By Sunil Sivarajah
PAPUA New Guinea is blessed with an abundance of natural resources, including minerals, oil and gas and seafood products the development of which is supported by stable Government and robust laws.
There are however risks underpinning any PNG commercial transaction, as would be the case in any country. In my view, any entity that is focussed on building or developing successful PNG operations should consider the following matters to the extent applicable:
- Consider the broader social, cultural and regulatory context of PNG;
- Assess and identify an appropriate corporate vehicle or transaction;
- Undertake risk management;
- Review timeframes and update expectations to save costs – always expect the unexpected.
1-Understand and work within the social, cultural and regulatory framework
Human resources are fundamental to the success of most PNG commercial operations.
It is therefore important to consider and factor into organisational forecasts the underlying impact of social and cultural issues whilst also having regard to PNG regulatory requirements.
Given PNG’s historical exposure to, and relationships with, other western & eastern countries particularly Australia, it should not be a surprise for many western expatriates to find instant cultural and social similarities.
Conversely there are significant differences many of which may only become apparent with increased PNG experience.
Whilst Papua New Guinean employees are generally proficient in English and multilingual, courteous and loyal, there are capacity issues in certain areas and, therefore, PNG entities should only sparingly deploy expatriate labour to build such capacity, maintaining a strong commitment to train and develop a strong PNG workforce.
Organisations that invest in their PNG work force will experience lower staff turn-over and increased productivity. In addition to the commercial benefits, there are important policy and regulatory motivations to develop any organisation’s PNG work force capability. Anecdotal evidence suggests that the Departments of Labour and Immigration are more closely scrutinising expatriate work permit and visas particularly when engaged by organisations without a strong PNG track record. Further, PNG imposes on certain organisations a training levy of two per cent of their payroll sum, however that levy can be offset by legitimate training expenditure (e.g. training Papua New Guineans using an authorised training program). In this respect, there are suggestions that, in the past, some PNG companies did not strictly adhere to the training levy offset legislative requirements yet still claimed an offset.
In fact, the legislation precisely defines what constitutes a legitimate training expenditure.
Things to look out for are in house training programs that are not compliant, training programs delivered by entities that are not an ‘approved Educational Institution’ or training courses that are not an ‘Approved Business Training Course’ (terms defined in the legislation). Further, all PNG organisations should review their training programs during the financial year, instead of waiting until the time for making the IRC declaration which will usually be too late.
By way of example, Orion PNG has implemented processes and procedures to support the development of its Papua New Guinean staff and managers, building their capacity with the support of expatriate managers. Orion PNG utilises its global back office processing centres in the UK, Singapore and the APAC region to provide additional support. This is an ethic which underscores Orion PNGs staffing solutions for our clients.
And, in 2014, Orion PNG and the Enga Children’s Trust Fund established a joint venture, South Pacific Employment Institute, to operate the former ExxonMobil training facility in Idubada under a public private partnership with the PNG State Government – other shareholders now include the PNG National Petroleum Company, Kumul Petroleum, and Site Group International.
South Pacific Employment Institute is already delivering world’s best training outcomes for Papua New Guineans (i.e. training that was not available in PNG), and more recently the company will construct the first Safe Live Gas Processing Plant in PNG, ensuring that many Papua New Guineans fill significant roles in forthcoming LNG projects.
Understand the legal and regulatory framework of PNG
It is important to understand the regulatory context of PNG. Generally, the Supreme Court and the National Courts are the highest courts in PNG, and PNG laws are framed with respect to PNGs Constitution & Organic Laws. The following is a brief comment on regulatory considerations, based on my own experiences (clearly dependent on a case by case basis):
- PNG taxation requirements are governed by complex laws and regulations, notably the Income Tax Act 1959 & Goods and Services Act 2003. PNG is a signatory to various international double tax treaties that may also be relevant. Generally, PNG Goods and Services Tax, which applies to most PNG transactions, is levied at 10%; certain transactions could be exempt, and certain companies particularly in the resources industry may be given exemptions. The PNG corporate tax rate for resident companies is 30% and for non-resident companies it is 48% although some companies can be taxed as foreign contractors.
