27 November 2016

Op-ed: Win-win-win for Samoa SOE reform

Samoa’s success in outsourcing its road building and maintenance services provides of
model for state-owned enterprise reform that other countries should consider. 
Reforms to state owned enterprises (SOEs) can unleash productivity and efficiencies in an economy. However, such reforms can bring pain and controversy—so-called “adjustment costs”.

These costs were evident in the former Soviet Union in the 1990s, when sweeping SOE reforms led to the closure of thousands of SOEs, unemployment, and social unrest. Even the more gradual reforms in the People’s Republic of China saw many SOEs dissolved.

Many economies in the Pacific are dominated by the public sector. Successive Finding Balance studies by the Asian Development Bank have revealed that Pacific SOEs are plagued by low productivity, inadequate management, and weak financial results. Because Pacific economies are small, a common perception is that there are limited opportunities for the private sector to grow and for people to find other employment. This perception has contributed to SOEs’ continued dominance in economic activities.

The reform of the Public Works Department (PWD) in Samoa provides an illuminating example of how to navigate the necessary adjustment costs and lessen the resistance to reforms. The capabilities and efficiency of the PWD had steadily fallen throughout the 1980s and 1990s. Its reform was a result of both chance and design. Two major cyclones struck Samoa in 1990 and 1991. The massive reconstruction required to repair the damage stretched the capacity of the PWD beyond its breaking point. The Government of Samoa opened up the reconstruction efforts to the private sector on a far wider scale than previously. The strong performance of private companies led the government to make a pragmatic and bold decision to completely overhaul the way road maintenance and construction work was organized and delivered: it made the PWD a contract manager which did not undertake construction itself, but managed the provision of these services by the private sector.

What distinguishes this reform, however, was the skillful way the government and its development partners managed the adjustment costs by ensuring that no employees lost their jobs involuntarily. After extensive consultation, PWD staff were offered three choices: taking redundancy with payments ranging from 3 to 18 months of salary, transferring to another government department, or establishing their own contracting firms with work guaranteed by the government for three years. Contracts were split into small packages to enable employees’ participation. Employees established three companies under this arrangement, which were given a boost by the government selling them the PWD’s heavy equipment at a sizable discount.

Over time, the results have been dramatic. The number of large Samoan owned building and construction companies has risen from 5 in 2002 to 14 in 2014 and there are now also 55 smaller Samoan companies in the sector. The restructured PWD—now called the Land Transport Authority (LTA)—estimates that the reform has resulted in more than 2000 new jobs being created either directly in the construction and road building sector, or indirectly through multiplier effects. Furthermore, the LTA estimates that productivity has increased two to three fold as a result of the reforms.

Because many new players are entering the market, the construction processes has become much more sophisticated. The LTA now insists on performance based contracts, with contractors’ remuneration being tied to quality standards. Over 95% of all roads are paved, and the quality of road surfacing is high. The cost per kilometer of road building and maintenance has fallen sharply because of the productivity improvements. Perhaps most tellingly, while civil construction in Samoa was once dominated by foreign companies, the level of local expertise and competitiveness has risen to the point where foreign firms struggle to compete with Samoan companies, which now even successfully bid on contracts in other countries in the region.

What factors enable successful SOE reform? Samoa’s PWC reform benefited from several factors. The first was a long-term (20 year) and continuing commitment to ensure a successful transformation. Secondly, efforts were made to ensure that those who could have been potentially disadvantaged were given options and treated well.

Next, contracts were broken up into smaller lots that local firms could bid for. While this entailed some up-front efficiency costs compared to tendering large packages for international firms, it helped to maintain support for reforms and build local private sector capacity. Local firms are now even participating in international competitive bidding. Finally, support from development partners, in this case the World Bank, played a critical role in implementing the reforms.

Too often, worthwhile state-owned enterprise reforms have failed due to resistance from people who were adversely affected. Samoa’s experience shows that reforms should aim to create as many winners as possible.

The aim should be to create a win-win-win situation. For the government, this means a reduced fiscal burden and higher employment. For employees, it means better job opportunities and income. And for consumers, it means better services, lower costs, and improved quality.

Samoa adopted an innovative approach that accounted for the complex political economy of the challenge. As a result, the reforms were successful and sustainable.

