Wednesday, February 11, 2009

Manufacturing sector stands to lose on tariff reforms



PNG Manufacturers Council


In early April last year the Treasury Department, made publically available the “Review of the Tariff Reduction Program July 2007”, a document that had only just been endorsed by the NEC.

 But what is this document and what exactly does the NEC’s endorsement of it mean?

This report, often referred to as the Scollay Report, is a review of the Tariff Reduction Program, prepared by Associate Professor Robert Scollay of the University of Auckland

The report was prepared for and presented to the Department of Treasury in July 2007. 

For reasons unknown the Government of PNG did not allow the public to assess the report until after the NEC endorsed it. 

In only what can be seen as a stark contradiction to the government’s intention to entice investment and private sector support as well as provide stability, the government did not allow for any private sector consultation on the proposed final report and in the months since the NEC endorsed the report there have been no calls for community consultations on the matter.

As a background, there were two papers on tariff reform in PNG: the Brogan Tariff Review in 1986; and the World Bank Tariff Review in 1995. 

Cabinet in 1995 (NEC Decision No 196/95) endorsed a tariff reform program that culminated in a White Paper on the Tariff Reform Program (TRP). 

The intention of the TRP was to encourage the development of a more-efficient and more -roductive private sector being more exposed to competition.

 The TRP removed many tariffs all together, saw the introduction of VAT (or GST) and proposed an eight-year tariff reduction program from 1999 to 2006.

With the TRP coming to an end in 2006, the government contracted the services of Scollay to review the TRP and provide some recommendations on the next steps and his report contains 14 such recommendations. 

Without discrediting Scollay, his 2007 report is somewhat of a back flip on a report he earlier prepared for the Manufacturers Council in October 2005 on Proposals for the Future of the Tariff Reform Program

His latest work seemingly encouraging changes to public policy that will effectively throw wounded PNG manufacturers amongst the wolves.

Perhaps unfortunately, in the climate of considerable increases to living costs especially over the past 12 months, local manufacturers stand to be big losers as politicians scramble to gain applause for reducing the cost of living under the guise of tariff reform.

 It must be noted that local manufacturers losing equates to the people losing.

In any of the tariff reform reviews, in so far as the manufacturing sector is concerned, the intention has been to enhance the sector either by protection or exposure.

 A commonality in each review was the high cost of doing business in PNG as a direct result of inadequate infrastructure and support services.

 It was indeed the expectation of PNG manufacturers, the public and the architects of the White Paper for the Government of PNG to make continuous and substantial improvements to infrastructure and support services.

The 2007 report by Scollay notes that impediments caused by these failures are adversely affecting private sector performance, in fact in Scollays third recommendation makes clear that there should be tangible results on improvements to infrastructure and support services before the 2009 Budget.

 Yet the report recommends the introduction of further tariff reductions in line with the handing down of the 2009 budget. 

A major concern of the Council and its members is the stark reality that very little to no improvements can be made to infrastructure and support services by the end of 2008.

One should ask who is asking for further tariff reductions and why PNG should be making moves to move closer to zero tariffs.

 Presently PNG rates in the top 10% worldwide for low tariffs, in fact we are an anomaly being ranked as such considering our state of development.

In an environment of high inflationary pressures it’s understood that consumers are searching for cheaper goods, and certainly in PNG retailers would prefer access to cheaply made foreign goods without tariffs.

There is no hiding behind PNG Manufacturers striving to be profitable, there is also no evidence that retailers would pass on the benefits of cheaper goods to consumers. 

The IRC confirms that duty avoidance is a problem in PNG, goods are being imported without duties paid and benefits are not being passed onto consumers.

Taxpayers and the wider community should not finance ineffective businesses, the private sector should target its efforts in areas in which PNG has a comparative advantage for production.

 If we accept the current level of infrastructure and support services (education, health, law and order) as adequate and not requiring improvement, academics could argue that those industries that fail if tariffs are reduced should fail. 

If however, existing infrastructure and support services are regarded as inadequate, why not offer temporary relief? 

In consultations with Scollay, the Manufacturers Council and its members proposed that further reforms should be linked to improvements in infrastructure and support services.

Perhaps the most important matter to consider when calling for further tariff reductions is its implications on PNG manufacturers. 

In the absence of any real improvements to infrastructure and support services, the high cost of doing business means that manufacturers will cease to trade and this will result in massive job losses in urban areas.

The question rolling around in my mind is what will be the real outcome from removing another 5 to 10% off the price of imported consumer goods for Papua New Guineans?



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