Trade Compliance Center

PAPUA NEW GUINEA TRADE POLICY REVIEW SUMMARY - 1999

PRESS RELEASE

PRESS/TPRB/120

9 November 1999

Continued economic reform can help Papua New

Guinea achieve sustainable growth.

Continued reform - including further efforts to liberalize trade and

investment regimes - can increase Papua New Guinea's economic

flexibility and improve its prospects of achieving sustainable

growth. A new WTO report says that while reliance on the tariff as

the main trade instrument has made the trade regime of Papua

New Guinea (PNG) more predictable and transparent, the economy

remains relatively weak and vulnerable to external shocks. The

report adds that PNG's trading partners can assist the adjustment

process by ensuring PNG's exports a stable and increased access

to their markets.

The new WTO Secretariat report, along with a policy statement by

the Government of PGN, will serve as the basis for the trade policy

review of PNG which will take place in the Trade Policy Review

Body of the WTO on 15 and 17 November.

The report notes that PNG's recent economic performance has

been erratic with years of modest growth alternating with declines

in output. The economy has been adversely affected by several

unavoidable shocks, such as the Asian financial crisis, depressed

commodity prices and severe droughts. The report adds that these

difficulties have been compounded by problems of governance, a

weak institutional structure and process, and a seeming lack of

momentum for reform. The report states, however, that in June

1999 the PNG authorities announced the implementation of an

Economic Recovery Package, with trade reform seen as an

important means of fostering private-sector-led growth and

enhancing productivity and competitiveness.

During 1992-97, merchandise exports and imports averaged 49%

and 27% of GDP, respectively. Exports are mainly oil and minerals

(gold and copper), which account for some 60% of exports, as well

as logs and traditional agricultural commodities, especially palm-oil

products and coffee. Imports are predominantly of manufactures,

especially machinery and transport equipment, food, fuels and

lubricants. The report notes that export balances have fluctuated

considerably, mainly in line with mining developments. Almost three

quarters of PNG's exports in 1997 went to Australia, Japan and

European Union (EU) countries, mainly German and the United

Kingdom. Over half of imports came from Australia, followed by the

United States.

Foreign direct investment (FDI), the report says, is confined mainly

to the "enclave" mining sector. Relatively little FDI has flowed into

PNG, with Australia as the major source. Such FDI has been

unstable, and has recently slumped due to investor uncertainty

over PNG's political and economic situation. The Government is

reviewing PNG's investment procedures, to make them more

transparent and conductive to FDI. Significant segments of

industry remain reserved for domestic investors, although since

1995 such restrictions no longer cover manufacturing and

construction activities. Where allowed, no foreign ownership limits

apply to FDI. The report also notes that non-PNG nationals may

lease, but not own land.

The tariff is PNG's main trade policy instrument, the report states.

Tax and tariff reform was introduced in 1999. Specifically, a VAT

was introduced on goods and services to fund a substantial tariff

reduction programme. The average tariff was halved to under 10%

and the structure rationalized. Furthermore, the Government plans

to reduce the average applied tariff to 5% by 2006. However, the

report states that PGN's authorities increased tariffs on some

goods - including certain food and plastic products - as from 1 July

1999, mainly to 30% or 40%, to provide protection for domestic

producers. PGN also retained pockets of high tariff protection until

2006. In 2006, the average tariff on agricultural products will be

16%, on mining products 0% and on manufacturing products 5%.

The report notes that unprocessed products are subject to the

highest tariffs, on average, and semi-processed products the

lowest. This indicates, the report states, that the tariff structure

may discourage processing, especially from raw inputs. The report

suggests that lower, more uniform tariffs on unprocessed products

could improve the incentive structure.

The report says that PNG applies few formal non-tariff trade

barriers. PGN has anti-dumping and countervailing provisions but

has rarely used them. Export taxes, ranging to 70%, apply to

unprocessed logs. PGN has no export quotas or voluntary export

restrains but a wide range of exports receive tax incentives. The

report notes that be targeting manufactured goods, these schemes

tend to discriminate against other exports.

