Reforming State-Owned Enterprises in PNG

SME Summit Madang, 1-3 July 2013

Chris Russell, Advisor

ADB Pacific Private Sector Development Initiative

Background
Three SOE Benchmarking studies released by ADB in 2009, 2011 and 2012
First of their kind in the Pacific Participation from 6 countries Fiji, PNG, Samoa, Solomon Islands, Marshall Islands, Tonga

Wide dissemination of results leading to strengthened governance practices Fourth benchmarking study underway 6 existing participants plus 3 non Pacific island nations Lessons learned have up and down scale value

Context
Why do Governments create SOEs? To deliver core infrastructure and related services . . .
transport power water/sanitation Broadcasting Telecommunications

where the private sector does not have the capacity or willingness to provide the services, or where the government believes that control over the delivery of services is best exercised through ownership of the assets through the commercialization of government departments

Infrastructure SOEs dominate Pacific

Represent between 59%-79% of total portfolio assets in FY09
100%

Commercial SOEs

% of total book value of SOE portfolio assets

90% 80% 70%

Other Commercial
Non-mutual Financial Institutions

Infrastructure Service SOEs

60% 50% 40% 30%

Utilities Ports/Airports

20%
10% 0%

Communications

Fiji

RMI

Samoa

Solomon Islands

Tonga

PNG

What should Government expect of SOEs?

The delivery of goods and services at an affordable price Provision of quality services in a sustainable manner

Delivery of Community Service Obligations

A return on investment that compensates for risk Support general economic growth

Not to crowd out the growth of the private sector

SOEs negatively impact economic growth

Absorb significant amounts of scarce capital stock, yet contribute very little to GDP Crowd out the private sector, by competing on an unequal basis Absorb government funds that could otherwise be spent on vital social sectors such as health and education

Drivers of Poor SOE Performance

Confused Mandates Absence of Performance Incentives Absence of Hard Budget Constraints / Accountability Weak Governance Arrangements

What has been the result?

Portfolio Return on Equity 2002 - 2010
25.0% 20.0% 15.0% 10.0%

FIJ
5.0% 0.0% 2002 -5.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011

RMI SAM SOL (ex SAL) TON PNG

-10.0%
-15.0% -20.0% -25.0%

SOEs benefit from subsidized debt and equity

Average Cost of SOE Debt vs Commercial Debt Rate, FY02 - 09
15.0%

10.0% Cost of Commercial Debt Cost of SOE Debt 5.0%

0.0%

Fiji

RMI

Samoa

Solomons

Tonga

PNG

Low productivity
SOEs absorb up to 31% of total fixed assets in selected Pacific countries, yet contribute comparatively little to GDP*
7.0% 6.0% 5.0% 4.0% 3.0%

2.0%
1.0% 0.0%
Samoa Tonga Fiji RMI PNG (2010) Solomons (09)

* Contribution to GDP is calculated by adding total wage expenditure to EBITDA and dividing by GDP

Fiscal drain
Government transfers exceeded SOE profits FY02-10
RMI

Government Transfers Net Profit after Tax

Samoa

PNG

Solomon Islands

Fiji

Tonga

(75)

75
Millions USD

150

225

Successful SOEs have strong commercial focus

Robust legal and regulatory framework
Clarity of mission for the SOEs Political support for implementation

Strong governance arrangements

Professional boards Robust monitoring practices Community service obligation frameworks Transparency and accountability for results Hard budget constraints

Competition

New Zealand provides useful lessons

14 SOEs corporatized in 1987 generated spectacular productivity gains +85% for Telecom NZ +60% for Coal Corporation A loss making portfolio turned into a profitable portfolio in 3 years SOE reform continued by successive governments due to positive outcomes; SOE Act introduced

SOE performance has waned since 2002 as performance expectations from government have been lowered

PNGs SOE support SME growth

Should not compete with private sector
create opportunities for SMEs through contracting for CSOs promote PPPs and good practice procurement contract out supporting services

Reduce cost of services and improve reliability

ICCC is concerned that existing Regulatory contacts do not incentivize cost reduction

Be champions of open competition

competition is good for SOEs and good for the market

Some issues to consider

SOE reform is cheap to achieve, quick to produce results and will deliver significant economic and social benefits. Should the Governments efforts be directed towards high-level institutional restructuring or targeted SOE reform? Is the current focus is a solution looking for a problem? The Government can have it all -- profitable SOE sector + deliver community benefits through a robust CSO framework Competition and open markets should be embraced as an effective valuable tool to improve SOE performance How many jobs have been lost as a consequence of high cost SOEs?

Thank you.
More information contact
Pacific Liaison and Coordination Office psdi@adb.org

www.adb.org/offices/pacific/main