WT/TPR/S/62 Trade Policy Review
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IV. TRADE POLICIES BY SECTOR
(1) OVERVIEW
1. PNG remains predominantly an agrarian and resource-based economy, heavily dependent
upon primary production, especially if subsistence production is taken into account.  This has made
the economy, and the Government’s revenue base, externally vulnerable to the effects of fluctuations
in international commodity prices, especially for logs, fish, gold, copper, and oil.  Nonetheless,natural-resource-based industries continue to be affected by government measures that may be
hampering their long-term development.  These in clude import and export measures, tax, investment,
and "domestication" policies.  The Government, for example, has adopted trade and investment
measures aimed at promoting wood and fish processing.
2. Government measures have also aimed, with little success, at encouraging manufacturing,
including certain food processing activities.  The tariff has been the principal instrument used in
recent years, following the tariffication of import quotas and bans in the mid-1990s.  While tariffs
have been reduced considerably under the reduction programme, implemented from 1 July 1999, and
currently average 9%, pockets of high tariffs remain to protect targeted activities, including canned
mackerel, sugar, and  plywood (Table AIV.1).
3. Tariff dispersion within and across certain sectors therefore remains high, and on average is
wider on agricultural products than for manufactured goods.  Tariffs on agriculture, forestry and
fishing currently average 25%, and range from zero to 55%.  However, these tariffs generally provide
less assistance in practice to traditional agricultural tree crops because most are exported at world
prices.  Relatively low average tariffs on manufacturing of 8% mainly reflect the zero tariffs on basic
and intermediate inputs, and mask much higher tariffs of up to 95% in key manufacturing activities,
such as on certain food and timber products.  Tariffs on major processed food and other productsprovide maximum assistance since they are so ld almost exclusively on the home market.
4. The protective tariff structure still penalizes the traditional export crops, albeit less severely
following the July 1999 tariff cuts, with negative effective rates of assistance (Table IV.1).  This
largely reflects their relatively low assistance on output, virtually all of their production is exported at
world prices, combined with moderate to high tariffs on imported non-capital inputs, such astransportation equipment and other manufactured products.  At the same time, selected food
processing and other manufacturing activities receive very high levels of effective assistance;  several
food processing and other activities are likely to have negative value added at world prices
(Box IV.1).
5. PNG’s protectionist policies have provided high levels of assistance to certain products in
which the country appears to have little comparative advantage, such as sugar, while penalizing
traditional competitive export crops of coffee, cocoa, copra, and oil palm, which receive much lower,
and indeed negative, effective assistance.  Similarly, food processing and selected other
manufacturing activities, such as cement, tobacco, beverages, soaps, and cosmetics receive relatively
high assistance.  High levels of assistance for selected agricultural and manufacturing activitiescontinue as a potentially major source of economic inefficiency by encouraging a shift in resources
away from goods (and services) produced relatively efficiently with little or no assistance.
6. The services sector, primarily community and social services, commerce, and construction,
contribute significantly to employment and pr oduction, accounting for almost 40% of GDP in 1997.
This level has, however, remained static.  Government  assistance to services mainly involves laws and
regulations that restrict market access, particularly those that confer monopoly power to state-ownedPapua New Guinea WT/TPR/S/62
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enterprises, such as electricity, air services and, until 2002, telecommunications.  Coastal shipping is
also sheltered from international competition by cabotage policies.  The consequent lack of
competition results in higher prices for these services.  This is to the detriment of consumers as well
as businesses that rely on such inputs;  the associated increase in costs and often poor service quality
impairs the economy’s international competitiveness and impedes foreign investment.
Table IV.1
Effective rates of protection for selected activities
(Per cent)
Commodity/product Effective rate of protection
A. Agriculture
Sugar 110
Tea -4
Cocoa/copra -4 to -14
Cocoa/balsa -2
Coffee -1 to -22
Oil palm -2 to zero
B. Fishing
Fishing -23
C. Livestock
Meat -11 to 22;  negative value added
D. Manufacturing
Food processing 106 to 228;  negative value added
Coffee processing 30
Tobacco products 80
Chemicals -134
Soaps and cosmetics 91;  negative value added
Paint 36
Matches 35
Packaging 970
Printing 67
Clothing 53 to 62
Tyres 43
Steel products 32 to 49
Jewellery 117
Note: See Box IV.1 for definitions and explanations.
Source: REPIM Ltd., Tariff Reform in an Expanded Indirect Taxation Structure,  Report for the PNG Government and the
World Bank, Volume I, May 1996.WT/TPR/S/62 Trade Policy Review
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Box IV.1:  Effective rates of protection
The effective rate of protection (or assistance) is a standard tool used to measure the assistance provided
individual domestic activities due to trade barriers applying to competing imports, such as tariffs and
quotas.  Whereas tariff levels on outputs indicate its gross or nominal assistance, the effective ratemeasures the activity’s net assistance by taking into account the benefits and costs of protection on bothoutput and inputs, related to the activity’s value added.  Thus, tariffs on outputs assist domestic producersby enabling them to sell in the home market at a higher price, while tariffs on inputs penalize users byraising their domestic (and import) price.  It is given by the formula:
Effective rate (%) = value added with assistance – value added without assistance x 100
value added without assistance    1
Since value added is measured at world prices, it is possible for it to be negative.  This means that when
valued at world prices, the cost of the activity’s in puts exceed its output price.  These activities are only
maintained by government assistance, and thereby receive very high levels of support.  They are highlyinefficient users of the community’s resources, which would be improved if the products were instead
imported.
The effective rate estimates presented in Table IV.1 for PNG provide a useful indicator of the likely
adverse effects on economic efficiency of the tariff structure.  These estimates pre-date the July 1999 tariffreductions.  Nevertheless, they are still useful since the tariff reforms are likely to have tended to reduce
absolute rather than relative effective rate levels since it is mainly the same industries that continue to
receive the highest tariff protection.  Indeed, disparities in effective rate levels may have widened, at least
in the short term, on products that received favourable treatment involving the maintenance of high tariffprotection, while benefiting immediately from zero tariffs on basic and intermediate inputs.
One study on effective assistance (REPIM, 1996) concluded that:- export products were negatively assisted;- food processing was generally highly protected, with many having negative value added at world
prices;
- although the livestock sector enjoyed high tariffs, it operated in a competitive environment that
ensured that the benefits of protection were not used;
- while steel products have a lower range of protectio n, other intermediate inputs such as packaging
and paint exhibited high levels of protection;  and
- the range of protection on final goods was wide.
Source: WTO Secretariat;  and REPIM (1996), Tariff Reform in an Expanded Indirect Taxation
Structure , report prepared for the Government of Papua New Guinea and the World Bank,
Vol. I and II, Hexham, May.
(2) AGRICULTURAL AND OTHER PRIMARY PRODUCTS
7. Primary production accounted for 51% of GDP in 1997;  agriculture, forestry, and fisheries, at
30% of GDP, represented well over half of this share (Chart IV.1).  These figures, however,
substantially understate the contribution of agriculture to what is predominantly an agrarian economy.
Commercial agriculture is supplemented by significant subsistence or non-monetary food production,
estimated to be about half of agricultural output.  Some 85% of the population live in rural areasPapua New Guinea WT/TPR/S/62
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dependant on agriculture;  a large share of these produce food for their own consumption with
minimal produce being sold commercially.
1988Per cent
Source : Commerce
10
Construction
4
Manufacturing
10Agriculture, forestry
 & fisheries
31 Financial & real 
estate properties   21997
Community & social 
services
16
Electricity & other 
services  1Transport & 
storage
5
Mining & quarrying
20Agriculture, forestry
 & fisheries
30
Petroleum
12Mining & 
quarrying
9
Manufacturing
10Electricity & other 
services  1Construction  6Commerce
10Transport & storage
5Community & social 
services
15
Financial & real 
estate properties   1
Total:  US$2.974 billion Total:  US$4.821 billion
Papua New Guinea Government, Budget Papers  Vol. 1; and  Economic and Development Policies , various 
issues.Chart IV.1
Sectoral composition of GDP, 1988 and 1997 (at 1983 prices)
8. The primary sector, principally agriculture and forestry, accounts for around a quarter of
official employment, second in importance to the services sector (Chart IV.2).  Again, however,
agriculture’s significance is increased substantially by subsistence/self-employment.  This sector is
thought to account for well over two thirds of the total workforce if unofficial employment is
included.1
9. Almost all of PNG’s exports are primary commodities, mainly minerals, especially gold and
copper, and oil.  In 1997, mining accounted for 60% of total exports;  well over half (46% of total
exports) were of crude petroleum exports, which have grown substantially since oil production
commenced in the early 1990s.  Traditional agricultural commodities of considerable export
significance include mainly coffee and palm oil;  copra and copra oil as well as cocoa are alsoimportant.  Although export shares fluctuate somewh at in the short term, the longer term trend has
shown a relative increase in mineral, especially petroleum, exports at the expense of agricultural
products.  In 1997, agricultural commodities accounted for 23% of exports, and although well up on
the 1992 figure of 13%, it is substantially lower than shares recorded during the mid-1980s of around
35%.  Timber exports, which had also expanded significantly during the 1990s, until the recentcollapse in world markets, represented 14% of exports in 1997, up from 8% in 1985.  Exports of
marine products remain relatively minor at less than 1% of total exports.
                                                     
1 The total workforce, allowing for the self-employed, was estimated to have been 1.1 million in 1990,
some five times the official employment level.  The self-employed were estimated to represent 70% of the totalworkforce (Millett, 1993).WT/TPR/S/62 Trade Policy Review
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Per cent
Mining & quarrying
3
Electricity & other services
2
Construction
5
Commerce
17Transport & communication
14Financial, real estate & 
insurance
7Community & social services
17Agriculture, forestry & fisheries
23Chart IV.2
Formal employment, by sector, 1990
Government of Papua New Guinea, National Statistical Office, Annual Business Census, 1990  and Secondary
Industries, 1989 .Manufacturing 
12
Source :
10. The agriculture sector comprises tree crop plantations and a large traditional rural sector
based on subsistence or near-subsistence agriculture.  Village smallholders not only produce almost
all of the domestically produced food, such as sweet potatoes, yams, bananas, taro, fruit, vegetables,
and rice, but also most of the cash tree crops and li vestock.  They produce about 70% of coffee, 65%
of cocoa and copra, and 35% of oil palm2, and raise over 90% of pigs and goats, 70% of sheep, and
22% of cattle.  The largeholder plantations are the commercial core of agriculture;  they consist of a
small group of private commercial entities operating mainly plantations averaging 50-150 hectares,and "nucleus" estates with smallholder "out-growers".  The main plantation crops grown are coffee,
cocoa, coconut, rubber, and tea for export, as well as maize for animal feed.  Most plantations suffer a
large debt overhang, which limits their expansion.  Nucleus estates are primarily involved in oil palm,
and have their own processing and exporting facilities.  Others include the Ramu Sugar Company,
two large poultry ventures, and several cattle farms.  Many of these were established with governmentparticipation; they include oil palm plantations that developed as joint ventures between the
Government and overseas investors.
11. The agriculture sector is the single most important sector in Papua New Guinea.  The
Government places a high priority on the sector’s development, which it considers important to the
nation’s economic growth.  Its overall policy objective is to ensure the viability of agriculturalproduction, to sustain growth, and to increase income-earning opportunities, including job creation
and promoting food and livestock self-sufficiency.  Policies are directed at increasing food production
and diversifying production and exports to include other cash and food crops.  However, the
agriculture sector has generally stagnated and performed below potential.  Agricultural land is under-
utilized in Papua New Guinea, although much of it is unsuitable for agriculture:  only a very smallproportion (about 0.3%) of total land area is regularly used for crops and grazing.
                                                     
2 World Bank 1997.Papua New Guinea WT/TPR/S/62
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12. Policies are also aimed at promoting greater downstream processing of traditional tropical
tree crop exports, such as copra, cocoa, and palm oil.  Promoting domestic food processing is also
seen as important by the Government, and import-substitution policies based on relatively high tariffs,
which replaced import quotas and bans, have been used with limited success to develop agriculture
and agro-food processing industries.  These protectionist policies were directed mainly at meat, fish,
fruit and vegetables, animal feed, sugar, poultry, eggs, and pork meat, the purpose being to promotefood self-sufficiency.  By and large, imports of these products will continue to bear the highest duties,
mainly at 40% in 2006 at the completion of the tariff reform programme.  Tariffs on agriculture and
livestock production currently average 22%, and range from zero to 55%.
13. Studies generally confirm that PNG is not internationally competitive in most of the livestock
and crop activities that have received high import protection (Box IV.2).  Although the recentsubstantial devaluation of the kina has boosted the country’s international competitiveness in its
traditional agricultural products, the relative lack of competitiveness of livestock and other crop
production has not generally changed, except possibly for vegetables.
Box IV.2:  Competitiveness of PNG Agriculture
Studies on PNG agriculture have consistently found that:
- it is a high-cost producer of most of its agricultural products due to high labour, transportation, 
marketing and management costs as well as overheads;
- smallholders are relatively more efficient at producing export crops;  and
- only palm oil production is internationally competitive.Some other crops have had their competitiveness improved since the mid-1990s following the kina
devaluations.  However, commercial production of eggs, poultry, sugar, cereals, including rice, pork, and toa lesser extent beef remain non-competitive.  Livestock industries have in the past been penalized by thehigh tariffs on imported feed designed to assist the domestic animal feed industry.
Source: World Bank (1997), Papua New Guinea;  Accelerating Ag ricultural Growth, An Action Plan ,
Washington, D.C., June.
14. The Government has encouraged alternative crops, such as spices of vanilla, cardamom,
chilli, pepper, turmeric, nutmeg, and mace, as well as balsawood, pyrethrum, and cashew nuts.
However, most of these crops are in their early stages of development.  Success in these nicheinternational markets will depend on PNG's ability to produce high quality produce consistently,
supported by efficient marketing.
15. PNG's trade and other economic policies have generally reduced incentives to retain and
improve resources in agriculture.
3  While, recently, some of these policies have been largely
corrected, such as the fixed over-valued exchange rate, trade policies continue to be biased againsttraditional agriculture, although this has been reduced somewhat by the removal of import quotas and
bans as well as the on-going tariff reductions implemented from July 1999.  However, land tenure
arrangements in PNG, with effectively no land market nor clear private ownership or property rights,
remain a major obstacle to agricultural investme nt and development.  Non-nationals may not own
land and must lease it from the Government, which obtains it, in turn, from the customary owners.
                                                     
