Divided by ridges of high mountains and dense with tropical rainforests, Papua New Guinea has some of the world’s most difficult terrain to traverse. The country also possesses around 800 islands, with much of its 6500 km of coastline only accessible by sea. Thus, transport and logistics in the country has long been a major challenge. Still, much of the country’s overall economic development hinges on these transport barriers being faced and overcome. The government, which is fully aware of the importance of the sector, is making a major effort to invest – and attract investment – into transport. New plans and strategies are being rolled out, with some of the state’s new largesse, gleaned from new hydrocarbons activities, finding its way into a major new infrastructure boost.
Tough Geography
With a population of around 7.3m, only some 15% of PNG’s inhabitants are urban residents. Most of these live in and around Port Moresby, the country’s coastal capital. The main landmass, which consists of roughly half the island of Papua, contains three main river systems, which have traditionally provided the only commercial transport access to the interior. These systems have been navigable enough for mines and rubber plantations upriver to be reached by ocean going vessels, yet for some upper stretches of the Fly, Sepik and Ramu rivers, dugout canoe remains the only effective means of transport.
PNG has one land border with Indonesia, with one official crossing on the northern coast from Vanimo to Jayapura. For the inland rural population, the most reliable and fastest means of transport has been air, with helicopter and light aircraft frequently used to connect with up-river and up-valley communities. Offshore, PNG has a network of islands known as Tropical Oceania, including Manus Island, New Ireland, New Britain, Bougainville and dozens of others. Thus, travel around PNG has been difficult, with the geography itself presenting many obstacles.
Nature, too, has an impact, via tropical rainstorms, earthquakes and high temperatures, along with fast-growing vegetation that can reclaim under-maintained road surfaces and infrastructure. This is particularly problematic when some 80% of the country’s freight and passenger demand is for road transport.
Bodies & Plans
The Department of Transport is the main government agency responsible for transport planning and coordination, with the Department of Works (DoW) key in infrastructure project roll-out. The Ministry of Planning also has a key role in linking transport strategy to other areas of government policy. According to a 2014 report from the DoW, PNG had a national road network of approximately 8738 km, divided into 4256 km of priority roads and 4482 km of non-priority roads. When provincial and district road networks were added in, the DoW estimated some 30,000 km of roads nationwide. The road system also included over 2000 bridges and culverts.
Yet, as the report also pointed out, the majority of these roads – 67% – are in a “failed” or “poor” condition, although the figure for national roads is much lower, at about 16%. Lack of maintenance and a lack of funding are behind this percentage, according to the DoW, with actual financial provision only around 20-25% of the amount outlined in DoW budget estimates. The country’s particularly punishing environment accelerates the deterioration of road surfaces, with decay becoming exponential once a certain period of neglect has passed. This creates a considerable burden on the country’s productive capacity. The DoW estimates that the poor state of the road network costs the economy dearly, with losses from the state of the Highlands Highway (HH) alone estimated at PGK662m ($250m) a year. Neglect of maintenance also has escalating costs, with PGK1bn ($378m) spent on maintenance before a road deteriorates to “fair” condition, saving PGK4bn-5bn ($1.5bn-1.9bn) in future costs to restore roads in worse condition. Poor transport links have many other costs too. Education and health are affected, as students have difficulty in reaching schools and colleges, while hospitals may be inaccessible for those from distant villages.
The Road to Investment
PNG also has a significant need for investment in the road network. To achieve this and to coordinate national, provincial and district transport development, the government has launched a series of plans for the sector. These include the National Transport Strategy 2014-30, which divides into Medium Term Transport Plans, with the current one running from 2014-18. These programmes also dovetail with the longer-term Development Strategic Plan (DSP) and PNG Vision 2050.
The government also launched the PNG Road Fund back in 2008-09, and created the independent National Road Authority (NRA) to administer it. The NRA was to direct the fund – made up of automatic transfers from road user fees – and channel it into road maintenance and repair. The fund receives around PGK16m ($6m) a year from a levy on domestically refined diesel fuel, an amount which some find low, however, with debate currently ongoing on measures to increase the size of the fund in the years ahead.
