The LNG Enterprise Centre: A Drop in the Diversification Reservoir?

By James Lloyd 1

The LNG project aspires to achieve local content targets, through the Local Business Development Programme, which will deliver economic benefits both to the plant and the economy of Papua New Guinea. The main vehicle for achieving this is the Enterprise Centre. But should the LNG plant’s Local Business Development Program have a wider remit than it has? Should it be involved in developing entrepreneurship and innovation in the economy more broadly than just those firms supplying the LNG plant?

The primary functions of the Enterprise Centre are to:

  • Build capabilities of PNG businesses which will engage in some form of business activity with the PNG LNG plant;
  • Develop and enhance the business skills of Papua New Guineans employed by the national supplier companies;
  • Facilitate access to business financing;
  • Provide business mentoring services;
  • Provide business advisory services; and,
  • Ensure efficient communication with contractors and sub-contractors.

These are admirable goals. Achieving them will require that each intervention is carefully designed and managed to ensure the best possible outcomes. But do these goals best promote the development of the Papua New Guinean economy- specifically, the important goals of job creation and diversification through innovation? As usual in economics, the answer is: ‘To some extent, yes’. The Enterprise Centre will, through its design and efforts, play a limited role in diversifying the economy by assisting the LNG plant in conducting commerce with identified suppliers and upgrading these local firms. However, its role in the wider economy will be limited. There is cause for concern on at least one ground. 

The LNG plant and its local content program could result in a ‘new-age’ dualistic economy. This economy will contain a less obvious dualism than that which currently exists. The result of the local content program may be a cluster which at its centre has a highly efficient and productive natural resource sector which is supplied by an efficient and productive ‘local content’ driven sector. The spillovers between this cluster and the rest of the economy (from hereon called the ‘other’ economy) could be restricted by the gap in absorptive capacity and the lack of interaction between the two economies. The economy will still be driven by the natural resource sector and its associated problems will remain.

An additional approach to the Enterprise Centre exists. Policy makers, and LNG itself, may consider using the LNG opportunity to truly diversify the economy of PNG. One way this could be done is through an Entrepreneurship Centre which would operate in coordination with the Enterprise Centre.

The economy of Saudi Arabia has 40 years of experience formulating diversification and job creation policies. One way the Kingdom has sought to achieve these objectives is through local content initiatives to supply the state owned oil company, ARAMCO. These have generated some success but policy makers, and ARAMCO itself, have known that for the economy to truly diversify and develop a lot more needs to be done. ARAMCO is such a large agent in the Saudi Arabian economy that it has taken a degree of initiative in this.

ARAMCO has recently established an Entrepreneurship Centre, as a separate entity to its Business Development Program. This Centre will work to develop entrepreneurship in the Saudi Arabian economy and the ability and willingness of firms to innovate. It will, among others, fund Chairs in Entrepreneurship at Saudi Arabia’s Universities, run training courses in entrepreneurship, management and marketing, assist in securing finance for local firms, hold business plan competitions and develop networks (including funding internships) between entrepreneurs within Saudi Arabia and large firms in Saudi Arabia and the rest of the world. The Entrepreneurship Centre will also lobby the Government of Saudi Arabia to improve the business environment.

Cynics may ask why a profit seeking organisation should strive to do more than local content programs. The answer is that local content initiatives are only one side of the puzzle, they can be distortionary and may not improve the investment environment in mineral rich economies. A complementary programme would be to develop the ability of firms and entrepreneurs economy wide which, when coupled with business enabling environment reform, would solve the other side of the puzzle. These may be accompanied by market information initiatives and, if necessary, carefully targeted support programmes.

If carefully designed, implemented and monitored the Entrepreneurship Centre would provide economic benefits to the LNG plant directly as well as providing a more stable investment environment in which it can operate in the medium and long term. Developing the ability of firms and entrepreneurs economy wide would increase the ability of firms to innovate to drive diversification and address the gap in absorptive capacities between the mineral cluster and the ‘other’ economy.

Diversification and job creation are challenging yet necessary targets to achieve. By developing new products and production processes (to Papua New Guinea or the world), the Papua New Guinean economy will diversify and create needed jobs. Local content initiatives are one way in which this may be done, but more needs to be done by the Government and the key players in the economy.

1. James Lloyd was an Overseas Development Institute Fellow in the Bank of Papua New Guinea from 2007-2009. He is now advising Governments’ in the Middle East on policy regimes to promote diversification and job creation.