3 Jarrett and Anderson 1989.WT/TPR/S/62 Trade Policy Review
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This provides little incentive to improve land or to use it efficiently, and provides a major hindrance
to using land for loan collateral.
16. About 97% of land in Papua New Guinea is customary, owned by tribal communities.  Rural
land is owned by some 700 clans under complex land tenure systems that impose rigidities on land
transfer.  There is very little private freehold land or documented or registered ownership of
communal land.  Land registration has been slow and frequently subject to disputed claims.Provincial governments are now responsible for registering customary land.  Virtually all inshore
reefs and lagoons are held under customary systems of tenure.
17. Two schemes currently operate to try to provide more secure land title.  Tenure conversion
enables individual clan members or groups to have a section of their land registered and converted to
freehold, provided all members agree.  The Government may also lease land from customary ownersand lease it back to legal entities of the clan under lease-back arrangements.
(i) Livestock and dairy
18. Poultry and pigs comprise the main commercial livestock production in Papua New Guinea.
Imports of poultry were previously banned, but are currently subject to a relatively high tariff of
K 3.15 per kg. on meat.  Under such protection, production has increased to 2,000 tonnes annually,sufficient to meet all local demand, at prices substantially above world levels.  The industry is
vertically integrated and comprises large nucleus producers, processors, and smaller contract growers.
There are three major processors.  A public-owned hatchery is run by the Department of Agriculture
and Livestock.  In some areas, poultry production has been integrated with crocodile farming.
19. Commercial poultry production is penalized by the tariff-inflated prices of imported
compound feeds and other ingredients, of which 85% is imported.  Without these imposts, the
industry would be more competitive and less likely to require the high specific tariff duties onimported meat.  Nevertheless, the opportunities for expansion of the industry appear very limited
given its lack of international competitiveness and saturation of the domestic market.  Tariffs on
poultry meat are to be reduced progressively, to K 2.20 per kg. in 2006, under the tariff reform
programme.
20. The government-owned Llimo Poultry Products, formed in 1971, is heavily in debt by an
estimated K 16 million, compared with assets of some K 10 million.  The Government intends to
liquidate the company in 1999 and to divest its ownership.
21. The pig industry was also assisted by tariffs of 40% on fresh or chilled pigmeat, and an
import ban on pork meat and pork-based smallgoods.  These are currently dutiable at 30% and 40%,
respectively.  Production satisfies 90% of domestic demand.  Like poultry, the industry is penalizedby high imported feed costs.  Reduced tariffs on these inputs would improve the industry’s
competitiveness, however, the industry would appear to  have little opportunity to expand.  Tariffs on
imported pork meats will be lowered to 15% in 2006, under the phased programme.
22. Beef cattle numbers have declined since the 1970s, despite efforts to boost herds.  Many
projects have failed, but a small industry exists, primarily in Morobe province.  Protection to the beefindustry has been relatively low compared with other livestock products, but tariffs on imported beef
were raised in 1995 from 10% to 40%.  Imports account for some 90% of consumption.  Beef
production also suffers from the high cost of imported feed, but less so than for other animals, due to
the abundant grazing possibilities in Papua New Guinea.  However, high tariffs on imported chemical
and fencing materials have penalized beef production.  Tariffs on imported fresh and chilled beef,
currently of 30%, will fall to 15% in 2006.Papua New Guinea WT/TPR/S/62
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23. All live animals may now be imported free of duty, but are subject to quarantine and health
regulations.
24. The relatively high tariff on imported honey has been maintained at 40% to encourage
small-scale production.  It will fall to 25% in 2006.
(ii) Fruit, vegetables and nuts
25. Commercial production of fruit and vegetables has increased in recent years.  However, poor
transportation networks and inadequate marketing services are a major constraint on the commercial
development of such perishable commodities.
26. The Government is trying to encourage the de velopment of cashew nuts and other local nuts,
such as betel nuts.  Consumption of betel nuts has increased, and they are being successfully grown as
a cash crop and marketed in the highlands where they do not grow.
27. Imports of fresh vegetables are subject mainly to a tariff of 55%, down from 75%.  This will
fall to 40% in 2006.  Imports of frozen, dried, and preserved vegetables are currently dutiable at 40%,
and will fall to 25%.  Edible nuts are currently dutiable at 40%, except for cashew nuts, which are
dutiable at 55%;  these duties will fall to 25% and 40%, respectively, in 2006.
28. All vegetables, except onions, and fruit that can be grown in PNG are banned from being
imported for quarantine reasons.  All other fruit imports require a quota permit.
(iii) Coffee, tea, and spices
29. Coffee is one of the main traditional cash crops produced and exported from
Papua New Guinea;  tea is also relatively important.  Coffee is marketed privately by the Coffee
Industry Corporation, established in 1991 as a publ icly owned semi-autonomous organization, using a
network of licensed exporters, factories, and roadside buyers.  The Corporation is also responsible for
providing smallholder extension and research, industry regulation, and administration of the pricestabilization programme.  It combined the functions of three former statutory bodies, the Coffee
Development Authority, the Coffee Research Institute, and the Coffee Industry Board.  The
Government intends to phase out its partial funding of the Corporation by 2001.  About one quarter of
its annual budget of approximately K 10 million is met by an export levy on coffee of K 40 per tonne.
30. Arabica coffee is the main coffee grown in PNG.  Some 70% of coffee is grown by
smallholders, much of it in the Highlands where Goroka coffee is produced.  Large-holder private
commercial plantations, which grow most of the tea grown in Papua New Guinea, also grow coffee.
Coffee production was adversely affected by the 1997-98 drought, although the longer term effects
are unclear.  While the Corporation projected 20% falls in production in 1999 and 2000, recent
evidence suggests that losses may be lower.  Accord ing to the Corporation, the record harvest in 1998
was partly due to supply responses by growers to the higher prices induced by the currency
devaluation.  Most of PNG’s coffee is exported as raw coffee for overseas processing.
31. Imports of coffee and tea are dutiable at a tariff rate of 40%, down from 55%.  This will fall
to 25% in 2006.
32. The Government has attempted to develop alternative spice crops, but these are in their early
stages of development.  To assist their developmen t, imports of spices that have growth potential in
PNG, such as vanilla, cardamom, chilli, pepper, turmeric, nutmeg, and mace, are dutiable at 40%,WT/TPR/S/62 Trade Policy Review
Page 94
compared with a tariff on other spices of 30%.  These rates will fall to 25% and 15%, respectively, in
2006.
(iv) Cereals
33. The main cereals production involves relatively small quantities of rice, grown by
smallholders under rain-fed conditions (about 1,000 tonnes annually), and maize (about 3,500-4,000
tons annually), grown by large-holders in the Markham valley, mainly for use as animal feed.Relatively high tariffs on cereals and animal feeds penalize livestock industries.  Rice, given its
importance as a staple food, remains duty free when imported.  To offset for the price increases
caused by the VAT on rice, almost all of which is imported, the current sole importer and distributor
of rice will receive a government subsidy of 7.5% of the c.i.f. value of its imports for three years.
Despite the apparent lack of competition in rice, a nd the traditionally high retail price of rice in PNG,
the Government is of the view that price controls on rice will ensure that the importer passes on the
full subsidy to consumers as lower prices.
34. The Government recently announced that it would establish central processing locations to
assist rice farmers.  As part of the policy to expand small-scale irrigated rice production, this will
include the introduction of plant and machinery, such as tractors, mills and storage sheds, for regionalfarmers to use in processing their rice
35. Evidence suggests that Papua New Guinea is inefficient in producing rice.  A study by the
Department of Agriculture and Livestock found th at, based on 1993 prices, domestic rice production
costs would be some US$468-576 per tonne, compared to a c.i.f. price of imported Thai milled rice of
US$300 per tonne.  This supports other studies, such  as by the FAO, which showed that substantial
subsidies, of up to 90% of world prices, would be needed to make rice growing viable in Papua New
Guinea.
36. Tariffs on non-rice cereals were reduced to zero on 1 July 1999.
(v) Oil palm and cocoa products
37. Oil palm products, including palm oil, have expa nded considerably in recent years, buoyed by
emerging export potential.  About one third of prod uction is produced by smallholders, the rest mainly
by five faster growing nucleus estates, ranging in size up to 6,000 hectares, established as jointventures between the Government and foreign invest ors.  Each estate has its own processing and
export facilities.  Most oil palm is exported in semi-processed liquid form for use in the production of
margarine, soap, paint, plastics, and cosmetics.
38. The Government has been heavily involved in the oil palm industry:  it owns 50% of both
Hargy Oil Palms Pty Ltd and Higaturu Oil Palms Pty Ltd.  The Government intends to divest itsshareholding in Hargy Oil Palms during 1999.  In March 1999, the Government sold its equity in the
Pacific Rim oil palm plantation for K 26.4 million.  More recently, several private oil palm operations
have been developed.  The proposed float of private Malaysian interests in New Britain Oil Palms Ltd
was recently suspended in view of the deteriorating condition of the PNG economy.
39. The Oil Palm Industry Corporation, a public semi-autonomous body established in 1992,
provides extension and research support to smallholders, concentrated in five oil palm developmental
areas.  It helps growers to obtain seedlings and other inputs, such as fertilizer, and transport produce
to mills.  The partly government-funded Oil Palm Research Association also carries out private oil
palm research.Papua New Guinea WT/TPR/S/62
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40. Cocoa is an important agricultural export in Papua New Guinea and was probably the most
adversely affected by the 1997-98 drought.  Some two thirds of cocoa is produced by smallholders;
the rest comes from large plantations of between 50 and 150 hectares.  The Cocoa Board, a statutory
board funded by export levies, provides regulatory and advisory services on marketing cocoa, and
operated the price stabilization scheme.  It also li censes fermentaries, traders, and exporters, and sets
and enforces standards and grades for cocoa beans.  It provides market information to smallholders.
41. Coconut and copra production is marketed by the Copra Marketing Board, which is a
fully-owned government trading company with exclusive statutory marketing rights over domestic
sales and exports of copra and its products under the Copra Marketing Board Act of 1952.  Although
it has powers to license other exporters and manufacturers of copra and copra products this has not
happened, despite a government decision in 1990 urging it to do so to increase competition.  All coprais sold on an f.o.b. basis (estimated from European c.i.f. prices).  A uniform purchase price is paid to
all suppliers after deducting storage, handling, and administrative costs.  A research levy of
K 4 per tonne and a fixed exporter’s margin is also deducted.  On average in recent years, growers’
returns paid by the Board represent as much as 80-85% of f.o.b. prices.  The Board also administered
the price stabilization scheme.  Some two thirds of copra production comes from smallholders.
42. The Cocoa and Coconut Research Institute, established in 1986, is jointly funded by the
Cocoa Board and the Copra Marketing Board, from export levies, and the Government.  Cocoa levies
have traditionally provided 50%, and copra levies 5-6% of the Institute’s budget.  It is currently
developing a research station in Madang province.
43. All vegetable oils and cocoa are duty free except for palm oil, copra oil, and palm kernel oil,
which are dutiable at 30% to assist local production.
(vi) Forestry and logging
44. Natural tropical hardwoods cover about four fifths of Papua New Guinea, and some
15 million hectares are commercially loggable.  Currently, only 1 million hectares are logged.
Interest in logging heightened in the early 1990s, and log exports tripled between 1990-94 to reach
some 3 million cubic metres in 1994.  Since then, export volumes have decreased;  they stabilized at
around 2.5 million cubic metres, before falling to some 1.3 million cubic metres in 1998 due to thecollapse in world log markets following the Asian crisis.  Some 90% of all trees harvested are
exported as round logs, mainly to Japan, the Republic of Korea, Chinese Taipei, India, and China,
which has just become the third largest market, after Japan and the Republic of Korea.
45. The greatest potential for logging is in the Western and Sandaun provinces, where only about
one fifth of total potential area is currently logged.  Based on a rotation length of 35 years, it isestimated that the sustainable annual forest yield for Papua New Guinea is 3 to 4 million cubic
metres.
4  However, there are indications that sustainable yields were exceeded substantially from
1993-97 when account is taken of the substantial subsistence use of timber (estimated at about
600,000 cubic metres) and substantial under-reporting of log exports.5  Forests are under customary
ownership, thereby guaranteeing harvesting rights for subsistence needs, such as house and canoemaking as well as clearing for subsistence gardening.  Some specific areas are over-logged, such as in
the West New Britain and in the New Ireland Provinces.
46. Logging in Papua New Guinea is disadvantaged by the international non-recognition of many
of its tree species.  This provides a much lower yield per hectare of commercial trees than for efficient
                                                     
