usiness challenge

The Challenges of
Doing Business in
Papua New Guinea

An Analytical Summary of the 2007 Business

Environment Survey by the Institute of National Affairs
B The Challenges of Doing Business in Papua New Guinea
The Challenges of Doing
Business in Papua New Guinea

An Analytical Summary of the 2007

Business Environment Survey by the
Institute of National Affairs
 2008 Asian Development Bank

All rights reserved. Published 2008.

Printed in Australia.

Publication Stock No. 101108

ISBN 978-971-561-742-0

Cataloging-In-Publication Data

Asian Development Bank.

The Challenges of Doing Business in Papua New Guinea: An Analytical Summary of the 2007 Business Environment
Survey by the Institute of National Affairs. Mandaluyong City, Phil.: Asian Development Bank, 2008.

1. Economic growth. 2. Private sector development. 3. Papua New Guinea. I. Asian Development Bank.

This report was written by Paul Holden and Paul Barker with the assistance of Robert Harden and Laure Darcy, under
the supervision of Winfried Wicklein, Asian Development Bank (ADB), Pacific Liaison and Coordination Office, Sydney,
Australia. Melissa Dayrit was the managing editor of this publication.

The views expressed in this book are those of the authors and do not necessarily reflect the views and policies of
ADB or its Board of Governors or the governments they represent.

ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any
consequence of their use.

Use of the term country does not imply any judgment by the authors or ADB as to the legal or other status of any
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An Analytical Summary of the 2007 Business Environment Survey by the Institute of National Affairs E
F

Contents

Introduction 1

Summary of the Findings 1

The Survey Sample 1

Methodology and Themes Surveyed 2

Political Uncertainty 2

Business Security 3

Government Regulations and Policies 5

BusinessGovernment Relationships 6

Infrastructure and Public Services 7

Constraints to Business and Investment 8

Comparison with the Findings of the Private Sector Assessment 10

Policy Reform 11
 G

Figures

Figure 1: Impact of Political Instability on Business 2

Figure 2: Concern over Future Political Stability 3

Figure 3: Concern over Crime and Security 3

Figure 4: Security Cost to Business as a Percentage of Sales 4

Figure 5: Impact of Crime on Investment Decisions 4

Figure 6: Concern over the Stability of Rules, Policies, and Regulations 5

Figure 7: Concern over Retrospective Changes in Rules and Regulations 5

Figure 8: Likelihood of Rule Changes with Changes in Government 6

Figure 9: Main Reasons for Problems in Complying with Regulations 6

Figure 10: Incidence of Investments Abandoned Because of Compliance Difficulties 6

Figure 11: Perception of the Helpfulness of Government 7

Figure 12: Impact of Corruption on Business 7

Figure 13: Frequency of Irregular Payments Made by Firms 8

Figure 14: Perception of Overall Efficiency, Effectiveness, and Quality of Government Services 8

Figure 15: Government Service Efficiency 2002 and 2007 9

Figure 16: Perception of the Efficiency, Effectiveness, and Quality of Specific Government Services 9