PNG applies stringent quarantine restrictions, the report says.

Imports of vegetables and fruit that are also grown in PNG are

banned outright. Imports of many plants, such as sugar cane, are

also prohibited, while imports of other are restricted.

PNG is member of APEC and as such is committed to achieving free

trade and investment in the region on goods and services by 2020.

It is also a member of the South Pacific Forum. As a member of the

Melanesian Spearhead Group, PGN grants some duty-free tariff

preferences. As a signatory to the Lom? Convention, PGN receives

non-reciprocal tariff and other preferences from the EU on many

goods as well as financial assistance. PNG is a party to the South

Pacific Regional Trade and Economic Cooperation Agreement

(SPARTECA), a non-reciprocal preferential agreement to provide

the Forum island countries with duty-free access for their products

to Australia and New Zealand. PNG is also a beneficiary of the GSP

schemes of most industrialized economies.

Notes to Editor

The WTO's Secretariat report, together with a policy statement

prepared by Papua New Guinea, will be discussed by the WTO

Trade Policy Review Body (TPRB) on 15 and 17 November 1999.

The WTO's TPRB conducts a collective evaluation of the full range

of trade policies and practices of each WTO member at regular

intervals and monitors significant trends and developments which

may have an impact on the global trading system. The Secretariat

report covers the development of all aspects of each of Papua New

Guinea's trade policies, including domestic laws and regulations, the

institutional framework, trade policies by measure and by sector.

Since the WTO came into force, the areas of services and

trade-related aspects of intellectual property rights are also

covered.

To this press release are attached the summary observations from

the Secretariat report. The full Secretariat and government reports

are available for the press in the newsroom of the WTO internet

site (www.wto.org). The Secretariat report, together with the

government policy statement, a report of the TPRB's discussion

and the Chairman's summing up, will be published in hardback in

due course and will be available from the Secretariat, Centre

William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed:

Argentina (1992 & 1999), Australia (1989, 1994 & 1998), Austria (1992),

Bangladesh (1992), Benin (1997), Bolivia (1993 & 1999), Botswana (1998),

Brazil (1992 & 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990,

1992, 1994, 1996 & 1998), Chile (1991 & 1997), Colombia (1990 & 1996),

Costa Rica (1995), C?te d'Ivoire (1995), Cyprus (1997), the Czech Republic

(1996), the Dominican Republic (1996), Egypt (1992 & 1999), El Salvador

(1996), the European Communities (1991, 1993, 1995 & 1997), Fiji (1997),

Finland (1992), Ghana (1992), Guinea (1999), Hong Kong (1990, 1994 &

1998), Hungary (1991 & 1998), Iceland (1994), India (1993 & 1998), Indonesia

(1991, 1994 & 1998), Israel (1994 & 1999), Jamaica (1998), Japan (1990,

1992, 1995 & 1998), Kenya (1993), Korea, Rep. of (1992 & 1996), Lesotho

(1998), Macau (1994), Malaysia (1993 & 1997), Mali (1998), Mauritius (1995),

Mexico (1993 & 1997), Morocco (1989 & 1996), New Zealand (1990 & 1996),

Namibia (1998), Nicaragua (1999), Nigeria (1991 & 1998), Norway (1991 &

1996), Pakistan (1995), Paraguay (1997), Peru (1994), the Philippines (1993),

Poland (1993), Romania (1992 & 1999), Senegal (1994), Singapore (1992 &

1996), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993

& 1998), Sri Lanka(1995), Swaziland (1998), Sweden (1990 & 1994),

Switzerland (1991 & 1996), Thailand (1991 & 1995), Togo (1999), Trinidad and

Tobago (1998), Tunisia (1994), Turkey (1994 & 1998), the United States

(1989, 1992, 1994, 1996 & 1999), Uganda (1995), Uruguay (1992 & 1998),

Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

TRADE POLICY REVIEW BODY: PAPUA NEW GUINEA

Report by the Secretariat Summary Observations

The Independent State of Papua New Guinea (PNG) is an

archipelago in the South Pacific. It consists mainly of the eastern

half of the island of New Guinea, which borders the Indonesian

province of Irian Jaya. PNG is a developing country, rich in

resources, with a GDP per capita of some US$900 and low social

indicators. The present Government, which took office in July 1999,

inherited an economy in crisis and in urgent need of fundamental

economic reform.