4 According to the 1999 Budget, the net annual sustainable harvest level is 3.2 million cubic metres.
5 Filer and Sekhran (1998).WT/TPR/S/62 Trade Policy Review
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Asian suppliers such as Indonesia and Malaysia.  Also, access to forests in Papua New Guinea is
difficult and logs must be transported large distances to export centres. Although international
comparisons of logging production costs are difficult and need to be interpreted cautiously, PNG's
costs are well above those of competing Asian suppliers.  Logging companies report their costs to be
K 90-100 per cubic metre while the World Bank and the PNG Forest Authority estimate such costs at
K 50-100 per cubic metre.6  Other studies have indicated that logging in Papua New Guinea is
uneconomic at current prices.  For example, log prices in February 1998, of on average US$60 per
cubic metre, were below the unit costs of production of US$80 per cubic metre, including royalties
and export taxes.7  More recently, however, export prices in kina have increased, due predominantly
to the currency’s devaluation but also to a small rise in world log prices as Asian markets have
improved.
47. Licences to log natural forests are the constitutional responsibility of the national
Government.  Loggers must also obtain a business licence from the relevant provincial government to
commence operations, and negotiate access to forests with traditional landowners.  Logging rights are
controlled by the PNG Forest Board in accordance with the Forestry Act of 1991 and the
National Forestry Policy (Table IV.2).  Government policy is implemented by the PNG ForestAuthority, and has been interpreted in the PNG Forestry Development Guidelines issued in 1993.  A
draft National Forestry Plan was also released in 1996.
Table IV.2
Steps in obtaining a logging permit
Step
Landowners:  Affected landowners organize into Incorporated Land Groups and their authenticity of land ownership is certified by
the Provincial Forest Management Committee.
Forest Authority:  Prepares a Development Option Study examining resource inventory, landowner participation, environmental and
social impact assessments, as well as feasibility of local processing and marketing.  Used by the Forest Authority to prepare d raft
development guidelines for approval by the National Forest Board.  The authority negotiates a Forest Management Agreement with
landowners.
Provincial Forest Management Committee:  Project is advertised for proposals and the Committee recommends a developer.
National Forest Board:  Selects developer who must lodge a deposit of K 50,000 plus K 2 per cubic metre of the proposed annual
harvest.
Selected developer:  Conducts a detailed feasibility study outlining the extent of the resource, financial projections, and corporate
arrangements, and submits to the National Forest Board for approval as the Project Agreement.
Minister:  Issues a timber permit to the developer when the project is approved by the National Forest Board following wide
consultations.  The developer must submit an environmental plan approved under the Environmental Planning Act before a permit i s
issued.
National Executive Council:  Should the Minister reject the recommendation of the National Forest Board, he must justify his
reasons and the Board is required to make a formal recommendation.  The National Executive Council intervenes if the matter can not
be resolved.
Timber permit:  Allows the developer to harvest logs in the project area, based on the approved terms and conditions, for a specified
time period.  A performance bond is lodged with the Forest Authority.
Source: The authorities of Papua New Guinea.
48. Export prices of log and processed timber pr oducts must be approved by the PNG Forest
Authority.  The Government may acquire up to 25% of log production under any timber permit as ameans of checking on market prices and controlling undervaluation of exports, but this right is seldom
used.
                                                     
6 Filer (1997a).
7 AusAid (1998).Papua New Guinea WT/TPR/S/62
Page 97
49. Timber permits usually require the developer to construct community infrastructure, such as
roads, bridges, and schools within permit areas.   However, such requirements have not worked
effectively, partly because of inadequate inspection and monitoring capacity by PNG authorities to
ensure that such commitments are properly implemented.  It could be questioned whether such
policies are an effective means for communities to capture the economic gains associated with
logging.  In any event, the expense of such requirements directly affects the surplus or rent left tologgers for government taxation.  It may be more efficient for the Government to fund such
infrastructure using the tax revenue collected from loggers.
50. Government policy calls for maximum forest de velopment in ways that promote sustainable
logging.  Its objectives are to use forest resources on a sustainable basis and to develop an
internationally competitive value-added processing activity.  A sustainable forest policy was adoptedin 1995.  This strategy limits the annual cut rate to about 3% of the permit areas, and is aimed at
ensuring that all forests will be sustainable by 2000.  Areas not sustainable are to be phased out by
2000.  Issued permits reportedly exceed sustainable yield by more than 100% at a total of over
8 million cubic metres.  A moratorium on new timber permits was introduced in 1991, and extended
to 1995.  Since then, however, three major commercial logging projects have been approved, one inthe Gulf province and two in Morobe province.
51. Existing logging areas are being reviewed individually to ensure that activities in areas where
permits have expired are closed down.  Although existing projects are intended to meet the
management practices contained in the guidelines, with permits to be revoked where necessary, the
validity of such action is being disputed.  Unlike in the 1993 Guidelines, the Act exempts current
logging projects from conformity with the new environmental and logging practices.  A logging code
of conduct, adopted in 1996, contains many of the temporary guidelines on clear felling introduced in1995.  These include limiting the annual harvest to one thirty-fifth of the net loggable area for new
projects (the previous standard was one tenth to one twelfth), and for existing projects, limiting the
aggregate annual harvest to 1994 levels.  Maximum production quotas are specified in timber permits,
although these have now become redundant following the collapse in world demand in 1997.
52. In order to reduce land disputes involving timber projects, the Forest Authority attempts to
restrict the issuance of new permits to companies that are incorporated customary landowners under
the Incorporation of Land Groups Act.  The Government is also committed to establishing tree
plantations to create rural employment and to provide an alternative to the harvesting of natural
forests.  These are financed by a reforestation levy of K 2 per cubic metre, which provided revenue of
K 2.6 million in 1995.
(a) Taxation of forest rents
53. The current structure of taxing the forestry sector in Papua New Guinea involves the
collection of resource rents mainly through royalty payments paid by loggers to landowners and much
higher export taxes on round logs.  Export tax rates have undergone major changes in recent years,
more than doubling on average from 1993 to 1995, and varying substantially across tree species(Table IV.3).  A progressive scale was introduced in 1996, which again raised average tax rates,
depending on f.o.b. log prices, ranging from 15% to over 35% for log values exceeding K 200 per
cubic metre.  A progressive tax structure is seen to be justified on the grounds that at higher prices
most of the marginal return is economic rent.  However, the disadvantage is that it diminishes the
incentive for developers to obtain the highest expo rt prices, and increases the incentives for evading
the tax through under-declaration of values, thereby requiring greater surveillance and administrative
effort to be effective.WT/TPR/S/62 Trade Policy Review
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Table IV.3
Export tax rates, 1979-95
(Per cent)
Tree species 1979-90 Jan. 1991-Nov. 1993 Nov. 1993-Mar. 1993 Mar. 1994-Nov. 1995
Kwila, Pencil, cedar, Planchonella 10 30 33 46
Calophyllum, Mersawa, Taun, Ealnut 10 20 23 36
Burckella, Canarius, Gluta, Hopea,
Terminella10 12 15 28
All others 10 9 13 26
Weighted average 10 14 17 31
Source: Levantis and Livernois (1998), "Taking a piece of the Pie:  Papua New Guinea's Log Exports and Optimal
Taxation", Pacific Economic Bulletin , Vol 113, No. 2, pp. 99-116, National Centre for Development Studies,
Canberra..
54. Log export taxes were subsequently increased, but reduced again in November 1998
following the collapse in world log prices.  The export tax was removed on f.o.b. log values of K 130
per cubic metre and below, but the progressive rates at higher values was unchanged at 55% (aboveK 130 per cubic metre); 60% (above K 150 per cubic metre); and 70% (above K 200 per cubic metre).
Export taxes were returned to their earlier levels in the August 1999 Supplementary Budget aimed at
collecting an additional K15 million.  The beneficial effects to loggers of the rate decreases had been
to some extent partially offset by the effects of the currency devaluation, which has substantially
raised log prices in kina terms.
8  While log export prices are set in U.S. dollars, the tax schedule is
applied to kina prices.  The average export tax rate for the first four months of 1999 was 17%,
compared with 22% over the same period in 1998.
55. Deciding whether existing export taxes appropriately tax economic rents from forests is
difficult because measuring such rents is almost impossible in practice.  They depend upon production
costs as well as log prices, which are volatile.  Based on reported production costs of K 50-100 per
cubic metre, it has been suggested that the November 1998 export tax reductions may have
undertaxed resource rents from forests, whereas previously they may have been overtaxed.9  I t had
also been estimated that the Government failed to capture a reasonable share of the economic rent
from logs in the early 1990s;  K 193 million of the 1993 rent accrued to loggers and the Government,
and landowners received K 132 million.10  This was due both to the low export tax rates in those years
and under-reporting of log export prices and volumes.  To help limit such evasion, PNG has used SGS
since 1994 to monitor log exports;  this includes verification of export volumes, prices, species,grades and payment of export taxes.
56. However, setting appropriate export tax rates is in practice a formidable task.  Not only will
the amount of rent vary substantially over time, such taxes need also to take into account the risks
associated with the project.  Moreover, taxes and other payments must be taken into account:  loggers
also pay royalties to landowners.  In 1996, stumpage  royalty payments to landowners were increased
from K 5 per cubic metre to K 10 per cubic metre, plus a price-related project development levy,
introduced on exported logs, of K 13 per cubic metre for logs valued at K 150-200 per cubic metre.
11
Two fifths of this levy accrues to landowners and the rest is paid into the Concession DevelopmentFund for the benefit of landowners.  These combined increases in royalty and export tax rates in 1996
                                                     
8 Export tax collections on logs for the first six months of 1999 were K 34 million, compared to budget
estimates for the full year of K 30 million.
9 Levantis & Livernois (1998).
10  Duncan (1994).
11 For logs exported at a price above K 200 per cubic metre, the levy is K 13 plus 7.5% of the f.o.b.
value.Papua New Guinea WT/TPR/S/62
Page 99
decreased the share of forest export receipts accruing to loggers as profit from 30% to 17%, while the
landowners’ share increased from 5% to 12%.12  The share collected by the national Government
increased only slightly to 33%, while loggers’ costs rose from 32% to 39%.
57. Although the concept of taxing economic rents from natural resources is widely accepted, the
adverse consequences of excessive taxation on the industry when all taxes are taken into account,
including required infrastructure expenditure, can be particularly severe.  The burden of these taxestends to fall on producers.  PNG is a small supplier, and is a price taker not a price setter on world
markets.  It thus has no international market power to enable producers to pass on the taxes to
overseas consumers through higher prices (Box IV.3).  Setting tax rates too high in relation to the
resource rents derived and other factors, such as risk, could reduce PNG's logging activity and timber
exports.  Moreover, what may appear to be a relatively low rate of export tax on logs may still be highwhen account is taken of other policies such as high import tariffs and a relatively over-valued
exchange rate, which continue to penalize exports, albeit at reduced levels.  There are many examples
internationally of export taxes that have been set so high as to quash producer incentives and retard
industry growth.
Box IV.3:  The incidence of export taxes in "small" suppliers
Whether the incidence of an export tax is borne by the domestic producer or the foreign consumer depends on
the supply situation of the country and demand conditions for the product in the world market.  If a country is"small", i.e. its exports of a particular commodity represent a minor share of world supply, it will have noinfluence on world price - that is, the country will be a price taker on international markets.  Any reduction inexport volumes caused by the export tax will not raise the export price.  In this case, the domestic producers of
the taxed commodity will bear the full incidence of the export tax, and are unable to pass on the tax to foreign
consumers via increased prices.
It would seem implausible for PNG to be other than a price taker for its exports, including lumber and fish.
Experience from other countries using export taxes demonstrates that even where such terms of trade benefitsare thought to be important, they can be difficult to captu re in practice, especially in the longer term, when a
country’s world demand for any particular commodity is likely to be more elastic due to greater product and
country substitution.  Thus, imposing export taxes on unprocessed commodities is unlikely to raise export
returns, and may both penalize the export industry and misallocate resources away from a (relatively efficient)taxed export activity into relatively inefficient downstream domestic processing of the commodity.
An export tax would be expected to reduce export volumes through two mutually reinforcing effects.  Firstly,
domestic supply will be reduced in response to the fall in the after-tax export price.  Secondly, thecorresponding fall in the domestic price will increase home consumption.  Both of these responses will result
in less ‘surplus’ production for export, and will reduce national welfare.  In addition, an export tax may lower
government revenue if the fall in export volumes induced by the tax more than offset the rise in the tax rate.
Source: WTO Secretariat.
58. Concerns have been raised in PNG that the recent decision in the Supplementary Budget to
increase log export taxes to previous levels may overtax the industry at a time when profits are
already low.  This could lead to a contraction in logging, causing exports to fall and export tax
receipts to decline rather than rise13, especially when the effects of the VAT introduction and other
taxes are taken into account, which are claimed to raise logger’s costs by 9%.  They receive no tax
credit for VAT paid on inputs because the sector, unlike mining, is not zero-rated for VAT purposes.
                                                     
