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II. TRADE AND INVESTMENT POLICY REGIME:  FRAMEWORK AND 
OBJECTIVES
1. The Independent State of Papua New Guinea gained internal self-government in
December 1973 and political independence from Australia in September 1975.  It is a constitutional
monarchy with the British Sovereign, represented by  a governor-general approved by Parliament, as
ceremonial Head of State.  The national Government  is elected for a maximum period of five years by
universal adult suffrage.  It is headed by the Prime Minister who, elected by Parliament, presides over
and appoints ministers to the National Executive Council (the Cabinet).
(1) THE INSTITUTIONAL FRAMEWORK
2. Under the 1975 Constitution, legislative authority is vested in the single-chamber National
Parliament.  This provides for the separation of pow ers between the legislature, the executive, and the
judiciary.1  Parliament is based on the Westminster system, and consists of 109 Members representing
89 constituencies.  A product of the political system and the fluidity of party allegiances has been a
large number of short-lived coalition governments.  No government or prime minister has yet seen out
a full term in office, with no-confidence votes against governments being commonly successful.
Governments therefore often change without recourse to public elections.  In an attempt to fostergreater political stability, the Constitution was amended in 1992 to increase from 6 to 18 months the
statutory grace period accorded to new governments against parliamentary no-confidence votes.
2
3. PNG comprises 19 provinces and the National Capital District of Port Moresby.  Each
province has its own elected member of the National Parliament.  Provinces were created in 1977
under the Organic Law on Provincial Government.  Each had their own constitution and elected
assemblies and executives, with certain tax and revenue-raising powers to supplement national
government grants.  Provincial assemblies were accountable to Parliament and to the nationalGovernment.  However, frequent disputes occurred between national and provincial governments over
the distribution of powers and responsibilities.  In 1995, this legislation was replaced by the Organic
Law on Provincial Governments and Local-Level Governments.  This abolished elected provincial
assemblies and replaced premiers with centrally appointed governors.  Provincial revenue-raising
powers were also reduced, removing their authority to levy sales tax (legislatively capped at 5% butgenerally levied at a rate of 3%), for example, in  return for increased conditional grants from the
national Government, including transfers under District Support and Infrastructure Grants.
3  The third
tier of government covers a number of local government councils centred on townships, funded
mainly by their respective provincial government.
                                                     
1 Constitutional changes are rare, and require an absolute two-thirds, or in some cases, a three-quarters
parliamentary majority.
2 This period was effectively increased to 24 months by the previous Government, which adjourning
Parliament for seven months in December 1998 to avert an expected no-confidence vote.  This delayed the
implementation of key economic reforms announced in the 1999 Budget, thereby further undermining
international confidence in the economy’s outlook and the Government’s commitment to economic reform.  The
decision to adjourn Parliament was subsequently declared unconstitutional by the Supreme Court in June 1999.On resumption of Parliament in July 1999, a new Government was voted into office following the resignation ofthe former Prime Minister.
3 Provincial governments on average collect about one quarter of their total revenue from internal
sources, including from provincial sales taxes, natural resource royalties, fines, fees, and investments.  Provinces
are compensated for the elimination of provincial sale s taxes by receiving from the national Government an
agreed share of the new VAT.  The national Government has reportedly failed to make grant payments in full toprovincial governments, or to make adequate budgetary provisions for such transfers as required under the new
Organic Law.WT/TPR/S/62 Trade Policy Review
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4. The new Organic Law is being implemented progressively, but the pace of reform has been
slow.  Several functions, such as greater responsibiliti es for education funding, have been or are in the
process of being transferred from the national to provincial governments.  District and provincial
treasurers are responsible to the Secretary of the Ministry of Finance (now called Treasury and
Planning), and must submit a financial statement a nnually.  However, approval of provincial budgets
– which cannot be in deficit – is the responsibility of the Minister for Village Services andLocal-Level Government.  Parliament can grant a nd withhold (through legislation) the powers of
provincial and local governments.
5. Provincial governments have concurrent power with the national Government in many
important areas, including agriculture, commercial and industrial development, forestry, fishing,
transportation, labour, and mining.  Thus, although national laws take precedent over provincial laws,provincial governments do play an important role in formulating and administering trade-related
policies.  They can make and enforce their own laws in these areas provided they do not conflict with
national legislation.
6. The three-tiered legal system of PNG is based on English common law.  The highest court,
the Supreme Court, headed by the Chief Justice, is the final court of appeal and is responsible forhearing all constitutional matters.  Next is the National Court of Justice, which has unlimited
jurisdiction both in civil and criminal matters.  There are also district and village-level courts, as well
as specialized agencies, such as the National Lands Commission, to deal with customary land disputes
and to handle civil cases relating to mining.  The legal system has also adopted several traditional or
customary local values required by the Constitution, particularly covering community land rights,
which mainly affect foreign investors wishing to acquire land or rights to develop natural resources,
especially minerals and forests.
(2) S
TRUCTURE OF TRADE POLICY FORMULATION AND IMPLEMENTATION
7. The principal ministries responsible for international trade matters and other economic
policies are the Prime Minister’s Department; Foreign Affairs and Trade; Commerce and Industry;
Treasury and Planning; Agriculture and Livestock;  Mineral Resources, Petroleum and Energy;  Land
and Physical Planning;  Provincial Affairs;  and Employment and Youth.  A number of offices fallingwithin various departments are also relevant, such as Public Enterprises, Rural Development, and
Environment and Conservation.  The National Planni ng Office was re-created in 1995 to improve
development planning and aid coordination.  The lead department in trade policy is the Department of
Foreign Affairs and Trade.  It handles internationa l trade policy formulation and involvement in trade
treaties and other trade-related agreements, including dealings with international agencies, such as theWTO and UNCTAD, as well as with foreign governments on regional and bilateral trade initiatives,
such as APEC.  It also deals with foreign policy.
8. There are a number of important sector-specific statutory authorities that also have a major
bearing on trade-related policies.  These include the PNG Forest Authority, the PNG Fisheries
Authority and the PNG Tourism Promotion Authority.  In addition, responsibilities for trade inservices involve the Departments of Transport, Works and Civil Aviation, Communications, and
Health and Education.
9. PNG’s trade policies have been conducted on a largely ad hoc basis.  No clear trade policy
goals were set, and poor coordination of trade po licies existed between responsible departments,
especially between Foreign Affairs and Trade and Industry prior to trade and foreign affairs functions
being amalgamated within the Department of Foreign Affairs and Trade.  Trade policy formulationPapua New Guinea WT/TPR/S/62
Page 23
was therefore fragmented and often lacked coherence.  Major efforts are currently being directed at
improving trade policy formulation and coordination.
10. The Bank of PNG, which is the Central Bank, plays a significant role in managing the
country’s monetary and exchange rate policies.  In principle, the Bank is run by its Board and is
independent from the Government.  However, the re sponsible minister, the Minister of Finance (now
Treasury and Planning), has broad statutory power s, under the Central Bank Act 1973, over monetary
and exchange rate policies, and can direct  the Bank to follow government policies.4  Disputes between
the Minister and the Board are to be resolved by the Head of State, the Governor-General, on taking
advice from the Government.  Monetary policy is determined annually by the Bank’s Board –
comprising the Governor, Deputy  Governor, Finance (Treasury and Planning) Secretary and six to
eight additional members appointed by the Government – and is endorsed by the Minister beforeformal adoption as policy by the Bank.  Thus, ultimate responsibility for setting monetary and
exchange rate policies rests with the Government.  The Government appoints the Bank’s Governor,
for a maximum period of five years.  However, the legislation is ambiguous on the procedures for
appointment, term of office, and criteria for the removal of the Governor.  There have been several
governors in recent years.
5
11. Recent developments would appear to have undermined the Bank’s capacity to pursue an
independent monetary policy. The Bank, for example, failed in its legislative duty to suspend
borrowings to the Government, despite having breached the maximum 25% statutory limit on
outstanding central bank debt at end 1998.  The Government had directed that commercial banks
temporarily swap their cash reserves for Treasury Bi lls in order to meet a narrow interpretation of the
statutory credit limits.  However, PNG authorities indicated that the Government had exceeded this
ceiling by 7 percentage points.6  The Bank also appears to have sanctioned a number of government
quasi-budgetary arrangements surrounding the co rporatization of the PNG Banking Corporation
group of companies.  It was announced in the 1999 B udget that the Bank would in future follow a
more independent role in monetary policy:  according to authorities, the Government would separate
its debt management from the Bank’s monetary policy implementation.
12. While the Bank’s day-to-day intervention in the foreign exchange market to support the
currency is at the Governor’s discretion, overall ex change rate policy is determined in consultation
with the Government.  The Government announc ed in the 1999 Budget that it had followed an
interventionist approach to exchange rate setting since August 1998.
13. As well as its supervisory functions over the financial system, the Bank plays an important
general advisory role to the Government on monetary and banking matters, and on economic policy ingeneral.  It is also the major source of economic statistics on the PNG economy.  The National
Statistical Office has very limited resources;
7  this impairs the preparation of reliable statistics, which
in turn hampers the formulation and evaluation of policy.  The Bank produces important regular
public reports and commentaries on the state of the economy, including annual reports, quarterly
bulletins, and updates.  The Economic Policy Unit of the Department of Treasury and Planning also
                                                     