The highest PNG individual tax rate is 42% which is applicable for salaries above PGK 250,000. Watch out for withholding tax obligations when dealing with a foreign company, noting that the burden for such tax collection is likely imposed on the PNG entity.
- Investment and foreign businesses are regulated by the Investment Promotions Act 1992. Generally, “foreign enterprises” may only carry on business in PNG if they obtain a foreign IPA certificate which will also specify approved activities. A “Foreign enterprise” includes any company which has more than 50% foreign shareholding or which is under foreign management control. Watch out for the protracted timeframes to obtain a foreign IPA Certificate, and make sure a shelf company has completed all returns before acquiring it. Importantly, a foreign enterprise that operates without the Foreign IPA Certificate or that operates outside the terms of the IPA Certificate, risks having its PNG contracts deemed as void or unenforceable.
- Stamp Duty is regulated by the Stamp Duty Act 1952 which sets out requirements for duty payable on certain transactions. Generally Stamp duty is payable on the transfer, agreement for sale, declaration of trust over, or grant of certain property. The amount of duty payable will depend on the type of property and its value. Watch out for the statutory deadlines to stamp a document and note the penalties for non-compliance; failure to stamp a document could also impact the contract’s validity and enforceability.
- Government dealings are regulated by the Public Finance Management Act. Such matters should be considered prior to entering into any transaction with any PNG Government department (e.g. for a Government property disposal). PNG case law suggests that non-compliance could render the contract unenforceable.
- Foreign Exchange considerations and more recent foreign currency complications for instance associated with the repatriation of funds is a concern for many PNG companies with offshore stakeholders. Generally, payments in PNG should be made in Papua New Guinean Kina and contracts should be expressed in kina; certain PNG entities are provided with statutory exemptions. It is no longer possible for PNG corporations to operate foreign bank accounts although companies with existing foreign bank accounts can continue to operate them. Taxation clearance is required before repatriating funds in excess of PGK 200,000. There are at present significant delays in repatriation, owing to limited foreign currency availability.
- Corporate Governance is typically regulated by the PNG Companies Act 1997 (as well as shareholder agreements and constitution). The Companies Act governs the activities of corporations, their shareholders, directors and officers. Regarding company directors, any PNG Company must appoint a PNG resident director being any person who is ordinarily resident in PNG – expatriate or PNG national.
Company directors should understand the inherent risks associated with such roles, noting that PNG Courts have stated “ignorance is not bliss”, and that non-executive directors have the same duties as executive directors.
Director’s duties are detailed in the legislation. There are overarching duties and obligations such as the duty to act in good faith and there are also procedural obligations such as to ensure that the company share register is maintained. Some obligations are imposed on the board of directors whilst others are imposed on each director, and only certain duties can be modified by a company (using its constitution).
- PNG Labour requirements are generally governed by the Employment Act 1978 & Employment of Non-Citizens Act 2007. This sets the framework for employment of any PNG nationals and non-citizens (expatriates). Generally, PNG employment contracts should be in writing and specify requisite information such as the employer name, place of employment and the occupation. The rules for employing PNG nationals differ slightly to the rules associated with employing expatriates. For instance, any PNG company must pay Nasfund superannuation of 8.4% for any Papua New Guinean employee (after three months of service) whist there is no similar requirement for expatriate staff. Expatriates must usually satisfy a language requirement (specified languages are English, Pisin or Hiri Motu). Whilst expatriates should be paid in Kina it may be possible to pay their salaries in a foreign account, provided that PNG tax is remitted. In fact, expatriates may only fill openly classified roles. It is not possible for any expatriate to work in PNG on a business visa other than relying on a specific exemption such as a “Rev visa” – the Department regularly undertakes spot checks and penalties are possible. It is also worth noting that employers are responsible for repatriation of their expatriate staff upon employment termination and this includes the expatriate’s in country family.
