By Lauren Barrett

LAW and order, corruption and infrastructure were among the top concerns of companies looking to do business in Papua New Guinea in a 2012 survey.

A recently released report by the Asian Development Bank (ADB) and the Institute of National Affairs, titled the “Challenges of Doing Business in Papua New Guinea”, offers insights into changes in PNG’s business operating environment.

The report was launched by PNG Prime Minister Peter O’Neill and then-Treasurer Don Polye at a sold-out breakfast organized by the PNG Chamber of Commerce in Port Moresby.

Mr O’Neill told attendees that the government would work closely with the private sector to address its needs, working to revitalise infrastructure following reforms to the budget process and alongside a review of the tax system.

While the report found that the overall business environment had improved over the last decade, many issues including business security, law and order, corruption and poor infrastructure continue to present major barriers for businesses.

The report compares results of similar surveys taken in five year increments in 2002 and 2007, the most recent edition the result of a six-month survey process of 13-firms undertaken in 2012.

Nearly two-thirds of participating businesses were PNG-owned, while one third were foreign-owned, and a few were jointly owned. About half of the firms surveyed had an annual turnover of less than K5 million, while the other half were large businesses and multi-nationals.

ADB economist and report co-author Paul Holden told PNG Resources he was cautiously optimistic about PNG’s ability to improve its business operating environment through a number of different methods.

Law and order

In 2012, law and order was again ranked as the most pressing concern for business and the top priority for government action.

“If the legal code and law enforcement institutions cannot ensure public safety, it becomes harder to do business and investment becomes more risky,” the report said.

While businesses can act to protect themselves from crime, the report stated this could never fully replace the State providing a legal code, policing, and enforcement.

About 80% of respondents said that law and order problems had influenced their business and investment decisions.
Paul-Holden
Dr Holden said the number of businesses which said they were ‘highly’ or ‘very highly’ affected by crime had fallen, a factor he said was encouraging, but added that the total proportion affected had risen in 2012.

The most common crimes against survey respondents were break-ins, followed by petty theft by employees, property theft without force and vandalism.

Dr Holden said the continued high crime rate and the “astonishing” number of break-ins was a cause for concern and could translate to a deterrent for future investment.

“It is a deterrent but larger companies are quite good at setting up their own security systems,” he said.

“It’s the small businesses where the burden of crime falls quite heavily.”

Dr Holden said that a very high crime rate essentially constituted a tax on businesses and also distorted growth statistics as spending on security showed up in GDP statistics but was not essentially contributing to general welfare.

Despite this, he was pleased to see the government was making a concerted effort to lower PNG’s law and order problems.

“The government is focusing on increasing the number of police…which is encouraging because it is the first step,” he said.

Corresponding with law and order concerns was an uptick in the lack of faith in law enforcement bodies compared to previous years.

Fewer than 10% of the companies surveyed in 2012 were either ‘highly’ or ‘very confident’ in law enforcement, and the majority of businesses indicated a lack of confidence.

Similarly, confidence in the judicial system was low. In 2012, only 50% expressed a conviction that the judicial system would prosecute law breakers and enforce contracts fairly.

In 2002, 44% of businesses were either ‘highly’ or ‘very highly’ confident in the judicial system; this dropped to 18% in 2007, and fell to 14% in 2012.

“One of the most disturbing factors about the report was the precipitous drop in the confidence in the court system,” Dr Holden said.

“One of the key factors affecting businesses and their willingness to invest is their faith in the courts,” he said.

While Dr Holden was at a loss to explain the reasons behind the drop of confidence in the country’s law enforcement bodies and the judicial system, he said this area was in need of serious reform and should be a key focus for the government if it was serious about improving PNG’s business environment.

Corruption

Corruption was listed as one of the top business and investment constraints by respondents, who said the issue should be PNG’s second highest reform priority.

Despite the O’Neill government stepping up financial commitments to fight corruption, the survey results revealed corruption remains a serious issue for businesses – with 57% of respondents reporting that they had been ‘fairly’, ‘highly’, or ‘very highly’ affected by instances of government corruption.

The proportion reporting that it was ‘mostly’ or ‘always’ common for companies in their sector to make ‘irregular additional payments’ to government officials increased from 17% in 2002 to 30% in 2012. “This suggests that low-level corruption became more common,” the report said.

“What we are talking about is policemen and junior officials demanding bribes and we have anecdotal reports of that becoming quite widespread,” Dr Holden said.

According to Dr Holden, the suspected rise in low-level corruption is due to discretionary regulation.

“Where there is discretionary regulation… you find corruption,” he said.

“If we take in conjunction with the decline in the faith in the court system I think it’s an amber light at the very least.

“It’s important that government cracks down on this…they’ve announced an intention to work on corruption but we’ll see.

“The jury is out at the moment,” he said.

Infrastructure and Public Services

Poor quality infrastructure services was another issue listed as a concern for the business surveyed, which was not only adding to the cost of doing business but was also discouraging investment.

The poor condition of roads and bridges remained the most pressing government service concern for business in 2012, with no improvement in the perceived quality since the 2007 survey.

Electricity services, ports and water and sewerage services were rated as poor quality and inefficient by survey respondents, with concerns about port services having increased since 2007.

“All these services providers are government owned, and reinforce findings of the low efficiency of state owned enterprises in Papua New Guinea,” the report said.

