27 April 2015

State-owned enterprise reform and public-private partnerships

SOEs continue to play an important role in many Pacific island countries. 
Many absorb large amounts of scarce capital on which they provide very low returns. While some provide essential public services, many others operate as purely commercial ventures and crowd out the private sector.

Reforming SOEs and implementing public-private partnerships (PPPs) creates opportunities for private investment, reduces the costs of doing business and improves basic services by introducing private sector discipline and competitive market pressures into the SOE sector.

Through a combination of legal, regulatory and monitoring reforms and the introduction of increased private sector participation, the performance of SOEs and infrastructure service delivery is improving in the Pacific.  PPPs expand the capacity of SOEs to deliver infrastructure and related services and also allow governments to contract directly with the private sector without the involvement of SOEs.

ADB, along with its PSDI cofinance partners Australia and New Zealand, have been working with Pacific island countries on SOE reform and PPPs for more than a decade. Key in driving this agenda has been publishing PSDI’s Finding Balance series: in-depth, analysis that tracks the challenges, achievements and best practices in SOE reform in PDMCs, providing a unique benchmark with which to measure progress and share lessons learnt. Finding Balance has proved a valuable advocacy tool in driving SOE reform.

Competition issues in the Pacific

“Competition policy” encompasses the range of policies, laws, regulations, decisions, and government actions that aim to promote competitive behavior between business undertakings and rationally address any circumstances in which competition might not be efficient or might conflict with other important social objectives. As such, competition policy forms an important part of national economic policy.
Competition policy is an increasingly important theme in PSDI and is now a focus area for activity in its own right. It is especially important in Pacific island economies because of the trade-offs between small market size and economic efficiency. Lack of competition allows firms to restrict output and/or raise prices without losing sales and reducing profitability because there are no (or few) other suppliers from which consumers can purchase a particular good or service. This is often the case with basic necessities (i.e., electricity, water, and other utilities). A lack of competition may also allow firms to reduce the quality of their products while maintaining prices or ignore market pressure for change. Such outcomes are clearly against the interest of consumers, and reduce overall efficiency and growth prospects. Competition policy may advance a variety of objectives, such as:
  • ensuring market efficiency,
  • encouraging entrepreneurship and innovation,
  • supporting good governance by restricting opportunities for rent-seeking behavior,
  • supporting equality of access to economic opportunities,
  • enhancing the climate for investment, and
  • promoting sustainable and inclusive economic development.
Competition is also a far preferable alternative to price controls, which have been widely used in many Pacific island economies. Price controls distort domestic production and fail to increase supply. These then result in raised prices.
The economic value of competition between firms stems from three types of benefits:
  • Better allocation of resources. In competitive markets, producers respond to price signals so that consumers can obtain the amounts of goods and services they require at the price they are willing to pay. In a competitive framework, producers do not restrict outputs and raise prices.
  • More efficient production. The pressure of competition forces suppliers to produce their goods or services at the lowest cost possible. To maximize their profits, suppliers must find the most efficient ways to produce their goods or services.
  • Innovation. Under competitive conditions, producers are more likely to innovate and develop new products and methods of supplying products. Domestic competition prepares local businesses to better compete in regional and international markets.
Competitive pressures also help minimize supply costs and keep producers mindful of consumer demands and market trends. For the public, the benefits of competition are apparent when competition is contrasted with monopoly (or a market structure where there are only a few suppliers, which may attempt to collude). In a monopoly,
  • the quantities of goods and services available may be restricted,
  • goods and services may be outdated and produced at higher cost than necessary, and
  • consumers may be charged higher prices than they would pay in a competitive market.
However, the relative size of economies in the Pacific implies that some sectors cannot support many competitors. In some sectors, economic efficiency dictates that only one or two suppliers serve the domestic market. This does not mean, however, that competition has a small role to play in Pacific island economies. On the contrary, it strengthens the case for competition policy and competition law. Effective competition law deters suppliers that might otherwise attempt to engage in anticompetitive conduct.
To date, PSDI assistance with competition policy has been focused on three countries: the Cook Islands, Papua New Guinea, and Samoa. This will expand on both the country and regional levels as part of the third phase of PSDI 2013-19.

Pilots to empower women and enhance prosperity

Under-investment in women, who represent 40% of the world’s labour force but hold just 1% of its wealth, is now widely recognized as an opportunity cost for economic growth and business performance.  
Women in the Pacific are an enormous potential economic resource who have the capacity to greatly enhance prosperity. Gender equality is recognised as one of the drivers of change in ADB’s Strategy 2020. Since PSDI’s inception in 2007, gender mainstreaming has been applied to all its initiatives.  In 2013, PSDI began an Economic Empowerment of Women (EEOW) program, where it is actively working to identify spaces to initiate pilot programs that encourage women’s engagement with the private sector.