PNG's recent economic performance has been erratic with years of

modest growth alternating with declines in output. The economy

has been adversely affected by several unavoidable shocks, such

as the Asian financial crisis, depressed commodity prices and

severe droughts. These difficulties have been compounded by

problems of governance, a weak institutional structure and

process, and a seeming lack of momentum for reform.

The new Government appears committed to broad-based economic

reform. These reforms seek to address chronic macroeconomic

imbalances and structural deficiencies. The Government

implemented a Supplementary Budget in August 1999 to contain

the fiscal deficit. It has re-engaged in dialogue with the World Bank

and the International Monetary Fund (IMF) to obtain support for

reform, including trade liberalization and a far-reaching privatization

programme.

Economic Environment

After independence in 1975, PNG adopted inward-looking policies to

promote industries to process primary resources, such as fish and

timber, and other manufactures, such as processed foods. These

interventionist policies were manifested, inter alia, in: high and

disparate trade taxes on imports and exports, as well as import

quotas and prohibitions; a significant state role in industrial

development, including joint ventures; a relatively large public

service; and, more recently, fairly high fiscal deficits, financed by

expansionary monetary policies.

PNG's present economic situation is difficult. Public debt is high, as

are the Government's accumulated arrears; inflation has risen to

over 20% a year, weakening external competitiveness, and low

world commodity prices limit export earnings; external reserves are

low and foreign direct investment is confined mainly to the

"enclave" mining sector.

The authorities recognize the need for a restoration of confidence

and in June 1999 announced the implementation of an Economic

Recovery Package. The Package includes measures aimed at

financial discipline and structural reform. Policy under the Package

is to be outward looking, with trade reform seen as an important

means of fostering private-sector-led growth and enhancing

productivity and competitiveness. Meeting multilateral

commitments is integral to the reform agenda; thus, for example,

PNG's tariff is fully bound and it intends to implement

WTO-consistent policies in intellectual property rights. In meeting

these commitments, PNG looks to bilateral and multilateral donors

for technical support.

In line with the Package, tax and tariff reform was introduced in

July 1999. Specifically, a VAT was introduced on goods and

services to fund a substantial tariff reduction programme. The

average tariff was halved, to under 10%, and the structure

rationalized; the average and maximum tariff are to be further

phased down over the period to 2006. As noted, the Government

introduced measures to contain the budget deficit to 1.7% of GDP,

from a previous target of over 3%. Donors and international

financial agencies are being approached to fund the deficit, thus

avoiding recourse to the monetary authority; privatization

proceeds are to help reduce the public debt. Change has also been

mooted to improve governance and political accountability.

Trade and Foreign Direct Investment

International trade and foreign direct investment (FDI) are vital to

the PNG economy. Merchandise exports and imports averaged 49%

and 27% of GDP, respectively, during 1992-97. External balances

have fluctuated considerably, mainly in line with mining

developments.

Trade is relatively concentrated, both in commodities and markets.

Exports are mainly oil and minerals (gold and copper), which

account for some 60% of exports, as well as logs and traditional

agricultural commodities, especially palm-oil products and coffee.

Almost three quarters of exports in 1997 went to Australia, Japan

and European Union (EU) countries, mainly Germany and the United

Kingdom. Log exports fell sharply following the Asian crisis and the

decline in world timber markets in late 1997.

Imports are predominantly of manufactures, especially machinery

and transport equipment, food, fuels and lubricants. Over half of

imports came from Australia, followed by the United States.

Outside the resource sectors, especially mining, which accounts for

some 80% of foreign equity in PNG, relatively little foreign direct

investment (FDI) has flowed into PNG. Such FDI has been unstable,

and has recently slumped due to investor uncertainty over PNG's

political and economic situation. Australia is the major source of

FDI.