Meanwhile, to support the focus on transport rollout, in the 2014 budget the government allocated some PGK2.7bn ($1bn) to infrastructure (which includes communications and utilities). This was the largest allocation to any sector, substantially larger than the PGK1.9bn ($711m) allocated in 2013. The budget also set aside PGK30m ($11.4m) to upgrade Port Moresby airport and PGK15m ($5.7m) for Kokopo airport.
The 2015 budget maintains this high level of investment in infrastructure, with PGK2.7bn ($1bn) allocated out of a total PGK16.2bn ($6.1bn). This includes PGK238.9m ($90.4m) for national roads, PGK150m ($56.8m) for the HH, PGK293m ($110.9m) for city roads, and PGK57.2m ($21.6m) for bridges and improved rural access. Another PGK121m ($45.8m) has been allocated for civil aviation development and improvement programmes, and approximately PGK50.8m ($19.2m) will be provided for maritime sector expansions (see analysis).
Challenging Year
Declining liquefied natural gas (LNG) prices – and thus lower government revenues – are expected to effect project roll-outs in the 2015-16 period, as government budgets have been based on higher hydrocarbons prices than those realised during 2014-15. This is also affecting sector operators. Allan Poulton, general manager of the freight services firm, GFS Limited, told OBG, “In this time of uncertainty, operators need to cut costs and slow down operations to counterbalance a cooling in the domestic economy due to low commodity prices.”
Nonetheless, a scheduled pipeline of approximately PGK7bn ($2.6bn) in road infrastructure projects is currently in existence. The government has set a number of short-term targets for the road segment. These include maintenance and repair so that 75% of the national road network is brought to a “good” standard by 2017 – up from 36% in 2014. A further target is to open up four of the “missing links” in the national road network. This refers to four economic corridors outlined in a previous Medium-Term Development Plan for 2013-16. These run from the Gulf of Papua inland to the Southern Highlands Province (SHP), along the Erave-Sembiriniki-Kikori axis; the Morobe-Gulf of Papua corridor; the East-West New Britain link; and the Madang-Baiya link in Western Highlands Province (WHP). The completion of transport projects in these areas are expected to have knock-on effects on local transit, as they connect existing networks.
Equipment Check
The DoW is targeting an upgrade of its Plant and Transport Division (PTD). The PTD is the body responsible for operational management, repair and maintenance of DoW construction equipment, while it also leases this out to the DoW’s Operational Division for project implementation. The PTD is slated to be deployed in support of rural road maintenance, with a new equipment-buying programme under way through the assistance of the Japanese International Cooperation Agency (JICA). This will see 48 pieces of heavy construction equipment purchased at a cost of PGK23m ($8.7m), with the items delivered to Morobe, WHP, West New Britain and East Sepik. Meanwhile, the private sector has also been a leading buyer of work-related vehicles. Speaking specifically about cars, Takeshi Abe, CEO of Ela Motors, told OBG, “Automotive sales to corporate sector clients continue to thrive, though we are seeing some stabilisation after the completion of the PNG LNG project. Still, we expect the market to pick up again in 2017 and the market should recover to 10,000 units per annum.”
Multi-Purpose Solution
The PTD’s expansion addresses a further challenge, in that PNG has fewer than 15 national contractors and just five international ones with the ability to conduct civil works to the standard necessary for modern roads. Most of these are also concentrated in one home province and infrequently work in other areas of the country. This private sector capacity constraint also comes alongside public sector limitations, which historically have resulted in unspent funding being allocated to transport infrastructure. Delays in approvals, road management agency capacity problems and land issues have all been cited as factors. In response, in 2012 leaders of the government coalition parties signed the Alotau Accord, an agreement aimed at tackling difficulties in project delivery. The accord also established the Infrastructure Development Authority (IDA). The IDA hopes to follow up on existing transport strategies and enhance implementation in the years ahead.
