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PNG FTZ PHASE 1 FINAL

publicité
Prime Consulting
in association with
Feasibility Study into the Development of
Free Trade Zones in Papua New Guinea
Phase 1 Report
Presented to
December 15, 2009
Table of Contents
Executive Summary ........................................................ i
1.0 Introduction ……………………………………………………1
1.1
1.2
1.3
1.4
1.5
Purpose ..................................................................................1
Study Objective ......................................................................1
Phase I Report ........................................................................2
Phase I Mission ......................................................................3
Project Background and Context ............................................3
1.5.1
Free Trade Zones in PNG ................................................ 3
1.5.2 Special Challenges in PNG……………………………………………………..4
2.0
The Special Economic Zone Concept ...................... 5
2.1 Historical Overview and Evolution of the SEZ Concept ............5
2.1.1
Freeports and Duty-Free City-States ................................. 6
2.1.2
Early Organized Free Zones ............................................. 7
2.1.3
Export Processing Zones .................................................. 7
2.1.4
Multi-Purpose SEZs ......................................................... 8
2.2 Types of Zones........................................................................9
2.2.1
Industrial Areas .............................................................. 9
2.2.2
Industrial Estates and Parks ............................................. 9
2.2.3
Free Zones, Free Trade Zones and SEZs .......................... 12
2.2.4
Public and Private Zones ................................................ 13
2.3 The Purpose of Zones ........................................................... 13
2.3.1
Land Access ................................................................. 13
2.3.2
Infrastructure .............................................................. 14
2.3.3
Trade ......................................................................... 15
2.3.4
Regulatory Simplification .............................................. 15
2.3.5
Laboratory for Reform .................................................. 16
3.0
Best Practices in SEZ Development ...................... 16
3.1 SEZ Functions……………………..…………………………………..
16
3.2 Best Practice: Government as Regulator…………………….
17
3.3 Why the Regulator Should Not Develop Zones ..................... 18
3.4 Functions of the Regulator ................................................... 19
3.5 Private Operators and Management..................................... 19
3.6 Public-Private Partnerships………………………………………...... 21
3.7 Why Zones Fail………..…………………………………………..….. .... 21
3.8. Location and Site Selection ……………………………………… ..... 23
3.8.1
Location ..................................................................... 23
3.8.2
Development Approval Process……………………………………………27
4.0
The PNG Investment Environment ...................... 27
4.1 Macro-economy .................................................................... 27
4.2 Wealth, Distribution, and Risk .............................................. 28
4.3 Taxation ............................................................................... 29
4.3.1 Corporate Taxes .............................................................. 30
4.3.2 Goods & Services Tax ....................................................... 31
4.3.3 Personal Income Tax ....................................................... 31
4.4 Investment Incentives......................................................... 32
4.5 Regulatory & Administrative Barriers to Investment ........... 34
5.0
5.1
5.2
5.3
5.4
5.5
5.6
5.7
SEZ Legal, Regulatory, Institutional Framework 36
SEZ and Free Zones Legislation ............................................ 36
General Business Legislation ................................................ 37
Public-Private Partnerships Strategy and Legislation ........... 43
Autonomous Region of Bougainville ..................................... 43
Interoil Agreement ............................................................... 44
The Institutional Framework for SEZs .................................. 46
Elements of a Good SEZ Law ................................................. 48
6.0
Sites and Infrastructure for SEZ Development……50
6.1
6.2
6.3
Industrial Areas and Facilities in PNG……………………………51
Infrastructure for SEZs…………………………………………………53
Infrastructure in PNG…………………………………………………..53
7.0
7.1
7.2
7.3
Next Steps........................................................... 57
Determine Value Propositions……………………………………...58
Methodology and Approach……………..…………………………..58
Potential Industry Sectors……………………………………………60
Tables
Table 1: Types of Special Economic Zones
10
Table 2: SEZ Functions
17
Table 3: Site Evaluation and Comparison Matrix
26
Table 4:PNG 2009 Resident Individual Income Tax Rates
32
Table 5: PNG 2009 Non-Resident Individual Income Tax Rates
32
Table 6: Overall ranking of PNG in “Ease of Doing Business” out of 183 countries
35
Table 7: Overall ranking of PNG in selected business indicators out of 183 countries (2010) 35
Figures
Figure 1: Historical Timeline of Economic Zone Development
Figure 2 : Infrastructure in Public Zones
Figure 3: Infrastructure in Private Zones
Figure 4: Malahang Industrial Estate Satellite View
Figure 5: Malahang Industrial Estate
Figure 6: Perceived Quality of infrastructure in PNG
Figure 7: Elements of Value Chain Analysis
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60
Boxes
Box 1: Should the Whole Country Be an SEZ?
Box 2: Trade in SEZs: The Problem of Export Requirements
Box 3: Senegal’s Failed EPZ
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Annex I – List of Persons Contacted ..... Error! Bookmark not defined.2
Acronyms and Abbreviations
Note: This report uses an exchange rate of US$ 1 = PGK 2.7 for all conversions
ADB
ARB
AusAid
BOOT
BOT
BSP
EPZ
FIAS
FTA
FTZ
GDP
GNI
GST
ICCC
ICDC
IPBC
IFC
ILO
IMF
IPA
K
MFN
MIC
PGK
PEZA
PMIZ
PNG
PNGPC
PNGSDP
PPP
SEZ
TEU
UNCTAD
USAID
VAT
WTO
Asian Development Bank
Autonomous Region of Bougainville
Australian official development assistance agency
Build Own Operate Transfer
Build Operate Transfer
Bank South Pacific
Export Processing Zone
Foreign Investment Advisory Service (World Bank/IFC)
Foreign Trade Area (also Free Trade Area)
Free Trade Zone
Gross Domestic Product
Gross National Income
Goods & Services Tax
Independent Consumer and Competition Commission
Industrial Centres Development Corporation
Independent Public Business Corporation
International Finance Corporation
International Labor Organization (United Nations)
International Monetary Fund
Investment Promotion Authority
Kina
Most-favored Nation (non-discriminatory trade relations)
Malahang Industrial Centre
PNG Kina
Philippines Economic Zones Authority
Pacific Marine Industrial Zone
Papua New Guinea
PNG Ports Corporation
PNG Sustainable Development Council
Public-Private Partnership
Special Economic Zone
Twenty Foot Equivalent Unit (capacity of 20-ft. container)
United Nations Conference on Trade and Development
United States Agency for International Development
Value Added Tax
World Trade Organization
Prime Consulting - Koios Associates Papua New Guinea SEZ Strategy and Feasibility Study
Executive Summary
The Department of Commerce and Industry has asked Prime Consulting of Papua New
Guinea, in association with Koios Associates of the United States, to carry out a feasibility study that investigates the development of Free Trade Zones (FTZs) in Papua New
Guinea (PNG).
Since 2000, PNG has had a Free Trade Zone Act in place, but until now, no FTZs have
been developed. During this same period, the FTZ concept and development of zones
worldwide has largely shifted from export manufacturing/processing platforms towards special economic zones (SEZs), which provide for greater integration with the
domestic economy and accommodate a wider range of productive activities. The PNG
government has recognized this evolution and has instructed the consultants to orient
their analysis and recommendations towards development of SEZs.
The purpose of this assignment is twofold: i) to prepare a national policy, strategy and
implementation plan for the development of SEZs in PNG, and ii) to conduct a preliminary feasibility assessment for potential SEZ development in four designated areas of
the country, Buka, Daru, Kerema, and Manus.
PNG’s Development Challenge
Although PNG holds numerous opportunities to develop SEZs that will contribute to
employment and income growth and technical advancement, there are also special challenges for the private business operators who want to invest, operate and grow a business as well as for the policy makers who seek to stimulate economic growth and facilitate sustainable livelihoods. The key challenges in PNG include:
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A vast territory. PNG is comprised of hundreds of islands, thousands of square
kilometers of ocean, and an interior of rugged mountains. This has made it difficult and expensive to build and supply transportation infrastructure, telecommunications, and power throughout the country. In addition, there are few population centers of any size, which poses challenges to any business trying to serve
the domestic market or maintain a labor force.
Inadequate infrastructure and connectivity.Due to the size and physical characteristics of the country, the road network, airport and seaport access and telecommunications connectivity are limited.This drastically increases the operating
costs and costs of doing business in PNG.
Staggering ethnic and linguistic diversity. PNG has over 1,000 tribes and more
than 700 distinct languages. This has made it difficult to establish a sense of nationhood, and has contributed to serious conflict between local and provincial
authorities and the national government.
Complicated land tenure. Acquisition of land is a significant barrier to investment and development because currently 97% of the land in PNG is being held
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under customary land management. This makes it difficult to acquire or transfer
land and limits investors and even the public sector when trying to acquire land
for infrastructure projects or for the development of serviced industrial land.
Poor education and training. Unemployment is high in PNG, while at the same
time both the public and private sectors experience severe shortages in skilled
personnel, ranging from senior executives and decision makers to artisans and
semi-skilled laborers. Labor productivity is, consequently, very low.
Crime and lawlessness is prevalent countrywide. A high level of security is
required throughout PNG at all times. This is raises the cost of doing business
and discourages foreign investors and tourists alike.
Corruption. Corruptionis widespread in PNG, creating uncertainty on the part of
potential investors and preventing the country from making the best possible
use of its resources.
None of these problems are unique to PNG, and all of them can be found to a greater or
lesser degree in many other countries. Some countries have been able to overcome
these issues and others have not. Growth in wealth and income from energy and mineral resources will give PNG the resources to mitigate some of these problems, but could
exacerbate others as tensions rise over the use and distribution of revenues.
The SEZ Concept
Special Economic Zones can be – and have proven themselves in many countries – a
valuable contributor to economic growth, incomes, job creation, investment attraction,
transfer of technology and knowhow, access to markets, export expansion, and foreign
exchange earnings. Since they were established in 1994,“ecozones” in the Philippines
by 2007 had attracted cumulative investment of $25 billion, employed 600,000 people
directly, and in 2007 exported more than $40 billion, or 86% of total national manufacturing output. Other countries, including China, Mauritius, Thailand, and several Central
American and Caribbean countries, have transformed their economies and societies
through successful zones programs. At the same time, many SEZ and similar programs
have ended in failure.
The Free Zone concept originated as early as Phoenician and Roman times and became
prevalent in Europe in the 17th and 18th centuries as a way to mitigate the effects of the
high import duties many countries depended on as a principal source of government
revenue, but which often choked off essential trade in goods. The concept evolved over
the years to become a way for governments to assist manufacturers by allowing them to
import raw materials and intermediate goods and re-export finished products without
ever paying customs duties on the imports. Free Zones also helped importers by allowing them to avoid paying import duties until they had sold a product and transferred it
out of the zone, at which point it became the purchaser’s obligation to pay duty. They
also helped manufacturers, even those selling in domestic markets, to avoid tying up
their funds in import duties, paying them only when they sold products out of the free
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zone into the domestic economy. This was a huge benefit, especially when average import duties in most countries were high.
Initially, most free zones, export processing zones, and free trade zones were in industrialized countries, but starting in the 1960s and 1970s developing nations, especially in
Latin America, the Caribbean, and the Middle East, began to develop zones as a way to
spur rapid industrialization. The 1980s saw a rapid rise of zones in East Asia, South
Asia, and South America.
Zone expansion in developing countries occurred at a time when countries were lessening restrictions on political and economic freedoms, and employing an export-led
growth strategy. In 1980, China established its first four special economic zones in
Shenzhen, Zhuhai, and Shanton in Guangzhou province, and in Xiamen in Fujian province. Located in coastal areas far from the political center in Beijing, these zones were
designed as platforms for export-oriented manufacturing and as test cases for marketbased economic reforms. Shenzhen, the first of China’s zones, was a village surrounded
by rice paddies, adjacent to Hong Kong.It has since become an urban agglomeration of
more than seven million people and is the richest in China, with a reported per capita
GDP in 2008 of over US$ 13,000. In 1985, Jebel Ali Free Zone opened in Dubai, UAE on
48 square kilometers of land adjacent to Jebel Ali Port, the sixth largest container terminal in the world. The zone opened with just nine companies in 1985, but has grown
to house over 6,100 tenants in 2008, and now has the world’s largest cargo airport, Al
Makhtoum, nearby.
The Free Zone concept has largely evolved from a pure manufacturing platform into a
Special Economic Zone concept, which tends to cover a greater area and accommodates
a wide range of industrial, service, residential, educational, and tourism/recreational
and even agricultural activities and enterprises. This evolution has included a shift away
from the old notion of Free Zones as a pure export platform with few linkages to their
host economies to a far more open concept, which is explicitly based on integration with
the host economy.
SEZs have served various purposes throughout history—most notably to offset high tariffs during times of mercantilism, and to provide serviced industrial land in locations
without proper access to land, power, water, or waste treatment. SEZs cannot overcome
most geographical disadvantages, compensate for low skills or productivity, mitigate
high labor costs, or make up for resource deficits. Zones can, however, help surmount
other key barriers to productive private investment. The main contributions a welldesigned and well-run SEZ program can make are:
1. Making Land and Infrastructure Available to Businesses: In many countries,
including PNG, serviced industrial land is at a premium. Complicated systems of
land tenure make it hard for an individual investor to secure title to a piece of
land and build a factory or warehouse without spending an inordinate amount of
time and money, and even then security of title is not assured. Investors subsequently face huge challenges getting reliable power, water supply and sanitation,
access to transport, and other basic services. SEZs, because title for the entire
zone is secured – often with government help – offer tenants unencumbered
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land. SEZ operators normally deal directly with public utilities and local governments, so connections to off-site infrastructure are usually in place before the
first tenants arrive. This reduces the uncertainty, cost, and difficulty of investment and makes a location much more attractive to investors. Many SEZs also offer pre-built factory and warehouse structures for sale or lease. This model dominates in many successful zones programs such as those in Singapore and the
UAE. It eliminates most administrative and regulatory burdens on tenants and
also reduces capital expenditures and lead times both important considerations
to companies like garment manufacturers, for which speed of response to customer demand and changing market access conditions is critical.
2. Reducing Bureaucratic Hassles and Delays: To start a factory operation often
requires a great many licenses, permits, and approvals, which typically include:
building permits, environmental certification, fire and safety certification, industrial and commercial licenses, registration with labor and tax authorities, getting
work permits and visas for foreign management and technical staff, and much
more. Ongoing operations can also involve frequent interactions, many of them
adversarial, with local government officials, tax collectors, customs inspectors,
safety inspectors, and others. A properly run SEZ, operating within an appropriate legal framework, can insulate tenants from many of these difficulties, often
through derogation of approval authority from ministries and agencies to the
SEZ authorities. In a 2005 evaluation of Egypt’s public free zones program, zone
tenants uniformly said that by far the most valuable benefit was their ability to
avoid all dealings with government authorities apart from GAFI, the agency responsible for the free zones. 1
3. Trade Facilitation: SEZs facilitate trade by allowing duty-free and often VAT- or
GST-free import of raw materials, intermediate goods and, often, capital equipment. Duties and taxes are then payable only on goods sold into the domestic
customs territory. SEZ programs often encourage development of linkages between companies inside a zone and those outside by allowing sales into a zone to
be zero-rated for GST or VAT purposes, thus allowing full recovery of all GST
paid.
4. Laboratory for Reform: SEZs are not a substitute for wide-ranging reform and
liberalization of business regulation. They can, however, offer governments an
enclosed area in which they can test liberal reforms before introducing them
more widely. China’s first SEZs were the country’s first tentative experiments
with capitalism, in which principles of market economics were tested before being introduced throughout the country.
Best Practices in SEZ Development and Administration
Scope and Purpose: The zone concept has evolved considerably over the past several
decades, from pure export manufacturing platforms like FTZs and EPZs, which had few
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Research conducted by Koios Associates for the World Bank
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links with and contributed little the domestic economy, to a more open concept, called
special economic zones, which allows a much wider range of productive activities – including commerce, residential development, transport and logistics, IT and business
services, finance, media, tourism, medical services, education, and even agriculture tends to cover larger areas, and explicitly fosters linkages with domestic firms.
Ownership and Management: At the same time, an evolution has taken place in the
ownership and management of zones, from a state-dominated model to one driven
largely by private initiative. Almost all of the newer generation of SEZ programs and
laws allow private companies to develop and operate zones and some, including Cambodia’s and Kuwait’s, allow nothing else. There are strong reasons to prefer private
zones over public ones: i) they are less susceptible to political pressures and so can operate on purely commercial principles; ii) they offer better amenities, facilities and services to attract solid companies - often large and well-known multinationals that can
pay their bills and serve as anchor tenants contributing to the development of sustainable clusters. In countries in which governments for various reasons retain full or partial
ownership of SEZs, various forms of public-private partnership are prevalent, ranging
from management contracts to concessions to build-own-operate-transfer (BOOT) and
build-operate-transfer (BOT) models, in which investment costs and risks are shared in
various proportions between governments and their private sector partners.
Regulation of SEZs: SEZs need to be regulated fairly and impartially by government.
Most successful zones programs are overseen and regulated by an independent government-owned agency, equivalent to a statutory agency in PNG, usually governed by a
Board of Directors that comprises representatives of government ministries and agencies together with private business owners and operators. This configuration helps ensure that decisions reflect both government policies and mandates and commercial considerations. Best practice principles favor a complete separation between regulation
and operation of SEZs. When a government acts as both regulator and operator there
are strong temptations for it to favor public zones over private ones, sometimes to the
extent of relaxing land use and environmental standards and rules, subsidizing land
prices and utilities tariffs, and providing concessionary financing to public but not to
private zones.
Functions of the Regulator: An SEZ authority’s main functions should include: i) establishment and enforcement of a transparent and impartial set of rules and procedures in
conformity with prevailing laws and regulations; ii) managing the process of approving
new SEZ development applications, iii) assist and facilitate processes for zone developers and tenants, acting as the principal intermediary with other government bodies, iv)
recommend new private or public SEZs to the government, and iv) verify that there is
sufficient demand for a proposed zone to justify public expenditure on offsite (and, in
the case of public zones, onsite) infrastructure development..
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Cautionary Note: Why Some Zones Fail: The history of economic zones contains as
many spectacular failures as successes, often involving huge public expenditure on
zones that fail to attract investors and eventually close. Reasons for failure include: i)
poor site locations, remote from industrial and population centers and roads, ports,
railways, and airports, ii) policies, rigid export performance requirements, which reduce competitiveness and limit tenants’ ability to manage their businesses as market
conditions dictate, iii) weak coordination between private developers and governments
in infrastructure provision, iv) policies that impede development of linkages between
tenants and domestic companies, thus restricting transfer of technology, know-how and
access to new markets, v) political pressures or imperatives that cause zones to be built
in remote and underdeveloped areas as a “solution” to underdevelopment, but which
lack any of the attributes needed to attract serious investors, and vi) reliance on tax holidays and other incentives to attract investors in the absence of any compelling business
case for investment.
Site Selection and Approval: Since zones often fail because they have been built in the
wrong place, and because some public investment in infrastructure is almost always required even for purely private zones, SEZ authorities have a special responsibility to get
site selection right. This applies to both public and private SEZs. Failed zones, moreover,
do not merely result in a waste of public funds; they also can cause long-term damage to
a country’s reputation as a good place to invest. A regulator needs to evaluate and approve or reject applications from private zone developers and so in a transparent and
impartial way that protects both public interests and private freedoms. An SEZ authority must also, when public or PPP development options are considered, evaluate different locations and recommend to government the one or ones most likely to succeed financially and commercially, contribute to job and wealth creation, enhance competitiveness, and foster sustainable economic development.
If the PNG government, for example, wants to develop an SEZ in a given location it
should, among other things, understand the probable returns on public investment, including such measures as the public investment per job created. If it will cost K1 billion
to build a zone that will create jobs for an estimated 10,000 people, it translates to an
investment of K100,000 per job, which at the minimum hourly wage of K2.29 equates to
over 17 years of earnings. Government may or may not decide to pursue such a project,
but in either case it needs to make an informed decision based on reliable data and estimates.