Legal and Institutional Framework

PNG is a constitutional monarchy. Legislative power resides in a

unicameral national Parliament. Executive power is vested in the

national Government. Parliamentary elections must be held within

periods of five years. The Prime Minister is elected by Parliament

and appoints ministers to the National Executive Council, or

Cabinet; the Government can fall on a successful no-confidence

vote in Parliament. New governments have a constitutional grace

period against no-confidence votes of 18 months, previously six

months. Coalition governments have been the norm and no

government or prime minister has yet served a full term.

Responsibility for trade-related policies rests with the national

Government, but provincial governments have concurrent powers

with the national Government in important trade-related areas,

such as agriculture, forestry, industrial development, fishing and

mining. This is especially true, for example, with respect to

approval of forestry, mining and fishing developments on customary

land, which cover over 90% of land ownership.

Trade and economic policy formulation in PNG has not always been

well coordinated. An Advisory Secretary was established in the

Prime Minister's Office in January 1999 with a view to supporting

reform, including oversight of cabinet decisions and implementation

of the 1999 Budget.

The Government promotes public dialogue through the Consultative

Implementation and Monitoring Council (CIMC), national economic

summits - last held in February 1998 - and the annual National

Development Forum. The Government's inaugural Forum, held in

August 1999, focussed on reform and the 2000 Budget. The

Government also interacts with the private sector via the PNG

Manufacturers' Council and other bodies, such as the Chamber of

Commerce. No independent statutory body exists to advise the

Government on trade-related policies, including the tariff and

industry assistance; in principle, the Industry Assistance Board has

such a role, but has lacked the necessary institutional capacity.

Trade Policy Features and Trends

PNG became a de facto GATT contracting party in 1960 under its

"UN trust" status with Australia, and acceded to the GATT in 1994.

It became a WTO Member in June 1996. PNG's entire tariff is

bound, mainly at ceiling tariff rates of 40% and 45%. PNG

scheduled commitments under the General Agreement Trade In

Services (GATS) on a broad range of services, including certain

business, construction, financial and telecommunication services. It

is not a signatory to any of the Plurilateral Trade Agreements.

As a member of APEC, PNG is committed to achieving free trade

and investment in the region on goods and services by 2020. It is

also a member of the South Pacific Forum.

PNG grants at least most-favoured nation (MFN) treatment to all

WTO Members. PNG grants some duty-free tariff preferences under

the Melanesian Spearhead Group (MSG). These preferences initially

covered imports of beef from Vanuatu and canned tuna from the

Solomon Islands; PNG exports of tea to these countries. Fiji has

since joined the Agreement, in 1996, and more products are now

covered, such as fruit, nuts, coffee and cement. MSG exports by

PNG include mainly tinned meat, coffee and cement. MSG trade is a

minor share of PNG's total trade, however, and the Agreement has

not significantly expanded trade within the region.

As a signatory to the Lom? Convention, PNG receives

non-reciprocal tariff and other preferences from the EU on many

goods. Financial assistance, totalling K 2.8 billion to end-1995, has

also been provided, mainly to fund development projects and to

finance past commodity price support schemes.

PNG is a party to the South Pacific Regional Trade and Economic

Cooperation Agreement (SPARTECA), a non-reciprocal preferential

agreement to provide the Forum island countries with duty-free

access for their products to Australia and New Zealand. PNG is also

a beneficiary of the GSP schemes of most industrialized economies.

Type and incidence of trade policy instruments

The tariff is PNG's main trade policy instrument. Tariffs were cut

across-the-board on 1 July 1999 from an average (unweighted)

applied MFN rate of 20% to 9%. The tariff structure was also

simplified and rationalized with the number of tariff rates reduced

from six to four zero, 30%, 40% and 55% by removing duties of

5% or 11% on basic and intermediate inputs and by lowering duties

ranging previously between 75% and 125% to 55%, with some

exceptions. Under the eight-year Tariff Reduction Programme, MFN

rates will be further phased down to 15%, 25% and 40%, without

exception, in 2006, when it is envisaged that the average applied

tariff will be 5%.

