2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

Openness to, and Restrictions Upon, Foreign Investment

The Government of Papua New Guinea (Papua New Guinea) welcomes foreign investment and the country has a liberal investment regime. The government has made considerable progress by creating policies and systems to streamline the regulatory and administrative requirements for foreign investors. This has included the establishment of the Investment Promotion Authority (IPA) which is mandated by an Act of Parliament to promote and facilitate investment and act as a one-stop-shop facility for investors. The IPA does not charge fees for the business facilitation and advisory services it accords to investors. However, fees are applicable for services such as company registration, foreign enterprise certification and registration of intellectual properties. There are private sector agencies that provide business facilitation and advisory services for a fee. Papua New Guinea is rich in natural resources and has recently placed a priority on the downstream processing of these assets to achieve economic growth. Large investments to date have been concentrated in the minerals and petroleum sectors. The Government supports developments in the tourism sector as the country has huge untapped potential in this area. In providing investment incentives, the government gives preference to foreign investment proposals relating to development of renewable resources including forests, fisheries and agricultural commodities over other business proposals. Challenges to investment include weak enforcement of contracts, corruption, crime, inadequate infrastructure, and underdeveloped private markets.

Foreign Investment requires government approval and is regulated by the national government with the assistance of the IPA per the Investment Promotion Act. The IPA assists in facilitating investment proposals, identifying relevant Government departments and assisting investors in obtaining the required approvals, licenses, and permits.

Business operations in Papua New Guinea may be conducted in a number of forms, such as private companies, public companies, branches of foreign companies, partnerships, joint ventures and sole traders. The Companies Act of 1997 and the Companies Regulation of 1998 regulate all matters regarding private and public companies, both foreign and domestic. All foreign business entities must have approval from the IPA and need to be certified and registered with the government before commencing operations in Papua New Guinea.

Foreign investors can either be incorporated in Papua New Guinea as a subsidiary of an overseas company or as a totally new foreign entity; OR be incorporated (registered) and existing under the laws of another country in order to register as an Overseas Company under the Companies Act 1997. A Certificate of Incorporation will be issued for option 1 or a Company Registration Certificate will be issued for option 2, if relevant documentation is provided.

While government departments in different economic sectors have their own procedures for approving foreign investment in their respective sectors, the IPA provides investors with the relevant information and contacts. There are a number of government Acts covering foreign investments in Papua New Guinea. These include:

• Free Trade Zone Act 2000;

• Investment Promotion Act 1992;

• Papua New Guinea Companies Act 1997;

• Forestry Act 1991;

• Mining Act 1992;

• Fisheries Act 1994; and

• Oil and Gas Act 1998.

There are different requirements for foreign investments in the resources, timber, and fisheries sectors but in most cases 100% foreign-owned enterprises are permitted. Joint ventures with local partners are, however, encouraged. Certain business activities are restricted to citizens and national enterprises. However, this list is currently under review and some have been phased out while others will be phased-out pending review.

The judicial system upholds the sanctity of contracts there are no overall strategies or policies that have discriminatory effects. However, there are delays experienced in the certification process which is done by the IPA which subsequently affects other parts of the process in investing in Papua New Guinea but this affects all investors across the board.

There are some restrictions on foreign ownership in certain activities. The Regulations of the Investment Promotion Act 1992, as amended, contain a list of business activities which are restricted to citizens and/or national enterprises (i.e. those in which a national/citizen has 50% or more ownership). Activities restricted to citizen enterprises only make up the Cottage Business Activities List (CBAL). Foreign enterprises cannot conduct business in activities listed under CBAL. The list may be reviewed from time to time. The IPA may grant certification subject to any terms and conditions it considers appropriate. However, provided a proposed investment does not fall within the list of restricted activities, certification is usually not conditional on maintaining a minimum level of local equity. Foreign enterprises are restricted from going into restricted activities regardless of local equity.

The Central Bank (Bank of Papua New Guinea)’s approval is required for all foreign investment proposals. Such proposals include the issue of equity capital to a non-resident, the borrowing of funds from a non-resident investor or financial intermediary, and the supply of goods and services on extended terms by a non-resident. The main concern is that the terms of the investment funds are reasonable in the context of prevailing commercial conditions and that full subscription of loan funds are promptly brought to Papua New Guinea. A debt/equity ratio of 5:1 is generally imposed with respect to overseas borrowings and a ratio of 3:1 in respect of local borrowings.