A number of different methodologies have been used in site selection and approval, but
most of them involve some sort of ranking of different sites by desirability or feasibility
based on a common set of criteria that in addition to cost and economic rate of return
projections include: i) proximity to ports, airports, and roads, ii) conformity with land
use planning and zoning requirements; iii) availability of sufficient and sufficiently
skilled labor; iv) absence of substantial environmental risks (which in PNG would include tsunamis, earthquakes, and volcanoes as well as air or water pollution).
The Investment Environment
Wealth and its Risks: The main feature of PNG’s investment environment, which will
affect almost all economic activities in the country, is the prospect of a huge surge in navi
Prime Consulting - Koios Associates Papua New Guinea SEZ Strategy and Feasibility Study
tional income and wealth from natural gas and other resource projects. Though this
wealth will give the government the means to provide the physical and social infrastructure needed to lift the population out of poverty via a strong productive economic base,
it is not without risks. PNG could easily become a country that lives off the rents from
resource projects. There are many examples of countries that have followed this path,
which usually results in heightened inequality of income, wealth, and opportunity together with the destruction of their agricultural and industrial base. There are enough
examples of this phenomenon from Nigeria, Equatorial Guinea, Nauru, Alaska, and Yemen, to name a few, for PNG’s government to recognize and avoid the temptation to become a rent-dependent economy, but it will need to make tough political decisions to
avoid this fate.
Taxation: PNG’s taxation is not unreasonable by most measures, though there is room
for improvement. PNG’s average effective company tax rate is over 42%, higher than the
36% average for the East Asia-Pacific region, and higher than several other South Pacific
countries like Samoa (18.9%) or Tonga (27.5%). The headline corporate income tax rate
of 30% is not excessive, but a variety of withholding taxes and payroll deductions raise
the effective rate to a fairly uncompetitive level. GST, at 10%, is moderate by international standards, while the absence of a capital gains tax is potentially attractive to investors.
Personal income taxes are relatively high, with a low income threshold and a 40% marginal rate on incomes over K70,000 and 42% on incomes over K250,000. These rates
can affect companies’ decisions to invest since expatriate technical and management
staff may be reluctant to move to such a high tax jurisdiction.
Investment Incentives: PNG offers a fairly standard package of investment incentives
that are competitive with those offered by most of the countries with which it is likely to
compete for investment. Most significant are generous accelerated depreciation allowances and largely unlimited loss carry-forwards, as well as tax credits for R&D, both of
which are among the least distortionary and most targeted fiscal subsidies available.
PNG does offer limited-duration tax exemptions on profits from export sales, which is
contrary to WTO rules and could invite retaliatory measures by certain trading partners, especially as PNG grows wealthier and loses most of the exemptions from trade
rules granted to less-developed countries. PNG also provides a five-year, declining wage
subsidy, which has been found to attract the wrong kinds of investors and increase corruption in other countries that have tried it, notably Botswana, which abolished its subsidy in 2000.
Administrative Barriers to Investment: PNG scores poorly on the World Bank’s Doing
Business indicators – 102nd out of 183 countries in the 2010 report – and fares no better
on other rankings such as Transparency International’s 2009 Global Corruption Report,
(151st of 180 countries) and the Heritage Foundation’s 2009 Index of Economic Freedom,
(ranked “mostly un-free” at 121st of 179 countries overall and 23rd of 41 countries in the
Asia-Pacific region).
Lack of secure property rights, high corruption, undeveloped financial intermediation,
poor contract enforcement, and difficulties obtaining investment approvals head the list
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of conditions that make for a poor ranking. Some of these conditions can, however, be
mitigated by an intelligently-designed and properly-managed SEZ program. SEZs can
offer secure property rights, attract financial service providers, streamline investment
approvals, and improve contract enforcement by requiring all SEZ developers and tenants to agree to international mediation and arbitration of investment disputes. Corruption, at least within the SEZs, could be reduced by designing and implementing procedures that remove, as far as possible, any discretionary elements in decisions and rulings.
Legal and Institutional Framework for SEZs
FTZ Act of 2000: Several laws govern different aspects of SEZ development, some of
which may have to be repealed or amended to make way for a new SEZ program. The
FTZ Act is the most important of these. The most serious issues with the Act are that it:
i) authorizes FTZ development in only four designated sites (later amended to five),
which are among the least-developed regions of the country and present the greatest
financial and commercial challenges for successful SEZ development, ii) does not provide for private SEZ development or management, iii) contains a 100% export requirement, iv) contains a “positive list” of permitted activities (which omits many activities
suited for new-generation SEZs) rather than a much shorter “negative list” of forbidden
activities, and v) grants the Minister of Commerce & Industry nearly complete discretion over all matters pertaining to FTZs.
Other important legal instruments include:
Bougainville Constitution and Laws: Pending a referendum on independence set to
take place in the next five to ten years, the Autonomous Region of Bougainville (ARB)
functions within an ambiguous legal framework. PNG laws remain in force until they are
repealed or amended by the ARB Government, but it is not clear whether a new PNG law
on SEZs would have force in Bougainville. This presents both challenges and opportunities, since the ARB Government could pass a significantly different law to the PNG law,
which could give it certain advantages in attracting investment.
Public Private Partnerships: One of the main purposes of SEZs is to provide appropriate infrastructure (roads, power, water, and telecom) to businesses. Hence, publicprivate partnerships, in the form of management contracts, concession agreements, and
various forms of Build-Operate-Transfer (BOT) and Build-Own-Operate-Transfer
(BOOT) contracts between the Government and private operators are an essential instrument to attract investors to PNG. PNG currently has no law on public-private partnerships, though the government has articulated a policy and passage of a new law is
expected in early 2010. Current draft versions of the law indicate that it conforms to international best practices and will include a PPP Center that will provide strategic and
management support in PPP contracting, negotiations, and monitoring to all government departments and agencies.
The Interoil Agreement: The PNG government in 1997 granted Interoil, an international company, a 30-year monopoly on the sale of refined petroleum products in PNG.
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Interoil owns and operates the country’s sole refinery and is the sole importer of refined
products. This arrangement gives Interoil monopoly pricing power, even though the Independent Consumer and Competition Commission (ICCC) has supervisory authority
over prices. It is a significant concern because higher fuel prices can diminish the competitiveness of PNG industry and even more because several emerging SEZ development
plans depend on their ability to serve shipping and fishing in the South Pacific and East
Asia, which would be difficult if locations in other countries can offer cheaper fuel. A legal review of the Interoil Agreement and other legislation suggests that SEZs would be
unable to get an exemption and import fuel directly from other sources.
Phase 1 research included an assessment of several institutions – especially statutory
agencies – in PNG with an eye towards their potential to take on the responsibility of an
SEZ Authority. In most cases it is better, where possible, to adapt an existing institution
to a new function than to create an entirely new one. The only three candidates among
existing institutions are: i) the FTZ Unit in the Department of Commerce and Industry ,
ii) the IPA, and iii) ICDC, the Industrial Centres Development Corporation.
The FTZ Unit in the Department of Commerce lacks staff, capacity, and experience in
development and oversight of industrial parks, zones, and similar facilities. Investment
in recruitment and training could overcome these deficiencies, but a more fundamental
problem is that it is part of core government. Though some successful SEZ programs are
run by government departments, they tend to be an exception. Government departments are subject to civil service employment rules, which can prevent them from recruiting and retaining the most skilled people. By definition, a government department
cannot resist political pressures and interference as an independent agency can. Finally,
a government department will rarely be able to balance public and private interests as
effectively as an independent agency accountable to a mixed public-private Board of Directors. This is not to rule out the FTZ Unit, but it does suggest that there are other, better options available.
The Investment Promotion Agency: Many countries, including Egypt, combine the investment promotion and SEZ oversight and development functions in a single agency.
The IPA, however, already appears to be overburdened with functions, including management oversight of the Securities Exchange and company registration, to the point
that a World Bank consultancy has been retained to examine the reassignment of some
IPA functions to other bodies so that the IPA can concentrate on its core investment
promotion and facilitation responsibilities.
ICDC is an independent corporation with a mixed public-private Board of Directors,
which has achieved some success in developing and operating the Malahang Industrial
Centre in Lae and in developing the Islands Industrial Centre in East New Britain. Oversight and regulation of public and private SEZs are in many ways more complex and difficult than development and operation of basic industrial estates, and require vastly
more financial and human capacity than ICDC has at present. This capacity could be developed with the right kind of organizational redesign and extensive training, and could
be less costly and more effective than building an entirely new agency.
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Border Development Authority is a statutory agency created by a 2008 Act of Parliament and formally constituted in March 2009. It is governed by a mixed public and private Board of Directors and its purpose is to promote social and economic development
of border provinces, which gives it some jurisdiction in 15 of PNG’s 20 provinces (counting the Autonomous Region of Bougainville and the National Capital District). Its main
current project activity is development of the Vanimo border crossing facilities in West
Sepik Province on the border with Indonesia, in cooperation with the Asian Development Bank. Vanimo was designated in the FTZ Act as a authorized site for FTZ development, and the border crossing development is seen by many as the first stage of an
eventual SEZ development. As a newly-created agency, the Border Development Authority has limited capacity to take on the responsibility of an SEZ Authority, but it is one of
only two existing agencies, along with ICDC, that have any such capacity at all, as well as
an expressed interest in filling that function.
Development Sites and Infrastructure
This report contains a detailed preliminary assessment of PNG’s infrastructure in general, and also with specific reference to SEZ development. It is no secret that PNG’s internal transport, including roads, air services, and coastal shipping are woefully underdeveloped, nor that electric power generation and transmission – despite PNG’s vast
hydroelectric potential and hydrocarbon resources - are inadequate to current needs,
let alone future demand. Telecoms are expensive and service is poor, international air
transport is monopolized, as is domestic air transport, by the national airline, and the
country’s two major ports at Lae and Port Moresby are stretched beyond capacity.
There are numerous large-scale road, port, and power projects under development with
substantial financial and technical support from donors, and the new PPP law expected
to be ratified in early 2010 should facilitate more rapid and extensive infrastructure improvements as private capital and knowhow are added to existing government and donor resources.
Next Steps
In January 2010, the Koios consultants will return to PNG for its second mission. At that
time, the team will:
•
•
•
Analyze trade flows and market access conditions to determine products and
markets that may offer the best opportunity for future industrial development in
PNG
Conduct a sectoral competitiveness analysis. This will consist of a detailed
analysis of existing and future sectors of the PNG economy, with a focus on existing or potential competitive advantages with respect to natural resources, human resources, location, market access, and infrastructure. We will employ a
value chain approach, which is detailed in Section 7.2 of this report.
Carry out a general demand assessment. Having identified the most promising
sectors and industries, the team will analyze global and regional investment
trends in those industries as well as domestic production and demand. This will
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•
include interviews with business owners and executives in PNG and in other
countries to gauge the level of interest in pursuing investment opportunities in
PNG, and will contribute to formulation of detailed demand projections by sector
and industry.
The second mission will also entail research needed to support the Phase III
analysis and final recommendations, including:
o Detailed site assessment and benchmarking, which will include ranking
the four designated sites against the specified site selection methodology
and benchmarking them against a reference site (probably Lae)
o Evaluation of infrastructure at each site, identifying improvements
needed to support a successful SEZ, and calculating the cost of development of both off-site and on-site infrastructure.
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1. 0 Introduction
The Department of Commerce and Industry has asked Prime Consulting of Papua New
Guinea, in association with Koios Associates of the United States, to carry out a feasibility study that investigates the development of Free Trade Zones (FTZs) in Papua New
Guinea (PNG).
1.1
Purpose
Since 2000, PNG has had a Free Trade Zone Act in place, but until now, no FTZs have
been developed. During this same period, the FTZ concept and development of zones
worldwide has largely shifted from export manufacturing/processing platforms towards special economic zones (SEZs), which provide for greater integration with the
domestic economy and accommodate a wider range of productive activities.
The purpose of this assignment is twofold: i) to prepare a national policy, strategy and
implementation plan for the development of SEZs in PNG, and ii) to conduct a preliminary feasibility assessment for potential SEZ development in four designated areas of
the country, Buka, Daru, Kerema, and Manus.
1.2
Study Objective
The objective of this feasibility study is to:
Examine economic zone models – including FTZs and SEZs - adopted by other countries
and identify best practices that may be applicable to PNG, taking into account environmental, social, economic, and political considerations
Determine the scope and areas in which the FTZ/SEZ concept can help realize the objectives and strategies of the Government of PNG (Department of Commerce and Industry)
relative to the creation of a viable domestic manufacturing and industrial base
Evaluate the need and potential for FTZ/SEZ development in Buka, Daru, Kerema, and
Manus
Propose institutional, management, regulatory, and administrative mechanisms that
could be put in place to ensure effective regulation, management, and development of
FTZs/SEZs, including measures for private sector involvement in zone development
Estimate investment and maintenance costs for selected FTZs and recommend funding
arrangements that can ensure their sustainability and facilitate the planning and development of additional FTZ projects
Design a cost-effective operational and management structure for the national and provincial FTZ/SEZ authorities that can encourage and facilitate private sector investment
in zones while minimizing opportunities for fraud, smuggling or corruption.
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1.3
Phase I Report
This report, which covers the first of three phases of the assignment, aims to evaluate
the context of FTZ/SEZ development in PNG. Specifically, it includes:
1.
2.
•
•
•
•
Introduction and Project Context
An overview of the team, its first mission and project context
Identification of the special challenges in PNG
The Special Economic Zone Concept: Definitions and Historical Overview
Exploration of the economic zones concept and identification of the contributions economic zones can and cannot make
Evaluation of international best practices in zone development, identification of
lessons learned, and an overview of why some zones fail
3. Best Practices in SEZ Development and Regulation
• SEZ functions
• Government regulatory functions
• Private operation and management
• Public-private partnerships
• Why some Zones fail
• The importance of site selection and site selection methodology
4.
•
•
•
5.
•
•
•
6.
•
•
•
7.
•
•
Assessment of PNG’s Investment Climate
An overview of PNG’s macro-economic, social and business environment, key
drivers for economic development, and how competitive PNG is within the region
Trade flows and market access
Taxation and incentives
Assessment of PNG’s Existing Legal, Regulatory and Institutional Frameworks
Laws and regulations
Agencies and institutions
The special status of Bougainville
Preliminary Site and Infrastructure Assessment
Assessment of FTZs and industrial estates in PNG
An overview of necessary infrastructure for SEZ development
A review of PNG’s existing infrastructure
Next Steps
Description of tasks and methodology for Phase II research and report
Timing of Phase II activities
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1.4
Phase I Mission
A team of Koios Associate consultants visited PNG between November 1 and November
29, 2009. These experts included Charles Krakoff, Team Leader and Zones Expert; Deborah Porte, Planning and Zones Expert; Jerry Striplin, Competitiveness Expert; Andrea
Erdmann, Zones and Demand Assessment Expert; Marc Reichel, Legal Expert; and Don
Jacobson, Institutional Expert.
Prior to the first mission, the team undertook extensive desk research aimed at collecting and analyzing a wide range of statistical, quantitative, and qualitative information
on topics related to FTZ/SEZ development in PNG. These sources are cited in the footnotes.
Once in Port Moresby, the team held meetings with both the public and private sectors
including: i) government officials, ii) statutory agencies, iii) state-owned enterprises, iv)
private manufacturing and service companies, v) legal and financial advisors, vi) financial institutions, vii) business associations and ix) civil society. A variety of documents,
statistics, strategies, reports and maps were gathered from these meetings, which will
be utilized throughout this assignment.
To understand the physical and investment environment in PNG, members of the team
also visited Lae, the Malahang Industrial Zone, Buka, and Manus. The team had planned
to visit Daru and Kerema as well, but difficulties with internal air transport and unscheduled holidays (the Vision 2050 celebration) made it impossible to do so. These sites
will be visited during the team’s next missions to PNG, which is scheduled for mid January 2010.
While in the field, the team felt it necessary to meet with a cross-section of senior government officials and the private sector in each location (Lae, Buka, and Manus) to obtain their views on the opportunities and constraints in each area. Annex II of this report contains a complete listing of meetings undertaken as part of Phase I.
1.5
1.5.1
Project Background and Context
Free Trade Zones in PNG
In 2000, PNG passed the Free Trade Zones (FTZ) Act with the intention of stimulating
economic development in several remote and undeveloped areas. The Act designated
four provinces – West Sepik, Western, Bougainville, and Gulf – as the areas in which
FTZs could be declared. Manus Province was subsequently added to the list. These areas
were chosen precisely because they are amongst the least developed parts of the country, lacking industrial activity, physical infrastructure, connectivity to other parts of the
country, and few skilled and educated people. Purposely, more developed areas of the
country that possessed greater potential for industrial development, were excluded
from the Act. The apparent rationale for this decision was to use FTZs and their fiscal
incentives as a way to attract private sector investment to these undeveloped locations,
thus providing jobs and income opportunities for local residents. However, since passing the Act, not one FTZ has been established.
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Although not technically FTZs, PNG does have a few industrial zones and centers that
have some of the features of an FTZ or an SEZ, and which might be classified as SEZs
under a new legal and regulatory SEZ regime in the future. These are the Pacific Marine
Industrial Zone (PMIZ) at Madang and the Islands Region Industrial Centre in East New
Britain, which are currently under development, and the existing Malahang Industrial
Centre (MIC) located in Lae, which was constructed in 1994. These sites will be discussed in more detail throughout the report. In addition to these zones, the Border Development Authority, working with the Asian Development Bank (ADB) has begun to
develop the border crossing near Vanimo. This project, started in 2008, focuses on development of new customs and immigration facilities and on creationof an enabling environment that promotes cross-border trade. This type of border crossing and associated trade facilitation at Vanimo could one day stimulate demand in this location for
an FTZ/SEZ.
1.5.2
Special Challenges in PNG
Although there are numerous FTZ/SEZ opportunities in PNG, there are also special challenges for the private business operators who want to invest, operate and grow a business as well as for the policy makers who seek to stimulate economic growth and facilitate sustainable livelihoods. The key challenges in PNG include:
•
•
•
•
•
A vast territory. PNG is comprised of hundreds of islands, thousands of square
kilometers of ocean, and an interior of rugged mountains. This has made it difficult and expensive to build and supply transportation infrastructure, telecommunications, and power throughout the country. In addition, there are few population centers of any size, which poses challenges to any business trying to serve
the domestic market or maintain a labor force.
Inadequate infrastructure and connectivity.Due to the size and physical characteristics of the country, the road network, airport and seaport access and telecommunications connectivity are limited.This drastically increases the operating
costs and costs of doing business in PNG.
Staggering ethnic and linguistic diversity. PNG has over 1,000 tribes and more
than 700 distinct languages. This has made it difficult to establish a sense of nationhood, and has contributed to serious conflict between local and provincial
authorities and the national government.
Complicated land tenure. Acquisition of land is a significant barrier to investment and development because currently 97% of the land in PNG is being held
under customary land management. This makes it difficult to acquire or transfer
land and limits investors and even the public sector when trying to acquire land
for infrastructure projects or for the development of serviced industrial land.
Poor education and training. Unemployment is high in PNG, while at the same
time both the public and private sectors experience severe shortages in skilled
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•
•
personnel, ranging from senior executives and decision makers to artisans and
semi-skilled laborers. Labor productivity is, consequently, very low.
Crime and lawlessness is prevalent countrywide. A high level of security is
required throughout PNG at all times. This is raises the cost of doing business
and discourages foreign investors and tourists alike.
Corruption. Corruptionis widespread in PNG, creating uncertainty on the part of
potential investors and preventing the country from making the best possible
use of its resources.
None of these problems are unique to PNG, and all of them can be found to a greater or
lesser degree in many other countries. Some countries have been able to overcome
these issues and others have not. Growth in wealth and income from energy and mineral resources will give PNG the resources to mitigate some of these problems, but could
exacerbate others as tensions rise over the use and distribution of revenues.
2.0 The Special Economic Zone Concept
Zones around the world go by various names and definitions. Some of the most common
names are—“free zones,” “free trade zones,”“foreign trade zones,”“economic
zones,”“export processing zones,” and “freeports.” Throughout this study, the Koios
team will use the umbrella term “special economic zone,” or “SEZ”, as a term to generally describe all of the above zones.