12 Filer and Sekhran (1998).
13 National Research Institute (1999).WT/TPR/S/62 Trade Policy Review
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59. Although using export taxes to tax resource rents in economies like PNG is sometimes
supported on pragmatic grounds, they can introduce other distortions.  Ideally, resource rents on logs
should be taxed equally irrespective of whether the logs are exported or consumed domestically, and
the method of taxation should not encourage domestic processing as do export taxes on only
unprocessed logs.  Arguably, a more efficient means of taxing forestry resource rents would be to
introduce a quota system whereby the Government auctioned logging entitlements set at sustainableharvest levels, and placed no restrictions on the transfer of quota outside the official auctions
(Box IV.4).  This would also provide the Government with an implicit means of taxing the economic
rent on logs that would be less distorting than expo rt taxes, and use the market to ensure that logging
rents were being appropriately taxed.  A suitable means would need to be negotiated to ensure that
landowners received an appropriate share of the auction rents from the Government.
60. An alternative means of taxing resource rents on forests would be to replace the export taxes
and royalty payments with a system of stumpage fees paid on trees felled.  Such a system was
originally proposed in the 1993 Forestry Developm ent Guidelines, but never implemented.  Under this
proposal, a "base" stumpage fee of K 20 per cubic metre would have been supplemented by a variable
fee set at 85% of the difference between the f.o.b. price and the appraised logging costs, including a
specified profit margin of 20%.  Landowners were to receive the major share of these fees and to take
over responsibility for reafforestation and other community infrastructure development.  Unlike
auctioning, where the developer largely bears the risk of fluctuating log prices, both the Government
and the landowners bear this risk under the stumpage and existing arrangements.
61. The Government is conducting a major review of the forest revenue tax system to ensure that
all stakeholders benefit equitably from the development of lumber resources.  If export taxes were to
be retained, the structure of tax rates may need to be reviewed.  Also, a number of other issues could
be considered, such as the desirability of extending such taxes to processed timber exports to remove
the incentives provided for domestic processing, and of equally taxing rents on logs processed
domestically.  This could cover an examination of alternative methods of taxing rents, including
auctioning, despite some legitimate concerns such as ensuring competitive bidding.  The desirability
of placing greater reliance on internal taxation rather than on export taxes to capture economic rents,as is done in the mining sector, could also be canvassed.
(b) Domestic processing
62. A key feature of government policy enunciated in the 1993 Guidelines is to encourage
downstream processing of timber.  The Government’s forestry policies emphasize the development of
value-added products by phasing out large-scale logging operations, and attempt to direct foreigninvestment towards downstream processing.  This is seen as an essential means of creating
employment and promoting domestic growth.  The intention is to have at least 30% of harvested logs
processed domestically by 2000.  To achieve this goal, the 1993 Guidelines call for limitations on log
exports - including a ban being phased in by 2000 - and for domestic processors to be given
preference in the allocation of logging permits, as well as a first purchase option on logs at exportprices.  Tax incentives would also be provided to processors, including exemptions from stumpage
royalty fees on logs processed domestically and favourable tax write-offs.  Export taxes that are
applied only to round logs, also encourage downstream processing of timber.Papua New Guinea WT/TPR/S/62
Page 101
Box IV.4:  Auctioning logging quotas
One method for allocating logging quotas would be for the Government to auction them to timber
companies under a tender or bid system.  Quotas could be set at the sustainable yield level and could be
auctioned in relatively small lots.  Bids could be requir ed either in kina per cubic metre or as a percentage
of the world (f.o.b) value of the logs.  While the former method of tendering would have the disadvantageof providing different ad valorem  tax rates across logs according to their value, it could encourage more
logging of higher valued lumber and would be administratively easier.  The Government would no longerneed to monitor export prices declar ed by loggers.  All successful tenderers would pay the clearing bid for
their quota, i.e. the price at which the total demand for logging trees equals the volume of quota auctioned.
Quotas would be for a set period, say one year, an d would be re-auctioned at the end of each period.
An auction system would offer several advantages ov er the current system of allocating logging licences.
Firstly, it would be more economically efficient.  Companies would compete among themselves at the
auction and the quota would go to firms that attached the highest value to the logs and were thereforeprepared to make the highest bids.  Moreover, it would allow potentially efficient new entrants to compete
equally, providing competitive pressures on existing loggers to remain efficient.
Secondly, it would enable the market to determine the price of the logs, including the size of the resource
rents.  In a well-functioning auction market with no restrictions on participants, the clearing bid would beexpected to include the full level of the resource or  economic rent - the excess in earnings that a scarce
resource derives above its transfer value or opportunity cost, i.e. above its most profitable alternative use.
This assumes that the market is competitive.  The Government would need to set realistic minimum reserve
bids and place no restrictions on participation to prot ect against legitimate concerns that logging companies
may collude to minimize tenders.  Where collusion wa s suspected, quotas could be re-auctioned with new
firms invited to tender.  Severe legislative penalties against such collusive behaviour could also beintroduced.
Thirdly, by requiring bids in dollars, the Government would no longer have to check f.o.b. values declared
by log exporters.  The incentive to under-declare log pr ices would also be eliminated.  The risk of sharp
falls in international log prices, of the kind currently experienced, would rest mainly with the loggers, whocould manage this risk by hedging using long-term contracts or futures markets.  This would make thegovernment budget less vulnerable to sudden revenue falls.  The Government would, however, still need tomonitor the volume of trees felled.
Fourthly, landowners would have a greater incentive to manage forests efficiently since they would receive
from the Government a true market price for their logs.  A mechanism would need to be implemented to
ensure that this occurred, with landowners responsible for managing the forests receiving the predominantshare.
Lastly, an auction system could strengthen government revenue:  the recent practice of issuing tax
remissions would be eliminated, and the system wo uld provide an objective means of allocating logging
rights.  Like any system, suitable checks would be needed to ensure that the auction process operated
without political interference and at "arms length".
An alternative but potentially less efficient system to auctioning would be to continue allocating log quotas
to loggers, but to replace the export taxes with a stumpage fee paid on trees felled.  Stumpage fees could,for example, contain a base rate plus a variable component to tax more effectively the economic rent fromlogging – such as the percentage of the difference between the production costs and the log's f.o.b. value.
Source: Duncan (1994), "Melanesian Forestry Sector Study", International Development Issues , No. 36,
Australian International Development Assistance Bureau, Canberra.WT/TPR/S/62 Trade Policy Review
Page 102
63. However, as noted in Chapter III, the use of export taxes and other government measures to
encourage downstream processing risks the development of inefficient and costly processing activities
by world standards.  By effectively de-linking the domestic and export markets for round logs, the
home price is pushed below world levels.  Wood processors receive an implicit input subsidy,
financed by the forest owner, through the purchase of log inputs at domestic prices, which are below
the export value.  This input subsidy transfers inco me from forest owners to domestic processors, and
may provide relatively high effective assistance to downstream processors, especially since high
tariffs also apply to certain wood products, including plywood.  Such controls also undermine forest
conservation by reducing domestic log prices.  The incentives for landowners and loggers to properly
manage forests is reduced, since the value of the forests is reduced and land is made more valuable for
other purposes.  More wasteful timber processing techniques may also be encouraged, since the costof the log inputs, and hence of wasted timber, is reduced, and investment in more technically efficient
capital equipment is made less attractive.
64. The economic merit of such "domestication" policies is questionable.  They can reduce
logging returns by requiring such rents to cro ss-subsidize internationally inefficient processing
activities.  Domestically, timber would be priced well below its market value, thereby wastefullydissipating the economic rents from logging, which could otherwise be taxed by the Government.
Since timber processing is capital intensive, it is likely to generate little net employment.  Maximizing
the value of log exports, and hence the level of economic rents that the Government can tax to fund
public infrastructure development, as well as education and training, is likely to provide greater
employment opportunities and skill development of the labour force.
65. Downstream processing of timber is not generally economically viable in Papua New Guinea.
However, the 1999 Budget referred to several nich e markets for certain tree species that PNG may be
able to target for downstream processing.  These are production of Malas sawn flitches in
West New Britain;  Taun dried veneer in Gulf/Western provinces;  Kwila sawn flitches in West Sepik;
and Calophyllum dried veneer in Manus.  Nevertheless, the Budget indicated that PNG’s best option
was to export logs, while concurrently promoting downstream processing of these specific timber
products.
(c) Monitoring and surveillance
66. A major problem with managing natural resources is to ensure that loggers abide by their
allowed felling volumes and meet their full tax obligations.  Governments also need to ensure that
forests are managed properly and that correct logging practices are used to minimize the adverse
impact of logging on forests and the eco-system generally.  The Government is committed to theinstitutional strengthening of the PNG Forest Authority and providing it with adequate financial
resources to be effective.
67. Monitoring and surveillance needs to be increased to control tax evasion through transfer
pricing by under-declaring f.o.b. log prices and/or under-reporting log volumes and grades.  Highly
progressive export tax rates increase the incentives to evade the top-margin tax rates.  The ForestAuthority carries out monitoring and surveillance activities aimed at improving forestry management,
and needs to maintain its independence from political  influence and vested interests.  In this context,
the proposed separation of the Chairman’s position fr om that of the Managing Director could improve
public accountability.  However, the amendments to the Forestry Act, approved by government in
1996 but rejected by Parliament, to vest powers in the Cabinet to appoint the Forest Authority Board
would have been a backward step.Papua New Guinea WT/TPR/S/62
Page 103
68. Log exports have been monitored by SGS since 1994;  their contract is currently under
review.  These inspection services cover over 70% of ports and are to be extended to all other ports by
2000.  The contract is jointly funded by the European Union and the PNG Forest Authority.
69. Logging licences need to be effectively monitore d and enforced to keep harvest levels within
set sustainable yields.  The Government intends to reduce harvest rates to 1994 levels.  The sharp fall
in logging rates since 1997, due to the slump in export markets, may provide a good opportunity toimplement more effective controls on harvest levels.  Effective monitoring and surveillance measures
will be needed regardless of the system used to allocate and tax forest resources.  However, as noted
above, an auction quota system could remove  incentives to understate f.o.b. values (but not
quantities), and may provide better incentives for landowners and loggers to properly manage forests.
70. Tariffs on imported forestry and logging products currently average 18% and 30%,
respectively, and range from free to 55%, with main rates of 30%.
(vii) Fishing
71. Papua New Guinea’s marine resources remain under-exploited and have considerable
potential for commercial deep-sea and near-shore fisheries.  They currently account for about 1% of
GDP.
14  However, subsistence and artisanal fishing is an important source of livelihood for most
coastal communities.  So far there has only been limited commercial fisheries development.  A
domestic tuna fishing industry, established prior to independence in 1975, closed down in the early
1980s.  Two fish processors currently operate canning facilities for imported mackerel and locally
caught tuna.  Most commercial fishing remains in the hands of foreign fleets catching tuna for
overseas canning.
72. PNG’s waters contain abundant supplies of tuna, as well as many other species.  The total
annual sustainable fish catch is estimated at 800,000 tonnes, compared with current catch levels ofaround 200,000 tonnes (Table IV.4).  Exports of mari ne products totalled US$64.8 million in 1998, up
from US$31.5 million in 1997.  The main exports include frozen and canned tuna, prawns and bêche-
de-mer;  together, these accounted for almost three quarters of the value of 1998 exports.
73. Under the Fisheries Management Act of 1998, the PNG Fisheries Authority, established in
1994, controls all fisheries except those in the Torres Strait.
15  This legislation replaced The Fisheries
Act of 1994 and Regulations of 1995.  The self-funded statutory authority is under the overall control
of the PNG Fisheries Board.  The Authority is currently undertaking an active role in export approvals
and price monitoring.  Exports of all fish products are regulated under the Export (fish and marine
products) Regulations.  An export permit is granted only for fish prepared or processed in a licensed
export establishment, which must be registered with the Authority.
74. Tariffs on imported fresh, frozen, and chilled fish and crustaceans currently average 36% and
range from zero to 40%.  Imports comprise mainly whole frozen mackerel from Thailand for
processing at the Lae cannery.
                                                     
14 This figure is based on export earnings and does not include subsistence fishing, estimated annually
at US$26 million, or the receipts from foreign licence fees.
15 Fishing in the Torres Strait is managed jointly by Australia and PNG under the Fisheries
(Torres Strait Protected Zone) Act of 1983.WT/TPR/S/62 Trade Policy Review
Page 104
Table IV.4
Fish production and sustainable yields
(Tonnes)
Resource Annual production Annual estimated sustainable yield
Skipjack tuna 100,000 – 200,000 180,000 – 200,000
Other tuna species 15,000 – 45,000 60,000
Coastal pelagics below 2,000 100,000 – 150,000
Reef and lagoon fish below 10,000 150,000 – 300,000
Deepwater snappers 1,500 – 2,000
Prawns 1,000 – 1,300 1,400 – 1,600
Lobster tails 70 – 100 400 – 500
Barramundi 200 – 400 400 – 600
Estuarine resource 1,500 – 2,000 4,000
Freshwater finfish 4,000 – 6,000 12,000 – 14,000
Shell 500 – 550 800 – 1,000
Bêche-de-mer 300 – 450 600 – 1,000
Source: Temu (1997), "Agriculture, Forestry and Fisheries", in Temu (ed), Papua New Guinea:  A 20/20 Vision , National
Centre for Development Studies, Australian National University, Canberra..
(a) Offshore fisheries
75. The offshore fishing industry comprises predominantly the catching of tuna by vessels from
Distant Water Fishing Nations (DWFN), initially mainly Japan, but more recently from the Republicof Korea, Chinese Taipei, and the Philippines, operating in Papua New Guinea’s Exclusive Economic
Zone (EEZ) under bilateral agreements.
16  PNG is also a member of the multilateral agreement
between the United States and 16 Pacific island countries under the Forum Fisheries Agency.17  About
90% of total tuna caught in PNG waters is by licensed DWFN vessels.
76. The PNG Fisheries Authority is responsible for licensing and regulating fishing and fish
exports, and for managing fishery resources to ensure sustainable use.  The National Tuna
Management Plan, gazetted in March 1999, is aimed at ensuring the sustainable exploitation of tunaand other fish resources.  Recent legislation has set a total allowable annual catch of the main tuna
species by purse seiners of 300,000 tonnes, compared with a 1995-96 catch of 250,000 tonnes.  For
longline and pole-and-line tuna, the limit is 10,000 and 20,000 tonnes, respectively.  The Government
also intends to enhance surveillance capabilities, including enforcement of port calls and presence of
fishery officers on vessels.  The National Surveillance Centre has been established to monitor licensedforeign vessels, which are required to carry an automatic location communicator.
77. DWFN vessels pay access licence fees to the PNG Government for the right to fish the
country’s EEZ.  These arrangements are negotiated bilaterally between respective governments, and
usually set fees according to a set percentage of the expected f.o.b. value of the catch.  These have
varied between countries, from just over 2% for the Republic of Korea to 5% for Japan.
18  Based on
                                                     