By Emma Fan, Regional Director of ADB’s Pacific Liaison and Coordination Office, and Paul Holden, PSDI Lead Economist.

This article was originally published in the November edition of Islands Business magazine.  

24 November 2016

Finding Balance 2016 and regional ports pricing study presented in Solomon Islands

Laure Darcy, PSDI's SOE Reform Team Leader, presents findings and recommendation relating to Solomon Islands from Finding Balance 2016
Solomon Islands-related findings and recommendations from Finding Balance 2016, PSDI’s regional state-owned enterprises benchmarking study, were presented to government and private sector representatives in Honiara today.

Laure Darcy, PSDI’s SOE Reform Team Leader and co-author of the report, explained how a reform program that incorporated financial restructuring, tariff increases and improved collections, privatization and liquidation, and compensation for providing non-commercial community services had made Solomon Islands’ SOEs the best performing in the region. The reform program led to a 21% turnaround in Solomon Islands’ SOE’s return on equity, turning an average loss of 11% between 2002–2009 into an average return of 10% during 2010–2014.

“The reduced costs, higher returns, improved service delivery, and increased private investment opportunities found in Solomon Islands show what a commitment to SOE reform can achieve in a relatively short time,” said Laure. “However, sustaining these gains and improving the performance of all Solomon Islands SOEs will require continued implementation of, and compliance with, the SOE Act.”

Findings and recommendations from a regional study of port pricing were also presented at the event. PSDI Port Expert Adrian Sammons presented analysis from his study, which compared port charges and basic productivity data for ship and cargo handling at a range of Pacific islands ports and found Solomon Islands ports were the most expensive in the region. Adrian also presented recommendations on how to improve Solomon Islands’ ports’ pricing and efficiency.

The ADB has supported a number of SOE reform initiatives in Solomon Islands, including the privatizations of Sasape Marina, Home Finance Limited, and Solomon Island Printers, and the implementation of a community service obligation framework.

Finding Balance 2016 compares the financial performance of SOEs in Fiji, Kiribati, Marshall Islands, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Vanuatu, as well as Jamaica, Mauritius, Singapore, and New Zealand. 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.

The report nonetheless finds many countries have made significant progress through commercially-oriented reforms. Solomon Islands’ leads this group—as it did in the 2014 edition of the report—followed by Tonga, where portfolio returns have increased to 6% from a low of 0% in 2009. Overall, seven of the 10 developing countries examined had seen improved SOE performance since 2010.

Finding Balance 2016 is the fifth report in the Finding Balance series, which identifies strategies to guide reforms of SOEs, highlighting the importance of balancing public and private sector roles.

22 November 2016

Expanded online registry featuring foreign investment and business names services launched in Honiara

Amila Salgado from ADB's Solomon Islands Extended Mission speaks at the launch of Solomon Islands expanded online business registry.
Applications for foreign investment licenses and business name registrations can now be lodged online and processed in 24 hours thanks to upgrades to Solomon Islands’ business registry.

The registry has been accepting online applications for company registrations since it was established with PSDI support in 2010. It has now been expanded so that applications for foreign investment licenses and business name registrations can also be lodged online.
A notice published in the Island Sun newspaper highlights
the benefits of the expanded online registry. 

Listen to PSDI's International Business Law Reform Expert Aaron Levine discuss the new registry on Radio Australia and Radio New Zealand International

The expanded registry was launched by Hunter Masuguria, Acting Permanent Secretary of Solomon Islands Ministry of Commerce, Industries, Labour and Immigration, this morning at a ceremony attended by representatives from the private sector and the Australian and New Zealand governments.

“Accessible and transparent foreign investment processes help attract the skills and capital needed to accelerate national development,” said Emma Fan, Regional Director of ADB’s Pacific Liaison and Coordination Office. “By making it easier for foreign investors to do business in Solomon Islands and for local businesses to partner with foreign investors, this upgraded online registry removes a barrier to increased private sector-led economic growth.”

The online service will dramatically reduce the time needed to apply for a foreign investment certificate.

“Would-be foreign investors previously had to engage the services of an agent, or apply in-person in our office in Honiara, a process that typically took around 10 days,” said Invest Solomons Director Derick Aihari “Using the online registry applications can now be done anywhere and a Certificate for Foreign Investment could be issued within 24 hours.”