Papua New Guinea’s certification process is also used to screen foreign investments. Certification conditions can be varied with the IPA’s agreement and the IPA may suspend or cancel a certificate if a foreign enterprise breaches its terms. The IPA must be notified of certain changes in control of a certified foreign enterprise (other than one that is a public company listed on a stock exchange that is a member of the Federation Internationale des Bourses de Valeurs) and ‘re-certification’ will need to be obtained. Certified enterprises wishing to expand or diversify their operations must lodge an Application for Variation with the IPA. Registration of a New or Overseas Company takes between 24 hours to 3 weeks at a cost of 500 Kina (US$252) and Certification of a Foreign Company takes between 2 to 5 weeks at a cost of 2000 Kina (US$1008).

In reviewing a foreign investment proposal, the IPA may consider a number of factors, including:

· The potential for positive development of human and natural resources

· The investor’s past record in Papua New Guinea and elsewhere

· The creation of additional employment and income-earning opportunities

· The likelihood the proposal will generate additional government revenue and contribute to economic growth

· The transfer of technologies and skills and the contribution to training citizens of Papua New Guinea; and

· The likely environmental impact.

There is no specific investment level. The IPA may, however, pursuant to Section 28(7) of the Investment Promotion Act require an applicant for Certification to deposit the prescribed amount prior to a Certificate being issued. The prescribed amounts are per Section 6B of the Investment Promotion Regulation

(a) in the case of an individual – K50, 000.00 (US$25,201)

(b) in the case of partnership – K50, 000.00 (US$25,201) per partner

(c) in the case of a corporate body – K100, 000.00 (US$50,403).

However, the requirement is usually made a Condition of Certification to be complied with within six (6) months from the date of Certification. Filing of annual returns is mandatory.

The purpose of the screening mechanism is to assess the net economic benefit and consistency with national interest. The possible outcomes of a review are prohibition, divestiture and imposition of additional requirements. The IPA and other regulatory bodies in particular sectors make the decision on the outcome. Appeal processes differ for each sector. For the IPA and specifically related to certification and registration of a business, an enterprise should submit an appeal to the Minister for Commerce and Industry through the IPA. A fee of K200 (US$100), payable in bank check to the IPA is required. The Authority will then provide a brief to the Minister. An appeal is not restricted and applies to any other decision such as, Terms and Conditions; rejection of an application; and cancellation.

There are no major sectors in which foreign investors are denied national treatment, both domestic and foreign investors/firms are treated the same. In the case of foreign investments there is no requirement that nationals own shares or that the share of foreign equity be reduced over time.

There is no formal privatization program in place and thus no guidelines or structure on when and how foreign investors are allowed to participate in privatization programs. The government has funding available for privatization and is currently using the Public Private Partnership (PPP) structure as a model for privatization.

Any tax concessions and other approvals or privileges provided are determined by the project and not by the investor’s country of origin, thus there is no discrimination against foreign investors at the time of initial investment or after the investment is made. There are no laws or regulations specifically authorizing private firms to adopt articles of incorporation or association which limit or prohibit foreign investment, participation or control. There are no practices by private firms to restrict foreign investment or participation in, or control of domestic enterprises but there are private firms who try to maintain their monopolies or large market shares.

Measure Year Index/Ranking

TI Corruption Index 2011 154

Heritage Economic Freedom 2011 131

World Bank Doing Business 2011 103

MCC Government Effectiveness FY12 0.11 (63%)

MCC Rule of Law FY12 0.01 (49%)

MCC Control of Corruption FY12 -0.36 (24%)

MCC Fiscal Policy FY12 -2.5 (53%)

MCC Trade Policy FY12 84.8 (98%)

MCC Regulatory Quality FY12 0.20 (66%)

MCC Business Start Up FY12 0.950 (70%)

MCC Land Rights Access FY12 0.654 (56%)

MCC Natural Resource Mgmt FY12 21.3 (22%)

Conversion and Transfer Policies

All remittances overseas in excess of K50,000 (US$25,201) per annum require a tax clearance certificate issued by the Internal Revenue Commission. In addition, approval of the Central Bank (Bank of Papua New Guinea) is required for annual remittances overseas in excess of K500,000 (US$252,016). Remittances relating to the payment of trade-related goods are not taken into account. There are no specific restrictions on the repatriation of capital owned by or due to non-residents. The Central Bank’s principal objectives in assessing applications for capital repayments are to ensure that the funds are due and payable to a non-resident and that Papua New Guinea assets are not sold at an artificial value.

