PNG FTZ PHASE 1 FINAL

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 Purpose .................................................................................. 1
1.2 Study Objective ...................................................................... 1
1.3 Phase I Report ........................................................................ 2
1.4 Phase I Mission ...................................................................... 3
1.5 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 SEZ Legal, Regulatory, Institutional Framework 36
5.1 SEZ and Free Zones Legislation ............................................ 36
5.2 General Business Legislation ................................................ 37
5.3 Public-Private Partnerships Strategy and Legislation ........... 43
5.4 Autonomous Region of Bougainville ..................................... 43
5.5 Interoil Agreement ............................................................... 44
5.6 The Institutional Framework for SEZs .................................. 46
5.7 Elements of a Good SEZ Law ................................................. 48
6.0 Sites and Infrastructure for SEZ Development……50
6.1 Industrial Areas and Facilities in PNG……………………………51
6.2 Infrastructure for SEZs…………………………………………………53
6.3 Infrastructure in PNG…………………………………………………..53
7.0 Next Steps ........................................................... 57
7.1 Determine Value Propositions……………………………………...58
7.2 Methodology and Approach……………..…………………………..58
7.3 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 5
Figure 2 : Infrastructure in Public Zones 20
Figure 3: Infrastructure in Private Zones 20
Figure 4: Malahang Industrial Estate Satellite View 51
Figure 5: Malahang Industrial Estate 52
Figure 6: Perceived Quality of infrastructure in PNG 54
Figure 7: Elements of Value Chain Analysis 60

Boxes
Box 1: Should the Whole Country Be an SEZ? 12
Box 2: Trade in SEZs: The Problem of Export Requirements 15
Box 3: Senegal’s Failed EPZ 22
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 Asian Development Bank
ARB Autonomous Region of Bougainville
AusAid Australian official development assistance agency
BOOT Build Own Operate Transfer
BOT Build Operate Transfer
BSP Bank South Pacific
EPZ Export Processing Zone
FIAS Foreign Investment Advisory Service (World Bank/IFC)
FTA Foreign Trade Area (also Free Trade Area)
FTZ Free Trade Zone
GDP Gross Domestic Product
GNI Gross National Income
GST Goods & Services Tax
ICCC Independent Consumer and Competition Commission
ICDC Industrial Centres Development Corporation
IPBC Independent Public Business Corporation
IFC International Finance Corporation
ILO International Labor Organization (United Nations)
IMF International Monetary Fund
IPA Investment Promotion Authority
K Kina
MFN Most-favored Nation (non-discriminatory trade relations)
MIC Malahang Industrial Centre
PGK PNG Kina
PEZA Philippines Economic Zones Authority
PMIZ Pacific Marine Industrial Zone
PNG Papua New Guinea
PNGPC PNG Ports Corporation
PNGSDP PNG Sustainable Development Council
PPP Public-Private Partnership
SEZ Special Economic Zone
TEU Twenty Foot Equivalent Unit (capacity of 20-ft. container)
UNCTAD United Nations Conference on Trade and Development
USAID United States Agency for International Development
VAT Value Added Tax
WTO World Trade Organization