PACIFIC ISLANDS REPORT

Pacific Islands Development Program/East-West Center
With Support From Center for Pacific Islands Studies/University of Hawai‘i

By Dr Ray Anere

PORT MORESBY, Papua New Guinea (PNG Post-Courier, May 14, 2009) – State-owned enterprises (SOEs) continue to play a dominant role in many Pacific island countries, where they serve as a drag on economic growth.

How so? When large amounts of available investment capital are invested in companies that provide very low returns, the economy as a whole suffers. This is the case throughout the Pacific, including in Papua New Guinea (PNG).

While some SOEs in the region provide essential public services, many others operate as purely commercial ventures and crowd out the private sector.

Almost all have performed poorly, and are in need of urgent reform. This reform is even more vital today as the global economic downturn reduces already scarce government resources. As state revenues decline, governments will increasingly have to make the choice between propping up inefficient SOEs or spending scarce resources on more vital investments such as health and education.

The Asian Development Bank has recently published a study "Finding Balance: Making SOEs Work in Fiji, Samoa and Tonga" of the SOE performance and reform experiences of Fiji, Samoa and Tonga, three countries with a long history of SOE reform and broadly similar SOE portfolios and legislative frameworks. The study found that SOEs absorb an estimated 14-24 per cent of the total capital invested in these three countries, yet contribute only 2-6 per cent to GDP. From 2002 to 2006, SOE portfolios’ average return on equity was -0.7 per cent in Fiji, -0.5 per cent in Samoa, and 7.7 per cent in Tonga. If these had been private sector companies, investors would not have tolerated this poor performance and the companies would have been restructured or closed. In the public sector, real commercial discipline, hard budget constraints and accountability rarely exists.

Indeed, there are few consequences for poor financial performance and few rewards for profitability. The same is true in PNG. While some notable reforms have been achieved in the sector, such as the commercialisation and partial divestiture of Bank of South Pacific, which has resulted in significant performance improvements, most SOEs continue to operate without hard budget constraints or clear profit objectives. Their vulnerability to political interference results in conflicting mandates, where SOEs are directed to deliver community service obligations (CSOs) without adequate compensation.

While financial reports on the SOEs are not publicly available, it is likely that very few are covering their costs of capital, and therefore represent an inefficient use of public funds.

Reform is difficult, but the Government of PNG has recognised that it is essential. The key to success will be placing SOEs on a fully commercial footing, with independence from political directives, hard budget constraints, full compensation for community service obligations, exposure to competition and full accountability.

The success of New Zealand’s SOEs in the late 1980s and those in Tonga over the past several years illustrates the power of such reforms. Tonga’s SOEs have performed comparatively better than those of Samoa and Fiji because their governance structures generally allow them to operate independently of the political process, with fewer unfunded CSOs.

In PNG, SOE reform could be accelerated with a policy decision to place SOEs on a fully commercial footing and hold them publicly accountable for results.

Once this is in place, SOEs can proceed to strengthen their boards, deliver CSOs on a cost-recovery basis, restructure and divest loss-making business lines and partner with the private sector where appropriate. As detailed in ADB’s 2008 Private Sector Assessment for PNG, the successful implementation of these reforms will improve basic service delivery, reduce the costs of doing business and create opportunities for private sector investment and growth, essential ingredients for longer term prosperity in PNG. The ADB is committed to continued support to PNG to implement these critical reforms.

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