4 Such directions are to be in writing and must be notified to Parliament within 15 sitting days from
when the direction was given.  The legislation first requir es the Board to endeavour to agree with the minister on
differences over policy matters.
5 The Minister may terminate the Governor’s appointment, inter alia , if the incumbent "becomes
permanently incapable of performing his duties" (Section 16 of Central Bank Act).
6 According to authorities, the Minister is required to present this breach to Parliament for
endorsement.
7 Official GDP and other national account data have not been produced since 1993.  Moreover, there
are a number of deficiencies in statistics produced on balance of payments, prices, and government finances.WT/TPR/S/62 Trade Policy Review
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produces, somewhat irregularly, a Monthly Economic Monitor  of economic statistics and a Treasury
Weekly Newsletter  highlighting important economic developments.
14. The customs division of the Internal Revenue Commission collects excise and trade taxes
(import tariffs and export taxes).  The Commission was formed in 1992 when the collection of all,
including direct, taxes was unified upon the amalga mation of the Taxation Office and the Bureau of
Customs and Excise.  In the past, tariff changes were often proposed to the Government by theIndustry Assistance Board, a statutory inter-departmental board chaired by the Commerce and
Industry Secretary.  However, this Board, which could hold public inquiries into matters of industry
assistance, has been effectively defunct for many years.  More recently, calls from industry for tariff
changes have been considered by the Internal Revenue Commission, either directly from the industry
concerned, or through the Council of Manufact urers and/or the Department of Commerce and
Industry.  The Commission therefore has both revenue collection and policy setting roles.  The tariff
reduction programme, for example, was primarily determined by the Internal Revenue Commission
conducting a line-by-line review of the tariff schedu le in close consultation with industry.  Future
tariff rate increases must be passed by Parliament, whereas tariff reductions require only the approval
of the Government.
15. The Government, on the approval of the Minister for Treasury and Planning, may authorize
exemptions, remissions, and concessions on trade and excise taxes.  Such applications are handled by
the Internal Revenue Commission in consultation with relevant departments.  Proposals are examined
on a case-by-case basis, and depend on the overall benefit to the economy of the project, such as
export orientation and local procurement, as well as revenue forgone.  Several legislative provisions
are also included for specific exemptions of import duties based on end-use arrangements that benefit
particular organizations or uses, such as the Lae Mackerel Cannery and mining and petroleumprojects.  Most import exemptions were removed, in April 1999, subject to "grandfathering" of
existing arrangements.  Price controls are admini stered by the Consumer Affairs Council using price
levels and mark ups set mainly by the Treasury and Planning Secretary.
16. PNG has no independent statutory body to review or advise the government on economic
policies, including the provision of government assistance to industry.  Most policy advice to theGovernment comes from the Central Bank, or from international agencies, such as the IMF and the
World Bank.  The Institute of National Affairs was established in 1976 and functions as a privately
funded "think tank" aimed at providing independent advice to the Government.  It commissions public
research into areas of current economic interest and liaises with government through various channels,
including regular meetings of the Consultative Implementation and Monitoring Council, formed by
the Government in 1998 to promote public dialogue;  and the National Development Forum, the latest
held in August 1999 on reconstruction and the 2000 Budget.  The Industry Assistance Board replaced
the Tariff Advisory Committee, principally to advise the government on industry assistance, however,
it has seriously lacked the institutional capacity and government commitment to be effective.
17. The private sector has established a close working relationship with the Government, mainly
through the PNG Manufacturers’ Council, which consul ts regularly with government departments and
statutory bodies.  The private sector is therefore actively represented in the decision-making process.
Many government delegations to various conferences and negotiations involve private sector
representation.  Other private associations include the Business Council of PNG, the Chamber of
Commerce, and the Chamber of Mines and Petroleum.  An Economic Summit was held in
February 1998 to enable the private and public sectors to engage in public dialogue on matters of key
economic interest.  This resulted in the formation of eleven sectoral committees to look at areas suchas health, education, commerce and industry, forestry, fishing, agriculture, infrastructure, and order.Papua New Guinea WT/TPR/S/62
Page 25
18. An Indirect Tax Summit held in September 1996 laid the foundations for the package of VAT
and tariff reforms implemented on 1 July 1999.
(3) IMPLEMENTING THE STRUCTURAL ADJUSTMENT PROGRAMME
19. The previous Government reaffirmed in its 1999 Budget, released in November 1998, its
commitment to implementing structural reforms.  These are seen primarily as a continuation of
reforms under the Structural Adjustment Programme agreed with the IMF and the World Bank in1995.  A number of key reforms were introduced in 1995 and 1996 (Box II.1).  However, since then
the programme has stalled badly, and a large unfinished agenda remains to be implemented.  Many of
these outstanding reforms were directly incorporated in the previous Government’s Economic
Recovery Package.
Box II.1:  1995 Structural Adjustment Programme
As part of the 1995 budget, the Government announced a Structural Adjustment Programme aimed at
regaining macroeconomic stability and improving the economy’s international competitiveness.  Thereform programme was agreed in consultation with the World Bank, the IMF, and other major aid donors.Its main elements were to:
establish a market-determined exchange rate;
raise the minimum liquid assets ratio and introducing a weekly kina auction;
limit the fiscal deficit to 1%;undertake reforms to enhance competitiveness and restore business confidence;create the basis for sustainable development of renewable natural resources, particularly forests;replace import bans (e.g. sugar, cement, beef, and lamb) with tariffs;reform and downsize the public sector;
improve public services, especially education, health, and agriculture;
upgrade public infrastructure needed for private sector development; and
divert development resources to the rural sector.
During the year of the Structural Adjustment Program in 1995, the Government made progress in a number
of key areas.  It:
contained the fiscal deficit to 1% of GDP;
established a floating exchange rate regime;introduced market-determined interest rates;removed Central Bank guidelines for spreads of commercial interest rates on deposits and lending;raised the minimum liquid assets ratio;deferred sitting of the Minimum Wages Board;
began to reduce the size of the public service;
subjected government agencies to import duties;reintroduced value-based taxation of fringe benefits;established monthly ceilings on public expenditure;set 25% targets for public expenditure on education, health, agriculture, and infrastructure;reduced import duties on industrial inputs;
initiated studies on tariffs and value-added taxation;
established the National Economic Development Forum;introduced surveillance and monitoring of log exports and ocean fisheries;provided additional funding for the National Forests Authority;
Box II.1 (cont'd)WT/TPR/S/62 Trade Policy Review
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established a logging code of conduct;introduced a progressive taxation and royalty system for log exports;legislated for transfers of additional funding to provincial and local governments;  andannounced a five-year programme for reducing import duties, including on beef, lamb, and cement.
Implementation of the Structural Adjustment Program continued in 1996 but proved more difficult.
Moreover, a number of these announced decisions were subsequently reversed or delayed indefinitely.
Source : Asian Development Bank (1997a), Country Economic Review of Papua New Guinea, Manila.
(i) Economic Recovery Package
20. The previous Government announced, in June 1999, Economic Recovery Package to be
implemented in line with the Structural Adjustment Programme, aimed at reinforcing macroeconomicstability, boosting public confidence in the economy, and deepening structural reforms.  The package
contained fiscal, monetary, exchange rate, and structural reform policies to ensure that the 1999
Budget and macroeconomic framework remained on track (Box II.2).  The Government believed that
further tightening of fiscal and monetary operations were needed to cope with the continued pressure
on the exchange rate and international reserves.  Implementation of these reforms was to beginimmediately.
21. The Economic Recovery Package included principally economic reforms yet to be completed
under the Structural Adjustment Programme – it contained few new initiatives.  Fiscal reforms
included expenditure control and revenue enhancement measures aimed at limiting the overall 1999
budget deficit to less than 1% of GDP.  Revenue measures included mainly improved enforcementand compliance procedures for collecting direct and indirect taxes, but also non-specified future
increases in log export taxes and certain other taxes.  Monetary and exchange rate reforms involved,
in particular, a tightening in monetary conditions and continued active intervention in the foreign
exchange market by the Central Bank to maintain an  appropriate level of international reserves.  The
main structural reforms covered taxation, with the introduction of VAT, and tariff reductions thatbegan on 1 July 1999;  the public sector;  labour markets and minimum wages;  the quality of
economic data and reporting;  privatization;  and the financial sector.
(ii) The 1999 Budget
22. Key features of the previous Government’s reform programme, announced earlier in its 1999
Budget, included:
- maintaining economic and financial stability, including the introduction of the VAT
from 1 July 1999, and improved performance of statutory corporations (minimum10% return) and public asset sales;
- promoting rural development;
- reforming the public sector, including major public service downsizing, termination
of 15 statutory authorities, agencies, and committees, at an estimated cost of
K 65 million in 1999, to be funded largely by the proceeds of asset sales;
- private sector development, including implementation of the tariff reform programme
(endorsed by Parliament in September 1998) from 1 July 1999, as well as introducingPapua New Guinea WT/TPR/S/62
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a national investment policy aimed at in vestment liberalization and removal of all
import duty exemptions granted under the Pioneer Industries Act, rationalization of
investment incentives, and the implementation of a comprehensive privatization
programme aimed at selling initially government plantations, the PNG Banking
Corporation, Telikom, and public equity in mining ventures;
- financial sector reform, including the deepening of the foreign exchange and treasury
bills markets, the establishment of a Stock Exchange (which commenced operations
in May 1999) and more effective central bank supervision of banks and especially
non-bank financial institutions;  and
- sectoral reforms, including streamlining of the incentives framework for promoting
mineral and petroleum development; as well as provincial and local governmentreforms to speed up implementation of the 1995 new Organic Law, including cuts in
financial grants to provinces in line with the Government’s tight budgetary position.
Box II.2:  The Economic Recovery Package
Announced by the previous  Government on 7 June 1999, the comprehensive package contains measures to
reinforce economic and financial stability and to deep en structural reforms.  The background to the
package, according to the Government, was the deteri orating public confidence in the economy, caused by
spiralling prices due to a steady decline in the exchange rate.  This had encouraged capital flight, and wasthreatening macroeconomic stability.  The package contained fiscal, monetary, exchange rate, and
structural reforms.
Fiscal reforms  are directed at a tight stance to limit the overall budget deficit in 1999 to under 1% of GDP,
to be entirely funded by the least expensive source of external financing.  Measures announced includedexpenditure controls to limit public expenditure to essential payments and avoid spending overruns andnew commitments, saving an estimated K 20 million in 1999.  Revenue enhancing measures, expected toraise additional funds of K 85 million in 1999 when fully implemented, include a range of improvedrevenue collection initiatives on direct and indirect ta xes.  Some future tax increases are also proposed,
such as raising log export duties in July aimed at generating an extra K 20 million in 1999.  The
Government intended to intensify dialogue with the World Bank and the IMF aimed at securing finance forthe 1999 Budget.  Alternative sources of external finance would also be developed.  These would include aline of credit for US$100-120 million with offshore commercial banks, and PNG’s inaugural Eurobondfloat of up to US$250 million.
Monetary policy and ex change rate reforms  are aimed at establishing price and currency stability.
Monetary conditions are to remain very tight pending availability of foreign financing and rebuilding of
international reserves to comfortable levels.  The Central Bank is to maintain a market-determinedexchange rate and will actively intervene to maintain an appropriate level of reserves.  Foreign retentionguidelines will be strengthened.  Restrictions are also to be removed on current account transactions, andprudential measures are to be enhanced.
Structural reforms cover tax changes, including tariff and excise tax reform and the introduction of VAT;
completion in 1999 of public sector reforms to improve service delivery;  labour market reforms to allowpayment of piece rates and to conclude the current minimum wage review; improving the quality ofeconomic data and reporting; completing the 1999 privatization programme;  and a range of reforms to thefinancial sector.
Commencement of these reforms is to begin immediately by the Budget Implementation Committee in
close cooperation with key departments, such as Treasury and Planning, Internal Revenue Commission,
and the Central Bank.
Source:  Government of Papua New Guinea.WT/TPR/S/62 Trade Policy Review
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23. A ministerial Budget Review Committee (BRC), chaired by the Secretary of Treasury and
Planning, was formed after the 1999 Budget to oversee its implementation and that of the reform
programme generally.  The BRC reports to the Cabinet sub-committee on Economics and Finance,
which is chaired by the Minister of Finance (Treasury and Planning).  It is assisted by thirteen sectoral
working groups comprising both departmental head s and ministers.  Another committee, the Budget
Implementing Committee (BIC), reviews submissions  from the working groups before they are
considered by the BRC.  Other policy proposals are considered by the National Development
Advisory and Implementation Committee before consideration by the National Planning Committee,
and then by the National Executive Committee (NEC).
24. However, there appears to be considerable duplication and inefficiency associated with the
current arrangements, together with deficiencies in the established procedures for the presentation andprocessing of policy submissions to the NEC.  A number of NEC decisions have been reversed after a
short time or challenged in the courts.  It seems that the National Development Advisory and
Implementation Committee and the National Planning Committee have become redundant, and that
instead the BIC and BRC have become the main avenues for considering most submissions even if
unrelated to implementation of the 1999 Budget or the reform programme.
25. In January 1999 an Advisory Secretariat was established to support the Office of the Prime
Minister on sectoral issues, including overseeing National Executive Council decisions and
implementation of the 1999 Budget.  The Secretariat has responsibilities in areas of public service and
provincial governments;  legal, law and order; economic, finance, commercial statutory authorities,
privatization, and natural resources, chaired by the Prime Minister’s Chief Economic Advisor;
infrastructure, budget implementation and foreign aid management; health and education; family,
church and non-government organizations.  Located within the Prime Minister’s Office, the creation
of the Advisory Secretariat is seen as an integral part of the reform process.
(iii) The August 1999 Supplementary Budget
26. The incoming Government of July 1999 moved quickly to restore international confidence in
the economy and to address the looming financial and currency crisis, including re-opening
discussions with the World Bank and the IMF aimed at obtaining the necessary external financing.The Government introduced a supplementary budget  on 12 August 1999 aimed at maintaining the
1999 budget deficit to 1.7% of GDP (Box II.3).
(4) P
OLICY OBJECTIVES
27. The Government has embarked on an overall policy of gradual trade liberalization as part of
its continuing Structural Adjustment Programme.  It recognizes the increasing role thatmarketing-opening measures must play in improving the economy’s competitiveness and
diversification of exports and markets.  The need for private-sector-led development, by redirecting
resources away from the public sector, is also reco gnized.  The Government is attempting to formulate
a coherent trade policy that will foster outward orientation and improved trade performance.
28. The authorities regard private investment, both domestic and foreign, as an important catalyst
for growth.  Therefore, the Government is keen to remove administrative obstacles to investment, to
improve the transparency of investment policies, and to create an atmosphere designed to restore
business confidence.
29. A major objective of the Government’s reform programme is to implement sustainable
management policies with regard to its key natural resources, such as forests, marine, mineral, and
agricultural commodities.  Economic self-reliance is to be achieved through implementation ofPapua New Guinea WT/TPR/S/62
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policies aimed at promoting sustainable development.  Implementing effective control over the
exploitation of such resources and encouraging greater domestic processing are seen as important
government priorities.
Box II.3:  August 1999 Supplemen tary Budget
The 1999 Supplementary Budget delivered by the incoming Government in August was aimed at restoring
macroeconomic and budget stability.  Corrections we re considered necessary due to the 1999 Budget being
formulated on overly optimistic assumptions and unrealistic policy initiatives.  The Supplementary Budget
introduced a distinct shift in the Government’s fiscal stance.  It aims for a surplus of 0.6% of GDP for the last
half of 1999, compared with a 2.3% deficit for the first six months, to achieve an overall deficit for the year
of 1.7%, or K 265.7 million.  This would have risen to 3.1% had the budget been left unchanged.
The budget deficit is to be funded entirely from external sources, such as the IMF and the World Bank,
thereby creating no new domestic financing requirements for 1999.  The Budget also proposes a major
privatization programme to be completed by 2002, which would be used to secure an external loan, to be
used to reduce domestic public debt by retiring Treasury Bills held by the Central Bank.  The Supplementary
Budget was designed to prepare the foundation for the 2000 Budget to be endorsed by the IMF and the World
Bank.  In the meantime, public expenditure and taxation reviews would be conducted.
The Supplementary Budget introduced new tax measures to raise an estimated additional K 72.4 million in
1999, and expenditure reductions worth K 140 million.  Revenue measures comprised increases in excise
taxes on fuel, tobacco products, and alcoholic beverages, as well as a higher luxury excise tax rate of 110%
(compared with 60%) on passenger motor vehicles with an engine capacity of 2,800 cc and above.  The
temporary relief granted to loggers in 1998 was removed and the log export taxes restored to their previous
levels.  In addition, the 4% mining levy was retained, while the interest withholding tax, introduced in the
1999 Budget on resource industries, was terminated.
The Supplementary Budget is based on the incoming Government’s economic objectives of:
restoring integrity to state institutions and respect for the laws;
stabilizing the exchange rate at a realistic level by a consistent mix of fiscal and monetary 
policies that will also contain inflation;
focusing on fewer priorities, including less impingement on commercial activities by the 
Government, while privatizing public institutions for fair returns;  and
improving business opportunities for all by removing investment barriers, as well as privatizing and 
improving price competitivity of utilities.
Source :  1999 Supplementary Budget, Minister for Treasury, August 1999.
30. Government policy is no longer geared heavily towards import substitution strategies.  This
approach dominated economic policies from independence until the late 1980s and early 1990s.
According to authorities, since then there has been a progressive move by successive governments
towards export-oriented policies, and this is curren tly the main trade policy objective.  The major
objectives of trade policy are to develop an open, outward-looking and export-oriented economy that
generates rapid rates of growth and higher living standards.  While the importance of the miningsector will continue, higher growth in the non-mining sector is also being targeted.
31. The Government’s primary development policy objectives are job creation and improved
delivery of public services, especially in rural communities.  These are contained in the "Medium
Term Development Strategy 1997-2002;  a Bridge into the 21st Century (MTDS)", adopted by
Parliament in 1996.  The main objectives of the five-year rolling plan is to adhere to structuraladjustment policies; to redefine and limit the functi ons and role of the Government as a facilitator ofWT/TPR/S/62 Trade Policy Review
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development; to redefine the role of the private sector as the main source of growth; to ensure
effective provincial government;  and to focus resources on human resource development.  The
MTDS provides the Government’s main policy statement in its agenda for economic and social
development to meet the National Goals and Directive Principles laid out in the Constitution.  It is
also aimed at better integrating the planning a nd budgetary processes.  The Government’s expenditure
and investment plans on specific development projects are contained in its five-year PublicInvestment Programme.
32. As part of the MTDS, a medium-term resour ces framework was also developed, aimed at
improving the performance of government activities  in priority sectors.  The Government also
adopted in 1997, as the basis for its development of sustainable human resource development, the
"Country Strategy Note 1997-2002:  Sustainable Hu man Development;  Integrating Economic, Social
and Environmental Development in PNG", devised in conjunction with major aid donors.  The 1999
Budget strategy of redirecting resources away from recurrent to developmental expenditures reflects
these principles and those contained in the development plan.  Priority areas of development
expenditure include rural development and agriculture;  health; education;  infrastructure maintenance
and development;  law and order; and capacity building within institutions at all levels of government.
33. To help sharpen the focus of the development strategy, the National Planning Office was
reformed in 1995, and is intended to play a leading role in the structural reform process.  As well as
monitoring and coordinating the development budget and facilitating public sector reform, the Office
is to assist provincial administrations in development planning and to develop comprehensive policies
for the non-renewable resource sectors.
34. The Government views greater integration of the PNG economy with the world economy as a
high priority.  It believes that the conclusion of the Uruguay Round and its membership of the WTOprovide important challenges and opportunities, and is attempting to bring its domestic policies into
conformity with its WTO commitments.  It is also committed to APEC objectives and is gradually
changing its sectoral policies to comply with th ese requirements.  The Government believes that
meeting these trade liberalization objectives should improve the country’s production and bring
resource allocation more into line with its comparative advantage.
35. PNG’s economic and trade relations with Asian and Pacific neighbours are also taking on
increasing importance, as reflected in the Government’s "Look North" and "Work the Pacific"
initiatives.  The "Look North" policy is aimed at increasing trade and investment ties with Asia, while
the "Work the Pacific" is aimed at strengthening relations with South Pacific neighbours.  The
Government in principle supports the establishmen t of regional free-trade areas as an opportunity to
further develop trading relations with neighbouring countries.
(5) L
AWS AND REGULATIONS
36. The laws of PNG consist of the Constitution and those adopted by Parliament either under the
Constitution or in the normal course of government business.  The constitutionally based Organic Law
provides for provincial and local governments and contains the division of powers and responsibilitiesbetween the three layers of government.  The national Government also makes emergency regulations
and subordinate legislation.  Customary (called the underlying law) is also relevant in some areas,
such as land rights.  Provinces are able to make their own laws and regulations governing areas of
their responsibility.Papua New Guinea WT/TPR/S/62
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37. Laws are enacted by Parliament and become operative after receiving certification by the
parliamentary Speaker and publication in the National Gazette .  In addition, relevant ministers issue
enabling regulations, guidelines, and administrative directives.
38. Treaty-making powers are vested in the national Government by the Constitution
(Section 117).  However, international treaties or conventions are not domestically applicable unless
implemented in domestic legislation.  Where there is applicable domestic legislation covering anaspect of WTO requirements, any person can, in principle, enforce these provisions through the
National Court (Section 155 of the Constitution).  Although PNG’s accession to the WTO did not,
according to authorities, adhere strictly to const itutional procedural requirements for practical reasons,
it was ratified by Parliament and hence PNG’s laws and regulations must conform to its WTO
obligations.  Although domestic law would in principle prevail in the case of inconsistencies withinternational treaty obligations, such as those of the WTO, the PNG Government would take steps to
ensure that domestic laws and regulations reflected its international obligations.
39. The main trade-related laws in PNG are the Customs Act; the Customs (Dumping and
Subsidies) Act; Exports (Control and Valuation) Act; Commercial Advertisement (Protection of Local
Industries Act; Foreign Exchange Control Act;  Land Act 1996;  and the National Institute ofStandards and Industry Technology Act.  In addition, there are a number of specific Acts that cover
the development of particular sectors, such as mining, forestry, and fishing.  These include mainly the
Mining Act 1992, Oil and Gas Act 1998, Forestry Act 1991, and Fisheries Management Act 1994.
(6) T
RADE AGREEMENTS AND ARRANGEMENTS
(i) Multilateral agreements
40. With minor exceptions, PNG accords MFN treatment to all trading partners.  As a de facto
member of the GATT, from 1960, by virtue of its status with Australia, PNG could become a GATT
contracting party following independence on assuming full autonomy in the conduct of its external
commercial relations.  The PNG Government ex ercised this right on 16 December 1994.  PNG
became an original Member of the World Trade Organization on 9 June 1996 when it accepted the
WTO Agreement (Article XI of the Marrakech Agreement).8  PNG is not a signatory to any of the
WTO Plurilateral Trade Agreements.  The status of PNG's notifications to the WTO is given inTable II.1.
41. PNG’s sector-specific commitments under the General Agreement on Trade in Services
(GATS) on market access and national treatment cover a broad range of services.  These are business
services (professional legal, accounting, architectural, and engineering services, consultancy services
covering computer hardware installation, mana gement consultancy services);  communication
services (courier services, excluding letters and postcards);  construction (general construction work
for buildings and civil engineering);  certain financia l services, such as banking services;  hotels and
restaurants;  maritime transport services;  and certain basic telecommunication services, including
voice telephony.
9
                                                     