Figure 17: Ranking of Constraints to Business and Investment 10

Abbreviations

PNG Papua New Guinea

PSA private sector assessment

SOE state-owned enterprise

1 The Challenges of Doing Business in Papua New Guinea
Introduction
This report describes the results of a 2007 survey
of 243 businesses in Papua New Guinea (PNG).1
Businesses were asked to provide their views on
a wide range of issues that affect the way they do
business, the factors that influence their investment
decisions, and the relationship between the
business community, government, and the public
sector more generally. A similar survey, which
provides a unique opportunity to compare how
the business climate has evolved through time,
was undertaken in 2002.2 The comparisons are
especially interesting in light of the political stability
of the past 5 years and the resource boom that
PNG has recently been experiencing. In addition,
a private sector assessment (PSA)3 analyzing the
constraints to doing business in PNG was recently
completed. The survey results provide further
insight into PNGs business environment that
complement the PSA as well as additional data
against which to test its conclusions.
This summary highlights the main findings of
the survey and should be read as a supplement
not only to the full report, but also in conjunction
with the recently completed PSA by the Asian
Development Bank.
Summary of the Findings
The survey identified a number of concerns
that impact the cost of doing business and the
propensity to invest. The most important are:
Political uncertainty: even though the previous
government (20022007) completed its full
5-year term and the current coalition government
retains many members who were in the previous
administration, businesses still fear possible
political instability.
Business security: law and order problems
impose substantial costs on businesses, with
many respondents indicating that this had
adversely affected their decision to invest
or expand.
Institute of National Affairs. 2008. The Business and Investment Environment in Papua New Guinea in 2007: Private Sector PerspectiveA Private
1 
Sector Survey. Port Moresby.
Levantis, T., and M. Manning. 2002. The Business and Investment Environment in PNG: The Private Sector PerspectiveA Private Sector Survey.
2 
Port Moresby: Institute of National Affairs.
3
Asian Development Bank. 2008. Foundation for the Future: A Private Sector Assessment for Papua New Guinea. Sydney.
Government regulations and policies: instability
in laws, regulations, and rules that adversely
affect businesses.
BusinessGovernment relationships:
Corruption remains a considerable problem,
as is the lack of consultation by the government
before the promulgation of laws or regulations
that affect business.
Infrastructure and public services: the quality of
infrastructure and services is poor and reported
to have declined since the previous survey.
The Survey Sample
Every effort was made to ensure a representative
sample. Of the businesses surveyed, slightly
over half were PNG owned, about a quarter were
foreign owned, and the rest were jointly owned.
The sample consisted almost exclusively of
formally registered businesses, 80% of which
have been in business for at least 5 years. Nearly
half of the businesses operated outside the
main centers of Port Moresby and Lae. Forty-
five percent of these were classified as large
businesses, having a turnover of more than K5
million, and the other 55% were small- or medium-
sized enterprises. About 20% of the respondents
cater to both local and foreign markets.
The businesses surveyed were from 10 broad
economic industry groups:
agriculture, forestry and fisheries;
building and construction;
finance, business and investment;
hotels, restaurants and bars;
manufacturing;
mining and quarrying;
retail and wholesale;
transportation and communication;
utilities; and
other services (e.g., gaming, hairdressing, etc.).
 An Analytical Summary of the 2007 Business Environment Survey by the Institute of National Affairs 2

Methodology and Themes Surveyed

The survey was conducted between May and
June 2007. It consisted of 26 questions grouped
When business risk is aggravated
into the following themes:
by political risk, the impact on
impact of political uncertainty on businesses,
business security,
investment is negative
effect of government regulations and policies,
businessgovernment relationships,
effectiveness of government services, and
weakening of business confidence, which
constraints to business and investment. may have served to undermine the Morauta
governments earlier achievements.
Political Uncertainty However, economic conditions in PNG have
Business is inherently risky. Investors and improved considerably since 2002, and the
entrepreneurs commit capital and time in attempts Somare government (20022007) was the first
to take advantage of commercial opportunities. in PNGs history to complete a full 5-year term.
Even in large developed countries, however, a Moreover, following the 2007 elections, a coalition
significant number of businesses fail. In one sense, government with much the same composition
this is good because it encourages productivity has continued in office.
and weeds out the inefficient. Nevertheless, when This period of continuity of government provides
business risk, which in the first place is already an excellent opportunity to assess the effects of
quite considerable, is aggravated by political risk, greater political stability over the past 6 years and
the impact on investment is negativeinvestors whether the business community has changed
will demand higher returns and shorter payback
periods to reduce their exposure to
uncertainty, and this lowers potential growth.
Figure 1: Impact of Political Instability on Business
Furthermore, experience in many countries 35
indicates that investors memories are long 32%
33%

when policy reforms are introduced, they do 30

not immediately rush to invest. Rather, they
adopt a wait-and-see approach to make sure
Percentage of respondents

25
that the changes are permanent. 22%

20
During the 1990s, businesses in PNG
experienced considerable instability arising
15
from frequent changes in government, a
breakdown in macroeconomic discipline,
10 9%
and erratic and frequent changes in policies
affecting the private sector. This began to
5
change in 1999, when the newly elected
1% 1% 1%
Morauta government introduced a wide 0
range of reforms aimed at enhancing policy
d

se
fe hly

cte

cte

cte

cte

cte

on

and political stability, including the Organic

d
af hig
cte

fe

ffe

ffe

ffe

fe

sp
af

af
ya

na

re
ry

un

un
ly

Law on the Integrity of Political Parties and

Ve

yu

No
irl
gh

ly

ly
Fa

irl
Hi

gh

te
Fa

ple

Candidates in 2000. Notwithstanding these

Hi

m
Co

efforts, a breakdown in fiscal discipline

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
in 2001 and early 2002 contributed to a New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
3 The Challenges of Doing Business in Papua New Guinea

its investment behavior, or is still holding back, The extent to which political instability harms
waiting to see if the improvement in the political businesses in PNG is shown in Figure 1. Fully 87%
climate is permanent. of respondents indicated that they were negatively
affected by periods of political instability and
Figure 2: Concern over Future Political Stability uncertainty. Having almost the same number of
50 respondents indicating concern in the 2002 survey
46%
45
suggests that the effect of unchanged government
has yet to produce a positive response in the
40
business community.
Percentage of respondents