There are no difficulties in terms of policies governing the obtaining of foreign exchange but the conversion costs are quite expensive. Foreign exchange and capital transactions face various documentation requirements and government approvals. Under the country’s tax clearance system, certain payments require approval from the central bank (Bank of Papua New Guinea) and the Internal Revenue Commission. The tax clearance period is two to four weeks and routine payments take about two weeks. Additional delays may be encountered if companies are not financially up to date with the Internal Revenue Commission. Remittance is done only through direct bank transfers.


Expropriation and Compensation

Investments may not be expropriated without compensation. The Investment Promotion Act 1992 that is administered by the Investment Promotion Authority also protects against expropriation, cancellation of contracts and discrimination, through the granting of most favored nation treatment to all investors.

The Regulations of the Investment Promotion Act 1992, as amended, contain a list of business activities which are restricted to citizens and/or national enterprises (i.e. those in which a national/citizen has 50% or more ownership). Activities restricted to citizen enterprises make up the Cottage Business Activities List (CBAL). Foreign enterprises cannot conduct business in activities listed under the CBAL. The list may be reviewed from time to time. Restricted activities are found in the following sectors:

Agriculture

§ Cultivation and growing of vegetables and other market produce with annual sales of K50,000 (US$25, 201) or less.

§ Farming of animals with annual sales of K50,000 (US$25, 201) or less

§ Poultry farming with annual sales of K50,000 (US$25, 201) or less

§ Hunting, trapping and game propagation including related service activates.

Forestry, logging and related activities

§ Gathering of wild growing forest materials including balata and other rubber-like gums; cork; lac, resins and balsams, rattan; vegetable hair and eel grass; acorns and horse-chestnuts; mosses, lichens and cut evergreen trees used for festive occasions; saps; bark; herbs; wild fruits; flowers and plants; leaves; needles; reeds; roots; or other wild growing materials.

§ Wokabaut (Mobile) sawmill.

Wildlife

§ Hunting or collecting of non-protected fauna, including insects, shells, animal teeth, tusks, feathers, declared sedentary organisms and similar products and living or dead fauna.

Fishing

§ Fishing on a commercial basis in coastal and inland waters. "Coastal" means within three miles off the shoreline.

§ Taking of marine or freshwater crustaceans and mollusks. Hunting of aquatic animals such as turtles, sea squirts and other tunicates, sea urchins or other echinoderms, and other aquatic invertebrates.

§ Gathering of marine materials such as natural pearls, sponges, coral, and algae.

Mining

§ Alluvial mining, according to the definitions of the Department of Mining.

Catering

§ Mobile food delivery service

Wholesale and Retail Trade

§ Wholesale and retail sale of wild growing materials including balata and other rubber-like gums; cork; lac; resins and balsams; rattan; vegetable hair and eel grass; acorns and horse-chestnuts; mosses lichens and cut evergreen trees used for festive occasions; saps; barks; herbs; wild fruits; flowers and plants; leaves; needles; reeds; roots; or other wild growing materials.

§ Retail sale through stalls, tucker shops, and markets.

§ Wholesale and retail sale of secondhand clothing and footwear.

§ Retail sale carried out from a motor vehicle or motorcycle.

§ Wholesale and retail sale of handicraft and artifacts.

§ Repair of footwear when not done in combination with manufacture or wholesale or retail of these goods.

Other Cottage Business Activities

Weaving – The activity includes, but not limited to, weaving of cane products, textiles, baskets, nets, dishes, ropes and bags that are saleable at home, street market or retail outlet on a fee.

Bilum (string bag) Making – Making of string bags (bilums) from traditional bush ropes and cottons taking traditional and contemporary designs that are saleable at home, street market, or retail outlet on a fee.