At the same time, the government is looking for private sector partnership opportunities with overseas contractors that can undertake transport infrastructure projects in PNG. In this, the government has also been receiving help from the World Bank, the Asian Development Bank (ADB) and the Australian government, in particular. In January 2015, the latter started the second five-year phase of its PNG-Australia Transport Sector Support Programme, valued at approximately PGK319.6m ($120.9m). Phase one, valued at PGK950m ($359.5m) for the 2007-14 period, financed work on some 17,500 km of road, nationwide.
The ADB, meanwhile, has signed a series of country partnership strategies (CPSs) over the years with PNG, with the current agreement running from 2011-15 recently being updated and renewed for 2016-20. Transport is one of the areas heavily emphasised in the CPSs, with around 68% of the $436m in the 2016-20 programme allocated to the sector, split evenly between land and air transport. The World Bank has also signed a series of country assistance strategies with PNG over the years, with a CPS also currently in place, for the financial period 2013-16. In 2015, the bank began the second, $157m phase of its Roads Maintenance and Rehabilitation Project to upgrade, restore and maintain bridges and roads across PNG.
Highlands Highway
One project of particular importance is the Okuk Highway, also known as the HH, that runs for around 700 km, making it the longest road in the country. The highway traverses some difficult terrain, running via Mount Hagen, while also crossing the 1500-metre-high Kassam Pass. It also connects the port of Lae in the east with Tari and the Porgera Gold Mine in the west.
The route encompasses the PNG LNG oil and gas fields in the SHP, while also providing the main transport artery for around 3m people, particularly in and around the towns of Goroka and Mendi. The HH is a vital link for many communities and for the overall economy. In recent times, however, its condition has deteriorated sharply. Thus, the 2015 budget allocated PGK150m ($56.8) for work on the HH, continuing many years of government financing. The ADB has been heavily involved in the project, with the Highlands Region Road Improvement Investment Programme (HRRIIP) also aiming to improve the Highlands Core Road Network – roughly 2500 km of national and local roads that feed into the HH over its length. The HRRIIP has seen the use of long-term maintenance contracts, with these performance linked. This addresses a key issue in ensuring that road systems do not deteriorate once they have been established. In 2014, the ADB signed a $109m loan to the government to fund the second tranche of the project. Other donors have included the Japan Special fund, which contributed $700,000 during the first phase. JICA and the Australian Agency for International Development have also provided significant assistance to the HH.
Traffic Trouble
PNG’s strong economic growth in the past several years has enabled Port Moresby’s National Capital District (NCD) grow, with the population expanding beyond the capacity of much transport infrastructure. To address this – and with the heightened traffic associated with the 2015 South Pacific Games and 2018 APEC Summit in mind – the government earmarked PGK700m ($264.9m) for six major road projects in the NCD in 2013. The Exim Bank of China is providing PGK300m ($113.5m), with the remaining funded by the state. The largest of the six is the 10. 7-km, four-lane Gerehu to Hanuabada road, valued at PGK196m ($74.1m), followed by the 8-km, four-lane Gerehu-to-9 Mile road, both being constructed by the China Harbour Engineering Company. These projects, which are scheduled to be completed in 2015-18, are expected to ease transport congestion for businesses and logistics companies, as well as ordinary citizens.
Taking Off
Roads are not the only area of focus for sector operators. Ripen N Sarepo, CEO, Trans Wonderland Limited, told OBG, “Road transport remains vital in PNG, but I believe that the aviation sector will see an exceptional growth in coming years and it will have an even greater impact on the country’s development.”