35
Furthermore, in the 2007 survey, businesses
30%
30 were asked how concerned they were regarding
25 the stability of the political environment. Fully
76% indicated that they were either very highly
20 18% concerned or highly concerned regarding future
15 political stability (Figure 2).4
10

5 4% Business Security
0% 0% 1%
0 A strong and effective legal system, contributing
to a safe and secure society, is essential for a well-
d

ed

ed

se
er hly

ne

ne

ne

on
rn

rn
d
nc ig

er

er

er
ne

ce

ce

sp
co ry h

functioning private sector. Indeed, law and order is

nc

nc

nc
on

on

re
co

co

co
Ve

yc

nc

No
un

un
ly

yu

required to help ensure security over physical assets

irl
gh

ly

ly
Fa

irl
Hi

gh

te
Fa

ple
Hi

and, more importantly, of employees. Apart from the

m
Co

costs associated with theft, high crime levels deter

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby. business and investment by increasing insurance
premiums, raising the cost of internally provided
Figure 3: Concern over Crime and Security security (e.g., guards and security systems)
50
and bringing up the costs associated with the
50.000000
45 employment of skilled labor from abroad. High
crime levels can also impact adversely on the
40 41.666667
36% productivity of a business if employees are
Percentage of respondents

35 unwilling or unable to work night shifts.

30 33.333333
26%
A strong and effective legal system is required
25%
25 to ensure that property rights and business
25.000000
20
contracts can be readily secured and effectively
enforced. Without a degree of certainty in the
15 16.666667
legal enforceability of property rights, security
10 9% over ownership of assets will be diminished and
5
the incentive to accumulate wealth and invest in
8.333333
2%
1% 1% productive capacity will be eroded.
0
0.000000
Poor law and order in PNG has attracted
ed

ed

ed

se
er hly

ne

ne

on
rn

rn

rn
d

considerable attention and debate over the past

nc ig

er

er
ne

ce

ce

ce

sp
co ry h

nc

nc
on

on

on

re
o

co
Ve

yc

yc

nc

nc

two decades, both in country and abroad. It

No
un
yu

u
gh

irl

ly

ly
Fa
Hi

irl

gh

te

has regularly been cited as a major constraint

Fa

ple
Hi

m
Co

to business activity and investment. The 2007

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby. survey provides an opportunity to assess

4
The survey was conducted before the 2007 election, which could have heightened the respondents concerns over political instability.
 An Analytical Summary of the 2007 Business Environment Survey by the Institute of National Affairs 4

whether the situation has improved in recent
years, or whether it remains one of the foremost
constraints faced by businesses.
Participants in the survey were asked to indicate
the extent to which law and order problems have
affected their businesses. Fully 87% indicated
that they were fairly concerned, highly
concerned, or very highly concerned by issues
of crime and security (Figure 3).
The costs of dealing with crime are substantial.
Figure 4 shows the security costs to business
as a percentage of turnover. While 57% of
Percentage of respondents
tiers of policing, prosecution, and detention is
urgently needed.
The fundamental requirements for a secure law
and order environment are (i) a strong police force
that successfully apprehends offenders so that
criminals are aware that they will be apprehended
Figure 4: Security Cost to Business as a Percentage of Sales
90
80
70

60 57%
businesses reported that their security costs as
a percentage of sales were 1%10%, 16% of 50
firms reported that security costs constituted
40
11%50% of sales. On average, the security
costs as a percentage of sales were 5.8% in 30
24%
2007 compared with 4.6% in 2002.
20
Not only does the poor security situation 10%
10
affect the costs and the productivity of PNG 6%
3%
businesses, but it also negatively affects 0
0%

investment decisions. Figure 5 shows how the

0%

5%

0%

5%

se
00

on
1

decision to invest or expand operations has been

1

sp
1%

re
%
11

26

21

75

No
impacted by crime. Over half the respondents
Percentage of turnover
indicated that the decision to invest or expand
Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
their business had been either very highly or New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
highly affected by the chronic state of law
and order. There had, however, been a small Figure 5: Impact of Crime on Investment Decisions
improvement from the 2002 survey. 35
33%