Similarly, business name registrations, which previously had to be done in person and took around a week to process, can now be done online and processed within a day. This will be of particular benefit to the almost-two-thousand business names applicants who have to travel from other islands each year to register their business names.

PSDI's International Business Law Reform Expert Aaron Levine delivers a
training course for business people on the functions of the new registry.
The new services available through the online registry make it possible for a business person to register as a foreign investor, incorporate a company, and register business names all in one sitting.
As the registry is searchable, key details of all companies, businesses, and foreign investors can now be verified by anyone anytime. The online system will also collect and analyze detailed data on gender, business sectors and applicants’ locations, which will assist government policy formulation.

The updated registry can be accessed at www.solomonbusinessregistry.gov.sb

15 November 2016

New PSDI report challenges use of credit guarantees

This 20-page report challenges the use of government-sponsored loan guarantees as a way of overcoming the lack of lending in the Pacific.

Credit Guarantees: Challenging Their Role in Improving Access to Finance in the Pacific Region argues there is no strong theoretical justification for the use of credit guarantees as, under the schemes, the nature of the risks involved does not change, only the entity that bears them. The report cautions that credit guarantees may encourage risky lending and increase lending costs. It also finds no evidence of credit guarantee schemes meaningfully extending access to credit, while some have suffered large losses.

The report says credit guarantees are not a substitute for improved credit assessment and credit risk management. Instead, it calls for continued support for reforms of collateral frameworks, noting that limited use of secured transactions frameworks by lenders to date does not detract from their long-term potential to increase access to credit. The report also recommends increased use of trade credit as an additional source of finance.

3 November 2016

PSDI case study: How engaging the private sector invigorated Samoa’s construction industry

Creating Jobs in Samoa through Public-Private Partnerships cover
A new PSDI case study examines Samoa’s success in contracting out its road building and maintenance work.

In 2002, Samoa’s Public Works Department was radically restructured, changing from a public construction agency to a contract manager with private sector. As Creating Jobs in Samoa through Public-Private Partnerships identifies, the results of this reform have been dramatic. They include:
the development of a dynamic and competitive construction industry;
the creation of more than 2000 jobs; and,
a fourfold increase in road building productivity.

The relevance of these reforms to the region are discussed in this op-ed published in Islands Business magazine, and PSDI Lead Economist Paul Holden can be heard discussing the reforms in Samoa in this interview with Radio Australia's Pacific Beat program.

2 November 2016

PSDI co-hosts Pacific pension funds workshop

The panel for the session titled Regulating Provident Funds and Retirement Funds
 was comprised of (L to R) Raynold Moveni from the Central Bank of Solomon
Islands, Vilimaina Dakai of the Reserve Bank of Fiji, and Warren Staley of the
Australian Prudential Regulations Authority. It was moderated by Peter Dirou,
PSDI’s Senior Financial Sector Expert. PSDI co-hosted a workshop in Suva
on November 2 and 2 to help identify policies Pacific island countries can pursue
to secure and expand their pension systems.  
PSDI co-hosted a workshop in Suva on November 2 and 3 to help identify policies Pacific island countries can pursue to secure and expand their pension systems.

Click here to listen to PSDI's Senior Financial Sector Expert Peter Dirou interviewed on Radio Australia about the challenges Pacific countries face in securing their pension funds.

Ageing populations and revenue shortfalls from low levels of formal employment are straining public pension systems in Pacific countries. Often these systems struggle to reach their beneficiaries, provide adequate support, and do so sustainably. The workshop aimed to advance discussions around how pension funds can deliver benefits to their members in the years to come.

PSDI moderated or participated in sessions discussing the challenges Pacific pension funds face; the regulatory implications of pension funds providing additional benefits, such as health care and loans; and options for pension fund reform. Discussion on the merits of pension funds providing additional benefits contrasted this practice with trends in developed countries, where pension funds tend to focus solely on retirement products.

The workshop was co-hosted by the Fiji National Provident Fund (FNPF). Sessions discussing the FNPF examined reforms enacted in 2011-2012 to secure the sustainability of the fund and the lessons these can offer other Pacific countries.