A network of small airports and airstrips serves the country’s interior, while major airports have been established in the capital and elsewhere. Port Moresby International Airport (PMIA) lies 8 km outside the capital and in 2014, 10 local airlines provided domestic services, while international routes were flown by nine airlines. The PNG national carrier is the state-owned Air Niugini, which operates both domestic and international routes. PMIA itself is operated by the National Airports Corporation (NAC), a state enterprise established in 2000. The NAC operates 22 major airports across the country, as well as another 23, secondary airports or airstrips.
PMIA is currently undergoing a major upgrade. The airport is on the site of an airbase from the Second World War, with its passenger terminal added in 1959 and a concrete apron and taxiway built in 1963. Despite extensions and additions since, upcoming events in Port Moresby require a major overhaul of the facilities.
“We expect the number of flights arriving to Port Moresby to increase considerably over the next few years,” Pacific Energy Aviation’s general manager, Henry Elias, told OBG. “The 2015 South Pacific Games and the 2018 APEC Summit are both expected to have a significant impact on the local airline industry.”
The airport was originally built with capacity to process just 300,000-400,000 passengers per year, but in 2014 it saw 1.4m people, according to NAC management. The airport also has cargo storage capacity of just 162,000 tonnes, with four runways, two of them 2750 metres and the others 2065 metres in length.
In 2010, Canada’s Jacobs Consulting delivered a 20-year master plan for the airport’s development. In 2014, the NAC began a PGK100m ($37.8m) expansion programme for the international terminal building, which adds a 30-metre extension to its north-west end and 20 metres to its south-east end.
The master plan will later see the international and domestic terminals connected via a three-level, 35, 000-sq-metre building constructed to link the two. The NAC expects to deliver this in 2017, in time for the APEC summit, and has been looking to use a public private partnership model for the long-term operation and management of PMIA. It would also like to see the airport develop more as a regional hub, connecting Australia across the Pacific to China and Japan, while also acting as a feeder to other South Pacific airports.
Regional Conundrums
In addition to major facilities, the NAC is responsible for 21 other airports, some of which are heavily subsidised from PMIA’s profits. Acting managing director of the NAC, Joseph Tupiri, told the local magazine, Business Advantage, in 2014 that the Mount Hagen airport, for example, makes PGK1m ($378,400) a year but costs PGK1.5m ($567,600) to run. This has led to some debate about reorganising the funding model for the facility, with the NAC suggesting that a community service obligation provision from the central government could fund loss-making regional airports, thus freeing PMIA from the task of effectively subsidising other airports through the NAC.
Regional airports are a key lifeline for much of the country. In 2014, 21 regional airports served some 3m passengers, according to the government. As with roads, many smaller stations are in need of maintenance, while another important area for investment is safety. Over 20 aircraft crashed in PNG in the 2000-14 period, most of them domestic light aircraft. Thus, the government received a $130m loan from the ADB in 2014 for its Civil Aviation Development Investment Programme (CADIP). CADIP has already helped with the PMIA upgrade and the new loan targets airports in New Britain, Mount Hagen, Wewak, Kavieng, Gurney and Goroka. The government provided PGK217.7m ($82.4m) in counterpart funding for these projects, while the 2015 budget extends PGK121m ($45.8m) to CADIP.
Outlook
The government’s expansion of infrastructure expenditures comes after years of neglect, with much of the current work therefore being done on restoring the road network, rather than expanding it. Nonetheless, this work is vital and expected to produce significant payoffs for the economy and society at large. Sustaining high levels of expenditure on transport projects will be a challenge for the government in the short term, given lower-than-expected LNG revenues during 2014-15 period. Still, the government’s determination to maintain a budgetary focus on this area bodes well for the sector. Other positive indicators for the economy, as well as population growth, provide strong fundamentals for improving transport and logistics demand going forward.
The main challenge is project delivery, which has necessitated programmes to strengthen capacity, as well as combat graft and mismanagement. The functionality of these programmes may turn out to be equally important as the construction itself in the years ahead. For investors, the opportunities are significant, with the country looking for everything from project financing, to international expertise in design and engineering. PNG may well be a challenging environment, but it remains one that is also full of possibility.
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