8 Like other developing countries, PNG was given an additional year, until 15 April 1995, to submit its
schedules on goods and services.  However, this period was extended by WTO Members at the Government’srequest to 13 August 1996.
9 GATS/SC/118, 16 November 1995 and GATS/SC/118/Suppl.1, 11 April 1997.WT/TPR/S/62 Trade Policy Review
Page 32
Table II.1
Notification requirements to the WTO as at 30 June 1999
WTO Agreement Description of requirement PeriodicityStatus as at August 1999 and
document number of latest
notification
Agriculture (Art. 18.2) Domestic support Annual Outstanding
Agriculture (Art. 10 and 18.2) Export subsidies (outlays and
quantities)Annual Outstanding
Subsidies (Art. 32) Laws and regulations Once by March 1995, then
changesOutstanding
Subsidies (Art. 25) Specific subsidies granted Annual Outstanding
Subsidies (Art. 25.11) Countervailing duty actions taken Every six months when measure
is takenNo notification received
Anti-dumping (Art. 18) Laws and regulations Once by March 1995, then
changesOutstanding
Anti-dumping (Art. 16.4) Anti-dumping actions taken Every six months preliminary or
final anti-dumping actionsNo notification received
Safeguards (Art. 12) Laws and regulations Once by March 1995, then
changesOutstanding
Safeguards (Art. 12) Investigations and actions taken Ad hoc No notification received
Technical Barriers to Trade
(Art. 15.2)Administrative arrangements
taken to implement AgreementOnce by March 1995, then
changesOutstanding
Preshipment Inspection (Art. 5) Laws and regulations that put the
Agreement into forceOnce, then changes only Outstanding
Import Licensing Procedures
(Art 7.3)Questionnaire;  rules and
information concerningprocedures for the submission of
applicationsAnnual for questionnaire;  rules
and information once, then
changesOutstanding; G/LIC/N/2/PNG/1,
24/07/1998
Import Licensing Procedures(Art.1.4(a) and 8.2 (b))Laws and regulations relevant to
import licensingOnce, then changes only Outstanding
Customs Valuation (Arts. 20.1
and 22.1)Delay in commencement of
provisions and changes in lawsOnce on delay, then changes
onlyOutstanding
Rules of Origin (Art. 5.1 and
Annex II, para. 4)Preferential and non-preferential
rules of originNon-preferential in April 1995;
preferential as soon as entry intoforceOutstanding
Trade-related Investment
MeasuresNotifications under Article 6.2 of
the TRIMS agreement of
publications in which TRIMS
may be foundBy February 1997 or upon
membershipOutstanding
GATT 1994 (Part IV) Enabling Clause Ad hoc No notifications received
GATT Council of Trade in
Goods on State Trading
(Art. XVII:4(a))State trading entities and
activitiesAnnual Outstanding
GATT Council for Trade in
Goods, G/L/59Complete notifications on non-
tariff measuresEvery two years, beginning
January 1996Outstanding
GATS (Art. 3.1) Alterations to rules governing
scheduled sectorsAnnual No notification received
TRIPS (Art. 63.2) Laws and regulations Once, then changes Outstanding; IP/N/1/PNG/1,
21/07/1998
TRIPS (Art. 63.2) Arrangements for patent
protection on pharmaceutical
and/or agricultural chemicalsAd hoc, but only if patent
protection on these goods not
already grantedNo notification received
Source :  WTO documents.Papua New Guinea WT/TPR/S/62
Page 33
42. PNG made horizontal GATS commitments on two modes of supply.  Commercial presence
by foreign service providers is subject to normal approval and registration requirements for all foreign
investors by the Department of Treasury and Planning.10  Externally incorporated firms must register
their name with the Investment Promotion Author ity.  Foreign nationals and foreign-owned firms
cannot purchase freehold land but must lease it fr om Government or land-holding groups.  Financial
service providers are subject to approval from the Central Bank.  The temporary movement ofmanagers and specialists who possess necessary skills unavailable locally is limited initially to three
years with extensions subject to labour and employment requirements.
43. The authorities hope that the incorporation of agriculture into the WTO will improve world
prices for tropical oil products by constraining the use of subsidies by the European Union and the
United States.  Such subsidies are seen as a major factor behind the continually low prices receivedfor copra and coconut oil exports.
44. The Government is keen to ensure that its domestic legislation conforms to its WTO
commitments.  A priority area is intellectual property, and new legislation on copyrights, patents and
industrial designs, and trade marks have been drafted since PNG joined WIPO in December 1996.
Other areas requiring changes and receiving priority include customs valuation, safeguards, andanti-dumping arrangements.  These are largely the responsibility of the Internal Revenue
Commission.
(ii) Regional agreements
(a) The Lomé Convention
45. Papua New Guinea became a signatory in 1978 to the Lomé Convention between the
European Union (EU) and 70 countries in Africa, the Caribbean and the Pacific (ACP).  There are
seven other Pacific ACP States.
11  The current (fourth) Lomé Convention extends non-reciprocal trade
preferences to all ACP States, and is due to expire end-February 2000.  According to the authorities,
the Lomé Convention has been important for the development of tree crops and the export of canned
tuna products.
46. Imports from ACP States enter the EU free of duty and quantitative restrictions, subject to a
safeguard clause and rules of origin.12  Commodities covered by the EU Common Agricultural Policy
may be excluded from preferential treatment.  The only PNG export benefiting from preferential
duty-free access to the EU market under Lomé IV is canned tuna.  Without this, it is doubtful whether
the foreign-owned cannery at Madang, which commenced operations in 1997, would be able to
compete in the EU, its main export market.  Other canned tuna imports enter the EU at a tariff rate of
24%.  These tariff preference margins will, however, be reduced over time as the EU lowers its MFNrates on fish products in accordance with its WTO commitments.
47. The Government is concerned that the extension by the EU of Lomé tariff preferences to all
least-developed countries, including non-ACP countries, as of 1 January 1998, in line with WTO
                                                     