However, tariffs were increased on some goods as from

1 July 1999, mainly to 30% or 40% to provide protection for

domestic producers. These increases included rates on certain food

and plastic products. Pockets of high tariff protection were also

retained until 2006, including current rates of 82% on sugar, 70%

on canned mackerel and 95% on plywood and veneer panels. On

some products, where domestic production was considered

non-viable, high tariff rates were reduced to zero.

Current duties, and the rates to apply in 2006, give rise to

substantial dispersion and some escalation. The average tariff in

2006 on agricultural products will be 16%, compared with zero for

mining and 5% for manufacturing. The revised tariff structure also

seems to provide mixed incentives for processing. Unprocessed

products are subject to the highest tariffs, on average, and

semi-processed products the lowest. This indicates that the tariff

structure may discourage processing, especially from raw inputs.

Lower, more uniform tariffs on unprocessed products could improve

the incentive structure.

All duties, with the main exception of those on alcoholic beverages,

are ad valorem, thus lending transparency. There is widespread use

of exemptions, often to specific users, but this is being

rationalized. A duty drawback system is in operation but is little

used, with refunds often involving significant delays. Recent efforts

taken to improve the system include relaxing approval

arrangements, and there are proposals to provide the drawback as

a credit against the import duties.

PNG applies few formal non-tariff trade barriers. During the 1990s,

high tariffs replaced widespread import quotas and bans. Certain

import prohibitions and controls apply for environmental, health,

public safety and security reasons, and under international

conventions. PNG applies no trade embargoes, nor any

local-content requirements for domestic production.

PNG has anti-dumping and countervailing provisions, but they have

rarely been used, although application of anti-dumping duties is

currently being considered for cement. Specific tariffs, mainly on

food items, have been used as the main means of guarding against

"cheap" imports. However, the Government has signalled greater

use in future of anti-dumping provisions, which are now to be

administered by the Internal Revenue Commission, within the

Treasury portfolio, instead of the Ministry of Foreign Affairs and

Trade.

PNG applies stringent quarantine regulations. Imports of vegetables

and fruit that are also grown in PNG are banned outright. Imports

of many plants, such as sugar cane, are also prohibited, while

imports of others are restricted. Live animals and certain animal

products, such as honey, beef, eggs and non-pork smallgoods, can

only be imported from Australia and New Zealand (and Vanuatu in

the case of beef). Fresh pig meat and pork smallgoods are

importable only from Australia, and canned ham only from Australia,

New Zealand, North American and certain EU member States.

PNG intends to align its national standards with international

norms; it is a member of ISO and IEC. Many Australian and New

Zealand standards are applied. Most standards are for health and

safety reasons and apply particularly on chemicals, construction

equipment, and building hardware. PNG aims to develop national

accreditation bodies for conformity testing, based on ISO

guidelines. Test results from foreign countries are usually

accepted. PNG has no significant marking, labelling or packing

requirements.

Government procurement is handled by the Central Tenders Board

for contracts above K 0.5 million. Preferences exist for local

suppliers on smaller contracts.

Export taxes, ranging to 70%, apply to unprocessed logs. Export

taxes were lifted on all marine products, except b?che-de-mer, in

1997. Export licences are required for resource-based products,

such as logs, which are also subject to minimum export price

guidelines. Exports of certain unprocessed logs and raw rattan are

banned. Other export controls are mainly for cultural, health and

environmental reasons, or in accordance with international

conventions.

PNG has no export quotas or voluntary export restraints, and

exports are unsubsidized. However, a wide range of exports receive

tax incentives, such as a tax exemption for up to three years on

profits from exports and an exemption for any increases in such

profits for a further four years. By targeting manufactured goods,

these schemes tend to discriminate against other exports.

PNG has no production subsidies. Tax concessions assist

investment and production; in addition to tariff concessions, there

are income tax holidays and other measures, such as special

write-offs and accelerated depreciation provisions for income tax

purposes. These incentives are currently being rationalized under

the Investment Promotion Authority (IPA); some measures, such as

tax holidays provided to start-up firms under a pioneer industry

scheme, have recently been removed, subject to grandfathering of

existing incentives.