Despite improvements in mobile network coverage over recent years, telecommunications services also rated poorly.

However it wasn’t all bad news, with businesses expressing slightly greater confidence in the non-governmental bodies that regulate professions like law and engineering. Businesses have a high level of confidence in the financial sector, with 92% of businesses ‘fairly’, ‘highly’, or ‘very highly’ confident in PNG’s banks and financial institutions.

Dr Holden said PNG’s infrastructure was a wide-ranging problem due to the country’s challenging topography, with many areas not well-serviced by roads and the like.

In urban and larger industrial areas the situation arising was one of bottlenecks. However, he noted that a large investment program was being undertaken to reduce bottlenecks, including expanding the Lae Port.

Political Stability

While Dr Holden admitted there was little in the report he found surprising, what was evident from the report was the importance of political stability.

Mr O’Neill’s rise to power in 2012, when former Prime Minister Sir Michael Somare was forced out of political life due to illness, was met with some controversy.

But whatever controversy there was did not concern survey respondents.

“Confidence in political stability did not take a hit in the 2012 responses, and there was further improvement in the perception of political stability,” Dr Holden told PNG Resources.

Despite some recent shifts in the cabinet, the current government appeared to be “reasonably stable”, Dr Holden said – a fact which in turns reduces international perceptions of PNG’s sovereign risk.

While the impact of political uncertainty fell between 2007 and 2012, nearly 70 per cent of the businesses surveyed in 2012 still reported that they were affected by political uncertainty.

“However, comparison with previous surveys shows a clear reduction in businesses that were ‘highly’ or ‘very highly’ affected,” the report noted. “This can be attributed to the stability of the political environment between 2002 and 2011,” it said.

Government regulations and policies

The businesses surveyed indicated they were concerned about the stability of PNG’s rules, regulations and policies, with more than half of the respondents identifying stability as either a ‘very high’, or ‘high’ concern.

If the ‘fairly concerned’ group is included, then more than 85% were concerned about the stability of rules, regulations, and policies, meaning the number of businesses worried about retrospective changes has increased since 2007.

“Two-thirds of businesses indicated that when changes in government occurred, they expected major policy changes that damage their business,” the report noted.

“Despite some improvement between 2002 and 2012, concerns about the continuity of policy and the implementation of new initiatives remain high.

“Sudden changes in rules and regulations impose adjustment costs on business and can even result in profitable businesses closing down,” the report noted.

The complexity of rules and regulations and the time needed for administrative processes were two of the most commonly cited problems.

Worryingly, 30% of respondents indicated they had cancelled planned investments due to compliance problems.

“It’s another ref lection of the proliferation of regulation and rules and so on,” Dr Holden said.

“Companies just give up. It’s certainly an aspect which needs a lot of attention.”

Dr Holden said streamlining regulations could help ease concerns from the business community.

“Businesses thrive best when regulation is transparent and simple, and unfortunately these things are all linked so when it’s not that way it tends to promote corruption,” he said.
Police-station
Post-survey, the report pinpointed some recent changes to business policy which could exacerbate some of the issues identified in 2012. The change in the shareholding of the Ok Tedi Mine, a major amendment to the Takeover Code, and a government decision to establish a foreign investment review board, were listed as just some of the recent changes which was likely to discourage foreign investment and could potentially reduce the rate of growth and job creation.

“The amendment to the takeover code is an example of the kind of sudden and unexpected policy change that businesses are concerned about,” the report noted.

“The amendment added a discretionary ‘national interest’ test to the review process for proposed takeovers.

“Changes like these create a worrying precedent and, in the absence of consultation on policy and implementation, it is natural for businesses and investors to become more cautious.”

Recommendations and Outlook for 2014

PNG experienced strong economic growth between 2007 and 2012 thanks to strong commodity prices and an upward swing in construction activity as a number of resource developments ramped up activity.

While the strong growth was accompanied by small but significant improvements in the business environment, Dr Holden said there was still more to do to ensure PNG’s future is accompanied with a thriving business environment.

“This will require a progressive transformation of the business environment to address the many barriers to doing business identified in the 2012 survey,” he said.

A number of key policy recommendations were listed in the report including law and order and poor infrastructure.

While Dr Holden said he was encouraged by the expansion of formal employment in PNG, which he said was vital for the long-term development of the country, he also said the government should reduce its involvement in PNG’s business sector.

“One of the points we make in the report is that the time to start improving the business environment is right now,” he said.

“One thing we don’t talk about in the report is the performance of state owned enterprises (SOE) which is not stellar at all.

“I believe it to be true that the privatisation and contracting out private-public partnerships are a far more effective way of delivering services that SOE.”

While Dr Holden is a firm believer in not mixing SOE with business, he says the PNG government should be focused on providing a strong basis for encouraging private sector growth.

Dr Holden said PNG needs as much private sector growth “as we can get” and believes much of this growth could be driven from the non-resource sector.

“There’s obviously continued natural resource development, but what has to happen in addition is the non-resource private sector has to expand,” he said.

“One problem with natural rich economies is there exchange range depreciates which quite often makes manufacturing less competitive and that would imply that the services sector should be expanding, and that has in fact already happened within the country.

“Overall I would say that I am cautiously optimistic on the business environment right now,” he said.

The ADB is set to provide more in-depth analysis of constraints to PNG’s private sector when it releases a separate report later in the year.