The 2007 survey confirms that PNGs law and 30

order situation remains a serious issue for the
business community. While, at best, there
Percentage of respondents

25
may have been a marginal improvement in
21%
20%
businesses perceptions of the law and order 20
situation since the 2002 survey, the responses 17%

indicate that the direct costs to business (in 15

terms of internal security costs) have increased.
10
Over the medium to longer term, many
underlying causes of PNGs law and order
5 4%
problems can only be addressed by increased 3%
2%
employment and income-earning opportunities, 0
and by a more general reduction of poverty.
d

se
fe hly

cte

cte

cte

cte

cte
d

on

However, the economys capacity to sustain high

af hig
cte

fe

ffe

ffe

ffe

fe

sp
af

af
ry

ya

na

re
un

un
Ve

ly

rates of employment growth through productive

yu

No
irl
gh

ly

ly
Fa

irl
Hi

gh

te
Fa

ple

investment is constrained by the current law and

Hi

m
Co

order problems. Hence, a more effective law

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
and order policy that encompasses the three New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
5 The Challenges of Doing Business in Papua New Guinea

for committing a crime; (ii) solid legal processes to offenders; and (iii) punishment that fits the crime
and institutions to successfully bring convictions and jail sentences that are served in full.5

Figure 6: Concern over the Stablity of Rules, Policies, and

Regulations Government Regulations and Policies
45
Stable policies, rules, and regulations as well
40 39%
as simplicity and certainty of their application
35
are fundamental prerequisites for a sound
business and investment environment. Frequent
Percentage of respondents

31%
30
changes in rules and regulations raise the costs
25 of compliance, make businesses vulnerable to
23%
predatory officials, and generally increase the
20
costs of doing business. A number of questions
15 were asked of the respondents to gauge the
extent to which changes in rules, policies, and
10
regulations are a concern for the business
5%
5 community in PNG.
1% 1% 1%
0 Overall, apprehension was high not only with
respect to future changes, but also regarding
d

ed

ed

se
er hly

ne

ne

ne

on
rn

rn
d
nc ig

er

er

er
ne

retrospective changes to rules and regulations.

ce

ce

sp
co ry h

nc

nc

nc
on

on

re
co

co

co
Ve

yc

nc

No
un

un

The latter issue is of particular concern to investors

ly

yu
irl
gh

ly

ly
Fa

irl
Hi

gh

te
Fa

ple

because an investment decision is based on

Hi

m
Co

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua cost calculations of the existing pattern of rules
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
and regulationsif these change and raise the
Figure 7: Concern over Retrospective Changes in Rules and costs of compliance, investments that might have
Regulations previously been profitable become less so, which
35
33% could result in some wrong investment decisions.

30 29% Figure 6 indicates that on average, 70% of

businesses were very highly concerned or highly
concerned about the stability of rules, policies,
Percentage of respondents

25
23%
and regulations. Importantly, there has been no
20 significant easing in the level of concern recorded
in 2007 compared with 2002. Overall, businesses
15 remain worried about the stability of the rules
of the game imposed by the government. The
10%
10
perception of risk of doing business in PNG
impacts negatively on investment.
5

1%
2% 2% A closely-related question asked respondents
0 whether they feared retrospective changes to
rules and regulations, an issue which is central
d

ed

se
er hly

ne

ne

ne

ne

on
rn
d
nc ig

er

er

er

er
ne

ce

sp

to the credibility of the regulatory and policy

co ry h

nc

nc

nc
on

on

re
co

co
Ve

yc

nc

nc

No
un
ly

environment faced by businesses. If investors are

yu

u
irl
gh

ly

ly
Fa

irl
Hi

gh

te
Fa

ple
Hi

concerned with retrospective changes to rules and

m
Co

regulations, they may apply a high-risk premium

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby. to the financial assessment of new investment

Levantis, T., and M. Manning. 2002. The Business and Investment Environment in PNG: The Private Sector PerspectiveA Private Sector Survey.
5 

Port Moresby: Institute of National Affairs.