10 These criteria are the provision of new services;  improvement of the economy’s productive
structure; viability of the project with respect to foreign exchange savings or earnings; and employment
implications.
11 The others are Fiji, Kiribati, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.
12 The Lomé IV rules of origin require that qualifying products be either wholly obtained or
"significantly worked or processed" in one or more ACP States.  The latter definition is based on the productbeing sufficiently modified in the ACP State for it to be classified under a different four-digit HS tariff item.WT/TPR/S/62 Trade Policy Review
Page 34
requirements, will intensify competition for key exports, especially tuna but also coconut products,
cocoa, palm oil, and timber.
48. According to the authorities, PNG has not fully utilized the Lomé trade preferences available
because of stringent and cumbersome procedures that have to be followed in order to receive such
preferences.  The main areas of concern for PNG ar e the rules of origin requirements;  poor shipping
services to the EU;  EU quarantine requirements;  and EU standards and conformance requirements.In the case of canned tuna exports, duty-free access to the EU market is currently allowed under
temporary arrangements,  pending the outcome of negotiations on these products meeting the rules of
origin requirements.
49. PNG has also received substantial financial assistance from the EU under the Lomé
arrangements, amounting in total to K 2.8 billion as at December 1995.  The EU provides support toACP States through the European Development Fund (EDF), the main assistan ce arm of the EU; the
European Investment Bank for commercial loans;  the Stabilization of Export Earnings Scheme
(STABEX), which currently covers 49 agricultural products and is aimed at reducing the effects of
price or quantity fluctuations on export earnings;  SYSMIN a financing facility for minerals;  and
development projects funded under the National I ndicative Programme (NIP).  Almost two thirds of
EU support to PNG has been provided under the NIP, mainly on rural roads and training programmes.
Most of the remaining assistance has been provided from STABEX funds (K 589 million), the sixth
largest beneficiary from such assistance, and EIB loans (K 247 million).  STABEX assistance was
used in PNG to fund the price support schemes fo r cocoa, coffee, cocoa, and oil palm growers.
50. The Lomé Convention is currently being renegoti ated.  PNG together with other Pacific ACP
States agreed in 1997 to support the expansion of the ACP to include other Pacific island countries.
As the WTO waiver for the EU to provide trade preferences under the Lomé Convention expires atthe conclusion of Lomé IV, continuation of these arrangements will require another means of
achieving WTO compatibility.
51. One proposal being considered to replace the Lomé Convention is the creation of a Regional
Economic Partnership Agreement (REPA) between th e EU and the developing Pacific ACP States of
PNG, Fiji, and Tonga.  The EU is committed to negotiating a reciprocal free-trade area with theseStates after the expiry of Lomé IV in February 2000.
13  Other alternatives being examined include an
enhanced GSP scheme provided by the EU, and the possibility of continuing preferential access to the
EU under commodity-specific waivers at the WTO after 2005.14
(b) Forum for Asia Pacific Economic Cooperation (APEC)
52. This forum was launched in 1989 to enhance regional economic cooperation and the
liberalization of trade and investment measures in  the Asia Pacific region.  There are now 21 members
of APEC, following the admission of Russia, Peru, and Viet Nam in 1999.  PNG joined APEC
in 1994.
53. APEC economies are committed to the Bogor objectives of voluntarily achieving free trade
and investment in developed economies by 2010, and by 2020 for developing members.Liberalization is to be comprehensive by including agriculture and services, and non-discriminatory,
                                                     
