The FDI angle:  

• The government of Papua New Guinea has championed special economic zones as a way to industrialise and diversfy the Pacific island nation. 
• Oil and gas and metals accounted for 86% of PNG’s goods exports in 2021. 
• So far, the government has licensed one SEZ in capital city Port Moresby, but another 12 are in the pipeline. 
• “PNG’s decision to go into SEZs is probably the most important economic decision any government has made," trade minister Richard Maru says. 

In early May, Papua New Guinea’s (PNG) government hosted its first special economic zone (SEZ) summit in the capital, Port Moresby. It flew in SEZ representatives from China, Indonesia, the Philippines, India, Bangladesh and Japan to share their experiences and sell the idea to hundreds of provincial officials, landowners and other local stakeholders.

Since taking office in 2019, prime minister James Marape’s administration has championed SEZs as a way to industrialise the Pacific island nation. PNG ranks 155th in the UN’s Human Development Index of 189 countries. Its population of 10 million speak more than 800 languages, and 85% of them rely on subsistence farming for their livelihood.

Previous governments also toyed with the idea of SEZs, drawing inspiration from Asian countries where the concept has helped develop manufacturing-based economies. But “this government’s push has been the most comprehensive yet”, says Maho Laveil, FDC Pacific Fellow at think tank the Lowy Institute.

High hopes

“PNG’s decision to go into SEZs is probably the most important economic decision any government has made since independence [in 1975 from Australia],” says Richard Maru, PNG’s minister for international trade and investment. 

SEZs are a pillar of the government’s plan to diversify its economy away from resources. Hydrocarbons and metals accounted for 86% of PNG’s goods exports in 2021, according to the UN’s Economic and Social Commission for Asia and the Pacific. They also drew 82% of its inbound FDI over the past 20 years, according to fDi Markets. 

So far, the government has licensed one SEZ: the K4bn ($1.1bn) lifestyle-focused Paga Hill precinct along Port Moresby’s waterfront, the first two projects of which are a casino being built by local developers and a K130m luxury apartment building reportedly backed by Malaysian property investor Jimmy Poh. 

Following the SEZ summit, Mr Maru announced his goal to license six of them by the end of 2023. These include a rice-growing zone, which a group of Filipino investors visited last year, and a log-processing zone which supports the national ban on exporting round logs by 2025. Another is the Pacific Marine Industrial Zone which will process fish caught in PNG waters, 90% of which today are exported unprocessed. “We want to move from an exporter of raw materials to an exporter of manufactured, finished goods across all our key resource sectors,” says Mr Maru. 

On May 12, the government published its draft SEZ policy which offers tenants a five- to 20-year corporate income tax holiday, depending on the size of the investment, and exemptions from other levies including customs duties and withholding taxes. 

Mr Maru expects SEZs to be PNG’s “biggest driver of sustainable and inclusive economic growth”. 

However, some private sector participants are more circumspect. Zanie Theron, who heads KPMG’s South Pacific practice, says the plan “shows good commitment to foreign investment and the reduction of red tape” but warns that incentives do not guarantee success. “These SEZs must be profit-generating for foreign businesses,” she says.

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Pivoting an economy

Reliance on resources has created a boom-and-bust economy which ties the general business environment to commodity prices and spillovers from large projects. Further, the prime minister’s ‘Take Back PNG’ policy is leading to more examples of resource nationalism. The latest example is the Porgera gold mine. To secure the renewal of their mining licence last year, operators Barrick Gold and Zijin Mining had to increase the government’s stake from 5% to 51%. Resource investors must “expect that the government will be negotiating a higher stake” than in the past, says Mr Laveil. 

As it is clamping down on resources, Mr Laveil says the government “has been doing its part” to “open up non-resource investments”. In addition to SEZs, in 2022 the government launched the department of international trade and investment to act as a one-stop shop for large foreign investors, and this year it reactivated PNG’s short-term business visa. Amendments in January to the Investment Promotions Act streamline foreign investors’ certification process which, Mr Laveil says, “makes the business environment more predictable”.

Crops and crime

Of the country’s non-resource industries, Ms Theron says “agriculture is by far the most promising”. Its biggest foreign investor is Israel’s Innovative Agro Industry which, alongside international partners, has invested $200m in 16 dairy, poultry, hydroponic and other farms since 2011. Executive director Ilan Weiss says PNG agriculture’s “promise is huge”, pointing to its fertile soil, ambient conditions and farming tradition. “But the practicalities mean there are hurdles to the sector’s success,” he adds. 

These include typical frontier market issues, such as bureaucracy, blackouts and a low-skilled workforce, but also PNG-specific challenges. Poor transport links make it hard to move goods from agriculture hubs in the mountainous highlands, and a culture dominated by indigenous tribes makes tribal conflict part of daily life. According to the World Population Review, PNG’s crime rate per capita is beaten only by Venezuela. Mr Weiss says security is a hurdle, and their farms have “incidents from time to time” but they are not major ones. “We need to engage security companies,” he says. “It’s an issue as far as costs are concerned.”  

The government’s ambitions for SEZs are matched by its willingness to offer incentives. But SEZs do not operate in a vacuum. Improving socio-economic conditions and the general business environment could be just as important in attracting future tenants.

This article first appeared in the June/July 2023 print edition of fDi Intelligence