 An Analytical Summary of the 2007 Business Environment Survey by the Institute of National Affairs 6

proposals and other operational matters. Figure 8: Likelihood of Rule Changes with Changes in Government
This risk premium could mean the difference 30
28%
between a new investment going ahead or 26%
being abandoned. 25

Percentage of respondents
21%
Once again, the majority of businesses 20
(52%) were either very highly concerned 17%
or highly concerned over the possibility of 15
retrospective change to rules and regulations
(Figure 7). Furthermore, reduction in the level 10
of concern between the 2007 and 2002
surveys was marginal. 5
5%

2%
A question regarding the likelihood of policy 1%
changes with changes in government explains 0 e

es

es

se
much of the concern regarding political instability.
re

re

re

re
as

as

on
ag

ag

ag

ag
tc

tc

sp
dis

dis
lly

to
Respondents were asked to indicate the extent to
os

os

re
Fu

to

ly
m

No
n

ng
Te

d
n

in
n
ei

ro
which they agreed with the statement that rules
Te

ee

St
re

gr
Ag

sa
and regulations changed as government changed
(Figure 8). A significant majority agreed that rules Di
Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
likely changed when governments changed.
Figure 9: Main Reasons for Problems in Complying with
In addition, when asked how burdensome Regulations
government regulations were, a great majority
indicated that compliance is a major problem
Excessive
from the perspective of fees, complexity, and compliance fees
processing time (Figure 9). 27%

Regulations being too

When asked whether the cost of compliance complex and haphazard
with government regulations affected investment 30%
decisions and increased the cost of doing business, Long processing time
again, the majority of respondents answered in 43%
the affirmative. Furthermore, nearly half of the
Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
respondents indicated that they had abandoned New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
investments because of compliance difficulties
(Figure 10). When these responses are considered Figure 10: Incidence of Investments Abandoned Because of
Compliance Difficulties
in conjunction with concerns over political
60
uncertainty and the stability of rules and regulations, 55 53%
it seems that the combination of all these factors 50 47%
is having a marked negative effect on investment.
Percentage of respondents

45
40

BusinessGovernment Relationships 35
30
In well-functioning business environments, 25

businessgovernment relationships are 20

collaborative. Ideally, governments consult with 15

10
the business community before embarking on
5
policies or regulations that impact the costs and
0
performance of business. Similarly, businesses
s

No
Ye

refrain from seeking special favors, and are open

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
to government concerns. New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
7 The Challenges of Doing Business in Papua New Guinea

In PNG, a weak relationship exists between the Furthermore, a significant number of respondents
private sector and the government. When asked indicated that they were negatively affected by
to rank their overall working relationship with the corruption among officials (Figure 12). Sixty-seven
government and bureaucracy, 39% of respondents percent said that they had been affected by
indicated that the government was highly corruption, with 40% stating that they had either
unhelpful or very highly unhelpful, while another been very highly affected or highly affected.
30% indicated that the government was fairly
On a follow-up question regarding the frequency
unhelpful (Figure 11).
of irregular payments to government officials,
Figure 11: Perception of the Helpfulness of Government just under 40% of respondents indicated that
35 such payments always, mostly, or frequently
occurred (Figure 13). By contrast, about 34% of
30%
30 respondents said that they seldom or never
made such payments.
Percentage of respondents

25
23%
21% Infrastructure and Public Services
20

16%
Another set of questions inquired about the
15 effectiveness of infrastructure and public sector
services for respondents businesses. The quality
10 of the business environment depends largely
on the effectiveness of supporting services and
5%
5 infrastructure such as water, telecommunications,
3%
1% electricity, ports, roads, as well as the courts
0
and the legal system. As in other countries,
these services are provided in PNG by a mixture
ul

ul

se
fu

fu
lpf y

lpf y
he ighl

he hl
lpf

lpf

on
elp

elp
gh l

ul
u

un hig
he

he

sp
yh

yh

nh

of public and private suppliers. The recent

un

re
ry
ly

yu
r

irl
Ve

Ve

No
ly
Fa

irl
Hi

gh

PSA for PNG and other economic reports

Fa

Hi

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua have consistently found that infrastructure and
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
supporting services have limited availability and
Figure 12: Impact of Corruption on Business are often of poor quality.
50
The perception of the overall efficiency,
45 effectiveness, and quality of government services
40
is very low, with over 80% of the respondents
rating them as fairly poor or worse (Figure 14).
Percentage of respondents