13 The EU has agreed to a two-stage process, with a preparatory period of five years followed by a
transition to free trade over a period of 12 years (by the year 2017).  Under the proposal, developing islandeconomies will be required to provide reciprocal access to the EU.  PNG, as a developing economy, will
therefore be required to provide th e EU with reciprocal duty-free access.
14 South Pacific Forum (1999).Papua New Guinea WT/TPR/S/62
Page 35
based on the concept of "open regionalism" that is to  be fully consistent with the WTO.  The three
pillars of APEC are trade and investment liberalization; facilitation; and economic and technical
cooperation.
54. To meet these commitments, APEC economies agreed in Manila in 1996 to submit
comprehensive plans, known as individual and co llective action plans, on how they would proceed in
meeting APEC objectives.  PNG submitted its Individual Action Plan in 1997.
55. In 1997, APEC economies adopted the so-called Early Voluntary Sectoral Liberalization
(EVSL) initiative, aimed at advancing trade liberalization in certain sectors.  Members agreed on
15 sectors, of which nine were to be fast-tracked for liberalization.  PNG participated in these
negotiations and supported other members in the nomination of several sectors for early liberalization,
including food, chemicals, and transport equipment.  APEC economies decided in 1998 to transfersuch initiatives to reduce tariffs in these sectors to the WTO, while continuing to advance
liberalization of non-tariff measures in these sectors.
56. PNG views APEC’s trade liberalization and other initiatives as crucially underpinning its own
domestic reforms, and, according to the authorities, is continuing to take steps consistent with
implementing its Individual Action Plan.
(c) South Pacific Regional Trade and Economic Agreement (SPARTECA)
57. This trade and economic cooperation agreement, concluded in 1981, provides Forum island
countries (FICs) with non-reciprocal preferential  treatment on goods exported to Australia and
New Zealand.
15  Its objectives are to achieve progressively duty-free and unrestricted access for a
wide range of products to Australian and New Zealand markets for FICs; to accelerate FIC
development through expansion and diversification of their exports to Australia and New Zealand;  to
facilitate expansion and diversification through elimination of trade barriers;  to promote FIC exportsthrough promotion of investment;  to promot e FIC exports in Australia and New Zealand by
cooperatively marketing and promoting such products in these markets; and to promote and facilitate
economic and technical cooperation.  It includes special provisions for the smallest FICs, but these are
not applicable to PNG.
58. Since 1 July 1986, FIC exporters have been eligible under SPARTECA for free and
unrestricted access to the Australian market, except for textiles, clothing and footwear, and sugar.
16
Australia removed the limitation on TCF products from 1 March 1993, and on sugar from 1 July 1997when it eliminated sugar tariffs.  Rules of origin mu st be met, however.  These require the last process
of manufacture to be carried out in the country claiming the preference, and for products to have at
least 50% local content in that country.
17  Australia or New Zealand may vary or suspend preferential
access under special safeguard provisions, and actions against dumped or subsidized exports are
handled according to each country’s national legislation.
                                                     
15 The FICs are the Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Republic of the
Marshall Islands, Nauru, Niue, Palau, PNG, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.
16 From 1981 to 1986, the FICs received duty-free and unrestricted entry on a fixed list of products and
duty-free and restricted entry on a further short list of products.
17 Also counted as local content are inputs from any or all FICs, as well as from Australia and
New Zealand (up to 25% of the required 50% minimum).  In July 1994, New Zealand reduced the local-contentrequirement to 45% for garments imported from Fiji, while Australia agreed to include more marketing andpackaging elements in the calculation of local content for these products.WT/TPR/S/62 Trade Policy Review
Page 36
59. Economic cooperation and development provisions were expanded in 1994 to cover
assistance in the areas of institutional capacity for export development; inter-island trade;  consumer
protection and standards;  harmonization of trade law;  and quarantine management capabilities.
Australia, for example, funds the South Pacific Trade Commissioner located in Sydney to help
promote and market FIC products in Australia.
60. The preference margins available to FIC exporters have been eroded following tariff
reductions in Australia and New Zealand.  Conse quently, the importance of SPARTECA to PNG has
declined and will continue to do so.
61. SPARTECA was notified initially to the GATT under the Enabling Clause in 1971.  The
extension of the agreement in 1980 to Nauru and Vanuatu by New Zealand was notified in 1982.
(d) South Pacific Forum
62. PNG, along with other FICs, Australia, and New Zealand, is a member of the South Pacific
Forum.  It was established in 1971 to develop a collective response to a number of regional issues,
and its Secretariat is located in Suva, Fiji.  Forum leaders meet annually;  forum economic ministers
also meet annually (since 1997) at the Forum Economic Ministers Meeting (FEMM).  Trade ministers
met for the first time in Fiji in June 1999.
63. The 1997 FEMM adopted an Action Plan whereby Ministers made commitments to develop
individually comprehensive national economic reform strategies.  The Action Plan provided for
adoption of principles of best practice for public accountability;  open, liberal, and transparent
investment policies, consistent with the APEC non-binding investment principles;  and to work
towards a common goal of free and open trade and inve stment on a unilateral basis.  Ministers agreed
to rationalize and progressively reduce tariffs, in accordance with several guiding principles, while
recognizing the specific requirements of some smaller FICs, and to introduce administrative reformsto facilitate trade.
18  They also agreed to consider the acceleration of tariff reductions for agreed
sectors, and for goods and services typically traded within the region.
64. Economic ministers, recognizing that preference margins under agreements such as Lomé and
SPARTECA are diminishing, also agreed to implement, to the extent practicable, domestic measures
consistent with WTO and APEC principles and obligations, and to report on policy changes taken toachieve this objective.
65. The FEMM Action Plan was endorsed by leaders at the Forum meeting in September 1997.
They reaffirmed their commitment to free and open trade among Forum island countries through tariff
reform and by ensuring investment transparency, and supported the creation of a Free Trade Area
between Pacific island nations.  The Forum holds observer status in the Asia Pacific EconomicCooperation (APEC) and the WTO, and will play an important role in assisting nations to achieve
these objectives.
66. Ministers agreed at the FEMM held in Fiji, during July 1998, to further develop a framework
for achieving a free-trade agreement among Forum members that would be WTO consistent and pay
due regard to the benefits both from preferential and non-preferential approaches.Telecommunications, energy, and transport sectors were also endorsed for further consultations on
                                                     
18 These guiding principles for tariff improvements are:  not to use protective tariffs;  to use a standard
general rate;  to provide a duty drawback system to exporters;  to use ad valorem  rates, unless serious valuation
and problems exist;  to levy tariffs on c.i.f. and not f.o.b. or current domestic value (CDV);  and on those goodsthat have high tariffs for social, health or environmental reasons to levy a similar excise duty on domestic goods.Papua New Guinea WT/TPR/S/62
Page 37
advancing the non-preferential tariff reductions.  Ministers also agreed to implement domestic
measures consistent with WTO and APEC principles and obligations.  In preparation for the next
round of WTO trade negotiations, members supported the formation of alliances to focus on
agricultural liberalization;  fishing subsidies;  trade and environment;  trade in services;  government
procurement; trade and competition policy;  and investment policy.  These matters were further
discussed at the FEMM in Samoa in July 1999.
67. Trade matters, such as the formation of a free- trade area, were further examined at a meeting
of Forum trade ministers held in Fiji during early June 1999.  They endorsed in principle a free-trade
area among Forum island countries, to be considered by Forum Leaders in Palau in October 1999, and
agreed to negotiate a draft framework agreement.  The agreement, based on negative lists of exempted
products, is expected to be implemented for goods in 2001 with tariffs to be eliminated over a numberof years.  Additional work is to be conducted on the effects of including services trade and on
extending the agreement to French and U.S. Pacific island territories and on longer term integration
with the Closer Economic Relations Trade Agreement (ANZCERTA) between Australia and
New Zealand.
68. Although such regional initiatives should be considered, a free-trade arrangement, especially
without Australia and New Zealand, would in all probability mainly divert trade, thereby providing
only illusory trade liberalization and economic benefits to members.  Empirical studies show only
small economic gains are likely from such an agreement.
19  This could undermine PNG's long-term
economic interests if, in practice, such moves delayed MFN trade liberalization and failed to provide
the necessary momentum to liberalize the PNG economy (Box II.4).  By contrast, unilateral MFN
liberalization by PNG and other FICs would unquestionably create trade, thereby maximizing
economic benefits.  Gains from trade liberalization come mainly from cheaper access to imports andimproved efficiency of resource-use at home, rather than from lowering overseas barriers to exports.
Evidence suggests that economies and investment grew faster after broad liberalization both in the
short and long term, but slower after participation in a regional trade agreement.
20
69. The Papua New Guinea Government generally supports the notion of a WTO-compatible
regional free-trade area among the Pacific island countries, but opposes Australia and New Zealandmembership.  According to PNG authorities, initial membership should be open to the MSG countries
with other FICs encouraged to join at a later stage.   It is closely following developments within the
South Pacific Forum.
70. Intra-FIC trade is relatively minor.  In the case of PNG, less than 1% of its exports and
imports are with other FICs.
                                                     