2-Choosing an appropriate commercial entity
For those entities looking to enter PNG, it is important to consider the most appropriate corporate structure or commercial transaction, as the case may be. Some obvious options for initial consideration are as follows:
- Private and public acquisitions and mergers. Private acquisitions are obviously more common. It is possible to acquire shares in a company or of a company’s specified assets. When acquiring the shares in a company, the acquirer assumes all of the target’s liabilities, even those that may not have been disclosed.
- Incorporated joint ventures typically involve a new corporate entity with its own corporate personality in which the joint venture partners hold shares. Such ventures appear to be common in PNG, however, there is evidence that that joint venture implementation considerations are often underestimated, resulting in cost blow outs. To mitigate such risks, shareholder agreements should be well planned. Some obvious considerations include: questioning which shareholder will have responsibilities to fund the joint venture’s management roles; responsibilities and rights of each shareholder in respect to joint venture secondments; resolving potential competition issues between the shareholders and between the joint venture and its shareholders; avoiding or managing inherent conflicts in the joint venture structure; ensuring shareholders are committed to building the joint venture company rather than leveraging the joint venture to benefit the particular shareholder; and agreeing on branding! Many of these considerations can be easily glossed over during the initial euphoria associated with entering into the commercial venture, but they won’t go away.
- An unincorporated venture or strategic alliance may be an easier first step to any commercial relationship, as they enable each party to retain their respective structures. Unincorporated joint ventures are typically governed by a contract and inherently less rigid. It is possible to replicate features of an incorporated joint venture, though there are additional considerations particularly relating to payments between the entities (e.g. withholding tax may apply if one party is a foreign contractor).
- Many entities rely on establishing a new PNG registered entity, using a shelf company. This is often reasonably straight forward. There are other options such as registering an overseas business however as always professional advice before embarking on any venture is necessary.
3-Manage the Risks
There are inherent risk in any commercial transaction in any jurisdiction, and it is prudent to consider and manage risk to the extent possible. The following three risk management strategies could be applied in most transactions.
First, undertake a due diligence investigation before entering into any commercial arrangement in PNG. The scale of the investigation will vary depending on the nature of the arrangement. It may be as simple as undertaking background and credit checks for standard contracts. Comprehensive legal and finance due diligence should be undertake for most complex transactions. Many searches still require physical attendance so there can be delays, and it is prudent to cross check search results.
Typical PNG searches include searching the Register of Mining Tenements; Companies Register; National and Supreme Courts; Intellectual Property Office of Papua New Guinea; Department of Lands/Valuer General, to name a few. Secondly, contractual terms such as warranties and indemnities may prove useful to manage risk. Thirdly, adequate insurance is a must in PNG. In my experience, using a reliable insurance broker can prove valuable. It is a requirement to use a PNG insurer in PNG save for certain exemptions.
Whilst there are significant opportunities in PNG, there are commensurate risks associated with all such commercial transactions. Timeframes and delays can have a significant impact; and having realistic expectations could reduce costs for instance engaging corporate resources at the right time. It is advisable to regularly review timeframes. Remember PNG is often referred to as the ‘land of the unexpected’, for good reason.
About the author
Sunil Sivarajah is the Commercial Manager and General Counsel of Orion Group (Country Manager for Orion Project Services PNG). He has more than 20 years of corporate and legal experience and prior to his current in house role he practised as a senior lawyer in leading law firms in Queensland, Western Australia and PNG.
These comments are general in nature and should not be relied upon as legal advice. Please feel free to contact me to discuss in more detail. I would be happy to recommend an appropriate PNG professional. My contact details are Australian Mobile +61 416156652; PNG mobile +675 7199 3111; email@example.com.