The special economic zone concept is not new. It is a constantly evolving construct,
which tends to reflect the geographical, political, cultural, economic, and trade outlook
of the day. Hence, throughout time, zones’ legal, regulatory, institutional and physical
forms have changed to meet the needs, conditions and market demands of their location
and era in time.
In this report, the Koios team will largely focus on the modern definition of a “special
economic zone,” which is:
•
•
•
•
•
2.1
A geographically delimited area
Created under SEZ legislation and accompanying regulations
Developed and operated under a common entity separate from the regulatory
body
Utilizing a streamlined business and regulatory enabling environment that may
differ from outside the zone
Often extra-territorial for the purpose of customs, allowing the duty-free importation of goods and services
Historical Overview and Evolution of the SEZ Concept
Elements of the special economic zone concept have existed since Hellenic and Roman
times. The earliest zones were freeports and duty-free city-states, but the SEZ concept
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Prime Consulting - Koios Associates Papua New Guinea SEZ Strategy and Feasibility Study
has evolved throughout time to largely describe areas of serviced industrial land (land
plus infrastructure) for trade, manufacturing, and other industries. Figure 1 provides a
snapshot of the historical timeline progression of economic zones.
Figure 1: Historical Timeline of Economic Zone Development
2.1.1
Freeports and Duty-Free City-States
The trend of freeports emerged during seventeenth and eighteenth century Europe, at a
time when mercantilist economic thinking placed limitations on imports and raised
government revenues through tariffs. The high tariffs charged by many states threatened maritime commerce, as taxes were imposed on any goods transitioning through
those ports. The solution lay in the establishment of freeports—open to international
shipping, with depots where goods could be stored without paying duty.
In 1719, the port of Trieste (in modern-day Italy) became a freeport on the Adriatic Sea,
facilitating trade to and from Germany after the area was no longer dominated by Venice. In the north, the Treaty of Berlin in 1878 created the Port of Batoum (currently
the Port of Batumi, in Georgia) on the Black Sea, spurring trade from Europe through
the Caucasus to Persia.
During the 1700s and 1800s, these ports helped facilitate transport trade throughout
the Mediterranean, North, and Baltic Seas, and also opened areas to foreign commercial
competition. As a result, relatively liberal business environments were created in the
commercial areas surrounding a freeport. The presence of foreign commercial interests
did cause political tensions from time to time, and smuggling was a commonly reported
problem for some freeports. These problems, however, and changing patterns of trade,
led to the closure of many European freeports in the late nineteenth and early twentieth
centuries. In 1886, the Emperor of Russia closed the port of Batoum to free commerce
with the powers of Europe to keep foreigners out. In 1939, the freeport status of Copenhagen, Danzig, and Hamburg ports was taken away in order to control smuggling.
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The nineteenth century also saw the establishment of duty-free city-states - often islands - through the conquest or acquisition of land by European colonial powers for their
own commercial interest. Some good examples are Great Britain acquiring control over
Singapore in 1819, Gibraltar in 1830, Hong Kong in 1841, and Portugal acquiring Macau
in 1887. Being small and barren, many of these city-states had very few productive resources, and thus benefited from duty-free status to grow into leading world shipping
and trading hubs—and many remain so today.
2.1.2
Early Organized Free Zones
The early to mid-twentieth century first experienced the rise of specialized zones to
spur trade, industrialization, and tourism. The Smoot-Hawley Tariff Act of 1930 had
raised tariffs to record levels on over 20,000 imported products to the U.S. In order to
mitigate the destructive effects of these tariffs, the U.S. passed the Foreign Trade Zone
Act in 1934. The foreign trade zone program was designed to expedite and encourage
foreign commerce, lower the cost of U.S. firms engaged in international trade, and retain
trade-related employment and investment in the United States.
Zones were often located as part of, or adjacent to, ports—either as required by law or
for reasons of market access. In the Bahamas, a freeport was created in 1955 through
50,000 acres (20,234 hectares) of land being granted by the government of the Bahamas, and the enactment of tax-free status for local businesses. Four years later, Shannon Free Zone was created on 243 hectares of land adjacent to Shannon International
Airport in western Ireland to become what many consider the first modern free zone.
Government planners were banking on the transit traffic through the international airport and tax and export incentives—many of which are no longer legal under the EU or
WTO—to transform Shannon into a tourism and industrial location. Shannon now hosts
over 120 firms in its existing free zone.
In the 1950s—as the General Agreement on Tariffs and Trade (GATT) began to break
down trade barriers—SEZs became popular trade policy instruments. In the U.S. foreign
trade zones—as in many emerging zones throughout the world—manufactured goods
sold into the domestic market were assessed customs duties based on their full value,
including domestic parts, labor, overhead, and profit. This created a distinct disincentive to sell goods into the domestic economy, creating an “Island Model”, whereby zones
were distinctly separate from the local economy. This also ushered in the era of export
processing zones.
2.1.3
Export Processing Zones
Before the 1970s, most SEZs were in industrialized countries. The 1960s and 1970s,
saw the advent of free zones in Latin America and the Caribbean, as well as government-run zones in Egypt, Israel, Syria, and Jordan. The 1980s saw a rapid rise of zones
in East Asia, South Asia, and South America.
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Zone expansion in developing countries occurred at a time when countries were lessening restrictions on political and economic freedoms, and employing an export-led
growth strategy. In 1980, China established its first four special economic zones in
Shenzhen, Zhuhai, and Shanton in Guangzhou province, and in Xiamen in Fujian province. Located in coastal areas far from the political center in Beijing, these zones were
designed as platforms for export-oriented manufacturing and as test cases for marketbased economic reforms. In 1985, Jebel Ali Free Zone opened in Dubai, UAE on 48
square kilometers of land adjacent to Jebel Ali Port, the sixth largest container terminal
in the world. The zone opened with just nine companies in 1985, but has grown to
house over 6,100 tenants in 2008, and now has the world’s largest cargo airport, Al
Maktoum, nearby.
2.1.4
Multi-Purpose SEZs
Since the 1980s, zones have increasingly moved from an “Island Model” or “Traditional
Model” to an “Integrated Model”, designed to create and strengthen links between companies operating inside the zones and those outside. This began, in part, when countries
like the United States, in 1980, began assessing customs duty for goods produced in a
foreign trade zone and sold into the domestic customs territory only on the value of imported inputs incorporated in final manufactured products, thus making it worthwhile
to source components from the domestic market. Most zones around the world now
operate in this manner.
Over the past ten to twenty years, the scope and complexion of SEZs has shifted. Three
main elements have transformed economic zones since 1990:
Multi-Purpose. SEZs have become more wide-reaching in their scope. Specialty zones
have opened, such as the Labuan Offshore Financial Services Zone in Malaysia in 1990,
and zones such as the Subic Bay Freeport (1992) in the Philippines and Aqaba Special
Economic Zone (2001) in Jordan attract a mix of tourism, residential, and industrialbased developments.
Elimination of Export Requirement. While SEZs still play host to export-oriented
firms, there has been a lessening of the requirement that firms must export. This is partly in response to the WTO Agreement on Subsidies and Countervailing Measures that
has largely eliminated the ability of countries to utilize export subsidies. It also reflects
the reality that domestic producers play an important role in the economiesof developing countries and require the same world-class infrastructure to produce goods for both
export and domestic consumption.
Privatization. There is a strong trend toward private development of SEZs and their
infrastructure. Of the 2,300 zones in developing and transitional economies, approximately 62 percent are developed and operated by the private sector. Private zones first
appeared in Latin American and Caribbean countries in the 1980s. In the 1990s and
2000s, the Philippines, India, Jordan, Thailand, Vietnam, and other countries followed
suit.
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2.2
Types of Zones
SEZ nomenclature is varied, and is reflective of both the types of zones in existence as
well as the time periods in which the zones came into fashion. Table 2 lists the most
common types of SEZs. These are best understood as three main types, as discussed below.
2.2.1
Industrial Areas
Generally, industrial areas are not considered “special economic zones.” They are simply areas that have been properly zoned for industrial use. They also might include “enterprise zones”, which are specially zoned for development or re-development, often
with special incentives attached.
Often in industrial areas, land is individually owned and developed by businesses, and
not under the management of a single operator or corporate entity. In many developed
countries, businesses locating in industrial areas have access to good utilities, roads, and
waste treatment services. This is not likely the case in developing countries, however.
Industrial areas are placed on the SEZ spectrum because they are an improved step over
un-zoned industrial development, which often springs up in an adhoc manner in residential or commercial areas in lesser-developed countries.
2.2.2
Industrial Estates and Parks
The defining characteristic of an industrial estate, industrial park, or technology park is
that the land or facility is generally developed and operated by a single government or
private sector entity. The estate is subdivided into plots, and individual offices, factory
shells, or serviced land is then leased or sold to tenants. The Malahang Industrial Centre
in Lae, PNG is one such example.
Industrial estates sometimes fall under the developmental or regulatory authority of a
government body, such as the Industrial Centres Development Corporation in PNG.
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Table 1: Types of Special Economic Zones
Type of Zone
Typical Eligible Activities
Organizational and Physical
Configuration
Industrial Area
Manufacturing, warehousing, Individually owned plots of
wholesaling
land with no central management
Enterprise Zone Manufacturing, retail, educa- Individually owned plots of
tion, tourism, recreation
land, often in urban area,
normally with no central management
Industrial
Estate, Industrial
Park
Manufacturing, warehousing,
wholesaling
Developed and managed by
a single entity, with or without
a border security fence
Free Zone
Manufacturing, warehousing,
trading
Export
Processing
Zone
Manufacturing, warehousing,
trading, re-exporting. All or
most goods produced or
traded must be sold for export.
Single
Zone
Manufacturing, warehousing
Bonded area developed and
managed by single entity,
with a security fence and
presence of customs
A type of free zone, with an
export requirement. Bonded
area developed and managed
by single entity, with security
fence and presence of customs service
Defined by boundaries of
company property, often with
bonded area for imported
goods
Physical port area given dutyfree status.
Freeport
Factory
Warehousing,
exporting
trading,
re-
Legal Basis
Examples
Area zoned for industrial use. Normal
regulatory laws apply.
Most are unnamed areas, simply zoned
for industrial use.
Special incentives granted under law to
develop and invest in previously
blighted or under-served area. Often a
provincial or local municipal initiative.
Normal regulatory laws apply.
May have special enabling legislation
or may be zoned for industrial use, with
normal regulatory laws may apply.
California Association of Enterprise Zones
Area governed by special free zone
legislation, allowing for duty-free area
and special regulation and/or incentives for zone.
Area governed by special EPZ legislation, allowing for duty-free area and
special regulation and/or incentives for
zone.
Woodlands East Industrial Estate (Singapore)
Al Tajamouat Industrial City (Jordan)
YonezawaHachimanpara Core Industrial
Park (Japan)
Malahang Industrial Centre (PNG)
Lima Technology Center (Philippines)
McAllen Foreign Trade Zone (Texas,
USA)
Miramar Free Zone (El Salvador)
Dhaka EPZ (Bangladesh)
Madras SEZ (India)
Karachi EPZ (Pakistan)
Area governed by free zone legislation
that allows for stand-alone, singlefactory zones.
Ford Motor Company (Michigan, USA)
Deere & Co. (Iowa, USA)
Area governed by special Freeport legislation.
Port Said (Egypt)
Port Louis (Mauritius)
Port of Hong Kong (China SAR)
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Type of Zone
Typical Eligible Activities
Organizational and Physical
Configuration
Legal Basis
Examples
Autonomous
Special
Economic Zone
Manufacturing, trading, warehousing, retail, tourism, residential
Area governed by SEZ legislation, often with many bureaucratic functions
separate from rest of country.
Subic Bay SEZ (Philippines)
Aqaba SEZ (Jordan)
Shenzhen SEZ (China)
Batam SEZ (Indonesia)
Specialized
Zones
Tourism, IT, petrochemicals,
financial services, education,
logistics
Very large zone, often encompassing an entire province, island, or city, sometimes with security fence or
checkpoints.
Normally a specifically defined geographic area, with or
without a border security
fence
Special legislation authorizing zone.
Often developed under general SEZ
legislation and regulations
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Labuan (Malaysia)—Financial Services
Yanbu Industrial City (Saudi Arabia)—
Petrochemicals
Point Indu IT SEZ (Hyderabad, India)—IT
Prime Consulting - Koios Associates Papua New Guinea SEZ Strategy and Feasibility Study
However, it is also just as normal for industrial estates notto fall under any special
enabling legislation or program. Companies located in an industrial park are usually
regulated in the same manner as firms outside the park, and there are normally no special incentives or duty-free concessions for park tenants.
2.2.3
Free Zones, Free Trade Zones and SEZs
A free zone, which by most definitions is the same
as a free trade zone or FTZ, is considered extraterritorial for customs purposes. Firms located
inside the zone are able to import products without paying duties, so long as the imported goods
are subsequently exported. Free zones require
either the physical presence or auditing control of
customs to ensure that companies abide by the
proper import procedures and pay necessary duties. Because a free zone is considered extraterritorial, they are normally enclosed by a secure
border or fence with guarded entrances, security
and customs checks for arriving and departing
goods, persons and vehicles.
Because of their duty-free features, free zones universally have special enabling legislation. The
free zone law and regulations normally cover: i)
the establishment of a free zone’s regulatory authority, ii) standards for zone development, iii)
operational rules and procedures for firms located
in free zones, and iv) special incentives available
for zone locators.
An export-processing zone (EPZ) is a type of free
zone in which firms are obliged to export most or
all of their products. Some countries, such as India
and the United States, allow for companies not located within the geographical boundaries of a free
zone to acquire “stand-alone” or “sub-zone” free
zone status. These firms act as individual free
zones, and are subject to the same customs audits,
regulatory control, and incentives as firms located
within the boundaries of free zone parks.
Box 1: Should the Whole Country
Be an SEZ?
Business leaders and government
officials often ask, “Should our whole
country be an SEZ?” This question
is best answered by carefully formulating the policy goals of an SEZ
program, and reviewing the core
elements of SEZs.
At their heart, SEZs are serviced
industrial infrastructure. In developing countries, SEZs are often established because appropriate infrastructure is lacking throughout the
country. In this sense, the whole
country cannot be considered an
“SEZ”.
Secondly, SEZs normally allow for
duty-free importation of goods. The
physical facilities of the SEZ are designed to protect smuggling of these
goods into the domestic customs
territory. To turn the whole country
into an SEZ in this respect would
mean the elimination of any and all
import tariffs, and associated revenues. Some countries, such as Singapore and Hong Kong, have successfully done this.
Finally, countries often provide
streamlined business environments
and fiscal incentives for companies
who locate in SEZs. If the whole
country is considered an SEZ, then
all businesses should receive such
treatment. In some respects, this is
very desirable, and SEZs can provide a stepping-stone in the direction
of bureaucratic reform.
“Special economic zones” originally referred to
very large tracts of land—often encompassing entire cities, provinces, or islands—with
free zone status, or with laws and regulations that differed from elsewhere in the country. Examples of such zones include the Batam Free Trade Zone in Indonesia, Aqaba
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Special Economic Zone in Jordan, and Shenzhen Special Economic Zone in China. These
semi-autonomous zones are often so large that they contain multiple industrial estates
and free zones within their borders, as well as entire towns and cities.
2.2.4
Public and Private Zones
Special economic zones of all types can either be public, private, or a type of publicprivate partnership. Approximately 60 percent of zones today are privately owned, developed, and operated, and this is the growing trend.
SEZs are normally very large infrastructure projects that require the backing and coordination throughout various levels of government. Their high cost and large size make
them natural candidates for public financing and development. However, beginning in
the 1980s and 1990s, an increasing number of SEZs were developed and operated by
private companies. Private zones are usually better located and better managed than
public zones. They have had immense success in El Salvador, Philippines, Jordan, and
more recently, in India.
2.3 The Purpose of Zones
SEZs have served various purposes throughout history—most notably to offset high tariffs during times of mercantilism, and to provide serviced industrial land in locations
without proper access to land, power, water, or waste treatment. Economic zones can
be one effective engine for economic growth, among others, when they are given their
proper place as a policy tool. SEZs cannot overcome most geographical disadvantages,
compensate for low skills or productivity, mitigate high labor costs, or make up for resource deficits. However, Zones can overcome some of the key barriers identified to the
Koios team by PNG business owners and managers, such as difficulty acquiring land, unreliable utilities, and security problems.
The primary purpose for developing zones can be divided into five main categories:
2.3.1 Land Access
Today, the primary purpose of developing SEZs is to provide serviced industrial land for
a variety of types of industries. This begins with access to land. Companies who locate
in zones want to be assured of clear title to land, in order to secure their investment. In
countries such as PNG, where land is largely under the control of local tribal groups
(customary land), finding suitable land for industrial development is very difficult. For
small and medium-sized companies in the Lae area, the Malahang Industrial Centre provides land and standard factory buildings/shells that they may not otherwise have had
access to.
With respect to land for SEZs, national and provincial governments acting in concert can
play a very crucial role in making SEZs successful. This includes:
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•
•
•
•
•
2.3.2
Developing planning policy papers on land for SEZ development
Engaging in long-term land use planning and zoning for a region
Creating clear, transparent guidelines for government expropriation of land
Creating/maintaining a land titling system and land dispute processes
Making public lands available for SEZ development, in cases where access to private land is impossible
Infrastructure
Though SEZs can and do provide needed infrastructure to tenants, they are still inextricably linked to infrastructure outside the zone, referred to as “offsite” infrastructure.
The largest complaint lodged by companies visited in Lae, was that PNG had poor quality infrastructure—particularly with regard to power and roads. Power outages, load
shedding and surges cause irreparable damage to factory equipment, cause work stoppages, and result in the use of expensive and polluting generators for back-up electricity. The presence of an industrial estate in Lae does not change this. Factories both inside and outside of the Malahang Industrial Centre face the same infrastructure challenges.
One of the obstacles to SEZ development is the massive infrastructure investment that is
necessary to make an area attractive for doing business. Bataan Free Zone in the Philippines required a US$25 million dam to be constructed, and the Cartagena Free Zone in
Colombia had higher than expected development costs because it was built upon a
swamp. Neither of these zones was hugely successful, owing largely to the high cost of
investment. It is usually advisable forSEZs be built on sites suited to industrial use and
close to existing infrastructure so as to reduce development costs and maximize use of
existing assets.
Existing infrastructure—power, water, telecommunications, roads, rail, ports and airports—may be sub-optimal. In these cases, the presence of an SEZ may not provide a
remedy sufficient to attract investors to the zone. Whether or not a zone is privately
operated and developed, the government must always play a strong role in ensuring
that offsite infrastructure supports the existing and future needs of the zone. This requires that the following be taken into consideration for each SEZ:
•
•
•
Industry and market demand estimations/projections
An assessment of all costs and benefits to both the private sector/developer and
the government and civil society
An estimation of the effects on the project if government investment in infrastructure is not made
Large-scale infrastructure requires vision and the ability to reap economic as well as
financial benefits for both the private sector/developers and the government. Infrastructure generally leads economic growth, not the other way around. Because of the
long-term payback period, infrastructure projects must often be at least partly bankrolled or guaranteed by the government.
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2.3.3
Trade
Box 2: Trade in SEZs: The Problem of Export Requirements
Many countries impose export requirements upon companies in
SEZs, and restrict the amount of
goods and services they can sell into
the domestic market. The rationale
behind these types of requirements
is to increase a country’s exportrelated growth.
However, these
types of requirements can ration
scarce infrastructure for the benefit
of exporting firms, but ultimately has
other detrimental effects:
•
Ban on domestic sales precludes the development of forward linkages—distribution, retail, marketing—in the economy.
•
Prevents local producers from
accessing good infrastructure
and services.
•
Restricts business models of
firms who may be able to export
today, but not in the future.
Such firms would be required to
abandon their investments in
zones when they can no longer
export.
•
Part of a country’s trade imbalance can be stemmed through
import substitution. However, if
a zone-based firm cannot produce goods for the domestic
market, consumers will continue
to import those products.
•
Export-linked incentives are not
compliant with WTO obligations
for most countries.
•
Export requirements decrease
the numbers of firms who can
locate in a zone, which is a deterrent to private SEZ investment, whereby developers want
to maximize their rate of return
by leasing space to as many tenants as possible.