19 Scollay (1998).
20 Vamvakidis (1999).WT/TPR/S/62 Trade Policy Review
Page 38
Box II.4:  Proposed preferen tial free-trade area (FTA) among Forum island countries
Trade ministers recently endorsed in principle the fo rmation of a WTO-consistent free-trade area (FTA)
among PNG and other FICs.  This would initially cover goods, and exclude Australia and New Zealand,
although the long-term integration with CER is to be examined.  A draft framework is to be negotiated basedon a negative list of exemptions so that it can operate for tariffs in 2001.
The costs and benefits of establishing a preferential FTA among FICs were examined in a study
commissioned by the South Pacific Foru m Secretariat.  Another study also looked at the impact of a larger
free-trade area between FICs involving Australia and New Zealand.
The economic benefits of a preferential FTA fundamentally depend upon whether it creates trade among
members or simply diverts trade.  While additional unassisted exports between partners will be beneficial,the case of increased imports is ambiguous.  Trad e diversion occurs when a preferential FTA leads to
switching imports from third countries to partners, usually less efficient producers.  Trade creation occurswhen increased imports from member countries re place less efficient domestic production rather than
displacing imports from third countries.  While both will enhance regional trade among members, only when
it is trade creating will there be genuine trade liberali zation and welfare gains to members.  Such gains will
be illusory where trade diversion predominates, and may even reduce members’ welfare.
Trade theory suggests that a preferential FTA among small countries with similar economic characteristics
will have small or even negative net welfare effects.  The empirical study by Scollay estimated smalleconomic gains to most Forum island countries from an FTA among FICs, Cook Islands, Kiribati, Samoa
and Tuvalu being made worse off.  PNG was found to receive a tiny increase in GDP of 0.03%.  It concluded
that modest economic gains would accrue to all FICs only if the FTA was accompanied by an overall 25%MFN tariff cut.  It thus confirmed the crucial importance to PNG and other FICs of non-preferentialliberalization in assuring economic benefits from trade reforms.
The inclusion of Australia and New Zealand in the FTA among FICs would increase considerably the
economic benefits to all FICs: great er liberalization, and hence trade creation, would be associated with
increased imports from more efficient Australian and New Zealand sources.  PNG’s GDP would increase by
almost 1.5%, equivalent to an expected annual gain of K 78 million.  Although economic gains to PNG areincreased substantially with the inclusion of Australia and New Zealand, they remain less than thoseavailable to PNG from substantial MFN liberalization.
It is often claimed that a FTA among FICs could prov ide a first step to wider trade liberalization, and
encourage greater cohesion among members.  However,  the evidence is ambiguous.  Foroutan urges caution
in believing that regional trading pacts among developing countries lead to more liberal trading regimes.  His
analysis suggests that a FTA is neither a necessary nor sufficient condition for an open and liberal tradingregime.  Moreover, since a predominantly trade diverting FTA means that some members gain only at theexpense of other partners, such arrangements may in  fact undermine regional relations.  Thus, any FTA
would need to be strongly oriented towards further br oader (multilateral) liberalization, supported by a set of
well defined measures.
It must also be remembered that the above studies may overstate the economic benefits from a FTA among
FICs.  This is because experience with negotiating FTAs demonstrates clearly that if pursued for their ownsake they are likely to end up being very discriminatory, by either excluding key products, or even reducingthird-party access through adopting convoluted rules-of-ori gin requirements or due to the differential effects
of other non-tariff barriers.  These results are likely to increase the chances of FTAs being trade diverting,
and welfare reducing on balance.
Care is needed to ensure that any FTA among PNG and other FICs is concluded in a way that promotes
overall trade openness and does not frustrate MFN libera lization.  If not, then it could be questionable
whether the formation of such an FTA is worth the substantial administrative costs members would have toincur to service the agreement, or indeed would be ma king best use of the Forum Secretariat’s financial and
other resources.
Source : WTO Secretariat;  ADB (1999b);  Foroutan (1998), Scollay (1998);  and Stoeckel and Davis (1998).Papua New Guinea WT/TPR/S/62
Page 39
(e) Melanesian Spearhead Group (MSG) Trade Agreement
71. The MSG (comprising the three founding members, Solomon Islands, PNG, and Vanuatu, as
well as New Caledonia and Fiji since September 1996), was formally launched in 1988 to promote
political cooperation among members.  In 1993, the MSG Trade Agreement was formed between the
founding members.  Fiji ratified its membership of the Trade Agreement in July 1998.21  It initially
covered duty-free entry of only three commodities, one from each member:  tea from PNG, beef fromVanuatu, and canned tuna from the Solomon Islands.  Revenue imposts on eligible imports are not to
exceed those applied to similar goods if produced domestically.  Safeguard provisions allow any
member to suspend obligations should imports incr ease so as to cause serious damage to existing
industries producing like or directly competitive goods, or against dumped or subsidized goods.
Moreover, parties may abrogate their obligations should they decide to develop new industries.
22
72. There are a number of other clauses in the MSG that allow parties to rescind obligations.
Quantitative restrictions and tariffs may be imposed on eligible imports under balance-of-payments
difficulties.  Quantitative export restrictions are prohibited, unless necessary to prevent circumvention
via the re-export of goods.
73. Members are committed in principle to extendin g the coverage of the agreement to ensure
that duties and other trade restrictions are eliminated between the parties.  In 1995 the coverage of
eligible products was extended to 140 tariff items, and agreement, yet to be ratified, was reached in
1997 to expand the list to 150 items.  Eligible products now include edible fruit and nuts, coffee,
coconut-milk powder, jams, cement, and certain wooden furniture.  Fiji has proposed the addition of
80 tariff items to the eligible list, but although accepted by officials, this has not yet been accepted by
the MSG governments.  Fiji has not been given the same preferences as other members, but has had to
negotiate them on a bilateral basis.
74. The structure of MSG trade has changed during the 1990s.  PNG has expanded its MSG
exports of tinned meat and coffee.  Since opening its cement factory in 1994, PNG has increased
exports substantially to the Solomon Islands and Vanuatu.  PNG continues to import substantial
canned tuna from the Solomon Islands.  However,  MSG imports by PNG of canned mackerel from
Fiji ceased in 1995 when PNG introduced import restrictions, later replaced by high tariffs, to supporta new mackerel canning plant in Lae.  PNG now exports canned mackerel to the Solomon Islands.
75. Eligible products under the MSG Trade Ag reement account for a substantial part of
intra-MSG trade.  Some 78% of PNG trade with the Solomon Islands is covered, and for trade with
Vanuatu the coverage rises to some 94%.
23  However, intra-MSG trade, estimated in total at almost
US$16 million in 1997, up from almost US$12 million in 1994, has remained a very low share oftheir total trade, accounting for less  than 0.5% of members’ total trade.
24  Moreover, intra-MSG trade
is less important to PNG than for other members. Since 1994, the importance of PNG as a destination
for MSG exports has declined, while it remains an increasingly important source of MSG exports.  In
1997, MSG exports by PNG amounted to US$5.2 million, up from US$2.7 million in 1994.
However, MSG imports by PNG declined over this period from US$4.5 million to US$3.9 million.
                                                     
21 Membership of the MSG does not automatically extend to the MSG Trade Agreement, which was
initially formed only between founding members.  Although any member of the MSG or South Pacific Forum iseligible to join the Trade Agreement, membership must be negotiated.
22 This obviously creates a high degree of uncertainty among members, and may discourage trading
opportunities.
23 Economic Insights (1999a).
24 The expansion of trade amongst the original MSG countries is almost all attributable to growth in a
few commodities, namely fresh, frozen and canned beef;  coffee;  canned fish;  cement;  and pasta and noodles.WT/TPR/S/62 Trade Policy Review
Page 40
76. The MSG Trade Agreement has therefore had a negligible impact on expanding trade within
the South Pacific region.  Moreover, its impact, if any, is likely to have diverted regional trade rather
than creating it, and thereby provided only illusory  trade liberalization and economic benefits to its
members.  Indeed, it has been estimated that the MSG Trade Agreement is most likely to have
reduced the region’s economic welfare, with at best only minimal gains to the PNG economy
(Box II.5).  The MSG Trade Agreement was described, soon after its formation, as essentially apolitical agreement, with few economic benefits.
25
Box II.5:  The MSG Trade Agreement
 It has been estimated that the MSG Trade Agreement ha s been primarily trade diverting.  Trade diversion
has occurred in all main products traded under the MSG, namely fresh, chilled, and frozen beef; pasta and
noodles; and cement.  The only product experiencing trade creation was found to be coffee, while forcanned meat and fish there was a mix of trade diversio n and trade creation.  This is because governments
have negotiated the agreement to avoid providing tariff reductions on goods produced locally that may bethreatened by concessional imports.
On this basis, it was concluded that the Agreement has had a small impact on MSG economies, most likely
reducing their combined GDP by 0.03%.  The upper range was an increase in GDP of 0.02%.
It is likely that Vanuatu and possibly Papua New Guinea would have gained most from the agreement at
the expense of the Solomon Islands.  The Solomon Islands is estimated to have borne a high share of thecosts imposed by trade diversion.  Papua New Guinea and Vanuatu on the other hand are estimated to havegained from an expansion in exports.  These benefits are estimated to have outweighed the cost to these
economies of trade diversion on other commodities.
Source :  Economic Insights (1999a), Review of the MSG Trade Agreement,  Report for South Pacific Forum
Secretariat, Suva, May.
77. The MSG Trade Agreement has not been notified to the WTO under either GATT
Article XXIV or the Enabling Clause.
(f) First Agreement on Trade Negotiations Among  Developing Member Countries of the
Economic and Social Commission for Asia and the Pacific (the Bangkok Agreement)
78. PNG acceded to the Bangkok Agreement in 1994, but has not implemented the agreement due
to ratification delays in Parliament.  It has operated since 1976 between Bangladesh, India, Laos, the
Republic of Korea and Sri Lanka.26  This provides limited reciprocal tariff concessions between
members on certain goods.
(g) Other agreements
79. PNG has observer status in the Association of South-East Asian Nations (ASEAN) and is
considering whether to seek full membership.
80. It is a signatory to several plurilateral fishing agreements with neighbouring Pacific States on
dividing access to highly migratory fish species within its water and the international waters of the
Western Pacific.  The Palau Agreement of 1997 requires PNG and other signatories to reduce by 10%annually the number of licensed foreign fishing vessels operating in their waters.  It is also a party to
                                                     