21 April 2015

NEWS RELEASE: Solomon Islands illustrates benefits of SOE reform

HONIARA, SOLOMON ISLANDS (22 April 2015): The Solomon Islands is leading the Pacific region in its successful reform of state-owned enterprises (SOEs), according to an Asian Development Bank (ADB) report presented in Honiara today.
The report, Finding Balance 2014: Benchmarking the Performance of State Owned Enterprises in Island Countries, shows that in the last 5 years the Government of the Solomon Islands has overseen a 21% turnaround in return on equity from SOEs, turning an average loss of 11% between 2002-2009 into an average return of 10% in 2010-2012. This improvement follows a program of increased privatization, public-private partnerships (PPPs), financial restructuring and efforts to place SOEs on a sound commercial footing.
“The outcomes the Solomon Islands has achieved—such as improved service delivery, reduced costs, and more opportunities for private investment—show what these kinds of reforms could achieve for other Pacific countries in a relatively short time,” said Laure Darcy, an SOE/PPP specialist and one of the report’s co-authors. “It also shows that reform gains can quickly be lost without ongoing efforts to sustain them.”
Finding Balance 2014 identifies strategies to guide reforms of SOEs, highlighting the importance of finding the right balance between public and private sector roles. It is the fourth in the Finding Balance series produced by the Pacific Private Sector Development Initiative (PSDI), a regional technical assistance facility co-financed by the Government of Australia, the New Zealand Government, and ADB.
The report’s findings and recommendations topped the agenda at today’s Solomon Islands State Owned Enterprise Forum, hosted by PSDI. The event, which was opened by the Permanent Secretary of the Ministry of Finance and Treasury and attended by senior representatives from both SOEs and the private sector, also heard about experiences in SOE reform in other island economies.
PSDI SOE expert Laure Darcy presents analysis from Finding Balance 2014
at the Solomon Islands State Owned Enterprise 
As the report documents, SOEs continue to exert a significant drain on the economies of the Pacific region. Analysis of SOE performance across nine countries, including six from the Pacific—Fiji, the Marshall Islands, Papua New Guinea, Samoa, Solomon Islands, and Tonga—shows that while some countries have been able to make great gains, others have struggled to enact reform.
The turnaround in the Solomon Islands has made its SOE portfolio the most profitable in the Pacific in 2010-2012. The ADB has supported a number of the reforms that have contributed to this, including the privatizations of Sasape Marina, Home Finance Limited and Solomon Island Printers, and the implementation of a community service obligation framework as required by the SOE Act of 2007.
PSDI is working with ADB's 14 Pacific developing member countries to improve the enabling environment for business and to support inclusive, private sector-led economic growth.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members—48 from the region.
PSDI SOE specialist Christopher Russell, Undersecretary of
Finance McKinnie Dentana and
former New Zealand SOE
Minister Richard Prebble.
SEE: Finding Balance 2014 launched in PNG
Solomon Islands SOE portfolio:
- consists of 6 SOEs: Solomon Islands Electricity Authority, Solomon Airlines, Solomon Islands Port Authority, Solomon Islands Water Authority, Solomon Islands Postal Corporation and Solomon Islands Broadcasting Authority.
- produced an average annual return on equity of –11% during 2002-2009 and 11% from 2010-2013, the most dramatic turnaround in the region. In 2013 it was the most profitable portfolio in the Pacific, returning 14% on equity and 10% on assets.
- has, since 2008, seen 4 SOEs divested through a merger, a share sale and an asset liquidation, reducing their fiscal burden on the government.
- has undergone financial restructuring of three SOEs involving the settlement of arrears, debt forgiveness and new equity investment, coupled with commercial sustainability measures.
- has implemented a community service obligation framework to support the commercial mandate of its SOEs, which has allowed over SDB80 million of services to be delivered to communities from 2011-2014 on an efficient, transparent basis.
- remains fragile and requires continued implementation of the SOE Act, partnerships with the private sector and further restructuring of its smaller SOEs. 

1 April 2015

Financing growth through more accessible finance and financial services

Financial markets in the Pacific are generally underdeveloped, and many people, particularly women, do not have access to even the most basic financial services, especially in rural areas. 

Access to credit remains a problem, despite excess liquidity across Pacific financial systems and the increased availability of savings products. Without access to financial services, businesses cannot grow, entrepreneurship is stifled, and people on low incomes cannot save securely to invest, pay bills, or move beyond subsistence living standards.

To address these issues, PSDI focuses on developing the linkages within the financial system to deliver better intermediation between savers and borrowers, so as to increase the availability of loans, securities and other financing instruments. Better financial intermediation requires improving the integrity of financial systems; strengthening selected financial institutions; designing and implementing new products tailored to the realities and particular needs of Pacific island countries; and supporting financial inclusion throughout the Pacific.

Finally, it means undertaking the analytical work to identify the institutional constraints to access to finance, and advocating for appropriate policy responses.