PNG ripe for huge change

  • OCTOBER 18, 2013¬†12:00AM
Port Moresby

Port Moresby in Papua New Guinea. Picture: Kym Smith Source: TheAustralian

THE view over Port Moresby’s beautiful, deep-water Fairfax Harbour from Deloitte Tower speaks volumes about Papua New Guinea’s immense potential. Below are ranks of new tower blocks, almost all built and owned by two superfunds, and Steamships, the local arm of the venerable Hong Kong-based Swire conglomerate.

The container port on reclaimed land is already overcrowded and needs shifting – providing a potential goldmine for developers, and doubtless also for the politicians who usually seek to gain from any big deal.

Across the harbour to the left is the InterOil refinery, providing monopoly fuels from PNG sources at monopoly prices. In central vision in the distance is Motukea Island, reached by a causeway, where Townsville-based construction entrepreneur Mick Curtain, who built much of the $19 billion liquefied natural gas project in partnership with Cloughs of Perth, has his massive base, with a shipyard including a huge dry dock.

To the right, where the nation’s original parliament building stood, a gleaming new, blue-tinged office and apartment building is rising fast, built by a Chinese company whose workers, from China, live in cabins on the site.

The reclaimed land beyond the container terminal now houses a “harbour city”, home to the Royal Papua Yacht Club. On Tuesday the club hosted a breakfast for more than 200 members of the Port Moresby Chamber of Commerce and Industry, where Grant Mitchell of Port Jackson Partners launched a seminal report produced for ANZ: “Bold thinking: Imagining PNG in the Asian Century”.

This estimates PNG could land $432bn in commodity exports by 2030, not just from its abundant oil, gas and minerals, but also from becoming a key food bowl for Asia – with prominent contributions from coffee, cocoa for chocolate, and palm oil, as well as from tuna, of which PNG controls the world’s biggest resource.

The potential for agribusiness is clear, with just 3 per cent of cultivated land being used for export cash cropping, and with the water supply almost five times per head greater than Australia’s.

As planes arrive at Lae’s Nadzab airport, they sweep over the vast land being managed by New Britain Palm Oil across the fertile Markham Valley, with its commercial sugar and palm oil plantations and premium beef herds.

“Stick anything in the ground and it will grow,” says the Port Moresby chamber’s ebullient chief executive Dave Conn. “But transport and marketing are the big challenge.”

To reach that $432bn commodities target, PNG would need to invest $180bn, chiefly in infrastructure. How to attract and use such vast capital effectively is an immense 21st century challenge.

The yawning gap between the country’s huge promise and its performance was underlined by the frequency with which Mitchell’s presentation was interrupted by blackouts.

Power, water, ports and the dominant airline are state owned – and the government, the strongest in PNG’s 38-year history, backed by 104 of the 111 MPs, appears more inclined to boost its role in business than reduce it. Mitchell’s report says the major state-owned enterprises return only 1.7 per cent a year on their assets – one-seventh of the performance of PNG’s private sector.

The political culture, however, is a transactional one, focused on deal-making – where the temptation to become involved in “business”, whether on one’s own account or the government’s – or sometimes both at the same time – is massive.

Leaders of an Australian resources company interested in taking a stake in a huge PNG mining prospect were told by a minister, when they asked why he had canvassed the prospect of a government takeover: “Don’t worry, it’s only politics.” But that is the very reason they were worried.

As politicians travel around Asia – about which PNG largely understands very little, despite Asia becoming the country’s chief market and potential source of capital – they tend to seize on what appeals. Thus Singapore’s huge pension fund Temasek, ultimate owner of Optus, and Malaysia’s Petronas are being viewed as models for PNG, although it is the drive of the private sector that is primarily responsible for Southeast Asian success.

Because of this deal-making focus, considerable political capital and time are expended on battles over ownership – including recently the nationalisation of the Ok Tedi mine, Commerce Minister Richard Maru’s refusal to allow Malaysian blue-chip Kulim to extend its stake in New Britain Palm Oil, and conflict with Fiji investors over control of the country’s second mobile network, BeMobile, and Malaysian managers over Port Moresby’s water utility.

As the size of the prize rises – thanks chiefly to an ExxonMobil-managed LNG project that is close to completion, with exports due to start next year, leading to a doubling of GDP – so the interest in the more modest responsibilities of government, such as maintenance, diminishes. Yet Mitchell’s report says regular maintenance saves governments 100 times its cost. The decrepit state of PNG’s roads, hospitals and schools underlines the need.

