. Spiraling rents and major resource projects has been kind to construction industries.

Think of the spin-offs sectors, the provision of consumables in the current market has seen tremendous year on year growth, everyone's volumes are increasing. Think of the next steps, services that complement or address the constraints.

Current and new investments can be extremely profitable with either import substitution or export focus. With a population of more than 7 million, an informal work force comprising more than 85% of the population there remains an immense market for the delivery of goods and services.

Entrepreneurs with a focus on SME development will find a market in PNG perhaps greater than the combined PIC market.

Opportunities (broad) The pacific, PNG in particular, has an abundance of unskilled labour, with an

abundant need for skilled labour.

Failing and inadequate infrastructures throughout the pacific present significant opportunities for investment.

PNG remains committed to the WTO multi-lateral trading system and the conclusion of a the Doha Round, including achieving the key objective of a fairer rules based trading system that can meet the specific needs of developing countries.

To date opportunities under MSG, PICTA and iEPA have not been leveraged, both arrangements offer significant trading opportunities – but it must be in both directions.

There is room for everyone, from the highlands to the islands there exists capacity to value-add, but there is a need to consider the value in low volume markets.

Value Adding – why is it important? The importance of growing the non-mineral sectors of the PNG economy can

not be understated, nor can the importance of shifting towards value-adding of other natural resources (agriculture, fisheries, forestry).

Governments, generally, do not have good track records for service delivery and improvement of livelihoods. The best driver is often the private sector, increasing participation in the formal economy, having disposable incomes increases services and livelihoods.

Activities which focus on extraction of ‘non-value added’ products have left many communities worse off. Often making traditional, subsistence lifestyles impossible.

Value-adding requires more hands, it creates more wealth.

Not all value adding needs to be export focused, value adding increases awareness of standards and supply chains.

Some case studies… There are a number of known winners in the region – coffee, spices, seafood,

tourism.

Coffee is one of PNG’s largest export earners (approx K450 million in 2012), despite high demand for our coffee we supply only about 1.2% of the world market. Major buyers and the industry board have struggled for decades to increase small holders and outputs. With the focus of a few medium sized growers and buyers on roasting, companies such as Goroka Roasters and Kongo are revitalising the industry.

Cocoa, vanilla and other spices – Paradise Spices, Queen Emma Chocolates

Oil Palm – dispelling the myths

Forestry products – PNGSDP - sustainable practices, affordable housing

Seafood – making the most of regional agreements

Landowner companies – supply contracts, local content

Interest Groups – SHP (Foe) from cooking classes to milling 1.5 tonnes of rice.

Building capacity – find a market they can service.

Managing the transition – subsistence, cash crop, supplier, agribusiness, agri-corporation.

Having the right platforms in place, the importance of reducing the cost of business. Despite recognition and an abundance of policy changes, we will be reliant on mineral and resource growth for the some time. Ambitious goals to increase sustainable value added industries will only be realised when tangible improvements are made to supporting infrastructure.

PNG’s success in fostering sustainable broad-based growth will in large part depend on its successful implementation of much needed policy and related reforms to improve productivity and investment, especially foreign. Such reforms provide the best path to generate non-mining growth, including services and economic diversification.

Best agents for driving change. Working more with the private sector.

Who are we targeting

Products for domestic consumption - standards, branding, changing consumer behavior

For export, which way should we be looking?

Fair trade, not free trade.

In closing...