SEZs facilitate trade insofar as they eliminate tariffs on imported products, and allow imported inputs to be measured on an equal footing with domestically produced intermediate goods. This was
a particularly salient purpose of zones when tariff
levels were much higher than they now are. In the
absence of foreign trade zones, for instance, it became more cost-effective for U.S. manufacturers to
produce final products oversees, due to the inverted tariff structure that put high duties on semifinished imported inputs necessary for production.
FTZs made it cost-effective to produce products in
the country using some imported materials. Most
zone regimes also exempt imported goods from
value-added tax and/or goods and services tax. As
VAT and GST regimes are introduced in more
countries and as rates rise, the value of this exemption increases.
SEZs have also played an important role in spurring exports from developing countries. China,
Bangladesh, Philippines, Jordan, and Malaysia all
provide examples of strong export-led growth
based in and around SEZs. It is important to understand that this trade increased because SEZ met
the essential needs of export-oriented businesses—access to raw materials, access to markets, location near transportation facilities, low-cost operating environments, and appropriately skilled labor – and not because of any special tax incentives
or subsidies.
2.3.4
Regulatory Simplification
In addition to land and infrastructure, the regulatory and bureaucratic environment in which a
company must operate in is of major importance in
attracting an investor to a location.Extensive research has shown that investors seek policy and
regulatory certainty, transparency, and accountability, and are reluctant to invest in locations in
which regulations and administrative procedures
are unclear and may be subject to arbitrary decisions. SEZs are often used to simplify administra15
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tive procedures and reduce bureaucratic constraints that a country has not been able—
or willing—to address throughout the greater economy. In many countries that environment often includes:
•
•
•
•
Excessive bureaucratic procedures for starting, licensing, and operating a business
Rigid labor regulations
Weak government administrative bodies
Corruption
SEZs can often lessen these restrictions and ease the cost and hassle of operating in an
otherwise difficult location. However, companies located in zones generally perform
better when a country pursues sound macroeconomic policies, realistic exchange rates,
and bureaucratic reforms outside SEZs. SEZs, though they can alleviate some regulatory
problems, should not be seen as a substitute for regulatory reform.
2.3.5
Laboratory for Reform
Special economic zones have been used throughout the world - and especially in developing countries - as laboratories for reforms that extend beyond just regulatory simplification. In the 1980s, for instance, China experimented with capitalist reforms by keeping foreign investors away from the political center of the country and both foreign and
national Chinese news media. Mexico also largely limited foreign investment to “maquiladora”-style, single factory zone operations along the U.S.-Mexico border. Similarly,
North Korea has allowed South Korean investors to establish an industrial estate in the
border city of Kaesong as a test case—or goodwill gesture, at best—for capitalist style
investment and employment opportunities. In the Aqaba Special Economic Zone, Jordan
experimented with a low, flat tax on corporate profits. Since that time, this method of
taxation has spread to additional zones throughout the country.
3.0
Best Practices in SEZ Development
3.1
SEZ Functions
Special economic zone programs have five basic functions that need to be addressed
through legislation, regulations, and the development of an institutional framework.
These functions are: i) regulator, ii) owner, iii) developer, iv) operator, and v) user.
These functions are listed in the table below, along with good practices pertaining to
each.
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Table 2: SEZ Functions
SEZ Function
Who Can Perform
SEZ Function
Regulator
Public Sector
Owner
Public or Private Sector
Developer
Public or Private Sector
Operator
Public or Private Sector
User
Private Sector
3.2
Good Practice Notes
Government regulates zones through an independent or
semi-independent SEZ Authority, or through a department
within an existing ministry. Independent SEZ Authority is
preferred for countries with many zones or with zones that
need to be regulated in a manner that differs from non-zone
areas.
Either government or private landowners can own zones.
Private owners tend to be more sensitive to market demands and, therefore, usually develop zones in areas
where businesses are interested in locating. A system that
allows private ownership of zones is a good practice.
There are three basic options:
1) Private zone owners can develop their own lands
as SEZs
2) The Government can develop publicly owned zones
3) The Government can contract with a private developer to develop a publicly owned zone.
The first and third options are best practices, as they are
less costly to the government and normally result in better
quality SEZs.
There are three basic options:
1) Private zone owners operate their own zones, or
contract operations to another private party
2) The government operates its own publicly owned
zones
3) The government contracts a private operator to
manage an SEZ
Options 1 and 3 are good practices since zones can be managed by private professionals skilled in SEZ operations.
Most users are private companies that lease or buy space
in SEZs. Some SEZ users may be educational institutions
or medical facilities, which might have some public ownership.
Best Practice: Government as Regulator
Good practice in SEZ program development establishes the government as the regulator
of special economic zones. This is accomplished through the creation of an independent
SEZ Authority or through the establishment of a regulatory department within an existing government ministry, such as a Ministry of Trade and Industry. The regulator supervises the zones program from the perspective of: i) public rule of law, ii) mitigation
of environmental hazards, iii) protection of worker and public safety, and iv) promotion
of investment into SEZs. It is important to strengthen the regulatory role of the SEZ
program so that it can oversee the development and operation of zones rather than becoming entangled with conflicts of interest often linked to construction and management of zones.
While the regulation of zones always remains in government’s hands, zone ownership,
development, and operation are can be performed by private enterprises. Many zone
programs around the world, including India, Philippines, Dominican Republic, El Salva17
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dor, Thailand, Egypt,and Jordan, allow private entities to own SEZs. Some countries, including Kuwait and Cambodia, require SEZs be owned by private companies.Under such
regimes, private zone owners are given the right—through SEZ legislation—to develop
and operate their own lands as SEZs. It is very important, however, that the regulator/SEZ Authority: i) supervise the process of approving new SEZ development applications, ii) recommend new private SEZs to the government, and iii) ensure that there is
sufficient demand from private sector users and sufficient public funds for offsite infrastructure to justify new zone development. Good practice stipulates that the private
sector and SEZ regulator work closely together to achieve these goals.
Where the government does retain ownership of zones on public land, it is good practice for the government to tender the development and operation of SEZs to private entities. There are several different PPP models in use by governments around the world.
These include:
Government provision of offsite infrastructure for purely private zones
Government investment in equity of predominately private SEZ venture.
Government procurement of zone developer/operator, paying private entity a
fee for management of zone
• Government procurement of zone developer/operator, allowing private entity to
keep all or a percentage of zone revenues.
•
•
•
Regardless of which PPP model a government chooses, the SEZ Authority still retains its
role as regulator of zones.
3.3
Why the Regulator Should Not Develop Zones
In the 70s and 80’s, it was common for Regulators (SEZ Authority/Government) to also
be the developer and manager of zones. Time and experience have proven that this development model is neither viable nor successful for a number of reasons, such as:
SEZ infrastructure and safety standards are sometimes compromised or not enforced. In order to cut development costs, the SEZ Authority may not build roads to the
proper load-bearing standards or construct facilities, infrastructure and utilities in an
inferior manner. When such an authority is also in charge of monitoring the performance of itself, it can result in relaxed control, potentially at the detriment to zone investors.
Public zones are favored over private zones. Publicly managed SEZs are often not
operated on a cost-recovery basis and often offer below-market pricing for land and
services, which can undercut the competitiveness of private zones.
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3.4
Functions of the Regulator
A regulating body should have the following responsibilities:
•
•
•
•
•
•
3.5
Drafting regulations and rules for zone owners, operators, developers, and tenants (users)
Establishing an SEZ Authority or ministerial department to enforce SEZ laws and
regulations
Facilitating bureaucratic processes for SEZ users
Undertaking feasibility studies to determine the extent to which the government
should participate in on-site and off-site SEZ infrastructure development
Issuing tenders for private zone developers and operators
Providing state-owned land, offsite infrastructure, and other SEZ facilities to the
extent that they provide a reasonable chance of positive financial return for private zone developers. All zones should be developed and run on private sector/commercial principles.
Private Operators and Management
When examining the performance of private SEZs throughout the world, the findings
suggest that they have the ability to out-perform public zones and at a lower cost to the
government. In general, private zones have the following qualities:
Location. Private zones nearly always locate in areas of high economic demand and in
close proximity to infrastructure and labor. Investors want to see a return on their capital investment, and as such, locate where they can attract the most tenants. Public
zones, by contrast, are often placed in locales that are politically “desirable”, but where
few businesspersons actually want to invest.
Services. Private SEZs compete for users partly on the basis of services they offer to
tenants. The privately operated Lima Technology Center in the Philippines, for instance,
operates a hotel within the zone for visiting business guests to the zone. Other private
zones include conference and training facilities, on-site telecommunications, on-site
power generation, daycare and health centers, and other convenience amenities for tenants and their employees.
Infrastructure. Private SEZs and their associated infrastructure almost always have
more appealing layout and amenities and are better maintained than public SEZs. Note
the pictures of infrastructure in the two public zones in Figure 2, in contrast to the infrastructure in the picture of the private zone (Figure 3).
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Figure 2 : Infrastructure in Public Zones
BalajuIndustrial District Public Zone
KathmanduValley, Nepal, 2007
Public Madras SEZ, Chennai, India, 2006
Figure 3 : Infrastructure in Public Zones
Miramar Private Free Zone, El Salvador, 2003
Cost. Private SEZs require less public funding. Governments are typically responsible
for off-site infrastructure. Public cost saving does depend on where private zones are
located, however. If private zone development is left unregulated—or is not part of a
national master plan—rapid growth can outstrip the government’s ability to provide
necessary utilities, roads, ports, and other infrastructure.
Countries that have had very positive experiences with private sector development and
operations of SEZs include the Dominican Republic, Costa Rica, Mexico, El Salvador,
Uruguay, Argentina, Philippines, Jordan, Vietnam, Thailand, Malaysia, Indonesia, and
India. The Philippines’ first four free zones were government developed and operated.
While those four zones continue to be managed by the government, more than 20 new
zones have sprung up and are entirely developed and operated by the private sector.
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3.6
Public Private Partnerships
In addition to public or private zones, there are several possibilities for public-private
partnerships (PPP) in SEZs, and all are considered “good practice”. In each case, the
government normally provides extensions of off-site infrastructure like roads and utilities to the border of the zone. It is important to note that the government should regulate each of these SEZs in the same manner, regardless of the entity that develops or operates the zone. Commonforms of PPPsfor SEZ development include:
100 percent private zone. Thistype of zone is located on private land and developed
and operated by the owner or by a corporation hired by the zone owner. No government participation in on-site infrastructure or zone development is needed.
Government share of zone equity. In order to make the project viable for the private
sector, the government may provide land or cash payments for on-site infrastructure
development, in exchange for an equity stake in zone profits.
Government contracts with private operator. In cases where a zone is publicly
developed, the government or SEZ Authority may wish to contract the operation of the
zone to a private management firm. The operator provides zone management services
for the specified period of contract, and is subject to all applicable rules and regulations.
The following principles can help PNG obtain the greatest benefit from private participation in SEZ ownership, development, and operation:
•
•
•
•
•
3.7
The SEZ law should allow for private ownership, development, and operation of
SEZs
An expropriation or “eminent domain” law should provide fair procedures and
compensation for private lands used for SEZs
The government should approve all private SEZ designations, but only in cases
where it can support the necessary off-site infrastructure required in the near
and medium terms of the project
In cases where the government enters into partnership with a private entity, the
transaction should be governed by national public-private partnership (PPP)
framework legislation.
Tightly regulated developer agreements are needed in cases where the
government tenders SEZ development or operator functions to the private
sector.
Why Zones Fail
In April 2008, the Foreign Investment Advisory Service (FIAS) which is part of the
World Bank Grouppublished the report, “Special Economic Zones, Performance, Lessons
Learned and Implications of Zone Development” which examined the experiences of
more than 50 countries in developing SEZs and noted that the failure or underperformance of economic zones programs can be attributed to a common set of causes,
which include:
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•
•
•
•
•
Poor site locations, remote from industrial and
population centers, which require higher expenditures on infrastructure
Uncompetitive policies, including reliance on tax
holidays and rigid export performance requirements
Poor zone development practices, including
cumbersome procedures and controls
Inadequate administrative structures or too
many bodies involved in zone administration
Weak coordination between private developers
and governments in infrastructure provision
These are not the only reasons SEZs fail. EPZs, in
particular, have suffered from high export requirements (typically 80% or more) and other restrictions, which prevent the development of sustainable
linkages between companies inside and outside the
zones. These restrictions prevent the transfer of
technology and knowhow, and impede access to
markets and the development of domestic supply
chains and industrial clusters, all of which are elements of sustainable industrial development.
Box 3: Senegal’s Failed EPZ
Senegal was a pioneer in the creation
of free zones, establishing the Dakar
EPZ in 1974. The project generated
significant hopes, with expectations
that Senegal could attract enterprises
from industrialized countries, as countries of the Maghreb, the Caribbean,
and Southeast Asia had done earlier.
The scheme’s promoters sought to
exploit Senegal’s geographical position as well as Dakar’s nearby port
and airport facilities. In 1999, 25 years
after its creation, Senegal’s authorities
closed the Dakar EPZ, which at the
time was home to just 14 active enterprises. The principal obstacles to
success for this program included:
Excessive bureaucracy involving different institutions in the country, especially customs;
Unnecessarily long delays in obtaining
necessary permits (often more than
one year);
Unrealistic goals imposed on potential
investors, both with regard to jobs to
be created (each company was required to employ at least 150 people)
and to initial investment;
High cost and low productivity work
force;
High cost of other factors of production (energy, water, communications);
Rigid labor regulations, including a
ban on temporary or contract workers,
strict working hours, difficulty in retrenching or dismissingworkers, and
high severance pay.
Many countries have used Free Zone or SEZ programs as a way to promote economic and industrial
development in poor, remote areas that remain
largely untouched by growth and development in
other parts of the country. Though politically understandable, such efforts have almost always
Source: Cling, J.P., Letilly, G., Export Processsfailed. Generous investment incentives, and even ing Zones : A threatened instrument for global
substantial government investment in infrastruc- economy insertion ?, Développement et insertion internationale (DIAL), WorkingPaper
ture, can rarely overcome the disadvantages of such DT/2001/17, Paris, 2001
locations with respect to: i) access to domestic and
export markets, ii) labor availability and productivity, iii) proximity to support manufacturing and support industries, and iv) even quality of life for domestic and expatriate technical and
management staff.
Thailand’s Southern EPZs, the Bataan EPZ in the Philippines, and the Moin Free Zone in
Costa Rica are a few of the many examples of zones built in remote locations that have
achieved only minimal success. The Moin FZ attracted only three firms in its first eight
years of operation, while the Bataan EPZ required such heavy government investment
in infrastructure it was never able to charge high enough rents to repay the develop-
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ment costs. A 1993 UNCTAD study showed that the Bataan zone had generated a negative $225 million net present value (NPV) 20 years after its establishment.
As a result of these early experiments, many countries retooled their original EPZ and
FZ programs in favor of new SEZ programs based on: i) private sector zone development, ii) openness to a wide range of service activities in addition to manufacturing, and
iii) abandonment of export requirements. Whether these zones were separate customs
territories in their entirety or contained internal duty-free enclaves, the basic rule of
thumb for this new generation of zones was that goods could be brought into the enclaves free of import duties or sales/value-added taxes, and could be re-exported outside the national customs territory without incurring taxes or duties, but that any goods
sold into the national customs territory would be assessed VAT and import duties as if
they were imports from outside the country.
India replaced its EPZ program with a new SEZ program, while the Philippines introduced a new “eco-zones” program to supplant the old-style EPZs. These, and similar
programs in other countries, decentralized regulatory authority and eliminated many of
the bureaucratic and regulatory constraints that had hampered the previous generation
of zones. In addition, the emphasis on private sector leadership meant that private investors, risking their own money, would be loath to invest in remote and uneconomic
locations, which in turn pushed governments to develop infrastructure in areas where it
was most needed and could best contribute to sustainable economic development.
The FIAS report also identified best-practice guidelines for the regulation of activities in
special economic zones, which include:
“Install streamlined procedures for business registration that embodies a simple declarative investment registration system rather than any sort of investment approval regime. Key elements include: i) application to a single government office that provides
the license, ii) promulgation of a negative list of ineligible activities and other explicit
criteria for approval or denial, and iii) a default clause authorizing automatic approval
of the application if no ruling has been issued within the review period.”
“Facilitate provision of secondary permits and authorizations. Additional permits—
land, buildings, labor, health and safety, and so on—can be facilitated by vesting all such
authorizations with the zone authority rather than with other ministries and agencies.
The zone authority should have offices within each zone to perform these services.”
3.8
3.8.1
Site Selection and Development Approval
Location
Location is one of the most important determinants of successful SEZs, and the way in
which governments select and/or approve sites for zone development is at the heart of
successful SEZ program design. This applies equally to public and private zones. In either case, government almost always has some obligation with respect to provision of
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off-site infrastructure, as well as, for on-site development costs for public zones and
must decide on the optimal use of public resources.
Different countries deal with these questions in different ways. When all SEZs are
owned and operated by private businesses, some set of objective ranking criteria is often used, with approval granted for any zone meeting the threshold requirements. But
even in these instances, governments may have to make choices with respect to their
own infrastructure investments and with an eye towards the eventual viability of approved zones. Approval criteria therefore tend to include such dimensions as:
•
•
•
•
•
Proximity to ports, airports, railroads, and/or main highways;
A site of sufficient size to accommodate existing and projected future demand;
Proximity to a reliable source of labor;
Conformity with land use planning regulations;
Conformity with environmental protection laws and regulations.
These are necessary, though not sufficient, conditions for a zone development to succeed. Many SEZ authorities add other conditions and require developers to submit detailed commercial, financial and technical feasibility studies, which are evaluated as part
of the approval process. Part of the justification for such detailed evaluations is to weed
out “unserious” developers. Though no developer would risk his own investment without evaluating the project’s feasibility, there is scant evidence that government’s extensive review of these studies can substantially reduce public or private risk.
Thailand’s industrial estates program seeks to avoid second-guessing business decisions by approving any private zone application that meets the established criteria. The
criteria, however, are not trivial and include a requirement that the developer possess
title to the designated land. In some cases it has taken years for private developers to
amass sufficient land on which to build a zone, a process in which the government offers
no help to the developer. The Thai Government overall offers little direct support to developers. Though the government guarantees provision of transport and utilities up to
the border of each zone, it makes no guarantee as to the timing of that provision, leaving
it up to the roads authority, the electric utility, and other service providers to fit it into
their typically five-year development schedules. Consequently,a zone may be approved,
but the guaranteed infrastructure may not come for several years. Thailand does allow
developers to accelerate the process by financing development themselves and then recouping their investment through discounted provision of utilities.
Thailand’s approach may be well-suited to a country with a large private sector and a
history of attracting domestic and foreign direct investment, but in other countries such
as PNG, developers may need more help, and more explicit guarantees, from the government. In such instances, especially where government resources are limited, the
government may need to impose its own priorities by engaging in site selection rather
than pure arm’s length approval, making judgments as to the best use of public resources.
Things are somewhat simpler for zones built and operated by government or under
PPPs. Governments there have an explicit responsibility to choose optimal sites based
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on projected economic returns from public investments. This is also the case when governments feel they need to act more deliberately to provide infrastructure to support
new SEZ projects.
An active approach to site selection can facilitate SEZ development in countries in which
the SEZ concept is not proven, but it carries certain risks. The process almost inevitably
becomes politicized, at least in part. Governments, seeing their reputation and prestige
on the line, want to maximize the chances for success of any zones in which they participate. Different members of government, especially Parliamentarians, want to secure big
projects that will benefit the people of their constituencies, and if they represent important political blocs a government will be tempted to accede to those demands.
Recognizing these pressures, governments should design SEZ programs so as to base
site selection and approval as much as possible on transparent physical, business and
economic considerations. This is the most reliable way for a government to select and
support projects with the greatest strategic importance and potential to attract private
investment, while discouraging ill-conceived projects.
