2013 Investment Climate Statement
Bureau of Economic and Business Affairs
April 2013
Report

Openness To, and Restrictions Upon, Foreign Investment

The Government of Papua New Guinea welcomes foreign investment and the country has a liberal investment regime. 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 to develop renewable resources including forests, fisheries and agricultural commodities over other business proposals. Challenges to investment include weak enforcement of contracts, corruption, crime, inadequate infrastructure (including unreliable power), underdeveloped private markets, and extremely high commodity and internet costs. Recruitment and retention of skilled workers is also an impediment to doing business in Papua New Guinea.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Index

2012

2.5 out of 10; 150th worldwide

Heritage Economic Freedom

2013

53.6 out of 100; 130th worldwide

World Bank Doing Business

2013

104 out of 185

MCC Gov’t Effectiveness

FY13

0.13 (65%)

MCC Rule of Law

FY13

0.07 (60%)

MCC Control of Corruption

FY13

-0.25 (31%)

MCC Fiscal Policy

FY13

-2.0 (64%)

MCC Trade Policy

FY13

85 (98%)

MCC Regulatory Quality

FY13

0.25 (69%)

MCC Business Start Up

FY13

0.94 (73%)

MCC Land Rights Access

FY13

0.59 (57%)

MCC Natural Resource Mgmt

FY13

14.2 (18%)

Facilitating Foreign Investment: Investment Promotion Authority

The Government has made considerable progress 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 Parliament to promote and facilitate investment and act as a one-stop-shop facility for investors. Foreign Investment requires government approval and is regulated by the national government with the assistance of the IPA per the Investment Promotion Act. More information on the IPA can be found at: www.ipa.gov.pg.

The IPA assists in facilitating investment proposals, identifying relevant Government departments and assisting investors in obtaining the required approvals, licenses and permits. 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.

The judicial system upholds the sanctity of contracts; there are no overall strategies or policies that have discriminatory effects. Delays in the IPA’s certification process have ripple effects on investment in Papua New Guinea, but this affects all investors across the board.

Certification conditions apply to IPA approval, 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 three weeks and costs 500 Kina (approximately US$238). Certification of a Foreign Company takes two to five weeks and costs 2,000 Kina (approximately US$952).

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:

  • Individual – K50, 000.00 (approximately US$23,810);
  • Partnership – K50, 000.00 (approximately US$23,810) per partner; and
  • Corporate Body – K100, 000.00 (approximately US$47,620).

If the IPA does require this sort of deposit, it is typically listed as a Condition of Certification and the applicant has six months from the date of Certification to comply. 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 (approximately US$94), payable by 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.

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 Companies Regulation (1998) regulate all matters regarding private and public companies, both foreign and domestic. All foreign business entities must have IPA approval and must 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 and registered as a totally new foreign entity, or incorporated under the laws of another country and therefore registered as an Overseas Company under the Companies Act 1997. A Certificate of Incorporation will be issued for the first option. A Company Registration Certificate will be issued for the second option, provided the relevant documentation is submitted.

While government departments have their own procedures for approving foreign investment in their respective economic 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.

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.

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.

There is no discrimination against foreign investors at the time of the initial investment or after the investment is made. 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.

Industry-Specific Restrictions on Foreign Ownership

There are different requirements for foreign investments in the natural 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. 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 are listed in 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. Restricted activities under the CBAL are as follows:

Agriculture

  • Cultivation and growing of vegetables and other market produce with annual sales of K50, 000 (approximately US$23,810) or less.
  • Farming of animals with annual sales of K50,000 (approximately US$23,810) or less
  • Poultry farming with annual sales of K50,000 (approximately US$23,810) or less
  • Hunting, trapping and game propagation including related service activities.

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: 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 for 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.
  • Crocodile Hunting/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.

Conversion and Transfer Policies

All remittances overseas in excess of K50, 000 (approximately US$23,810) per annum require a tax clearance certificate issued by the Internal Revenue Commission (IRC). In addition, approval of the Central Bank (Bank of Papua New Guinea) is required for annual remittances overseas in excess of K500,000 (approximately US$238,100). 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 Papua New Guinea’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 of 1992, administered by the Investment Promotion Authority, protects against expropriation, cancellation of contracts and discrimination, through the granting of most favored nation treatment to all investors. 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 (September 16, 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. There is, however, 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/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, see Price Waterhouse Cooper’s Global Tax Solutions page (http://www.pwc.com/gx/en/tax/index.jhtml).