Knitting – Includes knitting of textile, wearing apparel, cloth, garment, designs, fabrics, and decorations that are saleable at home, street market or retail outlet on a fee.

Art & Craft Making – All sorts of handcraft and artistic designs that are saleable at home, street market or retail outlet on a fee.

Carving – Wood carvings and sculptures on a fee (contract) or assorted carvings that are saleable at home, street market or retail outlet on a fee.

Pottery Making – All sorts of pottery products including clay pots, cups, mugs, dishes, plates, sculptures, and other art forms that are saleable at home, street market or retail outlet on a fee.

Painting – All sorts of paintings in any shape, type and form including portrait paintings, screen paintings, sand paintings, oil paintings, saleable at home, street market or retail outlet on a fee.

Screen Printing – Screen printing of designs including emblems, logos, traditional, and contemporary art forms, commemorations, and special events on apparels including laplaps, shirts, T-shirts and other garments and textile materials, suited to the event, situation or purpose to which they relate, that are saleable at home, street market or retail outlet on a fee.

Sewing – Sewing of garments, textile materials, wearing apparels, cloths, and fabrics that are saleable at home, street market or retail outlet on a fee.

Jewelry Making – Making of simple jewelry products including necklaces, earrings, arm bands, primarily from sea shells, tusks and beads for sale at home, street market or retail outlet on a fee.

Baking – Baking of fresh bakery products including bread loaves, cakes, pies, cookies and scones, saleable at home, street market or retail outlet on a fee.

Coffee Pulping – Coffee pulping using manual pulping machines with the beans saleable at buying points or at coffee depots.

Hunting of crocodiles and processing of skins – Hunting and processing of crocodile skins for sale at established market outlets.

Operation of Tire Repair Service – Operation of small tire repair shops, where not done as incidental to the core business of Maintenance and Repairs.

There is no record of instances of “creeping expropriation”.


Dispute Settlement

Investment disputes can be settled through diplomatic channels or through the use of local remedies before having such matters adjudicated at the International Centre for the Settlement of Investment Disputes or through another appropriate tribunal of which Papua New Guinea is a member. The Investment Promotion Act 1992 that is administered by the IPA also protects against expropriation, cancellation of contracts, and discrimination through the granting of most favored nation treatment to investors.

The principles and rules of common law and equity in England at the time of independence (16 September 1975), subject to certain exceptions, were adopted by the Constitution. Those principles and rules, together with custom (or customary law), comprise the underlying law of Papua New Guinea. Contract law in Papua New Guinea is very similar to and applies in much the same way as in other common law countries such as England, Australia, Canada, and New Zealand. It would however be fair to say that there is considerably less statutory regulation of the application and operation of contracts in Papua New Guinea than in those other countries.

The National Judicial System consists of the Supreme Court, the National Court and other courts established by Acts of Parliament. The Supreme Court is the ultimate appeal court in Papua New Guinea. It has original jurisdiction in matters of constitutional interpretation and enforcement and has appellate jurisdiction in appeals from the National Court, certain decisions of the Land Titles Commission and those of other regulatory entities as prescribed in their own Acts. The Supreme Court is convened as a bench of at least three National Court judges. The National Court also has original jurisdiction for certain constitutional matters and has unlimited original jurisdiction for criminal and civil matters. The National Court has jurisdiction under the Land Act in proceedings involving land in Papua New Guinea other than customary land. In addition to the courts mentioned above, there is also a system of Village Courts established under the Constitution and the Village Courts Act. Matters involving customary law claims are likely to arise at the Village Court level. There is no jury system in Papua New Guinea. Lawyers operating in Papua New Guinea are governed by the Papua New Guinea Law Society and only lawyers registered with the Society should be used.

Under the Reciprocal Enforcement of Judgments Act, certain judgments of certain foreign courts are recognized and are able to be enforced in Papua New Guinea by a process of registration. The Act establishes a system of reciprocity of recognition and enforcement of foreign judgments of designated courts within prescribed countries including Australia, the United States of America, the United Kingdom and New Zealand. Even if a foreign money judgment is not from a designated court, it may still be recognized and enforced in Papua New Guinea by commencing a separate action in the National Court to sue on the judgment under the local rules of private international law.