The report was well received by the chamber of commerce members, some of whom have been saying the same for some years. Many of them are Australians, successors of others who, from Erroll Flynn to Ross Garnaut, made their first mark on the world through PNG. Among them is Syd Yates, chief executive of the Kina group of finance companies, who played a prominent role in creating the Port Moresby stock exchange. The group was founded with $800,000 capital, whose value has grown 10 times in 16 years. “It’s been a lot of fun,” he says. “My attitude is: Let’s make it happen, not think of reasons why it can’t.”

He praises PNG Prime Minister Peter O’Neill’s “energy and enthusiasm and vision, which is exciting for the business community”, but adds that the quality of the public service must be upgraded if policies are to be implemented. “It takes too long to get things done.”

Yates says investment in education is even more essential than in infrastructure. The country’s capacity will be strengthened, he says, when dual citizenship is introduced as announced, potentially luring back more of those who have built successful careers overseas.

Isikeli Taureka is one, a senior Chevron executive who has worked all over the world, including heading operations in China; he has returned this year.

And the PNG private sector, Yates says, offers examples that are more appropriate for future development than Asian state-owned enterprises. Oil Search is a model of PNG-based achievement and good citizenship, for instance, he points out.

The finance sector has boomed, he says, since effective regulations were introduced and the central bank became truly independent under the Mekere Morauta government.

Other successful Australians include Mal and Sherron Lewis, in Lae, who led a management buyout of steel fabricator Hornibrooks, which employs about 1000 people there.

Hornibrooks and the rest of the PNG industry that services the resources sector is hoping that new projects can replace the LNG construction, the biggest task the country has yet taken on, and which was achieved at a considerably lower cost than similar projects in Australia and elsewhere.

The government’s costing framework surprises the private sector. It will budget $5 million-$10m a kilometre for highway construction, for example, whereas the true cost is estimated at less than $2m. Such gaps leave ample room for questionable practices, of course.

Lae port – where 75 per cent of the country’s cargo is shipped – is being rebuilt by Chinese companies. The Chinese government provides a $500m soft-loan facility for infrastructure in PNG, on condition the work is chiefly conducted by its firms.

The cost of inadequate infrastructure is palpable. Hornibrooks makes heavy trailers, but operations manager Bob Lewis says that bad roads are cracking them. He says: “Get infrastructure and security under control, and tourism, could fund everybody in PNG”. Such is the country’s natural beauty and liveliness of its traditional cultures. But few experts can see that happening any time soon, except possibly in enclaves.

The biggest success story, in employment terms, has been the tuna industry, with three canneries in Lae and a fourth being built, plus one in Wewak, and one in Madang, with a second in sight. Each of these employs up to 4000 people, mostly women.

Pete Celso, the managing director of RD Tuna Canners, came to PNG from The Philippines in 1995, and says it’s rewarding but tough. “A Harvard MBA doesn’t guarantee success here,” he says. “The challenges aren’t found in books.”

The country catches up to 17 per cent of the world’s tuna and cans for the US and especially Europe – it has a trade deal with the latter that removes tariffs, whereas the competition from Thailand has to pay 24 per cent.

“Business will go where it can maximise profit,” Celso says. “That used to be in the West, but now things are changing.

“The focus is shifting to Asian markets” – whose appetite is more for fresh fish.

Canning, freezing or chilling, the process requires immense power, the chief challenge for Celso, who says it is cheaper to use his own generator than to buy power from the grid – though the government requires him to do so as long as it is available. His business demands 55 per cent of Madang’s total power capacity. “PNG has its own gas and oil,” he says, as well as hydro capacity. “Power should be cheaper” and more reliable. It costs him more, due to the poor quality of the roads, to send a container of canned tuna to Mount Hagen in the Western Highlands than it does to ship it to Hamburg.

Another Asian business leader in PNG is Soekandar Tjandra, originally from Indonesia, who came in 1974 from Jayapura, where he was selling crocodile skins. He now runs stores in 18 of PNG’s 19 provinces, provides most of the vanilla used in Australia and New Zealand, has an immense property portfolio, and owns Shorncliffe construction company. He lives in Lae so he can supervise the shipment of goods for his stores, 60 per cent coming from China.

The scene is well set. PNG has its core of remarkably resilient local businesspeople, from Australia and Asia, to point the way. It has a can-do Prime Minister in O’Neill, who is the most powerful figure since Michael Somare.

And it has the commodities – the gas, the metals, the agricultural products, the fish – burgeoning Asia needs.

But can its political class transform itself so that it can in turn enable the country to be transformed by these once-in-a-century opportunities? We shall know the answer within a year or two, as the priorities and capacities of this five-year parliament play out.

Rowan Callick was in PNG as a guest of ANZ.

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