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 qualifying goods manufactured by them 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.

Wage 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.

Taxation of Foreign Companies

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 must apply for Certification under the Investment Promotion Act 1992 within 14 days of registering with the Registrar of Companies. 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 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.

There are no discriminatory or preferential export and import policies affecting foreign investors and there are low levels of import taxes.

Work Permits and Visas

All non-citizens seeking employment in Papua New Guinea must have a valid work permit before they can begin employment. The work permit must be granted by the Secretary of the Department of Labor and Industrial Relations (DLIR) in accordance with the Employment of Non-Citizens Act of 2007. 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.

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

Papua New Guinea’s legal system for property rights is similar to Australia’s. Since foreign investors cannot have direct ownership of land, long term government leases are used instead. The legal system protects and facilitates acquisition and disposition of all property rights, but there are substantial delays particularly within the Department of Lands, and State Owned Enterprises tend to get preference over private companies.

Protections for intellectual property rights relating to the reproduction and sale of counterfeit and pirated products particularly music and movies are insufficient. Such counterfeit products are openly sold on the streets and in shops. Sales persist despite sporadic law enforcement action. Other counterfeit products that infringe on copyrights, patents and/or trademarks are often imported from Asian countries and sold in Papua New Guinea. Customs periodically seizes such shipments, but there are significant gaps in their enforcement regime. Adequate protection for trade secrets and semiconductor chip layout design exist in law, and minimal infringements appear to occur.

Transparency of the Regulatory System

The ICCC (Independent Consumer and Competition Commission) is charged with fostering 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 and other 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 frequent complaints about corruption and bribery in 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 K10 billion (approximately US$4.7 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. Papua New Guinea’s SOEs are: Air Niugini, Eda Ranu (water/sewage company for Port Moresby), Motor Vehicle Insurance Ltd, PNG Ports Corporation, PNG Power, PNG Post, PNG Water Board, and Telikom PNG.

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. SOEs are required by law to publish annual reports.

The government has passed legislation to establish a Sovereign Wealth Fund to manage resource revenues. This fund would be held off-shore and managed on-shore by an independent Board of Directors.

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.

High levels of crime persist in Papua New Guinea’s cities. These are generally crimes of opportunity, and are often violent. Urban civil disturbances have resulted in looting and retail property destruction, which often targets Asian-owned retail businesses. The Royal Papua New Guinea Constabulary lacks the capacity to prevent and respond to these incidents, and companies therefore have to devote significant resources to private security.

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 are viewed with suspicion by some pro-separatist elements. As the region approaches a possible referendum on its future in 2014, the possibility for renewed violence by pro-separatist elements remains. There are no nascent insurrections, belligerent neighbors or other politically motivated activities in Papua New Guinea.

Corruption

Corruption is a widespread concern in Papua New Guinea, particularly the misappropriation of public funds and nepotism. The risk of domestic corruption is likely to be enhanced as PNG’s rapid economic growth continues, fueled by large scale foreign investment in the mining and petroleum sectors.

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$190) 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.

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.

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.

Prime Minister O’Neill has made combating corruption a central focus of his administration. Since its inception in August 2011, his “Task Force Sweep” has led to arrests for the misuse of government funds, including several current and former government officials. The head of this task force has complained that recovering stolen government funds is complicated by the fact that tens of millions of dollars are transferred to Australian bank accounts or invested in Australian real estate, principally in Cairns.

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.

Papua New Guinea has signed and ratified the UN Convention against Corruption. Papua New Guinea is not a party to the UN Convention against Transnational Organized Crime or the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

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 United States.

OPIC and Other Investment Insurance Programs

OPIC is active in Papua New Guinea. 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$357.1 million) a year to bring in foreign consultants to fill gaps in the workforce. This 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.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Foreign equity holdings by country of origin 2007

(in $US million)

Country

Holdings

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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