Papua New Guinea has been a member of the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) since November 19, 1978. In agreements with foreign developers, the government generally adopts the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). The National Court Act (the Act) was amended in 2008 to provide procedures for alternative dispute resolution (ADR) through mediation and other related methods. The Act provides for the powers of the Court in certain circumstances to order or direct part of a proceeding or proceedings to be resolved by way of mediation. The court may make orders or directions for mediation with or without the consent of the parties. The Alternative Dispute Resolution Courts were officially opened on 4 September 2009 and facilitate this cost and time effective method of dispute resolution.

Performance Requirements and Incentives

Performance requirements/incentives are applied uniformly to both domestic and foreign investors. The investment incentives currently available are designed primarily to encourage the development of industries that are considered desirable for the long-term economic development of Papua New Guinea or specific underdeveloped regions within the country and are as follows:

Loans to industry

Feasibility contribution scheme: The government, through the Investment Promotion Authority, is prepared to assist with the preparation of feasibility studies by contributing up to half the cost of such an exercise.

Infrastructure: Where considered appropriate, the government is sometimes prepared to provide or finance infrastructure needed for a particular project in exchange for a negotiable user charge.

Assistance to Papua New Guineans: The government offers a number of forms of financial assistance to Papua New Guineans to assist with the establishment of small-scale business operations, primarily through the Small Business Development Division of the Department of Trade and Industry

Investment guarantees

The Investment Promotion Act contains guarantees that there will be no nationalization or expropriation of foreign investors’ property except in accordance with law, for a public purposes defined by law or in payment of compensation as defined by law.

Tax concessions

Accelerated depreciation rates are available for new manufacturing and agricultural plants. Generous deductions are available for capital expenditure on land used for primary production and accelerated deductions are available for mining and petroleum companies. For more details, refer to the PWC Global Tax Solutions page.

Rural development incentives

A ten-year exemption from tax is available where certain new businesses are established in specified rural development areas. Businesses, resident or non-resident, engaged in the following activities qualify for this exemption:

  • Agricultural production of any kind
  • Manufacturing of any kind
  • Construction
  • Transport, storage and communications
  • Real estate
  • Business services
  • Provision of accommodation, motels or hotels.

The following have been specified as rural development areas:

  • Central province – Goilala
  • Enga province – Kandep, Lagalp, Wabag, Wapenamunda
  • Gulf province – Kaintiba, Kikori
  • Eastern Highlands province – Henganofi, Lufa, Okapa, Wonenave
  • Southern Highlands province – Jimi, Tambal
  • Madang province – Bogia, Rai Coast, Ramu
  • Milne Bay province – Losula, Rabaraba
  • Morobe province – Finschaffen, Kabwum, Kaiapit, Menyamya, Mumeng
  • East New Britain province – Pomio
  • West New Britain province – Kandrian
  • East Sepik province – Ambuti, Angoram, Lumi, Maprik
  • West Sepik province – Amanab, Nuku, Telefomin
  • Simbu province – Gumine, Karimui.

The exemption does not apply to businesses in areas in which a special mining lease or a petroleum development license is granted.

Export incentive for manufacturers

Businesses that commence exporting and manufacturing qualifying goods in Papua New Guinea are exempt from income tax on the profits derived from those sales for the first three complete years. For the following four years the profit derived from the excess of export sales over the average export sales of the three previous years is exempt from income tax. The list of qualifying goods include, among other items; motor vehicles, matches, paint, refined petroleum, soaps, wooden furniture, dairy products, flour, chopsticks, artifacts, clothing and manufactured textiles, and jewelry.

Wages subsidy

A wage subsidy is payable to new businesses that manufacture new manufactured products. The business will receive a prescribed percentage of the value of the minimum wage paid by the business, multiplied by the number of Papua New Guineans permanently employed by the business.

The relevant percentages are as follows:

  • Year 1 – 40%
  • Year 2 – 30%
  • Year 3 – 20%
  • Year 4 – 15%
  • Year 5 – 10%

Eligible products are, broadly, all products listed under division D of the International Standard Classification of All Economic Activities (Third Revision), provided the products are not subject to quota pricing without import pricing or to tariff protection.