35
Furthermore, businesses perceive little
30
27% improvement since the 2002 survey. On a scale
24%
25 of 1 to 6, with 1 being never efficient and 6
21%
20 being always efficient, businesses in all sectors
16% of the economy rated government service
15
provision as being largely inefficient (Figure 15).
10
5% 5%
The respondents were also asked to rate the
5 quality of particular infrastructure and other
1%
0 services (Figure 16). The ratings showed a
significant level of dissatisfaction with virtually all
d

se
fe hly

fe ely
cte

cte

cte

cte

on
d

d
af let
af hig
cte

cte
fe

ffe

ffe

fe

the items included in the questionnaire. Overall,

sp
un mp
af

af
ya

na

re
ry

un
ly

Co
Ve

yu

No
irl
gh

roads and bridges were ranked the poorest,

ly
Fa

irl
Hi

gh
Fa

Hi

followed by telecommunications and postal

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby. services, electricity, and water and sewage.
 An Analytical Summary of the 2007 Business Environment Survey by the Institute of National Affairs 8

While finance and banking services, which the

private sector primarily supplies, received the
best ranking, these services still received a Infrastructure and supporting
below-average rating.
services have limited availability
With regard to telecommunications services, it
should be noted that this survey was undertaken and are often of poor quality
before the impact of the entry of Digicel had been
fully absorbed by the private sector. Anecdotal
reports over the last 12 months suggest that
there has been a quantum improvement not Figure 13: Frequency of Irregular Payments Made by Firms
only in the quality of the privately-supplied 50
telecommunications services, but also in those
45
services provided by PNG Telikom.
40
This lessonthat competition is good for both
Percentage of respondents

35
the public and the private sectorshas far-
reaching implications for government efforts 30
27%
to improve service delivery supplied by state-
25
owned enterprises (SOEs), which center around 22%

efficiency improvements and using publicprivate 20

16%
partnerships to reduce costs. The effectiveness 15
12%
of both measures will also be improved by 11% 11%
10
ensuring that there is competition.
5
2%
The private sector supports the aim of improving
0
these services. In a separate question, 70%
ys

tly

tly

es

se
ve

of respondents agreed or strongly agreed that

ldo
wa

im

on
os

en

Ne
M

sp
qu

et

Se
Al

re

major reforms in the delivery and quality of

e
Fr

So

No

government services are needed. Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
Of the government services included in the
questionnaire, the court system is generally Figure 14: Perception of Overall Efficiency, Effectiveness, and
Quality of Government Services
regarded as effective and efficient. Over 60% of
45
respondents indicated that they had confidence 42.3%

in the judiciary and in court decisions. 40

35
Constraints to Business and
Percentage of respondents

30
Investment
25
As part of the survey, businesses were asked 21.8%
to rank 22 potential constraints according to 20 18.8%
their impact on the business environment. 15.1%
15
Respondents were asked to rank constraints on
a six-point scale ranging from not a problem 10
to extremely problematic. Figure 17 shows the
5
ranking of the constraints that the respondents
0.8% 1.3%
identified as posing the most important 0
problems for doing business in 2007. The major
igh

gh

r
o

oo
hig

po

Po
Hi
yh

yp

impediments to doing business in 2002 are also

ly

ly
r

r
ir

ir
Ve

Ve
Fa

Fa

included for comparison. Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
9 The Challenges of Doing Business in Papua New Guinea

Consistent with other responses to the survey, Among other major issues identified as significant
businesses reported that the most significant impediments to business and investment were
problems were law and order, corruption, and access to land and land compensation claims.
political uncertainty.
By contrast, macroeconomic issues embodied in
exchange rate instability and high interest rates
that were ranked among the most problematic
Figure 15: Government Service Efficiency 2002 and 2007 issues in the 2002 survey were not reported as
6
major problems in 2007. This reflects the greatly
improved macroeconomic situation in PNG over
5 the last 5 years.

The ranking of issues in this section tracks closely

(1 = Never to 6 = Always)

4
the constraints identified in the other parts of the
survey, providing a good consistency check of the
Rating

2.9
3 overall accuracy of the answers to the questions.
2.3
The respondents indicated significant problems
2
in all the areas investigated. Concerns regarding
political stability remain despite an extended
1 period in which the government has been in
office. The business community appears to have
0 little confidence in the ability of the government
to supply services and remains highly dissatisfied
02

07
20

20

Year with the quality of services available.

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby. Corruption is viewed as a widespread phenomenon,
which is consistent with the finding that when
Figure 16: Perception of the Efficiency, Effectiveness, and
Quality of Specific Government Services rules and regulations are pervasive and are
6 changed frequently, public officials are able to
extract irregular payments from businesses.6
5 4.8 Law and order problems continue to weigh heavily
4.5 on businesses, amounting to the equivalent of
4.3
(1 = Very good to 6 = Very poor)

4.0 a significant tax on profits. Investment decisions

4
3.7 3.7
have been affected by the difficulty of complying
3.4
with rules and regulations imposed by various
Rating

3
government departments and agencies.