16 Tuna fishing is based on three catch methods:  purse seine, using nets;  the pole-and-line method,
using many individually manned rods;  and longline, which uses  a long trailing single line with many hooks.
17 Under the 1998 Treaty, U.S. payments to the Forum Fishing Agency are shared among the
16 members based mainly on the share of total fish caught by U.S. vessels in each member's waters.  In 1996-97
(the Ninth Licensing Period), U.S. payments totalled US$18 million.  The size of the catch from PNG waters isrelatively small.
18 World Bank (1995).  Multilateral access fees paid by the United States are higher at 10%.  However,
this comparison is misleading since only about one quarter of these fees are paid for by the U.S. tuna industry;Papua New Guinea WT/TPR/S/62
Page 105
an estimated catch value of US$430 million, DWFN fees paid to PNG averaged almost 4% in 1995-
96.  Total annual access bilateral fees received by PNG amounted to US$12.7 million in 1997-98,
well down on the 1995-96 level of US$16.4 million (Table IV.5).  Most of the foreign catch
undergoes transshipment, at PNG designated port s of Wewak, Lae and Rabaul, to canneries in
Thailand, the Philippines, and American Samoa.
Table IV.5
Purse seine access agreements, 1995-96 and 1997-98
(Number and US$ million)
Number of seiners Access fees
     Licensed     Operating DWFN entity DWF nation
1995-96 1997-98 1995-96 1997-98 1995-96 1997-98
Frabelle Fishing Corporation Philippines 6 6 7 1.2 1.8
MYT Corporation Philippines 2 0.5
TPJF Corporation Philippines 1 0.3
J Enterprise Korea, Rep. of
/Vanuatu22 2 0 . 3 0 . 5
Taiwan Deep Sea Tuna Boat
Owners & Exporters AssociationChinese Taipei 40 40 6.3
Win Far Fishery Group Chinese Taipei 4 1.0
Korean Deep Sea Fisheries
AssociationKorea, Rep. of 28 27 Nil 4.1
U.S. Multilateral treaty United States 50 31 50 4.5 4.3
Total 126 106 66 16.4 12.7
Source: PNG Fisheries Authority.
78. It has been suggested that the catch fees paid by DWFN vessels, of around 5% on average,
have been too low and could be increased to more adequately capture the rents associated with fish. In
fact, PNG has recently increased the access fee rate on DWFN vessels to 6%.  However, determining
whether access fees are commercially too low is difficult.  Evidence does not suggest that foreign
vessels are necessarily making large profits over the longer term, especially when the capital intensityand the risky "boom or bust" nature of fishing are taken into account.  The fishing industry appears to
be a highly competitive industry.  It was estimated that only the Japanese and U.S. foreign purse seine
operators in the Pacific were profitable in 1997:  Korean vessels made net losses while vessels from
Chinese Taipei barely broke even.
19  The number of licensed purse seine vessels operating in PNG
waters, including fifty U.S. vessels, fell from 106 in 1995-96 to 66 in 1997-98 due to the non-renewalof access agreements by Chinese Taipei and the Republic of Korea.
20  Negotiations are continuing
with these as well as European governments over access fees.
79. Licensed DWFN vessels are also required to meet certain mandatory port requirements as a
condition for access to fishing rights.  These include making at least three calls to designated PNG
ports per fishing journey, with minimum local purchases of US$90,000 per vessel.21  T o t a l
expenditure in ports by vessels amounted to US$8.1 million in 1995-96.  There is also a training levy,
                                                                                                                                                                    
the rest is development assistance paid by the U.S. Go vernment to FFA members.  U.S. access fees account for
about 3% of the value of the catch (Duncan and Temu, 1996).
19 McCoy and Gillett (1997).
20 In 1995-96, not all licences were used, especially in the case of the U.S. vessels, which operated only
31 purse seiners from the available 50 licences.  The number of purse seiners licensed to operate in 1995-96 was126 vessels (there was one unused Korean licence).
21 Foreign vessels are also required to undergo a compulsory inspection on their first visit to PNG
waters.WT/TPR/S/62 Trade Policy Review
Page 106
ranging up to US$6,000 per purse seiner over 800 gross registered tonnes, as well as a fee of US$8
per tonne of the vessel’s average catching capacity to fund the placement of inspectors on vessels to
monitor catch levels.  As a member of the Forum Fisheries Agency, Papua New Guinea also banned
high seas transshipment in June 1993, and requires DWFN vessels to use designated ports for such
purposes as well as for inspection.  However, while such mandatory requirements implify the
monitoring task and provide additional direct benefits to PNG through use of domestic facilities, theydo impose additional costs on foreign fishing operators.
22  They are effectively local-content schemes
that require foreign oeprators to source a share of their inputs domestically in return for access to
fishing rights.
80. The principal objective of the National Tuna Fishery Management Plan is to "domesticate"
the tuna industry by promoting increased participation by Papua New Guineans.  This is to beachieved by encouraging domestic tuna processing through investment and other incentives as well as
providing PNG operators with preferential access to  fishing licences.  Guidelines and conditions
specified in the Plan are aimed at promoting domestic fishing fleets of longline vessels and purse
seiners (Box IV.5).  These discriminatory policies in favour of locally based foreign vessels include a
lower access fee rate of 5% for PNG-flagged purse seine vessels and five-year instead of one-yearfishing licences.  PNG registered and flagged vessels also receive preference in fishing licence
allocation.  To operate as a locally based foreign fishing vessel under the Plan there must be majority
domestic ownership.  Wholly domestic-owned vessels are exempt from licensing requirements as well
as access fees, and are allowed to fish in territorial waters (within 12 miles).
81. Locally based tuna fishing is currently limited to a small domestic-based fleet of some 12
purse seine vessels servicing the foreign-owned tuna cannery that has operated in Madang since 1997.
Only locally based vessels with majority domestic ownership may supply the cannery.  Foreign-basedlongline vessels are also catching tuna to supply the sashimi market in Japan.  However, although
longline fishery has been closed to foreign entrants since 1995, only a few local longliners have
entered the industry.  This activity, which involves minimal but expert processing, appears to offer
good potential, but success relies critically on reliable and competitive air services to principal
markets.  The Tuna Plan envisages having 100 licensed vessels each for longlining and purse seinetuna operations;  most of these would go to PNG-registered vessels (Table IV.6).  It is envisaged that
the annual catch by licensed DWFN purse seiners will be reduced over the life of the Plan from
currently around 250,000 tonnes to 128,000 tonnes.
82. There are also a number of regional arrangements involving PNG, aimed at establishing a
regionally based fishing industry.  As a member of the Palau Arrangement for Management of theWestern Pacific Purse Seine Fishery, PNG is committed to reducing the number of foreign fishing
vessels annually by 10% from 1997.  It is also a party to the FSM Arrangement for Regional Fisheries
Access whereby domestically registered vessels obtain reciprocal access to all signatories’ waters.  A
"points system" is used by the FFA to define a domestic vessel for purposes of obtaining a regional
access licence;  a minimum number of 26 points is needed to qualify.  Points are awarded on the basisof nationals employed, local purchases, and onshore investment.
83. PNG's "domestication" policies to promote domestic activity, including processing, may raise
efficiency concerns if such activity is not economically viable.  Large-scale tuna fishing may not be
well suited to PNG.  Past efforts in PNG and the region to establish domestic fishing operations have
generally failed.
23  The risks, capital requirements and expertise needed are high.  The fishing industry
may therefore be adversely affected if DWFN vessels are phased out.  Current government policy
                                                     
22 By increasing fishing costs, mandatory requirements and the ban on high-seas transshipment are
likely to reduce the capacity of foreign operators to pay higher access fees.
23 ADB (1999b).Papua New Guinea WT/TPR/S/62
Page 107
tends to favour the high risk option of potentially larger but highly uncertain gains from
"domestication" of the tuna industry over smaller but more certain benefits from collecting access
licence fees.24
Box IV.5:  Guidelines for tuna fishing operators
The National Tuna Fishery Management Plan applies a number of guidelines and conditions on licensing
fishing vessels, for longline, purse seine, and pole-and-line fishing, aimed at domesticating the industry.  Inallocating longline licences, preference is to be given to national fishing companies with PNG registeredand flagged vessels.  In the case of purse seine vessels, preference is given to vessels registered and flaggedin PNG, followed by locally based foreign fishing vessels operated by PNG fishing companies.
A. Longline tuna fishing
The following conditions apply:
- vessels must have majority local ownership;
- licences are issued only to PNG registered and flagged vessels and locally based foreign vessels
operated by PNG companies;
- national companies may charter foreign registered vessels to be based in PNG to operate only as
fresh chilled, and may do so only if they already own longline vessels registered in PNG.  The
number of foreign vessels for charter is determined by the Minister;
- all fish must be landed at PNG ports;- single fleet size is limited to 20 vessels;- sea transshipment is permitted only for fresh chilled vessels subject to landing the catch at a PNG
port;
- freezer vessels are allowed only if registered and fully domestic-owned company, subject to no
transshipment at sea and all catch landed and exported through a PNG port.
B. Purse seine tuna fishery
Locally based foreign purse seine vessels must have majority domestic ownership and:
- can only use mother ships if they have a carrying capacity of 600 tonnes or less;
- must be based at a PNG port;
- must land their total catch in PNG for processing or transshipment as export from a designated port;
- may not transship at sea;- receive one-year licences, to be reviewed after five years;- pay an access fee rate of 5%.
C. Pole-and-line tuna fishery
No current guidelines restricting licence applications.
Source: "PNG National Tuna Fishery Management Plan", National Gazette , March, 1999.
                                                     
24 Temu (1997).WT/TPR/S/62 Trade Policy Review
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Table IV.6
Fishing licences under the National Tuna Fishery Management Plan
Licensed levels
Type of licence
Number of licences Allocated catch levels
A. Longlining fishing vessels
PNG registered and flagged fresh chilled vessels 80 Not specified
Locally based foreign vessels (only for fresh chilled
operation) – provided that this category will be the firstreduced as PNG registered and flagged vessel capacity
increases.10 Not specified
Freezer vessels (only 100% national-owned companies) 10 Not specified
Totala100
B. Purse seine fishing vessels
PNG registered and flagged vessels and locally based
foreign fishing vesselsb30 132,000 tonnes
FSM arrangement licences and U.S. treaty licences 40 40,000 tonnes
Bilateral agreement licences 30 128,000 tonnes
Totala100 300,000 tonnes
C. Pole-and-line fishing vesselsc
Any licence category 30 20,000 tonnes
a The overall total allowable catch (TAC) shall be a rolling average taken over a three-year period to take into account the
possibility of the TAC being exceeded in any one year as a result of additional operation of PNG fishing vessels brought into t his
fishery in excess of the estimated number.  Such an increase will also result in a corresponding reduction in the number of
licences allocated to bilateral licensed vessels.  No limit on number of vessels or level of catch; provided the tonnage to be taken
shall be estimated based on the number of vessels expected to be operating.
b This number can be increased if demand permits by further reducing the number of licensed bilateral vessels.
c The TAC may be increased as demand arises, or if under-utilized will be transferred to the purse seine fishery.  The number of
licences may also be raised as demand arises through reduction of bilateral access for purse seiners.
Source: The authorities of Papua New Guinea.
84. As in the case of forestry, an auction system for fishing rights would maximise economic
rents for PNG and remove the incentive for DWFN vessels to under-report fish catches, which isexpected to be a major problem.
25  Enforcement and monitoring activities would be reduced, as
licensed vessels would also see it in their interest s to report illegal fishing.  The total number of
licences, set at sustainable catch levels, could be auctioned for a set time period to the highest bidder;
both foreign and domestic vessels would participate in the auction, and licences could be traded to
allow new firms to enter the industry.
85. Public subsidies are available under the Tuna Investment Guidelines.  A number of fiscal
incentives were also announced in the 1999 Budget aimed at enhancing the competitiveness of the
fisheries sector.  These included continuing the accelerated depreciation allowances for most fisheries
infrastructure;  zero duties on imported fishing vessels under the tariff reform programme; and the
introduction of a fuel excise rebate for approved licensed fishing vessels.  Fishing vessels imported byPNG registered companies have been exempt from tariffs since 1993.
86. A levy of K 3 per kg. on imported barracuda was announced in the 1999 Budget as an
anti-dumping measure.
                                                     
