Report criticises SOEs in islands

 A STATE-owned enterprise benchmarking study by the Asian Development Bank in nine island countries, including PNG, has shown that none of the SOE portfolios generated sufficient returns to cover the cost of capital.

The findings were from 2002 to 2012.

Laure Darcy, a private sector development specialist at the ADB, said it was important to note this because when SOEs performed poorly, the economy suffered.

“SOEs in the island economies are often the sole providers of core infrastructure services (power, water, transport). 

“So when these are of poor quality and insufficient reach, businesses cannot develop and become competitive,” she said.

She said by crowding out the private sector and absorbing large amounts of scarce capital stock on which they provide very low returns, SOEs acted as a “drag” on economic growth.

Darcy said SOEs often suffered from weak governance arrangements, conflicting mandates, absence of hard budget constraints and lack of accountability. 

“SOEs do not operate with the same efficiency incentives as private sector firms, and are often directed to deliver community service obligations without adequate compensation,” she said.

“Island governments are now actively debating the merits of the State-owned enterprise model and role of the State in the economy.”

Darcy said this was certainly evident in PNG where the announced plans to privatise selected SOEs and the recent passage of the Public-Private Partnership Act signalled a commitment to increase private participation in the delivery of infrastructure services. 

“The fact is that chronic SOE portfolio under-performance highlights a fundamental flaw in the SOE model. 

“It is not an effective long-term ownership structure. While the model attempts to replicate private ownership demands and dynamics, it never truly replaces the market disciplines that private firms face,” Darcy said.

“As long as SOEs remain under majority public ownership, politicians will avoid commercial decisions with potential short-term political costs. 

“This is what makes SOE reforms so difficult to effect and sustain.”