CONSTRUCTION BOOM SHOULD BE MEASURED WITH CAUTION

BY ROD MITCHELL

Ten years ago, PNG faced a very different development path, mired in the middle of a credit crunch, collapsed financial institutions and a low demand for major commodities.

Sir Mekere Morauta taking over the reigns as prime minister from the haphazard Bill Skate, quickly drove a major reform agenda that saw the liberation and repair of the financial sector, which since has become a well documented international case study of successful reform.

These reforms combined with an uptake in commodity prices from 2002 have underpinned the PNG economy over the last six to seven years. The revenues collected from a stable economy with growing resource and commodity income, led to bankable surpluses which helped underpin the PNG economy through the global financial crisis.

We mention the reforms of early 2000 for another reason. For without those reforms of stability and independence of the financial system, we would not have had the capital formation that has allowed for such a massive investment in infrastructure now occurring.

Come 2010 and we now have the LNG project, a project that promises much for Papua New Guinea and to this, we have to thank some committed individuals in government and the private sector for bringing this into fruition. With the construction boom, some of which is LNG related, now entering a new phase, we should all remain with our feet firmly planted on the ground.

Residential, commercial and hotel construction is in a boom phase and over the last few heady months, it is easy to believe that this boom will be like the endless summer. Some talk of a decade of construction.

More and more we are seeing an economy under stress by the current Port Moresby focused boom. Wage rates for construction workers, semi skilled and skilled are shifting visibly upwards.

Many skills remain in high demand, prices of material are increasing and bottlenecks are appearing.

Contractors in air-conditioning, electrical and so on are also feeling the weight of demand for their services. It is clear that contractors under the weight of large order books are finding it hard to meet client expectations as they juggle their services among competing clients. And we should remember that this is now happening at the early stages of the project and for the next few years, it can only get worse.

The wharves are also under stress as construction materials bank up at the ports awaiting clearance. Not a construction site in Port Moresby is running ahead of schedule and in some cases, we see construction some nine to 12 months behind expected completion dates.

Similarly, state-owned enterprises like PNG Power are finding it hard to placate demand for connections and the machinery of government, planning, building board, and associated regulatory arms for approval and occupancy certificates have also been grounded to a snail’s pace.

One important point is that of the local market in meeting the challenge. Papua New Guinean labour on construction sites has increased dramatically. Huge skill transfers are evident and importantly, evidence to-date suggests a very high quality of workmanship among Papua New Guineans on building sites.

This bodes well for the LNG project in that Papua New Guineans have demonstrated a quick ability to take up additional skills and with quality outcomes. Managed sensibly, the need for a large overseas skilled labour component for the LNG project may be overstated, as Papua New Guineans have demonstrated with on-the-job training a very adaptable, less expensive, quality product compared with international labour.

The message to international contractors is obvious. With proper training and supervision combined with a ready accessible pool of under deployed labour, Papua New Guineans can take a large share of the construction work and deliver a quality product.

The key over the next few years is to manage this boom and also bring reality checks to the market generally. Yes, there may be another train of gas that extends this construction boom beyond 2014 when the LNG project infrastructure is completed. But in the absence of further investment stimulus after 2014, there is no justification for construction at the current levels.

Hence, we see the growing conservatism developing in regards to bank lending. More and more, the three banks are slowing lending or demanding high equity content in anything to do with property or construction.

A boom to the seasoned player always has an opposite friend called bust and banks do not want to become the last resort landlords of projects gone sour.

A few years back, there were two major LNG projects in Russia in a town called Sakhalin. The level of infrastructure in the city was in a similar condition to Port Moresby. Major construction on hotels, up-market accommodation and commercial was undertaken.

Rental prices quickly jumped when oil and gas contractors started block booking complete hotels. In the peak of the project, accommodation was often impossible.

Post-completion, another story emerged of hotel vacancies and falls in demand for commercial space and accommodation.

Human memory tends to fade quickly. Similarly, we as human beings like to face optimistic scenarios. It’s the comfort factor. We only have to go back three years when the longest economic expansionary period the world had faced looked like continuing ad infinitum.

Many economists back then even wrote articles professing to the greater understanding of economics that allowed growth to more or less go on indefinitely with only minor inflexion from time to time. Less than 12 months later, the world sobered up with the worst economic crisis since the Great Depression.

On a micro-scale, this same psychology is now playing out in Port Moresby. LNG is seen as the “endless boom” for PNG and the ongoing construction around Port Moresby is but a part of this good fortune. In four years time, we will most likely sober up quickly—that not all roads are paved with gold and LNG will bring not only good but challenges, and definitely will need to be managed from an investment and social perspective.

For construction, the signs are there that the boom will end. Recently, the question was asked to a major supplier to the LNG project what was the international experience in the Middle East and places like Sakhalin of projects similar to the LNG that we are embarking on in PNG.

The answer was succinct. “A lot of hype and activity during the construction phase, but post-construction, everything reverts to the way it was before. It is something we need to keep in the back of our minds over the next few years.

*Rod Mitchell is the chief executive of NASFUND.