25 Duncan and Temu (1996).Papua New Guinea WT/TPR/S/62
Page 109
(b) In-shore fishing
87. A major part of in-shore fishing is subsistence based, since much of the population lives on
the coast.  The main catch is reef fish and crustaceans, such as prawn, lobster, and crab.  Cash fishing
has expanded, especially around urban centres where there is high demand and fish markets have
become established.
88. PNG has a number of management plans aimed at preserving these resources.  These cover
prawn, lobster, which can only be caught by diving, and bêche-de-mer.
89. The rights to fish in-shore areas, including the reefs and lagoons, belong to traditional tribal
groups.  The provincial governments also have jurisdiction over waters for up to three nautical miles.
90. Harvesting, processing, and domestic marketing of fish, although still relatively
underdeveloped and suffering from lack of good transport and storage networks, is now performedprivately.  Government involvement is limited to  regulatory functions, following failure of past
attempts to encourage cash fishing through the operation of coastal fishery stations and the Fish
Market Corporation.  Government policy is to promote the domestic fish trade and cash fishing.  This
includes providing access to special credit arrangements for economically viable smallholders.
91. The Government is attempting to develop a domestic fishing-gear industry.  For this reason,
the tariff on imported fishing nets was increased to 40% in 1996 and continues to be relatively high
under the reform programme.  This penalizes fishing activities.
92. Small-scale commercial operations currently exist for prawn, lobster and barramundi as well
as sedentary fish species such as bêche-de-mer, troches shells, pearl shells and green snail.  Prawning
occurs mainly in the Gulf of Papua;  the catch is processed into prawn tails for export.  These account
for over half of total marine exports (around K 9 million annually).  Annual production is around
9 million tonnes, and is the only fish resource that is thought to be near sustainable levels.  About12-16 vessels operate the prawn fishery, and a management plan exists to allow sustainable
harvesting.  Lobster and other sedentary resources are also mainly exported.  They are harvested by
village people and sold to processing and marketing agents.
93. Licensing arrangements restrict coastal fishing to domestically owned companies and
registered vessels.  Such fishing is on the reserved activities list for investment.  The managementplan for coastal fisheries also indicates that loca l companies will receive preferential treatment for
licences.
(3) M
INING AND QUARRYING
94. The mining and petroleum sectors account for some two thirds of Papua New Guinea’s
exports and contributes to some one-fifth of GDP. These sectors also yield over a quarter ofgovernment revenue.  Oil exports have increased significantly during the 1990s, and are now more
significant than mining.  Currently oil represents about two thirds of total mining and oil exports, and
contributed 12% of GDP in 1997 compared to 9% for mining.  Copper and gold production was
adversely affected by the 1997-98 drought, which curtailed output from the Ok Tedi and Porgera
mines.  In addition, mineral and oil production has been hit by the depressed international prices forgold, copper and, until recently, oil following the As ian crisis.  Total exploration expenditure in PNG
fell from US$83 million in 1988 to US$14 million in 1998, and to an estimated US$10 million in
1999.WT/TPR/S/62 Trade Policy Review
Page 110
95. However, despite their central importance to the economy and its prosperity, the mining and
petroleum sectors function mainly as an "enclave" activity with highly concentrated benefits.  They
are dominated by a few major gold, copper, and oil projects, which are mainly foreign-owned joint
ventures with the Government.  Total investment in  the mining and petroleum sectors is estimated at
around K 6 billion, of which about 80% is foreign owned.  The balance is mainly owned by the PNG
Government.  Domestic processing of minerals is limited to a small-scale gold and silver refinery,which produces bars for export to Singapore.
96. Three large-scale gold and copper mines are in production.  Ok Tedi, the world’s eighth
largest copper mine, started in 1984.  It has been subject to legal action over environmental
degradation, and its continued operation is currently being evaluated.  Porgera commenced in 1990
and is one of the world’s top five gold producers;  the Misima gold mine started in 1989.  A new gold
mine, the Ladolam mine at Lihir, began in 1997 (Table IV.7).  PNG's first major mine, the Panguna
copper mine on Bougainville Island, was forced to close down operations in 1989 following
secessionist resurrections seeking independence.  Although the mine’s closure was very premature,
estimated reopening costs stand at US$400-600 million, and reports differ on its continued viability.
PNG is one of the world’s top ten gold producers, and a major copper exporter.  A number ofadditional reserves have been discovered, including ores of nickel, cobalt, and zinc.
97. Oil production has increased significantly since it began in 1992.  There are now three
substantial oilfields also with gas reserves: the initial Kutubu oilfield, the Gobe oilfield, which started
in 1998, and the Moran oilfield, which is expected to be fully operational after 2000 (Table IV.7).
While relatively small by world standards, they have reasonably high production rates.  Oil is
currently exported through the Agogo production facility where it is pumped to the offshore terminal
at Kumull in the Gulf of Papua.  One gas export proposal under consideration is the construction of apipeline to supply gas to Queensland, Australia, from the Kutubu and Pandora fields;  this is now
hoped to commence by 2002.  A Memorandum of Understanding has been signed with the
Queensland Government.  There are also plans to ship LNG to Asian markets, especially Japan, the
Republic of Korea, and Chinese Taipei, by 2004.  Other prospects include expanding the limited
domestic use of liquefied natural gas, such as for electricity generation, but these would involve largecapital costs and sufficient demand to be economical.  Also, should the Queensland pipeline proposal
go ahead, there may be insufficient gas reserves to supply major domestic projects.
98. The Government is entitled to take a minority  equity holding of up to 30% (fully paid), at
exploration cost, when issuing a mining or petroleum licence, and has normally exercised this right.
This right may be exercised retrospectively, at cost, during the project’s life.  The Government hasretained its direct holding in the closed Bougainville mine of 19% and 30% in Ok Tedi, through the
Mineral Resources Development Corporation (M RDC).  In 1996, however, the Government partly
privatized its remaining interests in mining and petroleum projects by floating Orogen Minerals
Limited, in which it retains a 51% stake through the MRDC.  Orogen currently has 20% equity
ownership of the Porgera gold mine - following the Government's sale of its 5% direct interest in1999 for K35.7 million - and 15% of the Misima mines.  It also has the right to acquire an equity
interest in any future mining and petroleum project of 25% and 20.5%, respectively, as well as in the
Ok Tedi and Bougainville mines.Papua New Guinea WT/TPR/S/62
Page 111
Table IV.7
Mineral and oil production
Mine/Field Commodity Production rateAnnual value
(K million)Start year Mine life (years)
A.  Minerals
Currently producing mines
Porgera Gold (ounces) 900,000 450 1989 18
Ok Tedi Copper (tonnes) 210,000 460 1984 25
Gold (ounces) 365,000 180
Misima Gold (ounces) 300,000 150 1988 14
Lihir Gold (ounces) 600,000 300 1997 40
Tolukuma Gold (ounces) 50,000 25 1995 5
Wapolu Gold (ounces) 34,000 17 1996 5
Alluvial gold Gold (ounces) 60,000 – 100,000 35 – 50 1980 n.a.
Future developments
Upper Watut Gold (ounces) 200,000 100 2000 10 –15
Nena Frieda Copper (tonnes) 160,000 – 220,000 350 2002 12
Gold (ounces) 225,000 – 375,000 110
Ramu Nickel (tonnes) 33,000 325 2001 10 – 12
Cobalt (tonnes) 2,800 65
Wafi Copper (tonnes) 100,000 220 2002 20
Gold (ounces) 200,000 100
Simberi Gold (ounces) 30,000 15 1997 5
Woodlark Gold (ounces) 50,000 25 1998 7
Laloki Copper (tonnes) 4,000 8 2000 4
Zinc (tonnes) 1,300 1.5
Gold (ounces) 15,000 7
Possible future restoration
Bougainville Copper (tonnes) 160,000 350 2000 12
Gold (ounces) 350,000 175
B.  Oil and gas
Kutubu Oil (million barrels) 40 1,000 1992 ..
SE Gobe Oil (million barrels) 18.5 490 1997 ..
Hides Gas (million standard cubic feet) 5,500 11 1991 ..
Moran Oil (million barrels) .. .. 1998 ..
Kutubu & Pandora Gas (billion standard cubic feet) 55 – 73 180 – 240 2002 ..
Combined gas LNG (million tonnes) 4.5 815 – 840 2005 ..
n.a. Not applicable.
.. Not available.
Note: Production rates are estimates and do not reflect company policy.  Value figures based on price assumptions for gold of K 500
per ounce;  copper of K 220 per tonne;  and oil of US$20 per barrel.
Source : Moaina, R. (1997), "Mining and Petroleum", in Temu (1997) (ed), Papua New Guinea:  A 20/20 Vision , National
Centre for Development Studies, Australian National University, Canberra.
99. PNG’s mining industry is regulated by the Mini ng Act of 1992, which is administered by the
Department of Mines and Petroleum.  Major projects are developed under a Special Mining Lease,
granted for a term of up to 40 years, renewable for terms of 20 years.  Following agreements in
Bougainville, subsequently re-negotiated by the Government in 1974, and Ok Tedi, the governmentWT/TPR/S/62 Trade Policy Review
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developed a specific mining fiscal package that would apply to all future developments.  Such mineral
and oil projects are taxed at higher company tax rates, and an additional profits tax applies on returns
above threshold levels (Chapter III(4)).  The taxati on rates and thresholds differ between mining and
oil income, and according to information supplied by PNG authorities, the effective tax rate is higher
on petroleum projects, especially if the additional profits tax is applied.  Effective rates, including the
17% dividend withholding tax on petroleum income, are 75% for petroleum compared to 65% formining, or 50% and 46% without the additional profit tax.
26
100. Royalties are also payable irrespective of whether the project is profitable.  The rate was
increased in July 1996 from 1.25% to 2% of the gross value of mineral or oil production.  However,
the increase only became effective from March 1998 when the tax credit allowed for the increased
0.75% royalty payment was removed.  While mining products, unlike forestry, are zero-rated for VATpurposes, they are also subject to a new 4% levy on gross revenue.  This is effectively a production
royalty.  The 1999 Supplementary Budget maintained the levy, but removed the interest withholding
tax imposed on resource industries in the 1999 Budget.
101. These taxes are paid directly into the Mineral Revenues Stabilization Fund at the Central
Bank.  Its purpose is twofold: a sterilization or stabilization role, and a savings role.  Thesekina-denominated balances, paid in foreign currency, sterilize the impact of mining receipts on
domestic liquidity and the economy generally, until used by the Government to finance spending.
However, at times the Fund has been used to secure overseas borrowings, which has largely defeated
its sterilization function.  The balance in the Fund as at July 1998 was K 616.1 million, down from
K 622.5 million a year earlier.
102. Large-scale mining companies are required to construct community facilities, such as
villages, schools, and hospitals.  They may also have to supply one third of their mine output for localprocessing if such capacity exists at international standards and prices.  They must also assist the
establishment of local businesses and provide procurement preferences to regional and domestic
contractors.  The award of such contracts is monitored by a committee comprising national and
provincial officials as well as landowner and comp any representatives.  A training and employment
localization plan that provides preferences to Papua New Guineans must also be implemented.
103. Major conflicts have occurred between national and provincial governments and landowners,
including those owning land bordering mining de velopments.  Most disputes have revolved around
the distribution of mining income between these various stakeholders, and such arrangements have
tended to be negotiated on a project basis.  There has been an increasing tendency to raise the share
going to provincial governments and landowners.  A ll large-scale mining projects must be approved
through the "Development Forum", which comprises representatives of the landowners, the project
company, and national and provincial governments.  This process recognizes the right of provincial
governments and landowners to negotiate their share, while retaining the sovereignty of the national
Government to negotiate the development contract directly with developers.
104. In addition, provincial governments and owners of customary land may negotiate an equity
interest in the project on very generous terms.
27  For example, landowners and the Enga provincial
government own 5.1% and 4.9% respectively of the Porgera gold mine.  It was recently announced
that landowners would be provided "free equity" of 5% in new large-scale projects, but no details are
available and this decision is currently under consideration by a task force.
                                                     