When the private sector invests in zone development and operations, the government’s
role shifts from site selection to evaluation and approval (or rejection) of requests from
private developers for a certain site to be declared as an SEZ. Many governments have
instituted such an objective approach with considerable success,
In the Philippines, where most SEZs are privately owned and operated, the Philippines
Economic Zones Act (PEZA) sets out fairly simple set of selection criteria:
•
•
•
•
•
•
•
•
“The proposed area must be identified as a regional growth center in the MediumTerm Philippine Development Plan or by the Regional Development Council;
The existence of required infrastructure in the proposed ECOZONE, such as roads,
railways, telephones, ports, airports, etc., and the suitability and capacity of the proposed site to absorb such improvements;
The availability of water source and electric power supply for use of the ECOZONE;
The extent of vacant lands available for industrial and commercial development and
future expansion of the ECOZONE as well as of lands adjacent to the ECOZONE available for development of residential areas for the ECOZONE workers;
The availability of skilled, semi-skilled and non-skilled trainable labor force in and
around the ECOZONE;
The area must have a significant incremental advantage over the existing economic
zones and its potential profitability can be established;
The area must be strategically located; and
The area must be situated where controls can easily be established to curtail smuggling activities.”
Not all of these criteria are perfectly quantifiable and may not lend themselves to perfect side by side comparison of one potential zone against another, but the system overall has worked well, and the Philippines has one of the most successful SEZ programs in
the world.
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Table 4: Site Evaluation and Comparison Matrix
Source: International Finance Corporation
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Table 4 shows a site evaluation and comparison matrix which, although it does require
some subjective judgment, can be a useful analytical tool, likely to be among those employed by the Prime-Koios team in the Phase II and III detailed site evaluations.
3.8.2
Development Approval Process
In addition to selecting sites and approving applications to develop a zone, SEZ authorities also have the responsibility for setting procedures and providing oversight for approval of applications by companies that want to set up operations in a zone. Normally,
getting all the permits, licenses, and approvals needed to build a factory can take a long
time and cost a lot of money. In many zone regimes, however, the government has
streamlined the development process by allowing the SEZ Authority to grant all or most
development approvals. Often this process has been streamlined so that a one-window
approach is in place, and a potential developer’s application can be reviewed, approved
and licensed through this Authority in a cost- and time-effective way. This means that
physical development approvals, which for a factory may include; i) site planning, ii)
construction and building permits, iii) environmental impact assessment, and iv) fire
and safety certifications can be done in one location rather than making the developer
obtain approvals from each Ministry or approving agency.
One element of a best practice SEZ regime is the preparation and promulgation of clear
rules, regulations, and procedures for the physical development of SEZs and for facilities
within SEZs. An SEZ Authority often prepares an information brochure that identifies
the rules for development, including the cost and times needed for various approvals.
The purpose of these brochures is to provide a transparent framework for developers
and minimize opportunities for corruption. Many countries now post this information
online and accept online submission of applications.
4.0 The PNG Investment Environment
4.1
Macro-economy
According to the IMF, PNG is a lower-middle income country, with a real per capita GNI
of $1,010 in 2008, just above the least-developed country threshold of $975. At purchasing-power parity, per capita GDP is $2,000. 2 The income distribution in PNG however, is
highly skewed. A 2005 analysis by the Australian Centre for Independent Studies estimated that 85% of the PNG population is amongst the world's poorest. 3 A high GDP
growth since 2005 has minimally changed that distribution and according to the United
Nations, PNG ranks in the bottom 20% of countries as measured by income equality. 4
IMF 2008 (a), “Papua New Guinea: Selected Issues and Statistical Appendix,” March , 2008
“Papua New Guinea: Thirty Years On,” The Economist, August 25, 2005.
4 UNDP 2007, Human Development Report 2007/2008
2
3
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For much of the first decade of the 21st century, the growth in the world’s economy and
the resulting commodities boom enabled PNG to chalk up impressive numbers for GDP
and export growth. GDP grew by 7.2% in 2008, the highest in over 10 years, while exports rose 22.9%. 5 Estimated growth for 2009 fell to 4.5%, which is fairly robust given
the global economic crisis, and 10 percent growth is expected for 2010, fueled in large
part by the Southern Highlands-Port Moresby LNG project, which is expected to invest
some $10 billion over the next 10 years, as well as by an expected rebound in commodity prices as the global economy recovers.
Historic and projected growth for PNG has contributed to gains in government revenues, which rose by 3 percent in 2008. Since 2008, however, Government spending has
risen faster. After running surpluses for most of the decade, PNG ran a budget deficit of
K480 million in 2008 and an estimated deficit of K86 million in 2009. Government expects a balanced budget in 2010, but the revenue projections are based on speculative
assumptions related to the timing of investments in the LNG project.
In PNG, inflation is not a significant worry. Since 2003, PNG has experienced low inflation rates relative to peer countries, which the IMF has attributed primarily to appreciation of the Kina, itself resulting mainly from commodity price rises, and also to relatively
slow growth in public expenditure. 6 Instead, the risk of accelerating currency appreciation and so-called “Dutch disease,” is much greater.
4.2
Wealth, Distribution, and Risk
The LNG Project, which comprises extraction and conditioning of natural gas in the
Southern Highlands and its transport by pipeline to a new liquefaction plant and shipping terminal in Port Moresby, dominates the economic discussion in PNG. This project
is the first, and smaller, of at least two LNG projects in development. Through both direct and indirect income effects, this first project alone is expected to increase the country’s GDP, private and public consumption, and foreign currency export receipts by
around 100 percent and to increase aggregate employment by as much as 45 percent. 7
The project – together with the second LNG project, in an earlier stage of development,
and several big mining projects in development – has the potential to transform PNG’s
economy and society. Government’s own “Vision 2050,” statement aims for PNG to become “a smart, wise, vibrant and happy” country within the next 40 years, as well as becoming what the World Bank defines as a high-income country.
The risks, though, are high. Intense and sometimes violent conflicts between local landowners and the national government over ownership of resources and sharing of revenues from the project are prevalent. Many other countries, including Nigeria, Angola,
Sierra Leone, and Democratic Republic of Congo, provide cautionary examples of other
Asian Development Bank, 2009, Asian Development Outlook 2009, pp. 272-275
IMF 2008 (a), p. 3.
7 ACIL Tasman 2008-2009, PNG LNG Economic Impact Study, 6 February 2008, revised April 2009.
5
6
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countries in which these issues, if improperly addressed, have lead to protracted conflict, civil war, and failed states.
Other, less dramatic risks could be equally profound. Dutch disease, mentioned above,
has occurred in many countries in which large resource projects have increased revenue inflows and have led to exchange rate appreciation. In PNG this may happen when
growth in demand in the oil and gas sector and high rates of public and private expenditures,cause the Kina to appreciate. A stronger Kina will make other exports more costly
in international markets, thus reducing the competitiveness of domestic companies and
making PNG a more expensive tourist destination.
The gas development is also likely to draw capital and labor away from otherimportant
sectors such as agriculture, tourism, manufacturing, and forestry, and there are signs
that this has already started to happen. Several businesses in Port Moresby pointed to
increased difficulties in recruiting and retaining staff, because the gas project has an almost inexhaustible demand for workers at all skill levels and the project pays salaries
far above the prevailing norms.
The current feasibility study can be seen as one of several measures the PNG government has undertaken to try to ensure that the LNG project contributes to the Vision
2050 goals but also reduces the risks of potential negative outcomes. As such, the government recognizes that by attracting productive private sector investors through the
implementation of a best practice SEZ/FTZ regime, new jobs, income, and opportunities
for citizens of PNG will be developed and could contribute substantially to the achievement of those Vision 2050 goals.
It is essential however, to underline the limitations of an SEZ/FTZ program. Zones are
not a panacea and they cannot fix all of the problems that inhibit the private sector from
investing in a given country or industry. They are a partial solution that works best
when accompanied by other concerted efforts to improve the overall business and investment environment. As following discussions on international experiences of SEZs
will illustrate, FTZs and SEZs cannot by themselves attract investment to areas that
have no competitive advantages and no other features that would attract investors.
4.3
Taxation 8
A country’s taxation framework is an important consideration for companies investing
in a region as all investors seek the highest possible return. In all countries, but especially in those with a high effective tax burden on companies, investors tend to seek fiscal
incentives, including full or partial tax holidays. Empirical research sponsored by the
World Bank, the United Nations, and other organizations, has shown that incentives are
at best, a poor substitute for fundamental tax reform that seeks to lower headline tax
rates while at the same time, broadens the tax base to bring informal enterprises into
This section draws heavily on two publications: 1) PricewaterhouseCoopers, Papua New Guinea Tax
Facts and Figures 2009, and Deloitte, International Tax: PNG Highlights 2009.
8
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the formal system and reduces the motivation to evade taxes. This research, moreover,
demonstrates that incentives, as opposed to the fundamentals of the tax system, are at
most a marginal consideration as investors evaluate competing locations.
Export incentives, whether they are offered inside or outside an SEZ or FTZ, risk violating WTO rules, as well as the provisions of many regional and bilateral trade agreements. The WTO prohibits any subsidies (including tax exemptions or reductions) that
require the beneficiary to meet certain export requirements. It exempts countries with a
per capita GNP of less than $1,000 from this prohibition until they exceed the $1,000
threshold. This exemption was always meant to be temporary in any case, with an envisaged expiry in 2002. In 2002, however, at the inception of the Doha Round of trade
talks, several developing countries, of which PNG was one, negotiated an extension of
the exemption until 2009. In 2007, the WTO approved a further extension until the end
of 2013. Though further extensions are not impossible, PNG’s expected rise in income
over the next several years makes it unlikely that its exemption will be extended, even if
other countries may qualify.
This has important implications for policies pertaining to SEZs or FTZs. Since most
companies do not make a profit during the first two or three years of operation, investors in a zone within the next several years will be unlikely to reap any benefit before
the export subsidies must end. Rather than enact a policy only to repeal it, or to enter
into investment agreements that may soon run afoul of PNG’s international commitments, designing an SEZ/FTZ fiscal regime that conforms to best international practices
is likely to be in PNG’s long-term best interest.
4.3.1
Corporate Taxes
Company Income Tax.Resident companies in PNG pay a 30% tax on net pre-tax profits
and non-resident companies pay 48%. The World Bank, 9 however, has calculated that
the average effective tax on company profits in PNG is about 42.3%, substantially higher
than the average of about 36% for the East Asia-Pacific region. While the average tax
rate for the region has fallen significantly over the past several years, in PNG it has risen
slightly.
A “resident company” is defined as one that is incorporated in PNG, or has its central
management and control in PNG, or if it carries on business in PNG and has its voting
power controlled by PNG resident shareholders.
Withholding Tax. Dividends paid by resident companies to non-resident companies or
individuals are subject to a 17% withholding tax, or 15% if there is a tax treaty. Dividends paid by one resident company to another are subject to the tax but according to
PWC, the amount is rebated or credited against year-end income tax liability.
Withholding taxes are also imposed on several other transactions, including:
9
World Bank/IFC 2009, Doing Business 2010: Papua New Guinea
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•
•
•
17% on management fees paid to certain nonresidents;
10% on fees paid to PNG companies that do not have a certificate of compliance
from the IRC;
12% on service fees paid to foreign contractors on prescribed contracts.
Tax on Interest. Interest paid by a financial institution is subject to a 15% withholding
tax.
Capital Gains Tax. PNG imposes no tax on capital gains.
Land Tax. The power to levy land taxes is vested exclusively in the Provincial Governments. Because of customary land tenure and social issues arising from it, as well as the
absence of clear title, land taxes are rarely imposed or paid.
Payroll Tax / Superannuation Contributions. Employers with more than 15 employees are required to contribute 8.4% of employee salaries to authorized superannuation funds, and must deduct 6% (the minimum employee contribution) from the base
salary of citizen employees. Taxable non-wage benefits are not subject to payroll tax.
Effective May 2009, non-citizens are also subject to social taxes, but this is under review.
Training Levy. All companies with turnover above K200,000 must pay a 2% training
levy calculated on the sum of all salaries/wages and other benefits paid.
Gaming Machine Tax. The operator of a gaming machine must pay 60% of the “taxable
gross profit” it produces.
4.3.2
Goods & Services Tax
In PNG, a GST of 10% is payable on most goods and services, with the exception of a
small number of zero-rated or exempt categories. Exports are zero-rated, as are prescription drugs, medical prostheses, prescription eyeglass lenses, and the supply of
goods and services, except cars, to a mining or petroleum company. Some items are exempt from GST. These include financial, educational, and medical services, and the provision of housing or a motor vehicle to employees as part of an employment contract.
4.3.3
Personal Income Tax
In the country, personal income tax is relatively high, with the bottom 22% rate taking
effect at an annual income of K7,000 and five other tax bands that rise to a top rate of
42% on income over K250,000. Residents and non-residents are taxed at the same
rates, though non-residents pay tax on all income and do not benefit from the exemption on the first K7,000 of income, as residents do.
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Table 4:PNG 2009 Resident Individual Income Tax Rates
Taxable Income K
Tax Thereon K
Rate of Tax on Excess %
7,000
nil
22
18,000
2,420
30
33,000
6,920
35
70.000
19,870
40
250,000
91,870
42
Source: PricewaterhouseCoopers, Papua New Guinea Tax Facts and Figures 2009
Table 5:PNG 2009 Non-Resident Individual Income Tax Rates
Taxable Income K
Tax Thereon
Rate of Tax on Excess
Nil
nil
22
18,000
2,420
30
33,000
6,920
35
70.000
19,870
40
250,000
91,870
42
Source: PricewaterhouseCoopers, Papua New Guinea Tax Facts and Figures 2009
Stamp Duties. Stamp duties are applied to both individuals and companies on many
financial and property transactions. Conveyance of real property and transfer of longterm leases is subject to a 5% stamp duty. Transfer of mining and petroleum leases is
subject to a 2% stamp duty. Lease documents attract a tax of 0.4% on leases of less than
5 years’ duration and 1.0% for terms of 5 years or more. Share and stock transfers incur a 1% stamp duty. Stamp duties on property or lease transfers as a result of company
mergers or acquisitions are limited to K600 per transaction up to a ceiling of K12,000
for an overall merger or acquisition.
4.4. Investment Incentives
Like many countries, PNG offers a number of fiscal and non-fiscal incentives to investors. Many of these have been offered in individually-negotiated agreements for specific
projects, including those in the mining, oil, and gas industries. Oil and gas extraction and
mining in most countries are subject to incentives, taxes, royalties, and incentives that
differ from those applicable to other sectors, and this different treatment is often justified by the special needs of these industries and their often special importance to national economies. At the same time, equal treatment and transparency are generally accepted best practices in all forms of taxation, so even if a given industry is treated differently from others, it is generally a poor idea to grant different treatment to different
companies operating in the same sector. Otherwise, PNG’s system of incentives, though
far from perfect, by and large offers equal treatment and transparency to beneficiaries.
The main incentive programs are:
Accelerated Depreciation. Rather than providing tax holidays or exemptions, PNG’s
tax code relies mainly on accelerated depreciation allowances. Manufacturers can claim
100% accelerated depreciation on industrial plants with an expected life of five years or
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more and on construction or purchase of new industrial or warehouse buildings. Depreciation over five years is available for most other business purchases. Similarly, 100%accelerated depreciation is allowed for many kinds of agricultural and tourism plant
and equipment, and plant and equipment used for research and development.
It should be noted that a double deduction is granted for export market development
(e.g., advertising, publicity, market research, bid preparation, trade fair participation)
and R&D expenditure. In addition, tax losses can be carried forward for 20 years in most
cases, though primary production ventures qualify for unlimited loss carry-forwards.
Export and R&D Incentives. Export incentives are granted for a wide range of goods.
These consist of a three-year exemption on taxes from the profits of export sales, followed by three years in which the profits from any export sales in excess of the previous
three years’ average export sales are similarly exempt from income tax.
Wage Subsidy. Companies manufacturing new products (products not previously manufactured in PNG) as certified by the Internal Revenue Commission qualify for a wage
subsidy, which declines from 40% in the first year to 10% in the fifth year. The subsidy
is based on the minimum wage rather than actual wages.
Wage subsidies are intended to overcome productivity and skills deficiencies in the domestic work force. By gradually reducing the subsidies over five years, proponents argue that this provides sufficient time and a strong incentive for companies to train their
workers so as to attain competitive levels of productivity. There is scant evidence that
wage subsidies work. By reducing the cost of labor, they may encourage companies to
hire more workers than they need, but these jobs tend to be shed when the value of the
subsidies declines. Wage subsidies also appear to contribute little to enhanced worker
skills or higher productivity and may even, by artificially lowering the cost of labor, impede progress by reducing employers’ incentive to raise efficiency and lower production costs.
Botswana introduced its Financial Assistance Policy (FAP) in 1982. The FAP included
wage subsidies even more generous than those offered by PNG: 80% in the first year,
tapering off to 20% in the fifth and final year. A 1999 review of the policy found that the
program attracted many investors whose main interest was in reaping the incentives
and who generally closed up and left when the subsidies ran out, but found little evidence that the FAP grants were a crucial factor in attracting to Botswana those foreign
investorswho came and have remained. In 2000 Botswana abolished the FAP.
Infrastructure Credits. The tax code allows a tax credit to taxpayers engaged in mining, petroleum or gas operations, primary agriculture production, and tourism. In PNG,
any expenditure on local or regional physical and social infrastructure such as roads,
schools, clinics is considered tax paid and credited against the overall tax liability for the
lesser of the actual expenditure or 1.5% of assessable income for the year for tourism
and primary production operations and 0.75% for mining, petroleum and gas operations.
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In general, incentives of this kind are useful, since they can mobilize private investment
in areas and functions in which public funds are insufficient to meet local and regional
needs.
Regional Incentives. Qualified new businesses starting in one of 44 specified rural development areas and engaged in designated rural development activities (exploitation
of non-renewable resources is specifically excluded) get a 10-year exemption from corporate income tax. Companies can use tax losses from these activities to offset tax liabilities from other activities.
Regional investment incentives generally have a poor record in attracting investment.
Incentives typically are more generous for the more remote and undeveloped the location. Even a generous tax holiday will rarely compensate for the increased production
and transport costs and the difficulty of finding adequately skilled labor in such a location.
Thailand’s industrial estates program, which offers generous incentives to locate in remote and undeveloped areas, has found that private developers will not invest in these
areas and instead choose to invest in the Eastern Seaboard area, which enjoys only a
modest regional incentive. They choose to be in the Eastern Seaboard because it is close
to the national port and highway system, creates important economies of scale, and has
a large pool of labor to draw on and superior infrastructure. Because of the success of
the Eastern Seaboard, there has been a migration of workers from Thailand’s northeast
and west to the region to support the industry and investment.
International experience in regional investment incentives illustrates that it is far better
to attract workers to areas where productive investment is taking place than to try to
attract investment to areas that have little to offer. In other words, policies that seek to
bring people to jobs rather than bringing jobs to people tend to achieve much greater
success.
4.5
Regulatory and Administrative Barriers to Investment
The World Bank’s Doing Business reports assess, on an annual basis, business regulations and their administration within 183 countries and uses 10 indicators.10 For an
investor, this report offers a snapshot view of a country and quickly identifies how easy
or difficult it is to do business there. According to the latest Doing Business Report 2010
issued in October 2009, PNG ranked102 out of 183 countries, which was a decline of 7
points compared to the previous year. In comparison to other countries in the region
and in the same income category (lower-middle income), PNG’s ranking was below the
average.
10 See www.doingbusiness.org; The latest Doing Business Survey (2010) provides the results of data collected in June 2009.
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Table 6: Overall ranking of PNG in “Ease of Doing Business” out of 183 countries
2010
2009
East Asia & Pacific
Lower Middle Income
(24 countries) -2010
(54 countries) - 2010
PNG
102
95
17
21
Best
per- Singapore
Singapore
Singapore
Georgia
former
Source: Doing Business 2010 and 2009, World Bank
Other Pacific Island economies have consistently ranked higher than PNG in the World
Bank assessment. These include Tonga (52nd), Samoa (57th), Kiribati (79th), Palau
(97th) and Marshall Islands (98th).
PNG, shows particular weakness in three areas: i) obtaining construction permits
(121st), access to credit (135th), and enforcement of contracts (162nd). It takes 217
days on average to obtain a construction permit in PNG according to the Doing Business
survey, compared to an average for countries in the region of 168 days. The procedure
to enforce a contract is with 591 days and an average cost of 110% of the claim, is particularly lengthy and costly. In fact, going to court in PNG is economically unwise because even if the claimant wins, the cost of enforcement is often higher than the claim.