The survey responses clearly show that investors

2
in PNG have long memories, so that the political
stability of the past 6 years has had less impact
1
than might have been expected.

The business community follows ministerial

0
reshuffles and changes to the heads of key
ty

es

ge

es

rv nd
rv on

ice
ici

government departments and agencies closely.

idg

vic
wa

s
s a es

se ce a
i

ice
t

rv
ctr

l s ica
ic

er
br

se

se
Ele

ls

ing an
sta un

nd

It may also believe that the underlying political

d
e

rt

ga
an

nk in
po m

Po

ba F
d m

Le
er
ad
an leco

dynamic that has led to political instability in the

at
Ro

W
Te

past has not been addressed by reforms such as

Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua
New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby. the Organic Law on the Integrity of Political Parties

See Holden, P., and J. Sobotka. 2000. Corruption: An Economic Perspective. In Bernasconi, P., ed. Responding to Corruption. Milan: Milan Press.
6 
 An Analytical Summary of the 2007 Business Environment Survey by the Institute of National Affairs 10

and Candidates and therefore fears future

outbreaks of uncertainty.

Since independence in 1975, no-confidence An overwhelming majority of

motions and changes of government on the floor
of Parliament occurred frequently, and although
those surveyed indicated that law
there were no no-confidence motions or changes
of government in the seventh National Parliament
and order should be the prime
(20022007), business may require a continuation focus of policy
of stability in the eighth National Parliament (2007
2012) before perceptions on political stability shift.

Comparison with the Findings of the

The binding constraints to growth identified in the
Private Sector Assessment PSA for PNG closely mirrored the issues identified
As part of the survey, businesses were asked in the survey. The most important constraints in
to rank their most important policy priorities. the PSA are:
An overwhelming majority of those surveyed
High risk resulting from a high crime rate; lack
indicated that law and order should be the
of transparency in government; unpredictable
prime focus of policy. Closely related was the
changes in government policy; a weak
emphasis respondents placed on dealing with
commercial legal framework, including a
the corruption issues. Infrastructure was identified
poor collateral system; and an uncertain and
as the third priority, particularly transport and
complicated land leasing system.
telecommunications.

Figure 17: Ranking of Constraints to Business and Investment

6
5.5
5.1 5.1 5.1 2007 2002
(1 = Not a problem to 6 = Extremely problematic)

5 4.9
4.8
4.7 4.6 4.6 4.7
4.5 4.5 4.4 4.4 4.4 4.5
4.3
4.1 4.1
4 3.9 3.9
3.8 3.7 3.7 3.8
3.6 3.6 3.6
3.5 3.4 3.4
3.2 3.1 3.2 3.2
3.1
Rating