26 Since the closure of the Bougainville mine, no project has paid additional profit tax.
27 This is normally financed by the Mineral Resources Development Corporation, which usually also
manages the equity and is repaid from future earnings.  However, in practice most landowner groups have soldtheir equity holdings to Orogen Minerals rather than maintaining a long-term investment in the project.Papua New Guinea WT/TPR/S/62
Page 113
105. All royalty revenues to the national Government  are to be paid to landowners under the
New Organic Act (Section 98).  Provincial governments who previously shared in royalty payments
are instead to receive a set of new development levies from developers.  These levies include
infrastructure development levies, economic development and land use follow-up levies, community
and social development levies and any other levies as are from time to time determined by national
law or by agreement (Section 98(2)).  The rates, management, sharing arrangements, and theapplication of the development levies are yet to be determined through amendment of the Mining and
Petroleum Acts.  The open-ended nature of these proposed arrangements adds to uncertainty.
106. Tariffs on imports of minerals and petroleum are set at zero.
(4) M
ANUFACTURING
107. Papua New Guinea has an underdeveloped manufacturing sector, which accounts for around
10% of GDP and 12% of official employment.  It consists of mainly agricultural processing and some
small-scale light manufacturing industries.  Food, beverages, tobacco, and wood products account for
80% of manufacturing output and two thirds of of ficial manufacturing employment.  Other products
include textiles, paper and basic metal products as well as construction materials.  Industry is mainly
capital intensive and relies heavily on imported inputs.  Almost all output is sold at home.  The mainexport-oriented areas of manufacturing are wood products, including furniture and joinery products.
108. The manufacturing sector has stagnated under highly protectionist import-substitution policies
adopted since the 1980s, including for food processing.  High tariffs, and, previously, import quotas
and bans, were used to protect targeted domestic industries.  This accentuated the high-cost nature of
the PNG economy which suffered also from a number of natural and other disadvantages.  These
included a small domestic market offering virtually no economies of scale, inadequate infrastructure,
and relatively high labour costs, which, until the recent currency devaluations, had risen beyondproductivity levels.  Although non-tariff measures were previously tariffied and tariffs lowered
considerably from 1 July 1999, relatively high protective tariffs of up to 95% still apply to a range of
products, including vegetables and fruit, fish, tin ned mackerel, beer, cigarettes, plywood and veneer,
door frames, trailers, coffee, tea, and sugar.
109. A major constraint to development in Papua New Guinea is the high cost of doing business.
A major factor contributing to this is the severe law and order problem, which considerably inflates
business costs.  Major business inputs are costly, due to high tariffs and inefficient provision of key
utility services, such as electricity, telecommunications, transport, and water, which are of poor and
declining quality.  Land tenure problems and the shortage of freehold land also worsen the business
environment.
110. Policies for industrial development have been incorporated into various policy statements,
such as the Medium-Term Industry and Development Action Plan.  These have increasingly tended to
emphasis a more comprehensive approach to industrial development, highlighting the limitations of
the small domestic market and the need to promote export orientation.  Industrial diversification is
seen as a means of providing greater employment opportunities, higher value-added activities andrising living standards.  The 1993 policy statement on industrial development, "Beyond the Minerals
Boom", adopted ambitious targets to be achieved by 2000.  These included greater downstream
processing; a doubling of manufactured exports;  and expansion of the sector to contribute 35% of
GDP and 20% of official employment.
111. The formulation, coordination, implementation, and monitoring of industrial development
policies are the responsibility of the Department of Commerce and Industry.  Its objective is toWT/TPR/S/62 Trade Policy Review
Page 114
facilitate private sector development by providing a conducive economic environment, promoting
international competitiveness, and achieving the Government’s industrialization goals.  Its programme
initiatives include targeted development of garment, textile, wood, and marine-based industries.
(i) Food products
112. Tariffs on food products currently range from zero to 82%, and average 25%.
113. Price controls apply to a number of food products, such as flour, rice, dairy products, and
canned fish.
(a) Meat products
114. Meat processing in Papua New Guinea covers mainly the subsistence slaughtering of poultry
and pigs.  However, about 2,000 tonnes of beef is produced commercially each year.  The Livestock
Development Corporation, established in 1983, manages government livestock assets and regulatesthe construction and management of abattoirs, which has inhibited private sector development.  It also
owns a poultry hatchery at Lae (out on tender) and several piggeries.  The Corporation benefits from
free use of government assets and is not required to pay dividends to the Government.
115. There are two beef canneries operating in PNG:  one at Madang and the other just outside
Port Moresby.  These canneries were previously protected by a seven-year import ban, later tariffiedat a rate of 55%, reduced to 40% from I July 1999.  The canning industry exports a small share of its
output, and imports most of its meat requirements.  This is primarily because of the unsuitability of
domestic beef as a meat source for canning.
116. Tariffs on meat products range from zero to 40%, and average 18%.  Smallgoods are
currently dutiable at 40%, to fall to 25% by 2006.
(b) Fish products
117. There are currently two fish canning operations in PNG.  The mackerel cannery at Lae
processes fish imported from Thailand;  it was established in the early 1990s under a special
agreement with the Government, including initial  import bans.  Tariffs on imported canned mackerel
are currently 70%, down from 90%, and will fall  further to 15% by 2006.  A foreign-owned tuna
cannery was established recently in Madang to process locally caught fish.  Imports of canned tuna
are currently dutiable at 30% and will also be lowered to 15% by 2006.  Significant imports of cannedtuna from the Solomon Islands enter duty free under the MSG Trade Agreement (Chapter II).
(c) Vegetable and animal oils and fat
118. In order to encourage local processing of vegetable oils, tariffs on palm, copra, and palm
kernel oils are currently 30%, and will fall to 15% by 2006.  The monopoly Copra Marketing Board
buys virtually all copra and allocates sales between exports and the sole domestic copra oil producer,Coconut Products Limited.
(d) Grain-mill and bakery products
119. Production includes mainly instant noodles, crisps, bread, pastry, biscuits, and cakes based on
flour made from imported wheat.  To protect domestic production, tariffs are currently at 40%, and
will fall to 25% by 2006.  Flour imports are dutiable at 30% and will drop to 15% by 2006.Papua New Guinea WT/TPR/S/62
Page 115
(e) Sugar, sugar products, cocoa, and cocoa products
120. PNG is self sufficient in sugar products.  Ramu Sugar Limited, established in 1979, is 49%
government owned.  It has its own plantation, a milling plant, and, since 1995, at a cost of K 2
million, a refinery.  Molasses is used as beef animal feed.
121. PNG exports around 10,000 tonnes of industrial sugar to the United States under quota.  PNG
imports of sugar are subject to a relatively high tariff, currently set at 82%;  this will fall to 40% in2006. Consequently, domestic sugar prices are well above international levels.  Icing sugar, which is
not produced locally, is importable duty free.
122. Imported sugar confectionery is dutiable at a tariff rate of 30%, which will fall to 15% in
2006.  Cough drops are dutiable at 40%, and will fall to 25% in 2006.  Higher tariffs have been
retained to encourage domestic production of sugar and sugar products.
123. To encourage domestic production of cocoa and cocoa products, imports of these products are
currently dutiable at 30%, to fall to 15% by 2006.  A higher tariff of 40% (25% in 2006) applies to
imported chocolate confectionery.  Cocoa beans are mainly processed in Australia and returned to
PNG for repackaging and sale.
(f) Other food processing
124. PNG processes a small share of its coffee as Goroko coffee for export.  However, most coffee
sold on the domestic market is processed in Austra lia and returned to PNG for repackaging and sale.
To assist the domestic coffee and tea industry, imports of processed coffee and tea, including extracts
and concentrates, are currently dutiable at 40%;  this rate will fall to 25% in 2006.
(ii) Beverages and tobacco products
125. Beverage production in PNG mainly involves the manufacture of soft drinks, aerated waters,
beer, and spirits, mainly using imported inputs and domestic sugar.  To assist the domestic beverageindustry, the tariff of 55% on imported soft drinks as well as mineral and aerated waters was changed
to an alternate duty, currently at 55% or K 0.50 per litre, whichever is the higher.  This will fall to
40% or K 0.40 per litre in 2006.  Alternate rates were also extended to beer and spirits.  Tariffs on
beer were reduced from 125% to 55% or K 2.20 per litre, whichever is the higher, from 1 July 1999,
and will fall to 40% or K 2.10 per litre in 2006.  The tariff on imported beer concentrate will continueat the previous specific rate of K 6.25 per litre.  In the case of spirits, the tariff rate is currently 55% or
K 14.00 per litre, whichever is higher, and will fall to 40% or K 12.00 per litre in 2006.
126. To protect production of tobacco products, especially against dumping of cheap imports,
alternate tariffs were extended to tobacco products from 1 July 1999.  The tariff on cigarettes was
reduced from 125% to 55% or K 40.00 per kg., whichever is the higher, and will fall to 40% orK 30.00 in 2006.  Alternate rates also apply to imports of other manufactured tobacco products.
127. Cigarettes have been manufactured in PNG since 1971 using mainly imported inputs.  A new
factory was established at Madang in 1995 at a cost of K 6.8 million.
(iii) Textiles, clothing, footwear and leather products
128. PNG produces a range of clothing  and footwear products from imported raw materials.  There
are some six to eight relatively large manufacturers,  which account for 80% of production.  The sectorWT/TPR/S/62 Trade Policy Review
Page 116
comprises sports and leisure wear, uniforms, school and college clothing, tailoring, and dress fabric
specialists.  The industry relies heavily on supplying government and school uniforms.
129. To protect and encourage domestic production, tariffs of mainly 40% apply to clothing
imports.  Imports of second-hand clothing are dutiable at the same rates as new items.
130. To encourage domestic leather processing, tariffs on imported leather products are currently
40% and will fall to 25% in 2006.
(iv) Wood products
131. Around 95% of PNG’s logs are exported as round logs for overseas processing.  The domestic
processing industry comprises one woodchip mill  and one plywood plant, as well as around 50
sawmills and a number of furniture and joinery operations.  In addition, there are an estimated 700
small mobile sawmills.  These products are consumed mainly domestically, although small volumesof timber, plywood, and woodchip are exported.  In 1997, these amounted to K 24.3 million,
equivalent to about 5% of the total value of forest products exported.
132. Processed timber, such as plywood and joinery products, continues to bear relatively high
tariffs to protect domestic production.  Tariffs currently range from zero to 95%, averaging 39%.
Tariffs on wooden furniture range from zero to 40%, and average 36%.
133. The Government is committed to promoting downstream processing of timber, and taxes
round log exports partly to encourage domestic value added.  Holders of logging permits are
encouraged by the Government to engage in domestic processing.  The Government is committed to
the phasing out and banning of round log exports.  However, while such arrangements would assist
processors, they risk creating inefficient industries reliant on continued government support.
Considerable excess capacity already exists in domestic timber processing.
134. There is some evidence that export of processed timber products, such as furniture to
Australia, may be increasing following devaluation of the kina.
28  However, gaining reliable access to
sufficient quantities of quality treated timber remains a major hindrance to expansion.
(v) Paper and printed products
135. Tariffs on paper products, excluding pulp and paper, range from zero to 40%, and average
12%.  Tariffs of mainly 30%, but in some cases 40%, such as on imports of toilet paper and printedenvelopes, protect domestic production.  These tariffs will fall to 15% and 25%, respectively, in 2006.
136. Imports of postcards, calendars, and other printed matter are currently dutiable at 30% to
protect the domestic printing industry.
(vi) Chemicals
137. PNG has a small chemicals industry centred on the manufacture of paint, bleach, and soap.
The tariff on sodium hypochlorite, produced locally as a bleach, was increased on 1 July 1999 from
5% to 30%, but will fall to 15% in 2006.  Similarly, tariffs on lacquers and varnishes were increased
from 11% to 30%, the same rate as paint, and will fall on all products to 15% in 2006.
                                                     