Registered foreign companies must annually lodge with the Registrar of Companies an annual return together with a certified copy of its audited financial statements. A foreign company automatically falls under the category of a ‘reporting company’ and therefore must present its audited financial statements. However, a company may apply to be exempted from certain requirements. A foreign company must apply for Certification under the Investment Promotion Act 1992 within 14 days of registering with the Registrar of Companies. A company which chooses to conduct business through a branch registered in Papua New Guinea can repatriate its profits without being subject to withholding tax. On the other hand, the dividends of a Papua New Guinea incorporated subsidiary may attract dividend withholding tax. A higher rate of income tax is imposed on non-resident companies. If a foreign company merely wishes to have a representative office in Papua New Guinea, it may be exempt from lodging tax returns if it derives no income in Papua New Guinea. The Companies Act adopts similar principles and standards of corporate regulation to those in place in New Zealand. Companies registered in Papua New Guinea must lodge an annual return every year with the Registrar of Companies within six months of the end of its financial year.

It can take up to six weeks to obtain both a work permit and visa for non-citizens to work in Papua New Guinea and delays are common due to a lengthy bureaucratic clearance process. There are no discriminatory or preferential export and import policies affecting foreign investors and there are low levels of import taxes.

Right to Private Ownership and Establishment

There is a right of foreign and domestic private entities to establish and own business enterprises and engage in all forms of remunerative activity and a right of private entities to freely establish, acquire, and dispose of interests in business enterprises.

Protection of Property Rights

The legal system for property rights is similar to Australia’s. Foreign investors cannot have direct ownership of land, and therefore long term government leases are used instead. There is a legal system that protects and facilitates acquisition and disposition of all property rights, but there are substantial delays particularly in the lands department, and State Owned Enterprises tend to get first preference over private companies.

Intellectual property rights relating to the reproduction and sale of counterfeit and pirated products, particularly music and movies are ignored with products openly sold on the streets and in shops. Other counterfeit products that infringe on copyrights, patents and/or trademarks are often imported from Asian countries, and sold openly in Papua New Guinea. However there is adequate protection for trade secrets and semiconductor chip layout design.

Transparency of the Regulatory System

The ICCC (Independent Consumer and Competition Commission) has a mandate to foster competition. While there are transparent policies in place, the competition regime works more towards the regulation of existing monopolies and does little to foster competition. Tax, labor, environment, health, and safety laws do not distort or impede investment. However, the lack of implementation of existing laws by some government entities frustrates some investors. For example there are long bureaucratic delays in the processing of work permits and occurrences of corruption and bribery in some government departments. The IPA and the Government are moving, with the assistance of the International Finance Corporation, towards more investment promotion and a much more streamlined regulatory framework to encourage foreign investment. One major project taking place is the development of a new online registration system, based on the New Zealand system and funded by the National Government.

There are informal regulatory processes managed by nongovernmental organizations and private sector associations. There are impediments to the licensing of skilled foreign labor that are imposed by local professional associations such as the Papua New Guinea Institute of Engineers and the Law Society both of which have their own regulatory processes that foreigners must go through before they can work/practice in the country.

Proposed laws and regulations are made available for public comment but comments are not always taken into consideration/acted on by lawmakers. Legal, regulatory, and accounting systems are transparent and consistent with international norms but there are delays in the dispute resolution system due to a lack of human resources in the judiciary. The government has tried to address this by appointing more judges in recent years.

There are no private sector and/or government efforts to restrict foreign participation in industry standards-setting consortia or organizations.

Efficient Capital Markets and Portfolio Investment

There is no factor market but there is free flow of remission of funds offshore subject to approval by the Central Bank (Bank of Papua New Guinea) and the International Revenue Commission. Credit is allocated on market terms and foreign investors are able to get credit on the local market, much more so than in previous years due to the liberalization of policies, provided that foreign investors have a good credit history. Credit instruments are limited to leasing and bank finance. There is no private bond market. Portfolio investments are unregulated and limited to the availability of stocks. In terms of sufficient liquidity in the markets, there is a considerable money supply but a limited pool of borrowers. Bank South Pacific is Papua New Guinea’s only nationally owned bank and is the largest in the country with total assets of K10billion (US$3.8 billion) at year’s end in 2010. Branches/subsidiaries of two Australian banks represent the other financial institutions operating in the country. The Australia and New Zealand (ANZ) Bank had total assets of US$544 billion at year’s end 2010; and Westpac Bank had US$618 billion in total assets at the end of 2010. The banking system in Papua New Guinea is sound.

