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Life after the LNG Construction Boom

BUSINESSES in PNG are adjusting to the winding down of the construction phase of the PNG LNG project.

By Martyn Namorong

With the project more than 95% complete, there are limited opportunities for many who once enjoyed growth as a result of the construction phase.

In a March presentation to the Port Moresby Chamber of Commerce, Bank of PNG governor Loi Bakani urged the government to capitalise on the end of LNG construction.

“With the completion of the construction phase of the LNG project, the government should coordinate its efforts and priorities towards utilising the labour and capital that are released from the project,” Bakani said.

A recent Business Advantage PNG survey of PNG’s top CEOs also found that there had been a decline in business confidence.

Despite around half of the CEOs expecting increased profitability of their businesses, the number of businesses expecting reductions in profit had doubled and one third of businesses also anticipated reductions in their staffing levels this year.

Indeed, the government has done that by pumping billions of kina into the construction of vital infrastructure.

National budget figures indicate a doubling of infrastructure spending from K1.8 billion ($A693 million) in 2013 to K2.7 billion this year.

However, the Asian Development Bank’s outlook for 2014 highlighted weaknesses in implementation of projects by the government.

PNG’s generally unpredictable state of affairs is also reflected in the tendency for PNG’s economic variables to deviate from conventional wisdom.

Since the LNG project’s construction commenced in 2010, the real estate sector has been viewed as the proverbial “canary down the mine” with regards to the impacts of the LNG project on business.

The profit margins of PNG’s two largest property investors, Nambawan Super and Nasfund, are seen as a relative indicator of the performance of the real estate sector.

Despite the slowdown in LNG construction beginning last year, both funds have reported record profits for 2013.
Nasfund’s net profit rose by 50% to K335 million, while Nambawan Super saw profits grow by 17% to K410 million.

Despite these results, Nasfund chairman Mel Togolo warned Nasfund members that 2014 might not be as fruitful due to the winding down of the LNG construction phase and softer commodity prices.

“The kina is also expected to depreciate by 10% against a backdrop of decline in volume of exports and strong import demand from the retail, construction, manufacturing, petroleum and finance sectors,” Togolo stressed.

“The challenge of continuing to deliver at the same levels as in the previous two years will be more arduous this year and members must expect this.”

The recent stellar performance of the real estate sector provided the opportunity for the largest LNG related landowner company Hides Gas Development Company to diversify its interests.

In mid-2013, HGDC bought out the franchise rights to LJ Hooker in PNG.

Landowner companies such as HGDC have benefited from preferential contracts with the PNG LNG project.

In the third quarter of last year, the LNG project spent K280 million on services procured from landowner companies – a total of K2.48 billion has been spent on similar services thus far.

It is little wonder that the winding down of the LNG project has some landowner companies worried.

Last year HGDC chairman Libe Parindali told Radio Australia that he would like to see the expansion of the list of business opportunities reserved for landowner companies.

“The so-called reserved business area activity needs to be opened up,” Parindali said.

“Now they allow us to do light vehicles, catering, security, labour hire, camp maintenance but what is there for the long-term?”

Perhaps the landowner companies were seeing that despite preferential treatment in some business areas, they had received less than a third of total procurement contracts given to PNG companies.

Of the K10.31 billion the LNG project has spent in the country, landowner companies have received K2.43 billion, with the remainder going to non-landowner PNG-based companies.

Having raised community expectations, many PNG LNG tied landowner companies are faced with the unenviable task of demobilising local workers.

Parindali warned of potential for trouble outside the barbed wire and mesh fences of PNG LNG camp sites.

“I can’t sustain this animal and the expectations that we have created,” he told Radio Australia.

“If we give the jobs away to outsiders, they will not worry about us and then outside the fence we will have the people with high expectations, who cause problems for the project.”

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