In addition, indicators of ease of starting a business (104th) and closing a business
(104th) were no better than the overall country ranking. Only the indicators of employing workers (26th) and protecting investors (41st) were significantly better than PNG’s
overall ranking.
Table 7: Overall ranking of PNG in selected business indicators out of 183 countries (2010)
Starting a
Construction
Employing
Registering
Getting credit
business
permits
workers
land
PNG
104
121
26
83
135
Protecting
investors
Paying taxes
PNG
41
96
Source:Doing Business Survey 2010, World Bank
Trading
across borders
89
Enforcement
of contracts
Closing a
business
162
104
The Koios team interviewed numerous private business owners and operated, nearly all
of whom mentioned corruption as a major burden on businesses, especially with respect to “’ payments” to obtain government services and approvals within a reasonable
time, as well as direct payments to officials in exchange for public procurement contracts. This anecdotal evidence is confirmed by PNG’s ranking in the Corruption Perception Index of Transparency International, which ranked PNG in 2008 far at the bottom
at position 151 of 180 countries. 11
11
See www.transparency.org
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5.0 Assessment of PNG’s Legal, Regulatory, and Institutional Framework
To best understand howa new SEZ legal, regulatory, and administrative regime might be
structured so as to facilitate successful development of SEZs in PNG, it is important first
review the legal, regulatory and institutional frameworks currently in place.
5.1
SEZ and Free Zones Legislation
Although PNG does not have specific SEZ legislation, it does have the Free Trade Zone
Act of 2000 and the Industrial Centers Corporation Act to oversee the development of
industrial facilities and activities in zones. An SEZ Law has been proposed for PNG, and
is currently being drafted by the IFC. It is expected to be ready for review by the Ministry of Commerce in early 2010.
Free Trade Zones Act of 2000. The FTZ Act of 2000 is, as the name suggests, limited to
free trade zones. The Act proclaims that any tenant within a zone has to export all its
products 12, unless the Minister declares otherwise. 13 Two types of zones are permitted
under this Act: i) commercial and ii) industrial FTZs. All zones, their type (commercial
or industrial) and activities permitted within the zone (a positive list) are declared by
the Minister himself. 14 All activities undertaken in the zone must be licensed. 15An individual authority is to be set up for each FTZ. The Land Act 1996 is not applicable with
regard to leases in FTZs, 16and the FTZ Act includes special provisions on land
es. 17However, urban planning requirements and land titling procedures do apply. The
Minister is in charge of granting leases with a term that can range from 10 to 40 years.
The FTZ Act is limited in scope in that it authorizes FTZ development in only four specified locations (a fifth, Manus, was added later), and its prescriptions diverge substantially from what is now considered best practice. This is especially true of the requirement
that 100% of output must be exported unless the Minister grants a case-by-case variance, but extends to other conditions such as creation of a separate governing authority for each zone (with no centralized and standardized regulations), and the absence of
any provision for private zone development and operation. The government does agree
that the existing FTZ Act is obsolete and does not meet international standards, and has
encouraged the Koios consultants to consider wider SEZ concepts as opposed to a narrow export processing construct.
Industrial Centers Development Corporation Act of 1990. The Industrial CentersDevelopment Corporation Act created a new state-owned body (ICDC) and gave it responsibility and authorityover the planning, development, operations, and promotion of
12
13
Sec. 15 and 16 of the FTZ Act.
Sec. 16 (2) of the FTZ Act.
Sec. 14, 20-27 of the FTZ Act.
Sec. 28 of the FTZ Act.
17 Sec. 29-43 of the FTZ Act.
15
16
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Industrial Centers. 18 An Industrial Center is defined as an area of land designed to host
businesses, similar to that of an industrial estate.
The Act does not define activities that are allowed or prohibited in the Industrial Centers. Instead, its purpose is to contribute to the industrial development of the country in
accordance with the Government’s policies. 19 To achieve this goal, ICDC acquires land,
develops the designated area with infrastructure, and rents out plots and standard prebuilt factories and warehouses. These tasks are all covered by the Act.
ICDC has so far developed one center, the Malahang Industrial Centre at Lae, has begun
development of a second center on East New Britain, and has a mandate to construct
two more facilities.Lack of funding, however, has slowed the process considerably, so
that only the Malahang Center is yet operational. To date, the main problem encountered during the development of the existing two facilities has been related to land. In
order to lease land to investors, the ICDC had to purchase customary land and alienate it
to the State, then re-issue individual land titles for plots within the centers. This process
was complicated and lengthy.
Draft SEZ Act. In the context of a Structural Adjustment Loan by the World Bank, the
SEZ Unit of the Department of Commerce, in conjunction with the IFC, is in the process
of developing a new legal framework for SEZs. Adoption of this new legislation is proposed for mid 2010. (Annex III contains a list of best practice requirements for an SEZ
law.)
5.2
General Business Legislation
PNG Constitution. The Constitution of the Independent State of PNG guarantees a
number of basic economic rights to its citizens, such as equal opportunity to take part in
the economic life 20and protection of property from unjust expropriation with expropriation allowed only for public purpose and against compensation. 21 At the same time the
Constitution includes several rigid business rules, for example it asks for a strict control
of foreign investment 22, and that the state shall take active measures to control and participate in the economy. 23
Under the Constitution, only PNG citizens or companies with majority ownership by
PNG citizens can own freehold land. 24 This is not necessarily a problemfor SEZ development, however, because the Constitution and other laws posefew restrictions on
business activities undertaken by foreign persons or companies and in any case land
can be leased to foreigners for up to 99 years.
Sec. 5 of the ICDC Act.
Sec. 5 a) of the ICDC Act.
20 Art. 1 (2) of the Constitution.
21 Art. 53 of the Constitution.
22 Art. 3 (5) of the Constitution.
23 Art. 3 (6) of the Constitution.
24 Art. 56 (1) of the Constitution.
18
19
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A special case is the autonomous region of Bougainville, which has its own Constitution.
The status of Bougainville is discussed later in this section.
Companies Act of 1997. PNG has a comprehensive and sufficient legal framework for
companies and other forms of businesses. 25 Companies, both foreign and domestic,
have to register for incorporation according to the Companies Act. 26 The Act includes
comprehensive rules on corporate governance, such as: i) shareholders’ rights and obligations, ii) minority shareholders’ rights, iii) the rights and iv) obligations of the Board
and its Directors, as well as, v) sufficient rules on reporting and audition obligations,
mergers, and liquidation procedures. According to the World Bank’s doing business
report, it takes 2 months (56 days) to complete all procedures before starting a company. This includes tax and employment registration (19 days), opening a company account (9 days), and registering with the Capital District Commission (20 days). In actuality however, the Investment Promotion Agency (IPA), which is the company registration authority, says that registration of a company takes 1 to 2 weeks. Local legal practitioners confirmed this timeline.
While the registration of companies is sufficiently organized and can be finalized within
a reasonable timeframe, the overall business start-up process is nearly two months
longer than in many countries that compete with PNG’s to attract investors. PNG’s
102nd-place ranking confirms that in most other countries businesses can finalize this
process faster. This is not a critical issue for businesses because the rules on corporate
governance in PNG meets international standards, but the business start-up procedures
can and should certainly be improved to help improve the competitive advantages of
PNG.
Business Licensing. In general, domestic businesses do not need a license before starting their operations. However, all limited liability companies in Port Moresby must obtain a trading license from the National Capital District Commission after registering
with the IPA. In addition, there are a number of sector licenses required for certain activities.
On the positive side, licenses are needed only for a small number of specific sectors and
activities like mining, tourism, and telecoms.
Investment Promotion Act 1992. Investment promotion in PNG is controlled by the
Investment Promotion Act of 1992 and its regulations. The Act applies to both foreign
and domestic investment and includes provisions on: i) reserved activities for domestic
businesses, ii) foreign investment certification, iii) rules for joint ventures between domestic and foreign businesses, iv) basic investment guarantees, and v) the establishment of an independent Investment Promotion Agency. The regulations include the details on a negative (reserved) list and the procedure for exemptions. Activities in many
sectors are included in the reserved list, though most of these are oriented towards protection of smaller-scale activities typically not highly attractive to foreign investors. The
25
26
Companies Act of 1997, Companies Regulation of 1998, Companies Rules.
Art. 12-15 of the Companies Act.
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list includes selected activities in agriculture, forestry, real estate, rentals, recreational,
hotels, restaurants, fisheries, and transport, but is not of a scope or character to deter
any significant foreign investment.
All foreign investors need to obtain an investment certificate from the Investment Promotion Authority in Port Moresby. A K100,000minimum investment threshold is applicable to foreign investments in PNG and K500,000 to investments in Bougainville. Applications for investments in Bougainville are submitted to the ARB Government for
clearance, which is usually issued in about one month.PNG Central Government clearances generally take an additional two weeks.
The main characteristics of the law and its regulation are its protective character and
the high degree of discretion given to the IPA. Though the Act states at the beginning to
promote and facilitate domestic and foreign investment, every foreign investor needs a
certificate to do business in PNG, the list of activities reserved for domestic businesses is
long, and investment thresholds are relatively high. In short, the Investment Promotion
Act is relatively restrictive for foreigners and does not reflect good practice.
Prices Regulation Act 1949. The Prices Regulation Act established a Price Controller, 27and authorized it to fix maximum wholesale and retail prices for goods and services. 28 In 2000, the Price Controller was replaced by the Independent Consumer and
Competition Commission (ICCC). The Act provides details on the powers of the Price
Controller (resp. ICCC) as well as the price setting and enforcement procedures. The Act
does not give any rules as to when and for which specific products price controls shall
be applied; this is left to the discretion of the ICCC, thoughnew price controls must be
gazetted.
Price controls are currently applied to a range of products including: fuel (petrol, diesel,
kerosene); public transportation services (public motor vehicles, taxis); water and sewerage charges; freight handling charges; flour; rice; fish; butter, coffee beans; soap;
milk; and sugar.
Though prices for a wide range of products and services are controlled by the ICCC, few
of them will affect SEZ development or investment in general. However, the processing
of certain agricultural products like milk, sugar or coffee beans may become relevant to
SEZs operations. In addition, fuel prices, high or low, as well as freight handling and water and sewerage are important investment consideration indeed.
Independent Consumer and Competition Commission Act of 2002. The Act establishes the Independent Consumer and Competition Commission (ICCC), which sets the
rules for fair competition, market protection, and utility regulation. Corporate mergers
and acquisitions must be authorized by the ICCC, according to an established set of criteria for assessing the market impact of such transactions. ICCC decisions cannot be
27
28
Sec. 4 of the Prices Regulation Act.
Sec. 10 and 21 of the Prices Regulation Act.
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appealed administratively and can be challenged only in court. The Minister and Cabinet are prohibited from interference in decisions made by the ICCC.
The Act also provides criteria for fair business behavior, namely to fight price fixing, anti-competitive arrangements, the abuse of a dominant market position, and re-sale price
agreements. Exceptions from prohibited market behavior can be granted only by a specific Act or regulations approved by Parliament. 29
A third task of the ICCC is the regulation of state-owned monopolies or quasiimonopolies, including: i) Motor Vehicle Insurance Ltd., ii) PNG Harbours Ltd., iii) Post
PNG Ltd., iv) PNG Power Ltd., and v) Telikom PNG Ltd. In line with best international
practices, however, regulation of the telecom sector will be assigned to a separate and
independent regulator starting in early 2010.
The supervision of Interoil, which since 1997 has enjoyed a 30-year exclusivity agreement with the Government for importation and domestic refining of petroleum products,is explicitly excluded from ICCC’s portfolio by a separateregulation. ICCC does,
nevertheless, monitor wholesale and retail fuel prices.
Consumer and competition protection is a relatively new concept in PNG, and the ICCC
Act is a sufficient tool to achieve this. It grantsICCC sufficient authority to monitor and
prevent unfair business practices and anti-competitive behavior. The dominance of
state-owned companies, many of them monopolies, and the guaranteed long-term monopoly for fuel supply granted to Interoil, over which ICCC has no authority, are the real
impediments to investment in general and successful development of SEZs.
Environment Act of 2000. The Act is applicable where certain activities like construction, infrastructure development, installations, harvesting or releasing emissions are
executed. 30 The environmental act divides all activities into three levels. 31 Any activities
listed at level 2 and 3 must be licensed and reported to the Director of Environment
prior to work commencing. 32 All activities at level 3 require an Environmental Impact
Assessment (EIA) and an EIA may sometimes be required at level 2, if the Director determines it appropriate. 33This is consistent with best international practice, which allows relatively quick and simple environmental approval procedures for activities with
lower environmental risk and reserves more detailed evaluation and control for riskier
undertakings. The procedures, requirements and standards are prescribed within the
Environment Act. The Minister upon recommendation of the Environmental Council
approves or rejects applications involving an EIA, 34otherwise the Director of Environment decides on applications. 35
Sec. 65 (1) of the ICCC Act.
Sec. 41 of the Environment Act.
31 Sec. 42 of the Environment Act.
32 Sec. 44 of the Environment Act.
33 Sec. 50 of the Environment Act.
34 Sec. 59 of the Environment Act.
35 Sec. 65 of the Environment Act.
29
30
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Environmental protection is a vital task and plays an important role particularly for a
country with vast tourism potential. The Environment Act is a sufficient base to achieve
this goal.
Land Act of 1996, Land (Ownership and Freeholds) Act of 1976 and Land Registration
Act of 1981. This legislation regulates land rights, land ownership, urban planning and
zoning.
The Land Act establishes two basic types of land: i) customary land, and ii) state land.
Customary land is held by a person or community based on traditions and customs.
Title to all other land is held by the state. 36 Approximately 97% of all land in PNG is customary, and most State Land is concentrated in the more populated areas. The Minister
can acquire customary land by agreement or compulsory process/expropriation
(against fair compensation). 37
Land ownership in the form of a freehold right, is only allowed to a limited group of institutions named in the Land (Ownership and Freehold) Act. 38 These are the State, other governmental bodies, local-level Governments and Local-level Government Special
Purposes Authorities, incorporated land groups, business groups, and any other corporations that are declared by the Act to be corporations that are to be regarded as citizens for the purposes of Section 56(1)(b) of the Constitution. According to the Constitution, foreigners are not allowed to own land.Land can however, be leased from the Government, if it is not declared reserved land. 39 The purpose of the lease has to be in compliance with the Physical Planning Act. 40 The procedure to obtain a State Lease is described in the Land Act and includes the public advertisement of the lease, and the application requirements.
The Land Board decides on applications for State Leases, 41 however, the Minister has
the right to decide directly on applications. 42 The maximum lease term for business and
residence purposes is 99 years. 43 Leased land can be sub-divided with approval from
the Minister. 44 State leases can also be given for no specified special purposes after a
tender process by the Minister. 45
The application of the Land Act can be exempted. In fact, such an exemption exists for
land declared as aerodromes under Section 54 of the Land Act in connection with the
Aerodromes (Business Concessions) Act of 2000.
Sec. 4 of the Land Act.
Sec. 7 of the Land Act.
38 Sec. 15 of the Land (Ownership and Freeholds) Act 1976.
39 Sec. 49 of the Land Act.
40 Sec. 67 of the Land Act.
41 Sec. 71 of the Land Act.
42 Sec. 72 of the Land Act.
43 Sec. 93 and 102 of the Land Act.
44 Sec. 130 of the Land Act.
45 Sec. 100 of the Land Act.
36
37
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A land lease also has to be registered. The land registration process is described in the
Land Registration Act and can be quite time consuming. It may take up to 1 year to obtain a proper land title.
The term “public purpose” is defined in Sec. 2 (1) of the Land Act and includes the use of
land for economic development – 2 (1) b) - and industrial development (2 (1) q).
Land acquisition too is often a serious impediment to doing business. The registration
procedure takes on average 72 days according to the World Bank Doing Business Survey. However, this includes only the time to register land with a building from a known
owner with a title. Delays commonly occur in connection with the alienation of customary land into State Land, which is particularly relevant for the development of SEZs
outside the urban areas. The alienation process of customary land requires an investigation into the history of land ownership. Such an investigation can be costly and lengthy. After a plot is alienated, the lease has to be registered. The ICDC reports that even
as a government institution, the registration of individual plots within ICDC Industrial
Centers delayed project development by many months.
Employment Act of 1978, Employment of Non-Citizens Act of 2007 and its Regulations 46,and the Migration Act of 1978. Labor relations are not perceived as a barrier
to doing business in PNG. In fact, PNG performed particularly well in the World Bank
survey, ranking 26th of 183 countries in employment procedures (the ease of hiring and
firing of employees). In PNG the relationship between employer and employee is governed by the Employment Act 1978. Labor contracts can be terminated according to a
straightforward procedure and only with reasons set in the Employment Act. 47 The Act
sets basic labor standards such as: i) maximum working week, ii) sick leave, iii) sick
leave payment, etc., and iv) gives employees the right to establish unions, but it does not
impose unduly strict conditions on hiring, dismissal, or retrenchment of workers.
Foreigners, employed or self-employed, must obtain a business visa according to the
Migration Act 1978 and a work permit according to the Employment of Non-Citizens Act
2007 and its Regulations. Business visas are issued by the Immigration Office and work
permits by the Department of Labor. A work permit is valid for a specified job and person for a maximum of five years. 48 Foreigners can obtain a work permit only if the prospective employerdemonstrates that there is no citizen available for the job, and that the
candidate has sufficient language and professional skills.
While work permits can be obtained without difficulty, lawyers report that the business
visa process constitutes a bottleneck. The capacity of the Immigration Office is low and
it takes many visits and a lot of time to obtain a business visa. However, this is an implementation and not a legal problem.
Employment Regulation 1980, Employment of Non-Citizens Regulation 2008.
Sec. 33-39 of the Employment Act.
48 Sec. 10 and 11 Employment of Non-Citizens Act 2007.
46
47
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5.3
Public-Private Partnerships Strategy and Legislation
PNG does not yet have a law on public-private partnerships, though one is expected to
be enacted soon. One of the main purposes of SEZs is to provide appropriate infrastructure (roads, power, water, and telecom) to businesses. Hence, public-private partnerships, in the form of management contracts, concession agreements, and various forms
of Build-Operate-Transfer (BOT) and Build-Own-Operate-Transfer (BOOT) contracts
between the Government and private operators are an essential instrument to attract
investors to PNG.
To promote concession agreements the PNG government developed and adopted a national PPP strategy in December 2008. Government is now in the process of drafting the
law and regulations to implement the PPP strategy. Institutionally, the government
plans to establish a PPP Centre, under the Treasury Department, with the mandate to: i)
support line-ministries and authorities in the implementation of PPP projects, ii) ensure
compliance with the rules, and iii) guarantee consistency and transparency of the
process. The PPP Centre would screen all project proposals, facilitate bids, evaluate and
select developers, and support/monitor contract management.
5.4
Autonomous Region of Bougainville
Bougainville is an autonomous region (ARB) established after a peace agreement was
signed with PNG in 2000 following nearly 10 years of armed conflict. Bougainville has
its own constitution, citizens, parliament, government, judiciary, budget and some legislation. The 2000 Peace Agreement called for a referendum on full independence to take
place between 2015 and 2020, and most observers expect the measure to pass. Any SEZ
development in Bougainville will have to take account of several special legal considerations.
The autonomous government has full jurisdiction over the region of Bougainville. 49 The
Autonomous Region of Bougainville is in charge of labor, land and natural resources, sea
and air transport, the environment, manufacturing, trade, commerce and industry,
physical planning, public works, oil and gas, water and waste water. 50 The ARB can establish new institutions according to a procedure set in Article 43 of the Constitution.
Until they are replaced by new ARB legislation, all national laws of PNG are applicable in
Bougainville according to Schedule 4, Art. 296. However, the ARB may impose its own
tax regime excluding company tax, VAT and customs duties, 51 and it has the right to develop its own land policy. Currently, customary land can be owned only by a citizen of
Bougainville.
Art. 3 of the Constitution.