PNG does not have specific competition law; the Government

intends to introduce a national competition policy. Price controls

apply to a range of staple items; their coverage has been

substantially reduced. They no longer apply, for example, to bakery

or brewery products and soft drinks. Plans exist to further

de-control prices. The Government also intends to inject greater

competition and private participation into the supply of essential

utilities.

The Government is reviewing PNG's investment procedures, to

make them more transparent and conducive to FDI. A revised

National Investment Policy is currently being introduced. Significant

segments of industry remain reserved for domestic investors,

although since 1995 such restrictions no longer cover

manufacturing and construction activities; the authorities are

reviewing the reserve list with a view to phasing it out. Where

allowed, no foreign ownership limits apply to FDI. The Investment

Promotion Authority screens and certifies foreign investment

proposals. The aim is for the IPA is to become a "one-stop shop",

facilitating investment by moving to a simpler system of

registration and post-investment monitoring to replace the current

case-by-case approval process. Non-PNG nationals may lease, but

not own, land.

Sectoral policies

PNG is heavily dependent on agriculture and on natural resources,

notably minerals, forestry and fish. Primary production accounts for

just over half of GDP, and some one quarter of official employment.

By contrast, manufacturing represents 9% of GDP. Agriculture is

much more important if subsistence production is included; some

85% of the population depends on agriculture.

Besides mining, sectoral trade and investment policies relate mainly

to the development of targeted domestic food, wood and fish

processing industries, although, as noted, the tariff structure tends

to discourage semi-processing activities. Trade and investment

measures to support processing include export taxes and other

controls on unprocessed timber and rattan, as well as efforts to

make logging licences largely conditional upon domestic processing.

Domestic processors receive preference in the allocation of logging

permits, and first-purchase option on logs. The goal is to have at

least 30% of logs processed domestically by 2000, compared to

around 5% currently. Official policy is to ban log exports by 2000.

Processors of plywood and veneer boards also receive high tariff

protection, currently 95% but declining to 40% in 2006. The

combination of implicit input subsidies on logs and high import

tariffs would be expected to provide correspondingly high effective

rates of assistance for wood products.

Domestication of the PNG tuna fishing industry is the principal

objective of the 1999 Tuna Management Plan. PNG operators with

majority domestic ownership receive preferential access to tuna

fishing licences. Longline licences for catching sashimi tuna, for

example, have been closed to foreign entrants since 1995.

Additional preferences, including exemption from payment of

licence access fees, are granted to wholly domestic-owned

vessels. The Plan envisages a total of 100 purse seine tuna

licences, with 30 going to vessels from Distant Water Fishing

Nations (DWFN) under bilateral agreements, and a fall in the

licensed annual catch for these vessels from about 250,000 tonnes

currently to 128,000 tonnes. PNG is committed to reducing the

number of DWFN licences by 10% a year.

The tuna cannery at Madang can be supplied only by PNG fishing

operators, and relies almost totally on duty-free exports to EU

markets under Lom? preferences. Previous efforts to establish

regional fishing fleets and fish processing activities in PNG, as well

as elsewhere in the region, have failed, having been unable to

compete with more efficient processors.

Mandatory local-content requirements apply to DWFN vessels

fishing in PNG waters. Each vessel must make at least three calls

per journey to PNG designated ports and purchase minimum

supplies worth US$90,000. PNG, along with other island neighbours,

has also banned high-seas transshipment, which must occur in

designated PNG ports. These controls tend to raise the costs

incurred by foreign fishing fleets and reduce their capacity to pay

higher licence fees.

PNG's fishing and forestry policies are also aimed at sustainable

management. Fish catches and timber production, are currently

below estimated sustainable yields. Such management will require

enhanced surveillance measures to ensure that licensed levels are

enforced. The Government is also taking steps to terminate

unsustainable logging; these include withdrawing unused timber

permits, since issued permits are thought to be double sustainable

levels, and ensuring that expired licences are indeed terminated.

