Why SOEs matter in PNG

QUESTION: Why are State-Owned Enterprises important to a country’s economy and the market it operates in?
DARCY: SOEs in PNG provide essential infrastructure services such as power, water, transport and communications; these services are not only essential to improving individual livelihoods, they are also essential inputs for business. If these services are not provided efficiently or to an adequate standard, businesses cannot be competitive and the economy as a whole suffers.

Q: How have State-Owned Enterprises performed in the past few years?
DARCY: The nine largest SOEs in the portfolio of Kumul Consolidated Holdings (PNG Power Ltd, Telikom, PNG Ports, Eda Ranu, Water PNG, National Development Bank, Air Niugini, Post PNG, and bmobile) have seen their profitability steadily decline since
2005.
Over the 2002–2014 period, the portfolio’s average return on assets (ROA) was 2.9 per cent and return on equity (ROE) was 5 per cent. Average performance declined over the more recent 2010 to 2014 period, with average ROA at 1.3 per cent and ROE at 2.4 per cent, compared with average ROA of 4 per cent and ROE of 7 per cent the preceding 2002 to 2009 period.
The assets controlled by these nine SOEs have grown rapidly, but evidence suggests that asset use is inefficient. From 2003 to 2014, SOE assets grew at an average of 13.7 per cent annually, well above the average of 8.2 per cent among seven other Pacific Islands countries the Private Sector Development Initiative (PSDI) studied.  Portfolio asset utilisation declined from a high of 77 per cent in 2005 to 46 per cent in 2014.  The government supported the buildup of assets through K880 million of debt write-downs and equity injections and by allowing SOEs to reinvest the majority of their earnings rather than pay dividends.

Q: The Government endorsed a structural reform for SOEs in 2015 for the overall portfolio to come under Kumul Consolidated Holdings and to be managed by the National Executive Council (NEC). How will this reform impact the performance of SOEs?
DARCY: We understand that the government’s stated purpose for the restructure was to give the SOEs greater autonomy and accountability for results.  It is possible, however, that the opposite effect has occurred. The Independent Public Business Corporation (Kumul Consolidated Holdings) (Amendment) Act 2015 transfers all of the oversight responsibilities over KCH and the SOEs to the National Executive Council, giving it authority to appoint SOE directors and approve corporate plans.  KCH is largely reduced to administering the state’s ownership in the SOEs.
The Act gives the Minister of SOEs broad powers, subject to NEC endorsement, to direct an SOE concerning its operations, remuneration levels, tenders, engagement of consultants, and other matters, thereby reducing the SOE’s autonomy.
The net effect of the Act is to give NEC direct governance control over the SOEs, a responsibility normally reserved for SOE boards. This increases the risk of political considerations overriding commercial targets, as elected members of NEC exert their authority over the operation of the SOEs.
International experience has amply demonstrated that the best performing SOEs are those that are given the autonomy to operate commercially; by providing this autonomy, the government can then hold the SOEs accountable for their results.

Q: The Government has also passed the Private Public Partnership Act as a way to boot SOE’s performance and increase efficient delivery for projects and services. What are some ways to ensure this system is maximised for the benefit of SOEs?
DARCY: The purpose of the PPP Act is to create a transparent, rigorous and competitive process for preparing and tendering PPP projects. Properly implemented, this will facilitate private investment in infrastructure and allow the government (and SOEs) to “do more with less”.  Providing the SOEs with a PPP project preparation process and expertise will help them implement these projects.

Q: How can improved transparency and accountability boost the overall performance of SOEs and what more could be done to have more of that?
DARCY: Transparency, accountability and autonomy are essential to extracting good performance from SOEs, as is a legal framework that requires the SOEs to operate commercially.
These elements are currently lacking in PNG.
Most of PNG’s SOEs fail to produce financial accounts in a timely manner. In the absence of updated information on the performance of SOEs, it is impossible for lawmakers or the public to assess whether or not the state’s investment in the SOEs is providing value for money.
The requirement that SOE accounts be certified by the auditor-general has contributed to the backlog; nonetheless, once certified, accounts should be made publicly available. But audited financial statements for Kumul Consolidated Holdings (KCH) and the Government Business Trust are not publicly available at the moment.
Summaries of corporate plans detailing financial and operational targets, CSOs, and other important goals should also be made public so that annual assessments can be made. This is now the practice in Solomon Islands and Tonga, and has long been a requirement in larger economies in the region such as Singapore and New Zealand.

Q: What are your thoughts on the need for partial privatisation of PNG’s SOEs and greater collaboration with the private sector to enhance the SOEs’ performance?
DARCY: Globally, collaboration with the private sector through PPPs and partial privatisations has helped governments expand service delivery and improve the performance of SOEs. Collaboration brings not only investment, but also access to markets and expertise.  The privatisation of BSP is a case in point.
PNG’s SOEs (e.g. PNG Ports, PNG Power) are increasingly looking to partner with the private sector, and this should be encouraged. These partnerships pave the way for more competition in the provision of infrastructure services which, if properly structured, will greatly benefit consumers.
Community service obligations, which ensure key services remain available and affordable, can continue to be provided even in a PPP or privatisation context; in fact,
they are likely to be more efficiently produced through the introduction of fee-for-service contracts.