Second time lucky for Papua New Guinea?

Papua New Guinea is renewing attempts to diversify its domestic economy as its abundant mineral resources have so far failed to become a reliable driver of economic development for the Pacific country of 8 million people.

In fact, the country became entangled with the typical symptoms of a Dutch disease as soon as it pegged its fortunes to the development of a few massive mining and, more recently, oil and gas projects: volatile foreign investment, exchange rates, consumer prices and economic growth.

Plethora of problems

Today, businesses across Papua New Guinea are facing seemingly chronic shortages of foreign currency, and the government lacks the resources to stimulate the economy through its budget. To make things worse, a 7.5 magnitude earthquake struck its islands in late February, affecting about 544,000 people and requiring extra budget from the government to combat the emergency.

After securing a new term in mid-2017 elections, prime minister Peter O’Neill is now promising new efforts to develop sectors other than mining and oil and gas, to make the economy more resilient to external shocks. A recovering cycle in the commodity sector may now work to his advantage, as well as an international bond programme that the government is finally getting off the ground.

“The commodity boom and bust cycle has affected the stable growth we want in our country,” says Mr O’Neill. “We have developed a strategy to expand the base of our economy, which means that industries such as agriculture and tourism have become priorities of our government and, as a result, we are about to approve huge incentives for a certain period of time [for investment in these industries].” (See interview with Mr O'Neill on page 52.)

Papua New Guinea has developed some of its main basin of mineral resources since the 1980s and the 1990s, when the Ok Tedi copper and gold mine and the Lihir gold mine began operations (these also caused major environmental damage over the following decades).

A gas boost

The country also began exploiting hydrocarbons in the 1990s, but took this to the next stage only recently with the discoveries of major natural gas fields and the construction of a liquefied natural gas (LNG) plant near the capital, Port Moresby. The plant came online in 2014 and its $19bn price tag exceeded the whole of the national GDP for that year, which was less than $17bn.

The tremendous growth the country experienced in the investment phase of Exxon’s PNG LNG plant propelled domestic demand way beyond the reach of the local agriculture and narrow industry. Agriculture remains the single largest contributor to the national economy, accounting for 18% of the GDP and employing 85% of people living in rural areas, against a 16% contribution to GDP of oil and gas, and 10% of mining.

The country’s annual food import bill is now tagged at about K4bn ($1.23bn), prompting local authorities to call for a strategy to fulfil the country’s potential along the whole agri-business value chain to substitute imports. Besides this, the country’s natural attractions remain on the margins of global tourism routes.

“We would like to see a bit more investment into agriculture, fisheries, floristries and tourism,” says Clarence Hoot, acting managing director of the country’s investment promotion authority. “One thing that the government is looking at giving is a favourable tax rate for new investment going into these sectors.”

Getting around

The success of any diversification effort hinges though on the development of a functional infrastructure across a country where only 15% of households have access to electricity and poor transport connections still leave entire areas isolated – even Port Moresby has scarce connections with its surrounding areas.

“What we really need to be doing is taking revenues from resource projects and invest that into enabling infrastructure: ports, power, roads,” says Mark Baker, managing director of ANZ Papua New Guinea, the second largest bank in the country. “That enabling infrastructure will allow agriculture in particular to broaden and grow. A broader agriculture base has a couple of advantages – import substitution and the fact that you can grow most things in the country – yet it’s still cheaper to import it from northern Australia than source it locally.”

In late November 2017, the Papua New Guinea government signed agreements worth about $3.5bn with China Railway Group to upgrade 1600 kilometres of roads to improve connectivity between Port Moresby and surrounding areas, as well as on the islands of West New Britain and New Ireland. The Asian Development Bank is also financing the flagship upgrade of the Highland Highway that connects Port Moresby and the Highlands.

At the same time, the government gave the greenlight to relocate Port Moresby’s main port and upgrade the port in Lea. The country became a member of China-led Asian Infrastructure Investment Bank in May 2018, increasing its access to multilateral funding for infrastructure development.

Resource reliance

As Papua New Guinea's diversification finally gets under way, the short-term outlook still depends on the development of a few major projects in the resources sector.

After wrapping up the development of the PNG LNG plant, Exxon teamed up with French Total to develop three new LNG units to process the natural gas coming from its P’nyang field and Total’s Elk-Antelope fields, and thus double the facility’s LNG exports to about 16 million tonnes a year.

“With regard to working Exxon and Oil Search [Exxon’s partner in the PNG LNG plant], the idea was to find an option that would make us save a little bit of money and reassure both the state and us that we are not spending all the money on investment, and also ensure the project is cost competitive and attracts all the buyers we need to move forward,” says Philippe Blanchard, managing director of Total PNG.

He adds that the company plans to start front-end engineering design by the end of 2018 and thus arrive at a financial investment decision by the end of 2019 or early 2020. The price tag for Total’s two new LNG units is about $10bn, he adds.

A better deal?

This time around, though, the government seems committed to strike a better deal with both oil companies to use some of the cashflow generated by these projects to prevent as much as possible foreign exchange shortages and economic volatility from happening again.

“In the previous agreement, the negotiation was softer; this time we have learned the hard lesson, we will ensure that some part of the foreign currency is kept in the country to stabilise the foreign exchange,” says Wapu Rodney Sonk, managing director of state oil and gas company Kumul. “But also reserve part of the gas for power production in the domestic market.”

In the meantime, the government has to plug the current shortage of foreign currency in the domestic market, which is hampering business across the board. A few options are under assessment, including a sovereign bond issuance that will mark a debut in the international bond market for the country. The government is planning to sell notes for $500m by the end of 2018. The central bank is also working on the project of establishing a sovereign wealth fund to accumulate resources to fill future budget holes.

With mining and oil prices slowly recovering, and the earthquake emergency receding, authorities have gained some much-needed breathing space to engineer an economic policy that can make the most of the country’s resources and turn them into a durable asset once and for all.