Trade measures, initially import bans and quotas, but currently

relatively high tariffs, assist a range of agricultural commodities

(including sugar, poultry, eggs and beef) in an attempt to achieve

food self-sufficiency. These policies have met with little success,

and contribute to high domestic food prices.

Traditional tree crops, especially coffee, copra, cocoa and palm oil

products, remain important to the PNG economy, accounting for

substantial exports. These products were assisted by price

stabilization measures, which effectively provided substantial price

support, during the late 1980s, when export prices collapsed.

These schemes were terminated in 1999, except for a private

scheme run by the Coffee Industry Corporation. The statutory

Copra Marketing Board is the monopoly seller of copra and coconut

products on both domestic and export markets.

Past governments have promoted import substitution policies

through direct participation in numerous commercial joint ventures,

if not complete state ownership, aided by measures such as trade

restrictions or legislative provisions preventing new entrants.

Examples include government participation in oil palm plantations,

livestock ventures, Ramu sugar and Halla cement. The Government

has divested some of these interests, however, and intends to sell

off more as part of its privatization programme.

The Government plays a key role in the development of mining

projects. Mining leases must be negotiated with national and

provincial governments as well as with customary landowners.

Higher standard company tax rates apply to mining and petroleum

firms than to enterprises operating in other sectors, and additional

profit taxes apply to returns above certain threshold levels. The

Government may take a minority equity holding of up to 30% in any

mining or petroleum project, either directly or via its 51% stake in

Orogen Minerals. Royalties apply, at a rate of 2% of the value of

mine output. A profits levy of 4% has been applied to compensate

for the loss in government revenue from zero-rating mineral exports

for VAT purposes, thereby allowing mining companies in contrast

to loggers to receive a credit for VAT paid on inputs.

Hitherto, there has been minimal domestic processing of minerals. A

petroleum refinery is currently under construction; it is expected to

meet PNG's entire demand for refined petroleum products.

Most basic services, such as electricity, telecommunications,

ports, water, air and maritime transport, are provided by

state-owned statutory monopolies. Postal and telecommunication

services were corporatized in 1996, with the establishment of two

separate entities, Telikom and Post PNG; however, Telikom will

retain its legislated monopoly until 2002, when PNG is committed to

opening the market to foreign suppliers, providing them with

non-discriminatory access to the local network. Post PNG retains

monopoly rights in providing certain postal services, such as

registration and insurance of articles, although letter delivery is, in

principle, open to private entrants. It is government policy to

gradually divest 49% of both Telikom and Post PNG.

Banking licences are granted by the Central Bank. Foreign banks

may operate domestically as locally incorporated subsidiaries or as

foreign branches, provided an assigned minimum level of capital is

kept within PNG. The Central Bank accepts that PNG branches of

reputable foreign banks will be adequately supervised by those

banks' own domestic prudential regulators.

Foreign companies may enter the PNG insurance market without

discrimination; non-life firms must be licensed with the Insurance

Commissioner. However, the Motor Vehicle Insurance Trust has a

statutory monopoly on providing third-party motor vehicle

insurance. Although foreign companies are expected to place all

risks within PNG, such risks may be placed offshore, subject to

approval from the Insurance Commissioner. In 1997, some 20% of

gross non-life insurance premiums were placed abroad.

Life insurance companies and superannuation funds are currently

unregulated. However, legislation is planned that would extend

prudential controls to these companies and strengthen existing

requirements for non-bank financial institutions.

The Securities Commission was established in 1998 to administer

new companies and securities legislation, such as that dealing with

company law and the formation of companies as well as takeovers

and acquisitions. The PNG Stock Exchange commenced operations

in 1999.

Trade Policies and Foreign Trading Partners

PNG's trade measures are generally applied on a non-discriminatory

basis. Reliance on the tariff, which is fully bound and has been

simplified, as the main trade instrument has made the trade regime

more predictable and transparent. The economy, however, remains

relatively weak and vulnerable to external shocks. Continued

reform, including further efforts to liberalize trade and investment

regimes, can increase the economy's flexibility and improve its

prospects of achieving sustainable growth. PNG's trading partners

can assist the adjustment process by ensuring stable, increased

access to their markets.