3.0 2.9 2.9

3 2.8 2.7
2.5
2.3

0
Co er

e o tion nce n
at tran infra inty

re

a ure
ab f ski ture

l le ab f reg bor

or ve ha ions

an t / U e

es d

In s
ion on

ts

idy y ta r
te

s a g s rt
es

er r
m
Ac taxe an

x
o

na abo
e

im
les en rat
tio

n
ce s a

ta
f s npu

ra

ris
d

tu

lab
at

vic
i
Int o la

p
ns flat
d rb
or

a
a

cla
up

uc

uc

p
t

tr

ro
y o ed l

l
e

x
t

au vel le e ula
y o stru

er
u

ice
r

i
Ac ate Com led

na illed
ity rn ng
d

t
r

str

Av ricit astr

x / y ba iff s
of
r
an

ss
ll

rv

lt
kil
er

Co ost

an

k
lu

at
r
ab nfr

in

se
w

th go xc
inf

Ta

Int uns
ru m

k
La

C
ica

tio
yi

nd
o

/
s

f e port

pe

of
t

st
ilit
li

ilit

m
Po

er
st
s

ss ubs

od
co
ica

ca ari

ali

Co
lec

St

Go
ail

u
s
nd
un

q
f

La
m

to
eo
m

qu

ta
at
co

de
Lo
St

ed
ce
St
ele

Ina

dd
ft

-a
eo

lue
at

Va
St

a
Not included in 2002 survey.
Source: Institute of National Affairs. 2008. The Business and Investment Environment in Papua New Guinea in 2007: Private Sector PerspectiveA Private Sector Survey. Port Moresby.
11 The Challenges of Doing Business in Papua New Guinea
High transactions costs resulting from
the government intruding in every area
of the economy through ownership and
regulation, which raises costs and weakens
competitiveness.
Poor infrastructure, especially road infrastructure,
which has been described as a massive and
pervasive problem in PNG. Inefficient SOEs
provide poor, high-cost service and crowd out
the private sector.
Underdeveloped financial markets with low
lending and high interest rates.
These conclusions are to a large extent confirmed
by the business survey and highlight the need
for reform. Although in the short run the natural
resource boom has changed the economic
landscape in PNG and growth and investment
have been strong, ensuring that growth spills over
to the rest of the economy requires broad-based
reform. Many countries that have experienced
growth from natural resources fail to sustain the
expansion once commodity prices decline, as they
inevitably do.
The current boom provides PNG with an
opportunity to broaden its economic base and
provide for sustained growth in the future that
relies not only on natural resources but a more
diverse range of economic activity. Failure to
remove the bottlenecks, target public expenditure
on priorities, constrain corruption and other
handicaps to broad-based business and
investment, and maintain sound macroeconomic
management (allowing the Dutch Disease to
become unduly pervasive) will jeopardize the
countrys economic prospects, including the
needed employment growth.
Policy Reform
The conclusions of the survey and the PSA lead
to similar policy recommendations. The most
important of these are:
Vigorously promoting competition by eliminating
SOE monopolies. The dramatic reduction in
calling costs and expansion of services as a
result of the partial opening up of the mobile
telephony market to competition illustrates
the benefits of having new entrants in sectors
that have been monopolized. Generally,
policies should be directed at reducing costs
and improving service, instead of protecting
incumbent SOEs.
Promoting publicprivate partnerships to
increase investment and improve productivity in
infrastructure and service provision.
Modernizing the legal system to better meet
the needs of modern commerce and reflect
the realities of PNG. Initially, the Companies
Act and the companies registry require reform,
and should accommodate rural and community
organizations.
Simplifying the system of licenses, regulations,
and taxes which raises the costs of doing
business. This will especially help small- and
medium-sized enterprises.
Promoting financial market development by
reforming the collateral framework, establishing
a system for credit information, and promoting
access to financial services in rural areas.
Formalizing private and public sector
consultation mechanisms to arrive jointly at
a consensus regarding reform initiatives and
priorities. This will entail strengthening the ability
of representative private sector organizations to
analyze policy options.
Providing robust and adequately-funded
independent mechanisms for addressing
crime that have a tangible deterrent effect on
criminal activity, including public (and private)
sector corruption.
Vigorously pursuing public sector reform,
including the right-sizing of institutions and
staffing levels to meet the needs and priorities
of the business community. In many cases, this
entails cutting back on waste and excessive
overheads and staffing. In other cases, it
involves increasing staffing levels or providing
more specialist staff to eliminate bottlenecks in
areas such as migration and work permits, as
well as longer term issues related to education,
training, infrastructure, and contract oversight.
The Challenges of Doing Business in Papua New Guinea: An Analytical Summary of the
2007 Business Environment Survey by the Institute of National Affairs

This report summarizes the results of an extensive survey of the business community on the
challenges of doing business in Papua New Guinea. It finds that despite some improvement in
the business environment, progress since a similar survey was conducted in 2002 has been
disappointing. Many of the issues identified then still have a negative impact on investment and
entrepreneurship. To ensure that the current resource boom is translated into sustainable prosperity,
substantial reform is needed.

About the Asian Development Bank

ADBs vision is an Asia and Pacific region free of poverty. Its mission is to help its developing
member countries substantially reduce poverty and improve the quality of life of their people. Despite
the regions many successes, it remains home to two thirds of the worlds poor. Nearly 1.7 billion
people in the region live on $2 or less a day. ADB is committed to reducing poverty through inclusive
economic growth, environmentally sustainable growth, and regional integration.

Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments
for helping its developing member countries are policy dialogue, loans, equity investments,
guarantees, grants, and technical assistance. In 2007, it approved $10.1 billion of loans, $673
million of grant projects, and technical assistance amounting to $243 million.

Asian Development Bank

6 ADB Avenue, Mandaluyong City
1550 Metro Manila, Philippines

Pacific Liaison and Coordination Office

Level 18, 1 Margaret Street
Sydney, NSW 2000, Australia
www.adb.org/pacific

Papua New Guinea Institute of National Affairs

PO Box 1530, Port Moresby
National Capital District
Papua New Guinea
www.inapng.com

Publication Stock No. 101108

ISBN: 978-971-561-742-0 Printed in Australia