Art. 42 and Art. 290 with Schedule 4.
51 Art. 154 (2) of the Constitution.
49
50
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The minimum investment threshold for foreign investors is K500,000, which is five
times higher than elsewhere in PNG. To date Bougainville has not adopted and replaced
any of the PNG laws relevant to future development and operations of Special Economic
Zones. It is important to note, however, that Bougainville may establish its own, separate, SEZ regime that could differ substantially from the national SEZ law and policies
now under development.
5.5
Interoil Agreement
The cost and availability of energy and fuel is a critical factor in PNG’s competitiveness.
Several potential SEZ development plans under discussion are based on the potential to
provide services to regional shipping and fishing, which becomes impossible if low-cost
sources of fuel are out of reach. The present assessment only describes the current situation and identifies key issues relevant to SEZ development. However, an in-depth legal
and economic study of the applicability and effect of the Interoil fuel monopoly is
strongly recommended, since its effects extend much wider than SEZs alone.
The supply of petrol products to the country and the construction and operation of a
refinery is subject to an agreement dated May 1997 between the PNG Government on
one side, and the Interoil Pty. Ltd. (Refiner, PNG) and EP Interoil Ltd. (Developer, Cayman Islands), on the other side. The term of the agreement is 30 years from the issuance of a refinery license based on the Oil and Gas Act 1998, which was issued to Interoil in August 2000.
To avoid conflict, a regulation was passed in 2002 to exclude Interoil and the Agreement
from the competition rules set in the ICCC Act. Consequently, ICCC monitors retail and
wholesale fuel prices, but not the input costs.
Content of the agreement. The agreement contains a range of rights and obligations of
both parties. Main features of the agreement are:
Interoil and EP Interoil shall build and operate a refinery for Crude Oil in PNG. 52 The
companies shall construct a refinery according to the specifications provided in the Refinery Proposal. The Refinery Proposal was not available for this review, but from the
Agreement can be deducted that the companies proposed to relocate and refurbish a
former refinery (Chevron Nikiski) and provide initially, a daily refining capacity of
35,000 barrel 53. The Agreement does not mention the level of investment, but mentions
the sum of at least US$35m to be held on behalf of S.P. Interoil for the completion of the
refinery. 54The relation between Interoil, EP Interoil and S.P. Interoil is unclear.
The Agreement guarantees exclusive rights to Interoil for the sale of refined petrol
products to domestic distributors for the 30-year life of the agreement. 55 The guarantee
Clause 6 a) of the Agreement.
Recitals of the Agreement.
54 Clause 3.2 c) of the Agreement.
55 Clause 19.1 with Clause 2 of the Agreement
52
53
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covers motor gasoline, aviation gasoline, dual-purpose kerosene, automotive diesel oil,
gasoil, industrial diesel, industrial fuel oil, liquid propane gas, liquid butane gas, naphtha, and other viable products of the kind that the refinery may from time to time determine to produce.
Government may not authorize another refinery in the same business of Interoil. 56
The Agreement calls on the government to “persuade and induce” domestic producers
of crude oil to provide the crude oil to the refiner at fair market price and mandates that
new agreements with crude oil producers include a domestic market obligation to sell
to Interoil. 57 Interoil is, however, entitled to buy crude oil from any source inside or
outside PNG.
The wholesale price of refined products from Interoil in PNG is determined by a formula
set in the agreement (import parity price), 58and guaranteed by the government. 59
Interoil and EP Interoil are exempted from customs duty and VAT for imported machinery and raw material.
The government provides fiscal incentives under the Pioneer Industries Act and also
assists Interoil in obtaining exemptions from provincial and local taxes. The Pioneer
Industry Act grants a five-year corporate income tax exemption to industries investing
in new manufacturing activities never before undertaken in PNG. Existing tax law allows
unlimited tax-loss carry-forward. Though the Pioneer Industry Act was repealed in
1999, 60 the Agreement requires the state to honor these exemptions regardless. 61
Government is also required to assist the refiner and ensure that all clearances, licenses,
and permits are issued for the building and the operation of the refinery. 62 This includes IPA certificate, pioneer status certificate, import and VAT tax exemptions, foreign
exchange-related authorizations, environmental matters, work visas and permits, export clearances for refined products, necessary utility licenses, and provincial authorizations.
Government can terminate the Agreement only in cases of material breach of the
agreement by the refiner or force majeure. 63
Domestic jurisdiction is excluded for disputes between the parties of the Agreement.
Instead, international dispute resolution under ICSID is applicable.
Clause 13.2. of the Agreement
Clause 18 of the Agreement.
58 Clause 19.1 with Appendix A of the Agreement.
59 Clause 26.2 of the Agreement.
60 National Investment Policy, Volume II, Investment Incentives for Papua New Guinea, February 1999, p.
18.
61 Clause 8.7 of the Agreement.
62 Clauses 8, 9, 10, 14 and 15 of the Agreement.
63 Clause 24.1 of the Agreement.
56
57
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It is commonly assumed that the price for fuel is higher than it would be without the exclusivity agreement; however, detailed calculations based on various scenarios were not
available from ICCC or any other institution.
Applicability in Bougainville. It is uncertain whether the Interoil Agreement is applicable in the Autonomous Region of Bougainville. The following are some points on the
relation between Bougainville and PNG regarding contractual obligations. They do not
provide a definitive answer.
Under the Bougainville Peace Agreement, all national laws of PNG are applicable in
Bougainville until and unless they are repealed or replaced. Regarding contracts signed
by the PNG Government, Schedule 9, Sec. 224 of the Bougainville Constitution states:
“69. Saving of Contracts etc. All contracts and arrangements, other than contracts of
employment, entered into, made with or addressed to the Bougainville Interim Provincial Government are, to the extent that they were immediately before the establishment
of the Bougainville Government binding on and enforceable against the Bougainville Interim Provincial Government, binding on and of full force and effect against or in favour
of the Bougainville Government as fully and effectually as if the Bougainville Government had been a party to them or bound by them or entitled to the benefit of them.”
In a reverse argument it could be said that contracts not signed immediately before the
establishment of the Bougainville Government by the PNG Government are not binding
in Bougainville. The Interoil Agreement, signed in 1997, was not signed immediately
before the Bougainville autonomy was established in 2000.
A further argument against the applicability of the Agreement is that the PNG would not
be able to enforce compliance against Bougainville due to the autonomous status according Schedule 8, Sec. 205 (2) of the Constitution:
“331. Principles of Intergovernmental Relations.
The general principles of intergovernmental relations between the NationalGovernment
and the Bougainville Government are as follows:
(a)
that the autonomy arrangements, having been agreed through consultation and
co-operation, should be implemented in like manner;
(b) that there be a procedure to avoid, minimize and resolve disputes;
(c) that the National Government has no power to withdraw powers from the
Bougainville Government or to suspend it.”
Any disputes that arise between the PNG and the ARB Governments are to be resolved
by dispute resolution according to a procedure prescribed in Schedule 8, Sec. 205 (2).
5.6
The Institutional Framework for SEZs
The FTZ Authority. The FTZ Act 2000 contains a chapter on the establishment of an
FTZ Authority, Art. 4-10. In 2001, an authority located in Vanimo was created based on
the Act. As such, a building was secured, a Board and CEO was appointed, a budget was
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earmarked, and employees were hired. However, with the change of Government in
2002, the funding evaporated and the Authority was dissolved and the project abandoned.
Department of Commerce. The Department has had an FTZ Unit since passage of the
FTZ Act in 2000. It has recently hired additional staff to try to revive the FTZ program
and promote FTZ development. The Unit is working closely with the Prime-Koios consulting team. The FTZ Unit also recently hired two lawyers to produce a draft SEZ Act in
collaboration with World Bank/IFC consultants tasked by the Department of Commerce
and Industry with preparing a new law.
Industrial Centers Development Corporation. The Industrial Centers Development
Corporation (ICDC) is a statutory body, in charge of the development and operations of
Industrial Centers. The Act sets up the institution with a Board appointed and responsible to the Minister of Industry and Commerce. 64 A Managing Director is in charge of
the daily operations and s/he reports to the Board. 65 The Corporation has the right to
acquire land and stipulate contracts to fulfill its duties. Any commercial activity, as well
as, housing can be conducted or occur in the Industrial Centers. The regular land and
physical planning laws apply to the ICDC. The main attraction of Industrial Centers is
that it has resolved all land issues resolved and provides infrastructure. Industrial Centers are not export processing facilities. The management of ICDC sees itself as the natural implementing body of a future SEZ program. However, the current draft favors the
establishment of a new authority. ICDC argues that it is virtually impossible to dissolve
ICDC because of its contractual obligations and the property held in connection with the
operation of the existing and planned Industrial Centers.
Investment Promotion Authority. The Investment Promotion Authority (IPA) is in
charge of investment approvals and promotion as well as company registration. The IPA
has approximately 150 employees and operates three branches, in Lae, Buka and Mt.
Hagen, in addition to its headquarters in Port Moresby. The original responsibility of the
IPA was the implementation of the Investment Promotion Act. This included the issuance of investment certificates for foreign investors, monitoring, business facilitation,
investment promotion and advocacy. However, additional tasks were added and now
include business registration, regulation of securities as Securities Commission, and the
registration of intellectual property rights (trademarks, patents). For the time being, IPA
is also in charge of investment matters in Bougainville, though slightly different procedures apply; company registrations, for example, must be vetted by the IPA branch in
Buka before the registration can be completed in Port Moresby.
It is planned to move the Securities Commission and the Intellectual Property Registration out of the IPA in 2010. Furthermore, all procedures are currently under reviewbusiness registration and foreign investment certifications- as part of a World Bank
project. This project is driven by the poor performance of PNG in the Doing Business
Survey. It appears as if the IPA will concentrate more on its core tasks in the future.
64
65
Sec. 3-18 of the ICDC Act.
Sec. 20 of the ICDC Act.
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Independent Consumer & Competition Commission. The Independent Consumer
and Competition Commission (ICCC) was established in 2002 as an autonomous authority in charge of fair competition, market protection and utility regulation. About 54 employees work with the ICCC in Port Moresby and in three regional centers. The regionalcenters are mostly in charge of monitoring and inspections. The regulation of anticompetitive behavior includes the service of a voluntary pre-clearance of mergers and
acquisitions. The autonomous status gives ICCC the right to operate without political
interference. ICCC is not directly involved in the development or operation of SEZs.
However, ICCC may regulate the users of SEZs with regard to fair competition.
Border Development Authority is a statutory agency created by a 2008 Act of Parliament and formally constituted in March 2009. It is governed by a mixed public and private Board of Directors and its purpose is to promote social and economic development
of border provinces, which gives it some jurisdiction in 15 of PNG’s 20 provinces (counting the Autonomous Region of Bougainville and the National Capital District). Its main
current project activity is development of the Vanimo border crossing facilities in West
Sepik Province on the border with Indonesia, in cooperation with the Asian Development Bank. Vanimo was designated in the FTZ Act as a authorized site for FTZ development, and the border crossing development is seen by many as the first stage of an
eventual SEZ development. As a newly-created agency, the Border Development Authority has limited capacity to take on the responsibility of an SEZ Authority, but it is one of
only two existing agencies, along with ICDC, that have any such capacity at all, as well as
an expressed interest in filling that function.
5.7
Elements of a Good SEZ Law
Any SEZ law must be drafted in the context of a country’s constitution, culture and history, legal system, and existing legislations. No law that works well in one country can
simply be adopted by another with only a few changes in wording. A large and growing
body of experience in many countries has, nevertheless contributed to an understanding of some best practices in drafting of SEZ laws and of the main elements common to
the most successful ones.
Ownership and Development of Zones
SEZs should be open to private investment either as a developer or a tenant/land purchaser. Some countries allow SEZ development by both state and private entities or a
mixed public-private consortium, while in other countries only private investors may
invest or only public zones are permitted. In general, private development and ownership should be encouraged, as it leads to the creation of better zones built on sound
economic and commercial principles, and not political ones. In any case, there should be
no discrimination between public and private developers.
Approval of SEZ Development Proposals
All SEZ development procedures should be clear and all documents that must be submitted, the timeframes for approvals and the approval process should be transparent.
Investors should be able to know the requirements in advance and to have a high de48
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gree of certainty that if they comply with the requirements their projects will be approved. Some countries, such as Cambodia, require that an investor purchase the necessary land and provide proof of ownership prior to submitting an application even for
preliminary approval. This imposes a burden on potential investors, who must incur
substantial risks without knowing if their projects will be approved, but at the same
time it avoids granting approval to zone developers who have minimal chances of ever
launching a project. In other countries, including India, it is sufficient for an investor to
obtain options to buy land in advance of launching a project. This may be important in
countries with little in the way of formal zoning and land use planning, where an investor could buy land only to find that it is not approved for industrial development. At the
same time, any legal dispositions that place a burden of responsibility on private businesses are often a welcome antidote to the notion that governments should shoulder
the principal responsibility and protect private businesses from risk. As a corollary to
this, however, countries should seek to develop land use planning and zoning laws and
processes that provide clearer guidelines to developers.
Other procedures for review of zone development proposals should be clearly specified
in an SEZ law, and such laws should include details on the composition of review and
approval bodies, deadlines for issuance of decisions, and an appeal process for applications that have been rejected.
The principle of non-discrimination between domestic and foreign investors should be
enshrined in law and observed in practice.
Approval of SEZ Investments
The government should have a negative investment list for all SEZs rather than a positive list. This besides being best practice will give the government the ability to approve
investments and industry sectors well into the future. A negative list will only identify
what industry sectors are not permitted in a zone and these sectors are chosen usually
for safety reasons. Guns, ammunition, explosives, and alcohol are often not permitted in
zones.
Zone developers should be afforded maximum freedom to decide the kinds of investments they want in their zones, and government intervention should be limited to excluding projects that violate zoning and planning requirements or which violate general
national investment laws (pertaining, for example, to prohibited or restricted industries
like arms). The relevant approval body should operate as a “one-stop shop,” which
enables investors to obtain all necessary approvals with a single application at a single
point. A one-stop shop should, ideally, incorporate representatives of relevant ministries and government agencies who have full authorization from their parent entities to
issue approvals with the full force of law.
Incentives
An SEZ should be an enclave separate from the national customs territory, with controlled movement of goods and people into and out of the Zone. There should be no
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minimum export requirements for SEZ companies, and companies in SEZs should be
free to trade with one another.
Goods imported into the SEZ from the national customs territory or from outside the
country should be exempted from import duties and VAT. Sales from companies in the
national customs territory into the SEZ should be treated as exports and zero-rated for
VAT. Sales by SEZ companies into the national customs territory should be treated as
imports and subjected to the same import duties and taxes as imports from any other
country.
SEZ developers, as well as SEZ investors, should be able to import capital equipment,
construction materials and other items duty-free and tax-free. The same conditions on
resale into the national customs territory should apply.
Research has shown that fiscal incentives such as tax holidays are relatively unimportant as attractions for zone investors and developers. The attraction of zones lies more
in its freedom from the regulatory burdens that companies otherwise face in the national economy, and also in the duty and tax exemptions on imports, which lower the
cash flow requirements of enterprises. These policies also go a long way to increase
domestic value added and skills transfer to local companies via supply linkages between
SEZ and domestic companies.
Nevertheless, some countries may feel that they must offer some fiscal incentives to
compete with neighboring countries that offer them. It is quite possible that other alternatives exist, which include more liberal accelerated depreciation allowances and loss
carry-forward provisions, as well as lower overall corporate and personal income tax
rates. If, however, a government decides it must offer tax holidays or similar incentives,
certain principles should be observed. The most important of these are:
1. Non-discrimination between zone and non-zone companies: SEZ companies
should enjoy the same fiscal incentives as non-zone companies, but such incentives should not be more generous or for longer periods than those available to
non-SEZ investors;
2. Zone developers should receive the same incentives as zone investors or other
non-zone recipients of incentives.
3. Incentives should be limited in duration. Perpetual incentives, such as those that
have been granted in certain circumstances in Egypt, Turkey and other countries,
invariably lead to conflicts between calls to reform zone regimes and the need to
honor contractual and legal commitments to investors;
4. Incentives linked to export performance should be avoided. Even though LDCs
have limited exemptions from WTO requirements in this respect, eventually they
will become subject to these rules. Investors that may have been attracted mainly by the export incentives will probably decamp as soon as those incentives are
eliminated.
5. Fiscal incentives should be contained in the tax law rather than an SEZ law.
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6.0. Sites and Infrastructure for SEZ Development
According to the Terms of Reference, the Koios team is required to visit four regions in
PNG - Buka, Daru, Kerema, and Manus - to determine their suitability as SEZ locations.
Some initial site visits have taken place, but further visits and a detailed evaluation of
each site will be carried out and reported on in the next phase of work. The Koios team
has also visited the Malahang Industrial Center at Lae, which may serve as a reference
point for assessment of other sites. This section,therefore, is a review of existing industrial sites and those currently under development, including the industrial estates developed by the Industrial Centre Development Corporation (ICDC) and the Pacific Marine Industrial Zone (PMIZ), together with existing infrastructure and planned infrastructure projects on which future SEZs will depend.
6.1
Industrial Areas and Facilities in PNG
As mentioned in the introduction, PNG’s main industrial region is Lae, although new industrial facilities are also being developed in East New Britain and Maladang, and potentially in other locations on the northeastern coast of PNG. To date, there are two industrial centers in PNG, both developed and operated by the Industrial Center Development Corporation (ICDC). The Malahang Industrial Centre in Lae is operational, while
the second - the Islands Regional Industrial Centre in East New Britain - is under construction. Both are small in size and scale – 27 ha. and 70 ha., respectively – and their
development costs were covered by a relatively small public investment of less than
K20 million in each instance.
Figure 4: Malahang Industrial Estate Satellite View
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Figure 5: Malahang Industrial Estate
The Malahang Industrial Estate in Lae has been functioning for approximately 17 years.
It was originally founded on the edge of the city with poor road connections, and is now,
with the growth of Lae, centrally located in its industrial area.
Malahang has been a relative success. Although uptake of space in the zone has been
slow, over time the industrial center has provided useful facilities to help small and medium industries to develop. Although ICDC does not offer full service facilities as many
SEZs do, it does provide, both land and pre-built factory and warehouse space, as well
asconnections to municipal water and electricity and a road (in an advanced state of deterioration) to the port and Highlands Highway. The port—PNG’s largest in visits and
cargo tonnage handled—and the road, which provides the main transport link to the
main Highlands population centers, are key toLae’s importance as a commercial and industrial center. Government plans to invest some K84 million to improve the roads in
and around Lae, and more than US$45 million (in addition to a $100 million loan from
the ADB) to expand and upgrade the port facilities. Lack of reliable electric power is one
of the main problems for all industry in PNG, but it is especially acute in Lae. New
projects, including the 240 MW Ramu II hydroelectric power project, expected to cost
K1 billion, should alleviate the problem in the medium to long term.
The Pacific Marine Industrial Zone (PMIZ), which is in its early planning stage, is a much
larger industrial project than either Malahang or East New Britain. It covers over 200
ha. and is expected to cost some US$300 million. This project, which is expected to accommodate as many as 10 tuna canneries will also house a wide range of transport, lo-
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gistics, and business support services to facilitate the tuna sector. A concessional loan
from the China Exim Bank is expected to cover the bulk of the investment cost, though
project financing may also include a PNG Government contribution – the 2010 Budget
currently allocates K22.2 million to the project – and a minority equity investment by
the World Bank/IFC. As mentioned earlier, the IFC is providing technical services to the
Ministry of Commerce in order to draft a new SEZ law and implementing regulations
with the expectation that the PMIZ would become the first SEZ established under this
new law. Pending the formation of an SEZ Authority to implement this legislation, the
PNG Fisheries Authority and the Department of Commerce together have taken the lead
in managing this project.
6.2
Infrastructure for SEZs
Businesses decide to locate in an SEZ for a number of reasons, which include: i) ability
buy or lease land or buildings, with full security of title and without having to deal with
cumbersome procedures and high transaction costs, ii) proximity and quality of off-site
road and/or rail links and ports and/or airports, iii) ease of access to reliable and highquality on-site infrastructure and services, including roads, water, power, telecommunications, and security.
