22 September 2016

Op-ed: Continued state-owned enterprise reform will benefit the Pacific

This week, the Asian Development Bank (ADB) launched Finding Balance 2016: Benchmarking the Performance of SOEs in Island Economies. The study, produced by ADB’s Pacific Private Sector Development Initiative, compares the financial performance of state-owned enterprises (SOEs) across 12 countries: eight Pacific countries, as well as Jamaica, Mauritius, Singapore, and New Zealand. The results are sobering.

SOEs’ performance overall lags behind their private sector counterparts. PNG’s SOE portfolio generated an average return on equity (ROE)—profit as a percentage of equity investment—of just 2.4% from 2010 through 2014. Over the same period, the portfolio’s average return on assets (ROA)—profit generated by the firm’s total assets—was only 1.3%.

PNG’s SOE’s aren’t alone in performing poorly. Only two of the 12 countries’ SOE portfolios surveyed for the study produced enough return to cover capital costs from 2010 to 2014. Some countries’ portfolios produced ROAs and/or ROEs of below zero.

Why does this matter for PNG? As the sole providers of core infrastructure services such as power, water, and port services, SOEs play a vital role in the PNG economy. When they perform poorly, the whole economy suffers. PNG needs to reinvigorate SOE reforms to improve corporate governance and transparency, boost efficiency, and bring in private sector expertise and capital.

SOE profitability has steadily declined in PNG since its peak in 2005. Over 2010 to 2014, average ROA was 1.3% and ROE 2.4%. That compares poorly with the 4% and 7%, respectively, achieved between 2002 and 2009.

A leading reason for the poor performance of SOEs around the world is weak governance frameworks. SOEs have conflicting mandates, no hard budget constraints, and poor accountability mechanisms. They are not given incentives to operate efficiently, unlike private sector firms, and are often directed to deliver unprofitable services known as community service obligations without adequate compensation. Often, SOE directors can be appointed without regard to the skills required on SOE boards.

To be successful, SOEs must have operational autonomy and be held accountable for results. Rather than approving corporate plans and directing SOEs to provide CSOs, elected officials should only influence SOE operations through the establishment of sector regulations. Only in this way will SOEs be able to focus on achieving commercial returns.

PNG has initiated reforms which, if implemented, could help to further improve SOE performance. The Community Service Obligation Policy endorsed by the National Executive Council in 2013 will ensure that SOEs are compensated for any non-commercial services they deliver. It will also allow the government to purchase these services from other providers if they are more cost-effective than SOEs. The policy was piloted with one SOE in 2015-2016 but funding has not been made available for full implementation. Funding and extending the policy to other SOEs will be an essential step towards improving their performance.

Sustained improvements to SOEs’ service delivery will require greater private sector participation and competition. The private sector can not only bring much needed capital to infrastructure service delivery, but also technology, management expertise, and strong efficiency incentives. To date, attempts to involve the private sector in SOE operations have lacked coherence and transparency. The Public-Private Partnership (PPP) Act of 2014 has not been gazetted. PPPs are being developed in an ad-hoc manner, increasing their perceived risk—and, therefore, cost. This could be quickly remedied by implementing the PPP Act and building national expertise in developing PPPs.

Many of these proposed reforms are already in place in countries with stronger performing SOE portfolios such as Singapore, where all infrastructure SOEs are publicly listed and have partial private ownership. Most were established as joint ventures with the private sector. Most importantly, Singapore’s SOEs operate at arm’s length from politics and are exposed to international markets and competition.

SOE reform requires sustained political commitment to strengthen underlying legislation, resist interference, and allow greater private sector participation. These reforms have been initiated in PNG but have lost some momentum. With renewed political commitment, PNG can realize the enormous benefits of a fully-implemented SOE reform program.

By Laure Darcy, PSDI SOE Reform Team Leader

This piece was originally published in The National on 22 September 2016.

Finding Balance 2016 launched in Port Moresby

Pictured at the launch of Finding Balance 2016 are (left to right): David Conn, Chief Executive of the Port Moresby Chamber of Commerce and Industry; Jodie McAlister, Counsellor (Economic Governance and Private Sector Development, Australian High Commission; Laure Darcy, PSDI SOE Reform Team Leader; Patrick Pruaitch, PNG Minister for Treasury; Christopher Russell, PSDI SOE Reform Expert; and Tony Fautua, New Zealand High Commissioner to PNG. 
Analysis and recommendations from Finding Balance 2016 were presented at a breakfast hosted by the Port Moresby Chamber of Commerce and Industry today.

Around 80 members of PNG's business community attended the event, along with the PNG Treasurer Patrick Pruaitch, New Zealand High Commissioner Tony Fautua, US Ambassador Walter North and staff from the Australian High Commission.

The report's authors, PSDI State-owned Enterprise (SOE) Reform Team Leader Laure Darcy and SOE Reform Expert Christopher Russell, presented its findings, highlighting its analysis of PNG's SOEs.

The report found the profitability of PNG’s SOE portfolio has declined steadily since its peak in 2005. Between 2010 and 2014, PNG’s SOE portfolio produced an average return on assets of 1.3% and an average return on equity of 2.4%, down from 4% and 7%, respectively, between 2002 and 2009.

The report says incomplete implementation of 2014’s Public-Private Partnerships Act, and the transfer of SOE oversight responsibilities to the National Executive Council in 2015, are impeding reforms that would improve SOE performance. Ms Darcy called for renewed efforts to advance reforms to PNG's SOEs so the country can reap the benefits of better performing SOEs.

Click here to hear SOE Reform Team Leader Laure Darcy discuss Finding Balance 2016 on Radio Australia. 

See news release

19 September 2016

Latest edition of state-owned enterprise benchmarking study released

Finding Balance 2016 cover
The fifth edition of PSDI’s comparative study of state-owned enterprise (SOE) performance in the Pacific has been published.

Finding Balance 2016: Benchmarking the Performance of State-owned Enterprises in Island Countries assess the performance of SOEs in Fiji, Kiribati, Marshall Islands, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Vanuatu, as well as Jamaica and Mauritius. This is the first edition to include Kiribati and Vanuatu. Results from New Zealand and Singapore were also added to enrich the global benchmark.

As per earlier editions, Finding Balance 2016 identifies strategies to guide reforms of SOEs, highlighting the importance of balancing public and private sector roles.

The report emphasizes political commitment to reform as a key driver for commercial results, as demonstrated by the experience of each of the countries benchmarked. It finds many countries have made significant progress through commercially-oriented reforms. Solomon Islands’ SOE portfolio’s return on equity jumped from -11% in 2002-2009 to 10% in 2010-2014. In Tonga, portfolio returns have increased to 6% from a low of 0% in 2009. Overall, seven of the 10 countries examined had seen improved SOE profitability since 2010.

The report nonetheless highlights that, while improvements had been achieved, sustaining them has proven impossible in most countries, both developed and developing. It finds SOE portfolios in the eight Pacific countries examined contributed only 1.8% to 12% to gross domestic product, despite very large asset bases, ongoing government cash transfers, and monopoly market positions. It also finds productivity levels of the SOEs analyzed tend to be well below developed country benchmarks.

Drawing on the experiences of New Zealand and Singapore, the report concludes that increased private sector ownership and operation of SOEs is the only way to lock in reform gains.

The 10 participating countries were selected for their comparability and SOE reform experience. Their participation demonstrates their governments’ willingness to identify and address the core issues within their SOE sectors. This transparency is an essential precursor to successful reform.