25 Grynberg and Kabutaulaka (1995).
26 Afghanistan has also acceded in principle to the agreement.Papua New Guinea WT/TPR/S/62
Page 41
the Federated States of Micronesia Agreement whereby signatories provide each other’s domestically
registered vessels free access to their waters;  an d to the 1988 regional fishing agreement between the
United States and the 16 members of the Forum Fisheries Agency (the U.S. Multilateral Fisheries
Treaty).
(iii) Bilateral agreements
(a) Australia PNG Trade and Commercial Relations Agreement (PATCRA)
81. PNG has a bilateral agreement with Australia that establishes a non-reciprocal free-trade area
providing duty-free access for all exports to Australia.  It was formed on independence and notified to
the GATT under Article XXIV in November 1997.27  A revised version, signed in 1991, included
provisions on investment promotion, assistance to PNG's small business sector and primary industries,
and promotion of PNG exports by Australian overseas trade representatives.
82. Excepted goods for Australia include certain sugar imports, beverages, tobacco, and mineral
fuels (Schedules A and B).  For PNG all products are excepted (Schedules C and D).
(b) PNG/Fiji Trade Agreement
83. This reciprocal trade agreement was formed in August 1996.  Certain goods can enter PNG’s
market at concessional tariff rates, subject to quarantine approval on most eligible agriculturalproducts.  Prior to 1 July 1999, the concessional tariff rate was set at 10% to match the 10% VAT
imposed by Fiji on PNG eligible exports.  Currently, eligible imports enter PNG at zero tariff, but are
levied the 10% VAT.
84. The agreement currently covers 45 agricultural and manufacturing products, including chilled
or frozen mackerel as well as certain dairy products, including cheese;  fruit such as pineapples;  tea
and other beverages;  spices, such as chilli; cement; wood and wood articles; and clothing.
Negotiations are continuing aimed at expanding the product coverage of the agreement.  Theagreement also allows for cooperation in other measures, such as services, quarantine, rules of origin,
and other trade facilitation measures.
85. This Agreement has not been notified to the WTO under either Article XXIV or the Enabling
Clause.
(iv) Generalized System of Preferences (GSP)
86. PNG is a beneficiary of GSP schemes run by 27 industrialized economies.  According to
authorities, these have been particular important in the case of the United States (fisheries and
agricultural products);  Germany and the United Kingdom (coffee and cocoa);  and Japan (timber).
(v) Other agreements and arrangements
87. PNG is a member of several multilateral organizations that have a bearing on its economic
policies and development.  These include the International Monetary Fund, the World Bank, the Asian
Development Bank, and UNCTAD.
88. PNG belongs to several international commodity agreements that, according to authorities,
are important to its export interests.  These include the International Coffee Agreement, International
                                                     
27 GATT document L/4571, November 1977.WT/TPR/S/62 Trade Policy Review
Page 42
Cocoa Agreement, Association of Natural Rubber Producing Countries, Asia Pacific Coconut
Producing Countries, International Tropical Timber Agreement, and International Spice Organisation.
89. Trade and investment links with the United States have been strengthened by the signing of a
Memorandum of Co-operation under the U.S. Market Access and Regional Competitiveness (MRAC)
Program.  PNG also has quota access rights to the U.S. sugar market.  In 1998-99, the U.S. allocation
to PNG for the export of raw and refined sugar was 7,528 tonnes.
(7) TRADE DISPUTES
90. PNG has not been a party to any formal dispute within the WTO, either directly or as an
interested third party.
91. There are no formal dispute settlement procedures in regional arrangements involving PNG.
Disputes are handled bilaterally.  The Fiji/PNG Trade Agreement and the MSG Trade Agreementcontain provisions for consultations on disputes.
(8) F
OREIGN INVESTMENT POLICIES AND PROCEDURES
92. The PNG Government welcomes foreign direct investment (FDI) and believes that it can
make an important contribution to the country’s economic development.  However, outside the
mining sector, where investment is lumpy and variable, PNG has attracted relatively little FDI.  TheGovernment’s reform programme recognizes the impor tance of private-sector-led growth, and targets
foreign investment policies and their enhanced transparency as priorities for reform.
93. FDI in PNG has always fluctuated in line with investments in the mining and petroleum
sector.  Mining investment accounted for more than three quarters of FDI over the period 1994-98.
After peaking at US$475 million in 1995, due to re cord mining investment of US$428 million, FDI
declined sharply to US$23 million in 1997, with negative mining investment, rising modestly to a
projected level of US$130 million in 1998, due mainly to an expected increase in mining investmentto US$104 million (Table II.2).  The slump in FDI largely reflects a loss of confidence by overseas
investors in government stabilization and other economic policies, as well as the poor and uncertain
state of the economy generally and the depressed international conditions for the mineral and
petroleum sectors.  The current poor macroeconom ic outlook (Chapter I) combined with previous
opaque and unpredictable investment policies have also discouraged capital inflows.
Table II.2
Foreign investment, 1993-98(US$ million)
1993 1994 1995 1996 19971998a
Foreign direct investment (net) 81 74 475 226 23 130
Mineral .. 10 428 184 -7 104
Non-mineral .. 64 47 42 30 26
.. Not available.
a Estimate.
Source: International Monetary Fund (1999), Papua New Guinea – Staff Report for the 1999 Article IV Consultation, 
Washington, D.C.
94. Data on investment approvals by the Investment  Promotion Authority are shown in Table II.3.
While this is likely to differ from actual data, it provides useful indications of changes in the overallPapua New Guinea WT/TPR/S/62
Page 43
investment climate.  Approvals data show a large reduction in 1998, from K 1.8 billion to
K 0.5 billion, primarily due to a sharp decline in investment approvals for logging projects, from
K 0.4 billion to K 40 million, as well as substantial falls in manufacturing and construction
investment.  Mining investment approvals also  declined sharply in 1996, from K 1.3 billion to
K 0.4 billion, and remained at about that level in 1998 despite a small improvement in 1997.  Most
FDI in recent years has come from Australia, Malaysia and North America, although China accountedfor almost half of approvals in 1998, while that from Malaysia declined substantially.
Table II.3
Foreign investment approvals, 1995-98
(K million and per cent)
Sector/Country 1995 1996 1997 1998
Sector
Agriculture 464 152 7 1
Forestry 398 148 407 40
Mining 1,345 399 501 359
Manufacturing 17 67 232 7
Construction 43 131 282 16
Transport & communication 85 853 72 33
Other 104 169 302 82
Total 2,456 1,919 1,803 538
Country (%)a
Australia 21 21 21 17
Malaysia 18 18 18 9
North America 18 18 18 17
China 3 3 3 46
Japan 0.3 0.3 0.3 5
Other Asian crisis economies 3 3 3 2
Other 37 37 37 4
a Figures for 1995-97 are three-year averages.
Source: Asian Development Bank (1999a), An update on the Impact of the Asian Financial Crisis on PMDC Economies , 
Office of Pacific Operations, April;  and the PNG Investment Promotion Authority.
95. Many aspects of current legislation appear highly  restrictive:  foreign investment is prohibited
in substantial segments of the economy even though li ttle activity exists in many of these sectors.  In
addition, the procedures for FDI approval have lacked clarity and transparency, and have been subject
to political influence.  Uncertainty about the futu re shape of investment conditions, including the
structure of incentives, is likely to compound the unattractiveness for foreign investment.
96. The Constitution prohibits foreign investors or non-citizens from owning freehold land. They
must lease land from the Government for specified purposes.  This is a major restriction on foreign
investment, especially in agriculture and mini ng developments:  some 97% of land in PNG is
customary-owned land;  despite legislative attempts, little customary land has been registered or
"adjudicated".  A recent survey of foreign investors showed they had only a "reasonable appreciation"
of PNG’s investment policies.28  This same survey found the main impediments to new foreign
investors in FICs to be, in descending ranking, bureaucratic delays and inefficiencies; application of
government policies; and land tenure issues.
                                                     
28 South Pacific Forum Secretariat (1998).WT/TPR/S/62 Trade Policy Review
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97. A survey conducted by the PNG Investment Promotion Authority in late 1994 found the top
five impediments to investment to be the high cost  of doing business;  law and order problems;  poor
infrastructure;  inconsistencies in government pol icies;  and the difficulty of negotiating stable
contractual agreements with landowners.29
98. While the Government favours joint ventures, and promotes local partners, there are no
legislated foreign ownership limits;  these are determined commercially by the partners.  Noperformance requirements are imposed, although the Government usually prefers the use of local
materials.  According to authorities, PNG’s investment regime fully complies with the WTO
Agreement on Trade-Related Investment Measures (TRIMS).
99. The Government’s current investment policies target the manufacturing sector, including the
downstream processing of natural resources as well as the production of industrial goods, such asclothing, textiles, leather goods, food, timber products, footwear, chemicals, plastic products, paper
products and motor vehicle parts.  Village eco-tour ism and large-scale resort developments are also
priority areas for investment.  The Government does not, however, discriminate between proposals,
provided they contribute to economic growth;  create new jobs;  utilize domestic, especially
renewable, resources;  assist in skills acquisition;  expand exports;  develop remote areas;  facilitateincreased ownership of investment by locals;  and promote import replacement.
100. Special procedures apply to mining and petrol eum investment as well as to forestry and
fishing, where respective ministers exercise discretionary approval in accordance with set procedures.
Several stages are required in the Development Forum process for mining, for example:  the
application for exploration licence;  the exploration phase;  negotiation of terms for project approval
and the Government’s participation;  application to the Government for project approval, including
granting of a special mining lease; and project approval and construction (Chapter IV).  The Ministersfor Lands and Physical Planning and for Environment and Conservation also have some discretionary
powers over foreign investment.
(i) Legislative framework for FDI
101. Foreign investment policies are governed by the Investment Promotion Act 1992 (Table II.4).
This created the Investment Promotion Authority, within the Ministry of Commerce and Industry, tofacilitate foreign investment outside the mining and petroleum sectors.  All foreign enterprises
wishing to carry on business in PNG must be certified by the Authority, which screens FDI proposals.
Business enterprises are either citizen (wholly owne d by a citizen); national (more than half-owned by
a citizen); or foreign (half or more owned or controlled by non-citizens).  Before commencing
business, foreign companies must, like domestic firms, register under the Companies Act.  TheAuthority is also responsible for monitoring foreign investment.
30  It must also approve changes in a
firm’s operations, including its location, and variations in ownership above certain threshold levels.
102. Although processing of applications by the Authority takes on average less than the
legislative requirement of 35 days for issuing a ce rtificate, evidence suggests that such arrangements
                                                     