Successful zones depend on two types of infrastructure: i) onsite (within the boundaries
of the zone), and ii) off-site (starting from the boundary of the zone and linking into the
national road network leading to air, rail and seaports).
Infrastructure requirements for an SEZ are a function of the industrial sectors likely to
be attracted to the site and of the volume and timing of demand for space within the
zone.Identification of these requirements tends to involve undertaking an industrial/
sector competitiveness analysis together with a demand assessment and projections,
generally over a 15-year period.These analyses then feed into master planning, with infrastructure and a mix of plot sizes that correspond to the needs and pace of development of the focus industries. Infrastructure requirements vary, of course, according to
industry, some having higher water or electricity needs and others requiring larger effluent treatment capacity or heavier roads to handle cargo movements.
6.3
Infrastructure in PNG
Throughout PNG there is an acute infrastructure deficiency encompassing portand air
services, roads, water, power and telecoms, which inhibitsthe creation and expansion of
private enterprises. In order for PNG industry to become competitive at a regional
and/or global level, massiveinfrastructure and services must improve. A 2008 survey of
businesses, carried out by the PNG Institute of National Affairs, showed marked dissatisfaction with the quality of infrastructure and services, as illustrated in Figure 8 below.
(Although telecom has improved slightly with the introduction of Digicel, further improvements are still needed.)
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Figure 6: Perceived Quality of infrastructure in PNG
Source: Institute of National Affairs and ADB: The Business and Investment Environment in Papua New
Guinea in 2007: Private Sector Perspective, INA Discussion Paper No. 93, Port Moresby, July 2008
The following is an overview of PNG’s existing infrastructure:
Roads. In PNG, the responsibility of constructing and maintaining the road system is
delegated to the provincial governments, except for the gazetted national highway network. Throughout the country, the road system is extremely limited. It is also often: i)
unpaved, ii) of poor quality, and/or iii) in disrepair. Businesses suffer, as a consequence.
Lae is a notorious example of road deterioration and neglect. As the Koios team observed first-hand, as well as through interviews with businessmen in Lae, the local
roads are so pothole-ridden that trucks and their cargoes often incur severe damagewhile navigating the short distance between the port and the Malahang Industrial Center.
Similar conditions obtain in other locations.
For SEZs to succeed in PNG, roads connecting SEZs to national highways, ports, and airports must be improved. Because road construction is expensive and in PNG often involves disputes over land title and usufruct, development of new roads should be undertaken strategically to support areas in which industrial and commercial development is most likely to occur. PNG’s national transport strategy and development plan
appear to have been designed with this in mind.
Experience in developing regions worldwide indicates that roads are an essential pillar
of economic development and business competitiveness, and that poor road infrastructure can negate any competitive advantages that firms possess. For example, in East
Africa it costs an average of US$2850 to $3550 per TEU (twenty foot equivalent unit, or
the amount that can be carried in a 20-foot container) from the ports of Mombasa in
Kenya or Dar es Salaam in Tanzania to Kigali, Rwanda – a distance of about 1,500 km and up to $6500 for a 40-foot container. Depending on the nature and value of the
product, road transport from Mombasa or Dar es Salaam can cost as much as $4700
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This is a substantial multiple of the cost to ship a container from anywhere in the world
to Dar es Salaam or Mombasa. It costs, for example, an average of €1000, or $1500, to
bring a 20-foot container from Europe to Dar or Mombasa, or about half of the onward
transport cost to Kigali. 66
Money invested in road improvement projects, if they are properly planned, situated,
and executed, tends to be money well spent. The government of PNG should therefore
prioritize and commit to road repair and maintenance. Although costly, donor assistance for such developments is often available - the Asian Development Bank (ADB), for
example, is contributing US$750 million to the Highlands Region Road Improvement
Investment Program, which will upgrade 1,400km of highland roads and provide longterm maintenance assistance. The benefits of this type of program have been demonstrated in an earlier AusAID project for the maintenance of a 356km section of the Highlands Highway, which resulted in a 20% savings in travel time and an 18% reduction in
annual maintenance costs.
Ports. In PNG, there are 17 ports managed by the PNG Ports Corporation (PNGPC).
These ports support both international shipping lines servingLae and Port Moresby and
intra-regional and coastal transport to and from all other port locations. In addition to
the main ports, there are many small berths and jetties supporting coastal shipping
throughout the country.
Only three of the main ports are financially viable, with Port Moresby contributing 60
percent of PNGPC’s profits and Lae 32 percent (Madang is the third). These ports therefore subsidize the remaining 15 ports. According to PNGPC,K2billion to K3 billion is
required to maintain, operate, and repair their facilities.
The two main ports in PNG, Port Moresby and Lae,are currently running at capacity and
require significant upgrading and expansion to handle further growth in the region. Discussions with PNG Ports indicated that there are plans to expand both facilities, possibly
under PPP mechanisms, and there are plans to relocate the port of Port Moresbyto the
opposite side of the harbor in order to cater for the needs of the LNG project and to free
up land for development of the city center waterfront area.In addition to the $150 million Lae port expansion project already in progress, longer-term plans have been
mooted to create a large-scale container terminal at Lae, which could serve both the
South Pacificsub-regionand the wider East Asia/Pacific more comprehensively. According to PNG Ports, some 5,000 ships, mainly transporting cargoes between Australia and
China and Japan, pass through the Lae Channel each month. Expanded port facilities
could capture a meaningful fraction of that volume, turning Lae into a genuine logistical,
commercial and industrial hub.Such projectswill naturally augment the demand for and
viability of any adjacent SEZ development in these twolocations.
At present, existing port facilities at Buka, Daru, Kerema and Lorengau (Manus) are
small scale and not managed by the PNGPC. The establishment of any SEZ in these locations would requirethe development of new port facilities attached or in close proximity
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Research conducted by Koios Associates for a private client, 2005.
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to the new SEZs. Recently, the PNG Sustainable Development Program (PNGSDP) has
called for the design and construction of a port at Daru to accommodate ships up to
60,000 DWT. It should be noted that any new port development would be very expensive to construct and should not be undertaken until a guarantee from a shipping line
has been obtained. Experience has shown that ports without such guarantees from
scheduled shipping lines almost always fail.
Airports. The Government plans to upgrade the country's 21 airports with funding
from the ADB. The bank's board recently approved $480 million in multi-tranche financing that will go towards a $640 million, 10-yearimprovement program, the first
phase of which includes improvements to Jackson Airport in Port Moresby and to airports in Wewak, Alatau, Kimbe and Mt Hagen.Because of the difficulty of ground transport, planes and helicopters often provide the only access to isolated communities.
Rail.Currently there is no rail system in PNG. Several preliminary studies, offering
mixed conclusions, have examined the possibility of building railways. It might be advisable to update these studies in view of other big infrastructure developments underway in and around Lae and Port Moresby, and to determine once and for all if there is a
future for rail development. If rail networks were to be built, developers would most
likely seek to build SEZs in close proximity.
Energy. Power (electricity, oil and gas) is unreliable in PNG, with frequent load shedding, spikes, and brown- and black-outs that affect industrial, commercial, government,
and residential users alike. Back-up generators areessential for industry countrywide to
avoid work stoppages and equipment damage.Although the country has an abundance
of gas, the current ExxonMobil agreement earmarks the project’s entire production for
export, reserving none for domestic use. Most observers in government and the private
sector expect that subsequent gas projects will explicitly reserve gas for domestic power generation, which, together with hydropower development, could make the country a
low-cost energy producer.
Given the planned pace of development and expansion of electric generation and transmission by PNG Power, any SEZ developed now would almost certainly need to generate
its own power or depend on a stand-alone independent power project (IPP). An alternative might be for PNG Power to enter into a PPP agreement with a private company to
build a new power plant to serve selected industrial areas. Though the government will
soon have the financial resources to fund power projects on its own, domestic capacity
constraints may limit the speed at which such projects can be developed, though PPPs
could accelerate the pace.
Water. Water, drainage and sewerage are the responsibility of the PNG Water Board.
As with other infrastructure services in PNG, there has been insufficient investment in
water related services over a long period of time leading to inadequate (and often nonexistent) service provisions. This is evident in large urban areas such as Port Moresby
and Lae, as well as in more rural parts of the country. Any new SEZ in PNG would require an upgrade of the water distribution lines, or the development of an independent
system or boreholes, depending on the industry sectors and demand projections.
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ICT. ICT is defined as fixed land, mobile, and fax lines, broadband internet, satellite and
Voice over Internet Protocol (VOIP) systems.Telecoms coverage is limited in rural regions, though the PNG Sustainable Development Commission has reportedly built GSM
towers that provide coverage for all of Western Province. Service quality is often unreliable in both rural and urban settings. Partly as a result of the continuing monopoly on
fixed-line and international gateway services enjoyed by Telikom, the incumbent operator, costs are high, especially for international calls, and only about 2 percent of
the population has access to residential phone service. This compares unfavourably
with other countries in the region. In PNG, wireless services, including a digital GSM network, are restricted to the major centres of Port Moresby and Lae, limiting productivity
gains from these technologies.
On May 2008, the government approved and adopted a National Information Communications & Technology (ICT) Policy with the purposes of:
•
•
•
Providing a strong ICT policy framework encompassing all key aspects of effective ICT sector reform to ensure improving access to telecommunication services
across the country.
Proposing a staged introduction of open competition initially in the mobile sector and subsequently across all sectors of the telecommunications market. These
reforms are aimed at transforming Telikom PNG to an efficient company capable
of competing on its’ own merits against new and efficient companies.
Providing guidelines for competition in the mobile telephony, fixed line, internet
and international markets access. Commencing April 2007, two (2) new mobile
operators werepermitted to provide mobile phone services, in competition with
Telikom PNG Limited, resulting in an extension of mobile phone coverage to the
whole of PNG. Originally, mobile phone coverage was only available in four (4) of
the twenty (20) provinces. The two (2) new mobile operators are Digicel Limited
and Dawamimba Limited trading as Greencom.
In addition to these developments, the new PPC-1 undersea cable linking Australia,
PNG and Guam with Asia and the United States vastly increases available bandwidth
in PNG and should translate into higher service quality and reduced costs.
7.0 Next Steps
In January 2010, the Koios team will return to PNG for its second mission. During this
timeframe, the team will:
•
•
Analyze trade flows and market access conditions to determine products and
markets that may offer the best opportunity for future industrial development in
PNG
Conduct a Sectoral Competitiveness Analysis. This will consist of a detailed
analysis of existing and future sectors of the PNG economy, with a focus on ex57
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•
•
isting or potential competitive advantages with respect to natural resources, human resources, location, market access, and infrastructure. Value chain analyses will be carried out to identify physical, financial, and regulatory bottlenecks that may impede emergence of internationally competitive industries and their implications for FTZ program design. Though the focus will be on
high value-added industrial/manufacturing activities, the analysis will include
other sectors, including tourism and other services;
Carry out a general demand assessment. Having identified the most promising
sectors and industries, the team will analyze global and regional investment
trends in those industries as well as domestic production and demand. The
team will conduct interviews with business owners and executives in PNG and in
other countries to gauge the level of interest in pursuing investment opportunities in PNG, and will calculate demand projections by sector and industry based on this information. These interviews will also contribute to understanding investors’ perceptions of PNG and the requirements they would
need satisfied as a condition to invest, which in turn will feed into design of
the FTZ administrative structures and regulatory regime.
The second mission will also carry out research needed to support the Phase III
analysis, including:
o Detailed site assessment and benchmarking, which will include ranking the four designated sites against the specified site selection methodology and benchmarking them against a reference site (probably Lae)
o Evaluation of infrastructure at each site, identifying improvements
needed to support a successful SEZ, and calculating the cost of development of both off-site and on-site infrastructure
7.1
Determine Value Propositions
When evaluating the four locations, the Koios team will be looking for the SEZ site that
offers the best value proposition. The ranking will be determined by key factors such as
proximity and quality of off-site infrastructure,size and quality of the labor force industry and sector opportunities and trends. An assessment of appropriate industry sectors
for the region will also be undertaken and a value chain review will be completed. This
ranking does not imply that lower-ranked sites are unsuitable for SEZ development, nor
does it mean that the top-ranked site is necessarily a suitable location for an SEZ. Those
questions will be addressed in our interpretation of the results of this analysis.
7.2
Methodology and Approach
The Koios team has developed a methodology to identify and quantify industry and sector opportunities and to identify interventions – including SEZs - that can contribute
most to competitiveness enhancement and growth. The methodology is designed to answer some essential questions such as:
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•
•
•
Which industry sectors couldbenefit from the advantages offered by an SEZ?
Which industry sectors canbecomeprincipal economic driversof a possible SEZ
project, around which other industries and firms can gravitate?
Which industries can create the greatest economic impact through the establishment or deepening of linkages with other elements of the value chain?
This analysis will be based on the “value chain” methodology, which was first developed
in 1985 by Harvard Professor Michael Porter, who was a pioneer of the concept of competitiveness and competitive advantage, as well as, in the identification and analysis of
industrial clusters. The methodology has evolved considerably over the past 25 years,
and now focuses on conditions external to a firm, as much as or more than, on the internal dynamics of the firm itself. It explicitly recognizes the importance of government
policies, regulations, and services as enablers of or impediments to competitiveness.
Above all, the value chain methodology is quantitative. It seeks not only to identify bottlenecks and competitive advantages, but also to translate those observations into cost
advantages or disadvantages and to benchmark those findings against the cost of products from other countries. Value chain analyses have been carried out for a wide range
of industry sectors in many countries, so there will be no shortage of comparisons for
benchmarking purposes.
One of the strengths of the value chain methodology is that it can lay bare some widely
held assumptions about a country’s advantages overall or in a given industry. Many developing countries assume that they can offer low-cost labor, which gives them a manufacturing advantage against countries with higher labor costs, and they consequently try
to attract investment in labor-intensive industries, which fits nicely with social and political goals of creating jobs. The reality can be different.
In PNG, the government has recently raised the minimum wage to K2.29 an hour, nearly
three times the previous minimum. Hence, PNG is no longer an affordable labor country.
Its minimum wage is now roughly equivalent to, the average wage in the China’s garment industry, but PNG’s labor productivity is much lower than China’s. One study on
Africa’s ability to compete internationally showed that the annual value added per
worker in a medium-sized firm in China was eight times that of a Zambian worker, even
though wages were higher in Zambia than in China.
Figure 9 lays out the elements of a value chain analysis. This process calculates the cost
per unit of production, taking into accountboth labor costs and labor productivity, and
reveals where the true competitive advantages and disadvantages lie.
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Figure 7: Elements of Value Chain Analysis
Source: IFC/FIAS 2007, Moving Toward Competitiveness: A Value Chain Approach, August 2007.
In addition to the cost of labor, power, water, transport, land and buildings, and other
direct inputs, the value chain methodology also accounts for less direct cost elements
such as regulatory barriers, costs due to poor product quality and returns, high cost of
inputs, port delays, other transport costs, and many other elements.
7.3
Potential Industry Sectors
Given the complexity of value chain analysis, it is not practical to perform an assessment
on a large number of randomly selected industry sectors. Hence, the Koios team will
take as its starting point the main sectors in PNG’s economy as indicated by production,
trade statistics, national income statistics, and other indicators. These will almost certainly include:
•
•
•
•
•
•
•
Agriculture and agribusiness
Forestry and forest products
Fisheries and fish processing
Mining and petroleum
Liquefied natural gas
Manufacturing
Tourism
Not all of these industry sectors will necessarily be suitable for or benefit from an SEZ.
In certain circumstances industries like construction, financial services, ICT, and logistics can become growth sectors in their own right as well as contributors to the competitiveness of other industries, and the Koios team will investigate their potentialas
indicated. The Seychelles, for example, has a vibrant offshore financial sector in its SEZ.
In Dubai, ICT-focused, educational, media, and medical/wellness zones exist, while
value-added transport and logistics services are often the anchor industry in SEZs be-
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cause it attracts backward and forward linkages. None of these possibilities can be excluded for PNG, but in the first assessment of the industry sectors and their ability to
benefit from SEZs, these will be considered support industries rather than anchor industries, and the focus of analysis will be those industries listed above. Similarly, although the LNG project has its own special status, there could be scope for an SEZ to accommodate companies supplying goods and services to the project as well as other
zones to serve mining companies.
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Annex I – List of Persons Contacted
PORT MORESBY
International Finance Corporation, World Bank
Graham Keay
Asian Development Bank
Erik Albers
Consultant, Legal Adviser
Private Sector Development Coordinator
GOVERNMENT
Department of Commerce and Industry
Anton Kulit
Ignatius C. Kadiko
Vincent Kisso
Brenson Wera
Yole Kapili
Ms. Kilan Kerry
Secretary
Deputy Secretary of Policy and Administration.
Acting First Assistant Secretary, Commerce Division
Head of FTZ Unit
Senior Research Officer, FTZ Secretariat
Research Assistant, FTZ Unit
Clarence Hoot
Michael Enga
Ivan Bayagau
Rosanda N. Papaol
Timil Lanyeta Tape
Director, Business Investment and Export Promotion
Senior Investment Officer
Assistance Investment Officer
Enforcement Officer
Senior Enforcement Lawyer
Steven Paisi
Greg Topping
Senior Administrative Officer, Policy and Legal Affairs
Deputy Commissioner of Taxation
Aloysius Aihi
David Osborne
Camillus Midre
Stanis Tao
Acting Director, Transformational Projects
Adviser
Chief Program Officer
Program Officer
Leo Gonina
Director of Operations
Investment Promotion Agency – IPA
Internal Revenue Commission - IRC
PNG Sustainable Development Program – PNGSDP
Industrial Center Development Center – ICDC
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Border Development Authority – BPA
Pomat Manuai,
Charles Amini,
Sebastian Silih,
Department of Finance
Executive Chairman
General Manager
Executive Director, Corporate Services
Gabriel Yer
Department of Treasury
Secretary
Simon Tosali
Secretary
Ben Tauoa
PNG Power
Director, Field Services
Togaro Asiba
Michael Maita
Manager, Business Marketing and Sales
Manager Finance
Alcinda Trawen
Guma Wau
Senior Policy and Planning Officer
Economist
National Forestry Authority
PNG Tourism Promotion Authority
PNG Ports
Brian Riches
Michael Nye
Julie Camillus
Chief Executive Officer
Chief Operating Officer
Industrial Centers Development Corporation
Igitava Yoviga
Managing Director
Independent Public Business Corporation
Chris Burns
Chief Operating Officer
Bruce Carrad
Economic Advisor
Independent Consumer and Competition Commission – ICCC
Avi Hubery
Fego Ota Kiniafa
Executive Manger, Competitive and Fair Trade
Executive Manager, Prices, Regulatory and Affairs
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PRIVATE SECTOR
BSP - Bank South Pacific
Ian B. Clyne
Chief Executive Officer
Tropic Air & PNG Forest Products
A. M. Honey
Association
Managing Director and President, Forestry Industries
Deloitte
Ernie Gangloff
Lutz Heim
Gardens Lawyers
Director Risk Management Services
Partner Tax and Corporate Finance
Steven Kami
Partner
Manufacturers Council of PNG
Chey Scovell
Chief Executive Officer
BOUGAINVILLE
Government of the Autonomous Region of Bougainville
James Biscoe
Patrick Koles
Economic Development Advisor
Acting Chief Administrator
Albert Kinani
Chief Executive Officer
Robert Atsir
President
PNG Department of Commerce and Industry
Bougainville Business Association/Bougainville Resources Development Corporation
LAE
Malahang Industrial Center
Kevin Kianda
Centre Manager
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PRIVATE SECTOR
Agmark
Managing Director
International Food Corporation
Wesley Waninara
Narapela Wei, Ltd
Human Resource Manger
Abraham Kangku
Manager, Administration and Sales
Cologate-Palmolive, PNG, Ltd
Nagia Matang
Operations Manager
Lae Chamber of Commerce
Alan McLay
MANUS
Provincial Government
Michael Sapau
Kule’en Hamau
Pater Lasei
Piten Nama
Molean Chapau
President
Governor
Provincial Administrator
Executive Officer
Provincial Surveyor
Chairman and Manager Director, Manus Fisheries Corporation
Commander of the Naval Port
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