28 Duncan and Lawson (1997).Papua New Guinea WT/TPR/S/62
Page 117
138. Imports of soap, detergents, and bleaches are currently dutiable at 40%, and average 25%, to
protect the domestic soap industry.  These tariffs will fall to 25% in 2006.
139. Tariffs on non-industrial chemicals currently average 5% and range from zero to 55%.
(vii) Petroleum and plastic products
140. PNG currently has no domestic petroleum refining industry, and all petroleum products are
imported duty free.  However, the Napa Napa oil refinery, costing K 750 million, currently underconstruction will be able to produce a broad range of refined products, including petrol, diesel fuel,
avgas, jet fuel, and kerosene.  Government policy has long been to establish domestic processing of
oil resources.  It is envisaged that the refinery will make PNG self-sufficient in petroleum products,
and the balance of output (about half) will be exported.  The refinery will supply the domestic market
at import prices set by the Government and pay "fair market prices" for its local crude oil.
141. PNG has a small plastics industry manufacturing such products as shopping bags.  These
activities are protected by a tariff of 40%, which will be reduced to 25% in 2006.  Other plastic
products that are produced locally are dutiable at 30%, if imported, with a lower rate of 15% to apply
in 2006.
142. Tariffs on plastic products currently average 15% and range from zero to 40%.
(viii) Non-metallic mineral products
143. To protect the domestic engineering and cement fabrication industry, tariffs on cement pipes
and other cement products are currently 40%;  they will fall to 25% in 2006.
144. Cement production in PNG has been heavily assisted, initially by an import ban and
subsequently by relatively high tariffs, until recently up to 75%.  The single producer, Halla Cement,
is 50% government owned and is in the process of being privatized.  Small quantities of cement are
exported to the Solomon Islands and Vanuatu.
(ix) Metal products
145. PNG has a small steel fabrication industry, which manufactures tanks, small hand tools, and
other light products.  Tariffs on items produced locally currently range from free to 55%, and average
15%.  Maximum tariffs will fall to 15% and 25% in 2006.  The highest tariffs, on average, are found
on metal furniture and fixtures as well as structural metal products.
(x) Electrical machinery
146. Tariffs on electrical products are generally low, currently averaging 1%.  However, batteries
produced in PNG are currently assisted by a tariff  on imports of 30%, down from 40%.  The rate will
fall to 15% in 2006.  Also protected by tariffs of the same level is the production of lead-acid
accumulators for piston engines.
(xi) Transport equipment
147. PNG manufactures very little transport equipm ent, except for a range of trailers for
transportation of goods.  Thus, all imports of transport equipment are duty free, except for trailers
competing with local production, which are currently dutiable at 30% and will decline to 15% inWT/TPR/S/62 Trade Policy Review
Page 118
2006.  Imports of new cars are duty free while second-hand vehicles attract a tariff of 100%;  these
rates were introduced in the 1999 Budget.
(xii) Jewellery products
148. The jewellery industry is dominated by three producers, using mainly gold, silver, and black
coral.  Imports of all articles of jewellery are dutiable at a tariff of 55%, to fall to 40% in 2006.
(5) SERVICES
149. The share in GDP of the services sector has remained constant during the past decade at
around 40%.  Community and social services account for the largest part, at 15% of GDP in 1997,
followed by commerce (10%), construction (6%), and transport (5%).
150. PNG consistently records a large deficit on services trade of almost K 700 million.  About
two thirds of this deficit is associated with the mineral sector.  PNG imports significant professionaland financial services.
151. PNG scheduled GATS commitments covering a limited number of services: one tourism
subsector, hotels and restaurants (including catering); a range of banking and financial services, but
excluding insurance; maritime transport passenger and freight services; two construction subsectors,
covering work for buildings and civil engineering; several business services, covering a number ofprofessional and computer services; and extensive coverage of telecommunication services
(Table IV.8).  Except for telecommunications, these binding commitments involved no limitations on
market access and national treatment with respect to foreign supplies of these services by means of
cross-border supply and consumption abroad.  In all cases, however, supply involving the temporary
movement of people was unbound, and subject to a horizontal limitation that such movement would
only be for key managers and specialists where no comparable skills are available locally, and
initially for three years.  Moreover, market access commitments made on supply by commercialpresence are subject to the horizontal limitations of normal foreign investment and land ownership
requirements. In the case of construction, national treatment for commercial presence is subject to
preference being given to national firms on contracts valued below K 500,000.
Table IV.8
Summary of sector specific commitments under GATS
Modes of supply
Cross-border supplyConsumption
abroadCommercial
presenceTemporary presence of
natural personsa Sector or subsector
Market access (MA)/national treatment (NT)
Tourism & Related Services
Hotels & restaurants (including
catering)None (MA & NT) None (MA & NT) None (MA & NT Unbound (MA & NT), subject
to horizontal limitation
Transport Services
Maritime, passenger & freight None (MA & NT) None (MA & NT) None (MA & NT) Unbound (MA & NT), subject
to horizontal limitation
Financial Services
Banking & other financial services
(excluding insurance); retail deposit
acceptance, lending, financial leasing,guarantees & commitments & trading
(including in money market
instruments, foreign exchange &
transferable securitiesNone (MA & NT) None (MA & NT) None (MA & NT) Unbound (MA & NT), subject
to horizontal limitation
Table IV.8 (cont'd)Papua New Guinea WT/TPR/S/62
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Modes of supply
Cross-border supplyConsumption
abroadCommercial
presenceTemporary presence of
natural personsa Sector or subsector
Market access (MA)/national treatment (NT)
Construction & Related Engineering Services
General construction work for
buildingsUnbound (MA & NT) due
to technical feasibilityNone (MA & NT) None (MA); NT
exception to prefer
national firms for
construction
contracts under
K 500,000.Unbound (MA & NT), subject
to horizontal limitation
General construction work for civilengineeringUnbound (MA & NT) due
to technical feasibilityNone (MA & NT) None (MA); NT
exception to prefer
national firms for
constructioncontracts under
K 500,000Unbound (MA & NT), subject
to horizontal limitations
Business Services
Professional services
- Legal services None (MA & NT) None (MA & NT) None (MA & NT) Unbound (MA & NT), subject
to horizontal limitation
- Accounting, auditing &
bookkeeping servicesNone (MA & NT) None (MA & NT) None (MA & NT) Unbound (MA & NT), subject
to horizontal limitation
- Architectural services None (MA & NT) None (MA & NT) None (MA & NT) Unbound (MA & NT), subject
to horizontal limitations
- Engineering services None (MA & NT) None (MA & NT) None ( MA & NT) Unbound (MA & NT), subject
to horizontal limitation
Computer & related services None (MA & NT)
- Consultancy services on hardware
installationNone (MA & NT) None (MA & NT) None (MA & NT) Unbound (MA & NT), subject
to horizontal limitation
Other business services
- management consulting None (MA & NT) None (MA & NT) None (MA & NT) Unbound (MA & NT), subject
to horizontal limitation
Communication Services
Telecommunication
- voice telephone;  packet-switched
& circuit-switched data
transmission;  telex; telegraph;facsimile;  private-leased circuit
services;  digital cellular;  paging;
personal communication;  trunkedradio system;  & mobile data
servicesNone (NT);  MA
only using
Telikom PNG network –subscribes to regulatory
principlesNone (NT); MA
exception
prohibitingalternative calling
or call-backNone (NT);  MA
exception that all
services are subjectto a five-year
exclusivity
(1997-2002) toTelikom PNG as
monopoly service
provider
bUnbound (MA & NT), subject
to horizontal limitation
- courier services, excluding letters None (MA & NT) None (MA & NT) None (MA & NT) Unbound (MA & NT), subject
to horizontal limitation
a Horizontal limitation on commercial presence states that market access is subject to normal government approval of foreign
investment (and from the Central Bank in the case of financial services) and may only lease land from the government;  nationaltreatment requires foreign employees to provide on-the-job training to local employees.  For presence of people, market access
and national treatment subject to limiting entry of managers and specialists to those of key importance where local employees a re
unavailable.  Entry is limited initially to three years.
b The issuance of additional operating licences and their terms and conditions will be considered and announced at least two yea rs
prior to the end of the exclusivity period.  Telikom PNG is designated as signatory to the INTELSAT Operating Agreement.Telikom PNG reserves the right to set up subsidiary companies in business ventures on particular services and
telecommunications.
Source: WTO documents.WT/TPR/S/62 Trade Policy Review
Page 120
(i) Tourism
152. The Government’s Tourism Policy Statement of 1996 sees tourism as a viable
growth-oriented industry.  However, despite its hug e potential, the industry has performed poorly.  It
attracts only about 30,000 tourists annually (excluding business visits).  Tourist promotion is the
responsibility of the Tourist Promotion Authority.
153. The main constraints on tourism development are the lack of adequate resort facilities
combined with the high costs of tourist services.  Law and order problems add substantially to the
costs of tourist operators and visitors, and security concerns are probably the single greatest factor
inhibiting tourism.  The high cost structure of the PNG economy also restricts the tourism industry,
which must compete for international travellers with regional islands such as Fiji.  The cost of car hire
is expensive, as are internal and international airfares and hotel accommodation.  The high costs ofutilities such as telecommunications, and the limited and costly transportation infrastructure are also
major disincentives to tourism development.
(ii) Transportation
154. A White Paper prepared in 1992 by the Department of Transport made a number of
recommendations aimed at improving the efficiency of the road and maritime transport industries.  Inparticular, it was suggested that controls be abolished on the number of freight and passenger
transport vehicles, including taxis, except for urban buses.  Continuation of price controls on taxi fares
and urban bus fares was also recommended, with those on inter-urban and rural services to be
terminated.  The introduction of road user charges that closely reflect the costs of road usage was also
suggested.  However, these recommendations have not been implemented.
155. Limited road networks and inadequate maintenance is a major constraint on industry
development.  Provincial regulations requiring hauliers to be licensed in each province have alsolimited inter-provincial competition and maintained relatively high haulage rates.
156. The coastal shipping industry is heavily regulated by cabotage policies.  Only PNG-registered
vessels are permitted to operate in coastal waters.  This policy prohibits overseas vessels from
carrying domestic cargo, except where heavy equipment or specialized cargoes cannot be carried by
coastal vessels.  Government policy is to retain cabotage, but the 1992 White Paper recommended thatcontrols on the number of vessels operating specific routes within PNG waters be abolished to
encourage new entry.  There is no state-owned shipping line and the Government is considering
payment of subsidies on loss-making routes, but only where in the national interest.
157. PNG ports are run by the PNG Harbours Board and are currently being considered for
privatization.  Currently, stevedoring services are supplied by one licensed company at the main portsof Port Moresby and Lae.  A recommendation in the White Paper to competitively tender stevedoring
licences for a period of up to six years has not been implemented.  The Government is considering
whether to accede to the United Nations Liner Code.
158. Investment on road and coastal transportation is reserved for PNG citizens or companies with
majority domestic ownership.
159. International flights into PNG are provided only by the government-owned national airline,
Air Niugini, except where code-shared with other airlines, especially Qantas and Singapore Airlines.
International routes are negotiated under bilateral arrangements involving reciprocal rights.
Currently, air services are operated to and from Hong Kong, China; Singapore; the Philippines;
Indonesia; and Australia.  International flights to PNG tend to be relatively expensive.Papua New Guinea WT/TPR/S/62
Page 121
160. Air Niugini is also the only licensed "first level" domestic air carrier operating regular flights
to major centres.  This monopoly situation, together with price control based on uniform pricing
practices, results in high cost services.  Other airlines may operate but not in direct competition with
the national carrier.  Air Niugini has had difficulties trading profitably and has accumulated
government-guaranteed debts;  it recently received a further injection of government funds.
(iii) Telecommunications
161. The commercial statutory authority, Post and Telecommunications Corporation, was
corporatized in 1996 when the Post and Telecommunications (Corporatization) Act was passed.  This
separated the provision of postal and telecommunication services into two government-owned
delivery companies, Post PNG - subject to the Postal Services Act 1996 - and Telikom PNG.  The
Telecommunications Act 1996 also established PANGTEL as the sole regulatory and licensingauthority for telecommunications.  It commenced operations as a statutory authority on
1 January 1997.  It also manages the radio frequency spectrum under the Radio Spectrum Act of 1996
and is responsible for PNG’s or bital satellite arrangements.
162. PANGTEL is self-financing and obtains most of its funds from fees associated with business
and spectrum licences allowing licensees to provide services to specific areas and to use particularfrequencies.  Its policy is to achieve 85% coverage of telecommunication services in rural areas.
PANGTEL has licensed Iridium services, through Telikom PNG, to provide a mobile satellite phone
system that commenced operations in 1999.  PANGTEL also inherited the Pacific Star Satellite
Project, which  started in 1984 to provide a domestic satellite phone system.  A joint-venture
agreement was concluded in 1997 with the Loral Space Company from the United States.
163. PANGTEL is responsible for approving all telecommunications equipment before it may be
used.  All telecommunications equipment must meet International Telecommunications Union (ITU)and other relevant international standards.  PNG is a signatory of the voluntary Mutual Recognition
Agreement on Telecommunications Te rminal Equipment within APEC.
164. Telikom PNG has a statutory monopoly for the pr ovision of all telecommunication services.
PNG’s extensive GATS commitments on telecommunications involve removing this monopoly over a
wide range of services in 2002 (Table IV.8).  By adopting the regulatory principles, PNG is alsocommitted to ensuring that, from then, foreign suppliers will be able to interconnect with the local
network in a non-discriminatory manner.  Many of these requirements are reflected in the current
legislation.  Call-back arrangements are prohibited.
165. The Government’s policy is to gradually privatize Telikom PNG and Post PNG by divesting
up to 49% of ownership.
166. The delivery on standard letters by PNG post is open to competition from private firms.
However, a number of services may be supplied only by Post PNG.  These restricted services include
registration and insurance of postal articles; printing and issuance of stamps; supply of post boxes;
transaction of money and postal orders; and regulation of the hire and use of franking machines.
(iv) Financial services
167. The financial sector in PNG comprises six commercial banks, several finance companies,
merchant banks, and many savings and loan agencies, as well as specialized financial institutions,
such as pension funds and insurance companies.  The PNG Stock Exchange commenced operations in
1999.WT/TPR/S/62 Trade Policy Review
Page 122
168. The banking sector is dominated by the six commercial banks, which account for about 90%
of total assets in the banking system.  The largest is the government-owned PNG Banking
Corporation, which recently merged with the Rural Development Bank, the Motor Vehicles Insurance
Trust, and Niugini Insurance Corporation.  There are currently four foreign commercial banks
operating in PNG.  The Central Bank is responsible for processing banking licences (Banks and
Financial Institutions Act), which must be approved  by the Minister of Finance.  Foreign banks are
not required to participate as joint ventures with local interests.  They may operate in PNG as locally
incorporated subsidiaries or as foreign branches.  The only requirement is that foreign branches or
agencies maintain an assigned minimum capital level of K 500,000 in PNG.  The Central Bank
accepts that reputable foreign banks will be adequately supervised by their own prudential regulators.
169. The Central Bank currently regulates and supervises banks, and non-bank financial
institutions such as finance companies and merchant banks.  Commercial banks are currently subject
to prudential guidelines on capital adequacy standards coinciding with BIS guidelines; limits on large
exposures to single customers of 50% of capital; limits on net foreign exchange exposure of 30% of
capital; and standards on provision of information to customers, such as current interest rates.  Capital
adequacy and large exposures are monitored six monthly, while compliance with foreign exchangeguidelines is checked weekly.  There is no discrimination between local and foreign banks in the
application of these prudential regulations.  The Bank is currently reviewing its prudential
requirements for non-bank financial institutions to bring them more into line with banks.
170. Several state-owned non-bank financial institutions exist;  the Public Officers Superannuation
Fund and the National Provident Fund are among the  largest.
171. Under the Insurance Act of 1995, non-life insurance companies must have a licence from the
Insurance Commissioner.  The criteria for licensing insurance companies involve liquidity andsolvency tests, reinsurance programmes, complaint procedures, and contingency provisions.  Life
insurance and superannuation funds are unregulated, although prudential legislation is currently being
finalized, such as the proposed Superannuation Act.  As of 1 July 1998, an industry levy of a
maximum 1% is paid by insurance companies to cover the costs of the Office of Insurance
Commissioner.
172. Foreign companies are able to enter the insurance market without discrimination.  They are
expected to place all risks within the PNG.  Howe ver, risks may be placed offshore with permission
from the Insurance Commissioner.  In 1997, about 20% of the K 101 million gross premiums were
placed overseas.
173. The Motor Vehicle Insurance Trust, recently merged with the PNG Banking Corporation, has
a statutory monopoly in the provision of third-party motor vehicle insurance.  It is required to meet
certain community service obligations, such as on-road safety activities and covering uninsured
vehicles.
174. The Securities Commission was established in 1998 as part of the Investment Promotion
Authority to administer new companies and securities legislation.  This has included the CompaniesAct of 1997 and Companies Regulations of 1998;  the Securities Act of 1997;  and the Takeovers
Code of 1998.  The Securities Commission recently released a draft of the securities regulation for
public comment.Papua New Guinea WT/TPR/S/62
Page 123
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