There are no "cross-shareholding" and "stable shareholder" arrangements used by private firms to restrict foreign investment through mergers and acquisitions.

Competition from State-Owned Enterprises (SOEs)

State owned enterprises (SOEs) are active in the airline, telecommunications, port facilities/management, power generation and transmission, water and sewerage facilities/management, and motor vehicle insurance industries/sectors. Since 2002, SOEs have been regulated by the Independent Public Business Corporation, a 100% State-owned statutory corporation governed by the IPBC Act. The IPBC Board reports to the Minister for Public Enterprises and members of the IPBC Board are appointed by the National Executive Council/Cabinet.

There is no Sovereign Wealth Fund although the government has recently passed legislation to establish one to manage resource revenues. The new legislation envisions that this fund would be held off-shore and managed by an independent Board of Directors.

SOEs are required by law to publish an annual report.

Corporate Social Responsibility (CSR)

There is a general awareness of the concept of corporate social responsibility among both producers and consumers. CSR is practiced principally by larger domestic and international firms, who have had exposure to CSR in international markets. Larger companies and multinational corporations are more inclined to follow generally accepted CSR principles, but these are generally absent among smaller businesses and in the sizeable informal sector. Firms who pursue CSR are viewed favorably by the local populace.

Political Violence

Incidents of damage to projects and/or installations over the past few years have not been specifically politically motivated. The majority of disruption and damage caused to projects is due to disputes between landowners and the central government, which are fueled by a perception in certain cases that the central government has failed to uphold its financial commitments to landowners. Landowners in these disputes have taken out their frustration with the central government by damaging the infrastructure or disrupting the operations of foreign investments in their regions. Periodic tribal conflicts occur, particularly in the Highlands and Sepik regions of the country. While foreign investors/interests are not the target of these often violent confrontations, their project infrastructure can occasionally be inadvertently damaged or their operations disrupted due to the prevailing security situation. The central bureaucracy is increasingly politicized, which has eroded the capacity of government departments and allowed nepotism/political cronyism to thrive in parts the public service. Civil disturbances have been triggered by the government’s failure to deliver financial and development commitments made, particularly to landowners in the resource project areas. They have also occurred in major urban areas based on disputes between long-term residents and newly arrived migrants and/or between competing criminal networks. Urban civil disturbances have resulted in looting and retail property destruction, which often targets Asian-owned retail businesses. The situation in the Autonomous Region of Bougainville has improved dramatically since the signing of a peace agreement between the central government and separatists in 2001. Despite improvements, there remain regions of Bougainville that are essentially closed to outsiders, and foreign investment in the region’s mineral resources is viewed with suspicion by some pro-separatist elements. As the region approaches a possible referendum on its future in 2014, there remains a strong possibility of renewed violence by pro-separatist elements. There are no nascent insurrections, belligerent neighbors or other politically motivated activities in Papua New Guinea.

Corruption

There are adequate laws, regulations and penalties for corruption but enforcement and implementation are weak due to a lack of political will and the limited financial and human capacity of relevant agencies such as the Ombudsman Commission, the Police, the Auditor General’s office, the Audit Inspections Division of the Treasury Department, the Finance and Provincial Affairs Department, and the Public Prosecutor’s office to effectively address corruption. The Asian Development Bank (ADB) has repeatedly highlighted some critical areas of concern including budget management, forestry, fisheries and public procurement. Some foreign investors particularly in the forestry and fisheries sectors have been known to contribute to government corruption by bribing public officials either to fast track paperwork, award discretionary concessions, or “ignore” illegal activities occurring at project sites.

Papua New Guinea has signed and on July 16, 2007, ratified the UN Convention Against Corruption.

