SOEs poorly managed: Barker

The National Business

By PETER ESILA
STATE-owned enterprises (SOEs) have largely been undercapitalised, poorly managed and saddled with expectations to deliver politically driven outputs rather than to operate cost effectively, says a researcher.
Papua New Guinea Institute of National Affairs (INA) director Paul Barker said as a result these companies struggled to reinvest and maintain plant and equipment which affected their profitability.
“All of Papua New Guinea’s SOEs started with well skilled staff and a lot of corporate commitment from professional, technical and clerical staff, unfortunately, going back to the 1980s, there was increasing political pressure to appoint cronies, wantoks and supporters to boards and management positions, when professionalism and accountability were what was needed,” he said.
Barker told The National that PNG’s SOEs were required to perform various functions for which they were poorly prepared and consequently generally failed to meet international standards.
“They are expected to raise revenue, and that’s particularly the function of those organisations holding major equity stakes in PNG’s natural resource extraction projects, such as Kumul Petroleum and Kumul Minerals,” he said.
“Others are primarily expected to provide major utilities and other services, such as delivering water and sanitation, power and telecommunications, as well as housing, port, airport and civil aviation services.”
The Kumul Consolidated Holdings declared recently that it would present a dividend of K80 million to the State.
“They’re often being pushed to deliver profits to a cash strapped government and yet, in many cases are seriously in debt and maybe technically insolvent, and barely able to deliver the core services, for which they exist, despite, in many cases, holding a monopoly role in the market,” Barker said.
He said the Asian Development Bank (ADB) undertook a survey of their performance and found that in most cases the SOEs were the worst performing in the Pacific region, in terms of return on capital and other criteria – and the Pacific performed poorly by global standards.
“It’s unfortunate, as the critical public goods that these, SOEs are expected to provide are critical to households and businesses across the nation, and their poor performance and high costs undermines the viability and potential for other businesses and employment generation, as well as pushing up the cost of living for households,” he said.
“Delivering public and commercial goods and services is invariably costly in PNG, by nature of its rugged topography and widely dispersed communities, across mountains, islands and tough terrain.”
Barker listed instances of SOEs falling well short of the mark and the reasons for the underperformance:

  • PNG Power (Elcom) failed to maintain and invest in timely new capacity, being pressured into taking on overpriced power supply from commercial (or public private partnership) suppliers;
  • Air Niugini was burdened with unsuitable and non-viable routes and sometimes aircraft, and with providing a stack of free services to current and former politicians;
  • Telikom was pushed into over-priced mobile phone technology and was unprepared and undercapitalised to take advantage of its existing platform as the incumbent service provider;
  • the former PNGBC was encumbered with political lending and was virtually insolvent, but ultimately rescued by the market, fresh capital and becoming subject to private sector discipline;
  • PNG Ports lacks competition and (together with limited competition in domestic shipping) contributes to high transport and product prices in PNG, albeit recognising that smaller ports and wharves (as with rural airstrips, shipping and aviation) may always require some subsidisation or cross subsidisation as an essential service; and,
  • Kumul Petroleum and mining are the result of the government’s inclination to hold equity in mines, petroleum and gas projects.

Many other countries have followed this route, but many have also discontinued or avoided this option, recognising that the corporations tend to perform more efficiently in this field, and that the State has other ways to make its revenue without the risk of investing, and often borrowing to invest in resource projects.
The State also has regulatory functions, with respects to social, labour and environmental standards, as well as revenue collection, which can be undermined by also being an active investor. Kumul Mining has effectively been given the wet rag with its investment in the highly speculative Deep Sea mining project, where Kumul (then Petromin) was expected to take a disproportionate level of the costs and risk, and the problematic Tolokuma mine.
Kumul Petroleum has been lumbered with major debt, but received the vast majority of the revenue stream in dividends from the major PNG LNG project, albeit seeking to exclude itself from normal accountability of State entities, notably from audit by the auditor-general.
Barker said provinces seemed to start their own provincial business arms, but in almost all cases these folded in the 1980s.
“A few, and most notably the East New Britain Development Corporation, shone out, as examples, that public sector businesses can perform, if given the right level of skills and operational independence from political or unwise business direction and exploitation; in ENB’s case that can also be partly ascribed to the skills and integrity of its long term management, notably the late Paul Arnold and the province’s higher commitment to accountability,” he said.
“So, when the Minister for State Enterprises calls for a major review of SOEs, this is certainly justified.
“Some of the work has already been done for example by the ADB analysis, but also by specific sectoral reviews conducted, for example by the World Bank.
“Much of it is not rocket science, but, as Sir Mekere Morauta stated back in 2000, taking control away from political expediency and letting the market determine management and investment conditions, subject to a suitable regulatory environment.
“When the INA conducts its periodic surveys of the impediments to business and investment in PNG, many of those impediments relate specifically to the performance of the SOEs, such as the high cost, unavailability and unreliability of power supply, poor transport infrastructure and telecommunications.”
Barker said the other factors relate to law and order and corruption, which in some cases also related to SOEs.
“The fact remains that some of Papua New Guinea’s State-owned enterprises are able to provide exemplary services, with a dedicated workforce, but the conditions are set to handicap performance,” he said.