What foreign investors need to know about the Investment Promotion (Amendment) Bill

By: PNG Business News June 18, 2019

Businesses already operating in Papua New Guinea (PNG) or considering investing in the country would be aware that the PNG Government has stated its intention to promote the growth of micro, small and medium-sized enterprises (MSMEs).

Proposed changes to the Foreign Investment Regime The latest proposal from the PNG Government in this field is the Investment Promotion (Amendment) Bill 2019 (IPA Amendment).

An Explanatory Memorandum, 2 sets of Frequently Asked Questions, and a mark-up of the existing Investment Promotion Act 1992 (Existing Act) as it would be amended by the IPA Amendment are available on the Investment Promotion Authority’s website, www.ipa.gov.pg.

Contrast with the proposed Foreign Investment Regulatory Authority Bill 2018 Before looking at the IPA Amendment itself, it is worth noting that the IPA Amendment effectively replaces the proposed Foreign Investment Regulatory Authority Bill 2018 (FIRA Bill) which was put before the PNG Parliament in February 2019, but then withdrawn.

The FIRA Bill would have substantially changed the regulatory framework for foreign investment in PNG, and attracted substantial criticism regarding:

• the extent of the restrictions imposed on foreign investment, which it was claimed would result in negative economic impacts; and

• the lack of consultation with the business community before the preparation and introduction of the FIRA Bill. Features of the FIRA Bill that attracted most comment, such as:

• imposition of a minimum PGK10 million investment requirement; • application of a “national benefit” test on new applications;

• a 3 year sunset period for existing foreign owned operations in reserved activities;

• a requirement for a licence for a minority foreign investment in a majority PNG owned enterprise are not repeated in the IPA Amendment.

General comments on the IPA Amendment The IPA Amendment tries to achieve more of a balance between promoting MSMEs and the encouragement of foreign investment, and it draws back from the more extreme aspects of the FIRA Bill.

However, the PNG Government’s primary aim remains encouraging the promotion of MSMEs and the IPA Amendment proposals should be read against that background.

While there are a number of positive aspects to the IPA Amendment (its promise of quicker and more transparent processing of applications for foreign investment certificates is certainly welcome), much of the real detail of how the new system will operate will be in regulations that are not yet drafted.

It is possible that some of the elements of the FIRA Bill that attracted criticism could be resurrected in those regulations.

Changes to the system under the Existing Act that would be made by the IPA Amendment If the IPA Amendment as proposed became law, and assuming that the FIRA Bill is not reintroduced, major changes to the existing foreign investment regulation system would include:

Improved clarity of IPA functions and responsibilities

• Creation of a new Registrar of Foreign Investment, whose role is to issue foreign investment certificates.

• The Registrar will grant an application for a certificate, unless:

• the application is for a reserved activity; or

• the Registrar believes the applicant fails on probity grounds (bankruptcy, prior criminal convictions and the like); or

• the application is otherwise incorrect, misleading or non-compliant.

• The Registrar is now not empowered to impose conditions on certificates for activities that are not restricted activities. It would be necessary to see the Regulations before being certain how much of a change this represents from the current situation. It may be that the Regulations will impose a set of standard conditions which apply to all certificates, including those for unrestricted activities.

Additionally it may be that only a limited range of activities are left unrestricted once the lists of reserved and restricted activities are produced;

• The Registrar must give written notice of grant or refusal of an application within 5 working days of a “complete and correct” application being lodged (down from 35 working days in the current legislation); Introducing “restricted” activities and a rethink of the “reserved” activity list

• A new category of “restricted activities”, where foreign investment may be allowed subject to conditions, has been created;

• Regulations will set out what are restricted activities, and will set out conditions that may be imposed on those investments (which can vary from activity to activity).

The IPA Amendment sets out 2 categories of possible conditions that may be applied – the form and minimum level of investment required, and a requirement for a minimum level of PNG ownership – but Regulations may set out other types of possible conditions.

Until draft Regulations issue, it is not possible to comment on whether the introduction of “restricted activities” will or will not operate as a substantial restriction on foreign investment, counteracting the apparently more positive aspects of the IPA Amendment;

• There remains a category of “reserved” activities, but these are now reserved only to “citizens” (that is, individuals who are PNG citizens, or 100% PNG owned entities) and not to both citizens and “national organisations” (majority PNG owned entities).

The list of reserved activities is to be set by Regulation. It should be noted that the list put forward with the FIRA Bill is extensive – if that list was to stay in place, that would actually operate to prevent minority foreign investment into many fields of activity;

• Some limitation on what can be included in the lists of reserved or restricted activities is proposed, by reference to the number of existing businesses conducting that activity in PNG and whether or not the activity involves the supply of goods or services important to the operation of other PNG businesses.

While the drafting of this provision is unclear, the intent appears to be that reservation or restriction will not apply to activities which have few existing participants where the activity is an important supplier to other businesses.

This is likely not to greatly limit the activities that can be reserved or restricted;

• A review of the reserved and restricted activity lists is required every 3 years;

• There is no longer a separate mechanism to seek a certification to invest in a majority PNG owned enterprise, as under the Existing Act.

An investment that took an enterprise from majority PNG ownership to majority foreign ownership will require the Registrar to issue a certificate, as for a foreign investment in a new business;

• There is also no longer a requirement for religious, charitable and educational bodies to seek exemption from foreign investment legislation – rather the IPA Amendment limits the application of the legislation to for profit activities.

There may still be some grey area where a charitable body has associated entities or divisions that generate profits from, for example, the sale of services.

It is not clear whether the for profit division is subject to foreign investment licensing if the separate entity or division distributes the profit back to the charitable body for use in its charitable activities.

• Existing businesses operating lawfully in reserved or restricted activities will be permitted to continue operating indefinitely, in contrast to the FIRA Bill proposal. However, as currently drafted, any change of ownership of a reserved activity business removes the protection – including quite small changes, or changes resulting from an inter-family transfer, or the will of a family member. A change to the definition of “carrying on business”

• The threshold test for an investor wanting to invest in PNG has been changed to include any activity that is to be carried on for profit or gain on a long term or permanent basis.

On the other hand, professional service providers (defined as accountants, engineers, architects, lawyers, dentists, doctors and veterinarians) will not have to apply for certification if they are providing services on a temporary basis.

Improved compliance and monitoring powers

• A new foreign investment register will be established and maintained by the Registrar.

• A new annual reporting requirement is imposed. Certificates may be suspended if these requirements are not met.

Businesses may be concerned regarding the confidentiality of business sensitive information that may be required in such reports (again, the exact requirements for such reports are to be set by Regulation);

• The Registrar has strengthened inspection powers and powers to obtain information

• New offences are created in addition to those in the Existing Act where:

• any person is “knowingly” party to a foreign enterprise carrying on business with “intent to defraud” or for fraudulent purposes; or

• holders of investment certificates (including directors of corporate holders) either fraudulently induce a person to give credit to the foreign enterprise, or deal with property of the foreign enterprise with intent to defraud creditors.

The penalties applicable on conviction have not been provided in the current draft. While it is debatable how much this provision extends existing PNG law, it at least potentially makes a prosecution easier;

• Appeals from any decision can still be made to the Board and to the Minister. What do I need to do now? The IPA has invited public comment on the IPA Amendment, although it has imposed a very short deadline of 29 March 2019 for the receipt of comments.

If you wish to learn more about the proposed IPA Amendment or if you have any questions about it will affect your business (if it becomes law) please contact the authors at karo.lelai@nortonrosefulbright.com and paul.toua@nortonrosefulbright.com. w

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