Papua New Guinea is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

U.S. firms have identified corruption as a challenge to foreign direct investment. Some critical areas in which corruption is pervasive include budget management, forestry, fisheries and public procurement. Giving or accepting a bribe is a criminal act. Penalties differ for Members of Parliament (MPs), public officials and ordinary citizens. For MPs the penalty is imprisonment for no more than seven years; for public officials the penalty is imprisonment for no more than seven years and a fine at the discretion of the court; for ordinary citizens the penalty is a fine not exceeding K400 (US$201) or imprisonment of no more than one year. A bribe by a local company or individual to a foreign official is a criminal act. A local company cannot deduct a bribe to a foreign official from taxes.

The Ombudsman Commission, the Police, the Auditor General’s office, the Audit Inspections Division of the Department of Treasury, the Finance and Provincial Affairs Departments, and the Public Prosecutor’s office are responsible for combating corruption. Transparency International has a local Papua New Guinean branch – Transparency International Papua New Guinea.

The government encourages companies to establish internal codes of conduct that among other things prohibit bribery of public officials. Most of the larger domestic companies and international firms from Europe, North America, Japan, Australia and New Zealand have effective internal controls, ethics and compliance programs to detect and prevent bribery. Many firms from elsewhere in East and Southeast Asia, particularly those in the resource extraction sectors, lack such programs.

Bilateral Investment Agreements

Papua New Guinea has bilateral investment treaties with Australia, China, Germany, Malaysia, and the United Kingdom, and is in the process of finalizing one with Japan. Papua New Guinea does not have a bilateral investment treaty or a bilateral taxation treaty with the U.S.

OPIC and Other Investment Insurance Programs

Papua New Guinea has been a member of the Multilateral Investment Guarantee Agency (MIGA) since October 21, 1991.

Given the strength of the kina and its value’s close relationship with the Australian dollar, the risk of devaluation or depreciation of its value against the United States dollar is unlikely at present. Indeed, in recent years the United States dollar has depreciated markedly against the kina.

Labor

Papua New Guinea has a severe skilled labor shortage which presents a major constraint to business and investment, as investors are forced to recruit from abroad. Such recruitment is expensive given the very high cost of living in Papua New Guinea. The country spends up to K750 million (US$378,024,193) a year to bring in foreign consultants to fill gaps in the workforce. The figure represents 3.6 per cent of the gross domestic product (GDP). The government generally adhered to the ILO conventions protecting worker rights and labor unions are very active in the country. Problem areas that persist, however, include child labor and trafficking in persons.

Foreign Trade Zones/Free Ports

Papua New Guinea has not established geographically defined duty-free export zones.

Foreign Direct Investment Statistics

According to Bank of Papua New Guinea figures, Australia is Papua New Guinea’s largest source of foreign investment (as it has been historically), accounting for over half of all foreign equity investments in Papua New Guinea in 2007 – the last year for which formal figures are available. Australia is followed by China, the United Kingdom, the Bahamas, Malaysia, Singapore, and Japan. From 2003 to 2008, investment from Australia, China, the United Kingdom, Canada, Singapore, and Hong Kong increased, while it decreased over the same period from Japan and South Korea. Investment from Papua New Guinea’s other major investment sources remained stable. With the share of Papua New Guinea’s six largest investor countries reducing between 2003 and 2007 from 80% to 75% of all foreign investment, Papua New Guinea is clearly developing a broader base for its foreign investment. These figures were compiled prior to the investment by ExxonMobil in a significant liquefied natural gas pipeline project in Papua New Guinea. It is very likely that the United States now figures ahead of most countries other than Australia and China following this sizeable investment. In 2007, the vast majority of foreign equity (73%) was invested in the minerals/petroleum sector, followed by manufacturing (9.1%), agriculture (5.2%), forestry (3.1%), and fisheries (1.2%). Foreign aid has been a significant contributor to the Papua New Guinea economy and was 8% of GDP in 2010.

Foreign equity holdings by country of origin 2007, in $US million:

Australia 1161

United States 24

United Kingdom 103

Japan 53

Canada 49

Singapore 81

Hong Kong 35

South Korea 12

Malaysia 85

Bahamas 95

Bermuda 33

Others 372

Source: Bank of Papua New Guinea statistics used in The Papua New Guinea Investors’ Manual - A handbook for investing and doing business in Papua New Guinea Second edition, produced for Port Moresby Chamber of Commerce and Industry by Business Advantage International Pty Ltd (2011).

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