29 Duncan and Lawson (1997).
30 The commercial banks are authorized to approve foreign investments below annual limits of
US$270,000.  They can also usually approve foreign currency borrowings by resident businesses or individuals
(outside mining or petroleum) up to the level wh ere aggregate foreign currency borrowings exceed the
equivalent of US$2.7 million at a debt to equity ratio of no more than 5:1.  The Central Bank normally requiresforeign investors to maintain a satisfactory gearing ratio of total loans to shareholder funds for the locallyincorporated company receiving the investment.  It hand les all exchange controls in mining, petroleum, and
forestry.Papua New Guinea WT/TPR/S/62
Page 45
can be slow and cumbersome, especially for more sensitive developments;  such delays add
considerably to investment and business costs.  The National Land Board screens applications for land
allocations and makes recommendations for approval to the Minister of Lands.
Table II.4
Summary features of foreign investment policies and proposed changes
Investment principle Reported progress in implementation as
at April 1998Plans for meeting 1998 target date
Transparency No response sought No response sought
Non-discrimination between source
countriesReviewing the reserved activities list, with
the last exclusions being the manufacturing
industriesA further review to go to Cabinet end-April
1998 to classify reserved activities into job
creation and protection
National treatment Addressed partly under the review of the
reserved activities list, but also addressed in
the draft national investment policy relating
specifically to review of the certification
processTechnical assistance sought from World Bank
to assist review of act
Investment incentives In review of investment incentives,
relaxation of health, safety and
environmental regulations do not feature.
These requirements will continue to exist.Regulatory status is on-going
Performance requirements To be implemented under the Government’s
overall national investment policy
framework, in which one of the main policy
statements is aimed at eliminating all
regulatory and procedural obstacles to trade
and investmentDraft national investment policy being drafted
and expected to go to Cabinet by June 1998
Expropriation and compensation A signatory to the International Convention
for Dispute Settlement.  Domestic
legislative framework also allows for fairand impartial settlement of commercial
disputesNo plans to change in 1998
Repatriation and convertibility Repatriation and convertibility is allowed
for and facilitated under the requirement ofthe Banking Act administered by the
Central BankAn on-going activity.  The Government
announced a public review of the financialsector in 1998.  This aspect of banking may
be considered.
Settlement of disputes No response sought No response sought
Entry and sojourn of personnel Current immigration procedures being
applied.  Discussions commenced in APEC
on Business VisaOn-going activity
Avoidance of double taxation Double tax agreements have been signed
with United Kingdom, Australia, Canada,
Malaysia, China, Germany and Korea,Dem. Rep.  Negotiations with Fiji are
completeAgreements being considered with United
States, Japan, New Zealand and the
Philippines.  Work on a PNG Double
Taxation Model under way.
Interest behaviour All investor inquiries and approvals are
processed with the underpinningassumption that other applicable laws of the
country are complied withOn-going
Removal of barriers to capital exports Under the Government’s Structural
Adjustment Programme and the overallpublic sector reforms, the regulatory and
institutional barriers to the free flow of
capital are being addressedOn-going
Source :Foreign Investment Advisory Service (1998), FIC National Investment Policies: Consistency with APEC Non-Binding
Investment Principles and the Status of Reform,  Session 2 Background Paper, Forum Economic Ministers Meeting, Fiji, 7-8 July.
103. Appeals against rejection of applications or terms and conditions imposed by the Authority
can be made to the Minister of Commerce and Industry.  These must be settled within 35 days.  The
Minister’s decision is final.WT/TPR/S/62 Trade Policy Review
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104. The Foreign Investment Advisory Service (F IAS), on behalf of the South Pacific Forum
Secretariat, reviews the transparency features of investment policies of FICs.31  The latest assessment
was based on PNG’s 1997 investment legislation.32  PNG received an average score of 2.4, with
individual scores across the categories examined ra nging from one to four (out of a maximum of 5).
PNG received a rating of two or below in eight categories (Table II.5).  Criteria used by the FIAS to
assess the transparency of a country’s investment legislation are public availability, consistency inapplication, and the extent to which the policy statement is complete, understandable, and
unambiguous.
33
Table II.5
Transparency ratings of investment policies and practices
Investment policy category Comment Score (1-5)
Approval criteria Approval criteria and criteria levels not specified 1
Approval procedures No detailing of process or time frame 2
Approval cancellation Not mentioned 1
Sectoral restrictions Not fully specified 1
Local equity requirements No requirements 5
Repatriation restrictions Some clarification needed as process appears to be discretionary 3
Incentives award criteria Incentives and broad objectives are given, but details of awards and criteria are not
evident1
Incentives award process Broadly outlined only.  No time frame given 1
Investment protection Availability indicated but no details provided 1
Import duty exemption criteria Not clear whether all or only some exporters are eligible 2
Import duty exemption process The process is outlined but more detail is needed, for example, what constitutes
‘evidence’3
Export requirements Not included in statement
Work permit approval criteria Data requirements given but no decision criteria or criteria levels 3
Training requirements Training requirements are presented but the acceptability criteria for a programme are
not3
Exchange controls Requirements are not fully specified 3
Local borrowing restrictions Some clarification needed 4
Investment guarantees Extensively documented 5
Average 2.4
Source : Foreign Investment Advisory Service (1997), Pacific Island Country Foreign Investment Policies:  A Further
Assessment of Transparency , Sydney.
105. FIAS conducted a further assessment of FIC investment policies for the 1998 FEMM by
examining the consistency of FIC their investme nt policies with the APEC non-binding investment
principles.  This assessment is particularly relevant to PNG, given its membership of both fora.  Of
the twelve principles, PNG was found to comply with three, possibly four;  and to approachcompliance in one, possibly two, other principles.  No assessment was possible for the remaining
principles due to insufficient information (Table II.6).
                                                     
31 FIAS is a joint service of the World Bank and the International Finance Corporation.
32 Foreign Investment Advisory Service (1997).
33 These aspects are assessed on the basis of transparency ratings for 17 investment categories, such as
approval criteria, sectoral restrictions, and provision of incentives. A score of two out of five indicates that verylittle of the policy category is clear or that most elements are missing.  A score of one, two or three wouldsuggest major improvements in transparency are possible.Papua New Guinea WT/TPR/S/62
Page 47
Table II.6
Compliance of investment policies with APEC non-binding principles
APEC non-binding investment  principle Assessment
Transparency Response not sought
Non-discrimination between source countries Assessment could not be given based on the information in the response provided
National treatment Compliance, but with some uncertainty surrounding assessment
Investment incentives Compliance
Performance requirements Approaching compliance, but with some uncertainty surrounding assessment
Expropriation and compensation Assessment could not be given based on the information in the response provided
Repatriation and convertibility Compliance
Settlement of disputes Response not sought
Entry and sojourn of personnel Assessment could not be given based on the information in the response provided
Avoidance of double taxation Approaching compliance
Interest behaviour Assessment could not be given based on the information in the response provided
Removal of barriers to capital exports Approaching compliance, but with some uncertainty surrounding assessment
Source : Foreign Investment Advisory Service (1998), FIC National Investment Policies: Consistency with APEC Non-Binding 
Investment Principles and the Status of Reform , Session 2 Background Paper, Forum Economic Ministers Meeting, Fiji, 7-8 July.
106. These studies suggest that the transparency of PNG’s investment policies could be improved,
especially in the area of approval procedures and criteria, the criteria and use of investment incentives,
and in investment protection.  PNG joined the World Bank’s Multilateral Investment Guarantee
Agency in 1990, ensuring that the investor would be compensated should nationalization occur.Similarly, the Investment Promotion Act contains  protection against expropriation, cancellation of
contracts, and discrimination.  It also allows for remittance of earnings overseas and capital
repatriation to meet payments of principal, interest, dividends, royalties, and service charges;  similar
liabilities on foreign loans; and costs of other foreign obligations approved by the Government
(Section 37).  The legislation also applies the Investment Disputes Convention Act to any disputesinvolving foreign investors.
107. Investment promotion and protection agreements have also been ratified with Australia,
Malaysia, and China.  These bilateral treaties are administered by the Department of Foreign Affairs
and Trade, and accord reciprocal assurances or guarantees against nationalization or expropriation of
investment in respective territories.  PNG also has double taxation agreements with several countries,and is considering such agreements with Chinese Taipei, Indonesia, New Zealand, the Philippines,
Thailand and the United States.
34
108. Residency or employment visas will only be issued by the Department of Foreign Affairs
after the Authority issues a certificate.  Foreign investors are expected to employ nationals in areas
where the required expertise exists, and must apply for a work permit from the Department of
Industrial Relations for each non-citizen employee.  Specific occupations, covering 578 vocation
codes out of a total of 1,048, are reserved for nationals.35  Foreign investors must include a training
and localization programme in accordance with the Employment of Non-Citizens Act.  Work permits
are usually for three years and cover a particular position.  The employee working in the position can
be replaced without approval.  Work permits are only issued after the employee has arrived in PNG.
                                                     
34 PNG has double tax agreements with, Australia, Canada, China, Fiji, Germany, the Republic of
Korea, Malaysia, Singapore and the United Kingdom.
35 Foreign workers may be used in these prohibited occupations where it can be shown that nationals
with suitable skills are not available.WT/TPR/S/62 Trade Policy Review
Page 48
(ii) The national investment policy
109. Many of the shortcomings in the current investment regime are recognized in the
Government’s National Investment Policy released in June 1998.  The legislative provisions are being
reviewed and amendments proposed to the Act.  Legislation is to be amended to refocus the
Authority’s role to promote, rather than control, FDI.  The new national investment policy is designed
to provide transparency, equal treatment, and consistency to investors, and specifically proposes:
- strengthening the Authority’s investment support functions by establishing a one-stop
shop to process investors more efficiently;
- modifying the Investment Promotion Act to shift from a case-by-case approval
process for foreign investments to a simpler system of registration of businesses, with
ex post monitoring of investments;
- repealing the Pioneer Industries Act, subsequently achieved, to eliminate
case-by-case ministerial discretion in approving investment incentives;  and
- reviewing investment procedures under specific sectoral legislation and making the
procedures and requirements consistent with a more liberal approach to foreign
investment.
110. The aim is to develop the Authority as a "one-stop shop" to facilitate investment.  At the same
time, however, the investment policy specifies that the legislation will be reviewed to remove
investment barriers while also allowing for discrimination in provisions for increased support to the
domestic sector.  The Government is reviewing the negative list of activities reserved for domestic
investors with a view to reducing its coverage (Chapter III).  Manufacturing and construction
activities were removed from the list in August 1995.  The Government has approved a phase-out
schedule for other reserved activities, and is again reviewing the list’s coverage.  Entry restrictions arealso to be removed on post and telecommunications, commercial shipping, abattoirs, and agricultural
marketing and processing activities.
111. Investment incentives are to be rationalized under the tax and customs laws (Chapter III).  It
was announced in the 1999 Budget that a uniform and consistent set of investment incentives would
be administered by the Authority.  According to the investment policy, the new arrangements aredesigned to remove case-by-case ministerial discretion in the use of investment incentives in order to
avoid intense lobbying and misuse.