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The latest edition of PSDI’s state-owned enterprises benchmarking study finds SOE performance has improved in many countries, but gains are proving difficult to sustain.

The fifth edition of Finding Balance, PSDI’s comparative study of state-owned enterprise (SOE) performance in the Pacific, was published in September.

Finding Balance 2016: Benchmarking the Performance of State-owned Enterprises in Island Countries assesses the performance of SOEs in Fiji, Kiribati, Marshall Islands, Papua New Guinea (PNG), Samoa, Solomon Islands, Tonga, and Vanuatu, as well as Jamaica and Mauritius.

This is the first edition to include Kiribati and Vanuatu. Results from New Zealand and Singapore were also added to enrich the global benchmark.

The 10 participating countries were selected for their comparability and SOE reform experience. Their participation demonstrates their governments’ willingness to identify and address the core issues within their SOE sectors. This transparency is an essential precursor to successful reform.

Increased private sector participation needed

As per earlier editions, Finding Balance 2016 identifies strategies to guide reforms of SOEs, highlighting the importance of balancing public and private sector roles.

The report emphasizes that political commitment to reform is a key driver for commercial results, as demonstrated by the experience of each of the countries benchmarked.

It finds many countries have made significant progress through commercially-oriented reforms. Solomon Islands’ SOE portfolio’s average return on equity jumped from -11% in 2002-2009 to 10% in 2010-2014. In Tonga, portfolio returns have increased to 6% from a low of 0% in 2009. Overall, seven of the 10 countries examined had seen improved SOE profitability since 2010.

The report nonetheless highlights that, while improvements have been achieved, sustaining them has proven impossible in most countries, both developed and developing. It finds SOE portfolios in the eight Pacific countries examined contributed only 1.8% to 12% to gross domestic product, despite very large asset bases, ongoing government cash transfers, and monopoly market positions. It also finds productivity levels of the SOEs analyzed tend to be well below developed country benchmarks.

Drawing on the experiences of New Zealand, Singapore and selected Pacific countries, the report concludes that increased private sector ownership and operation of SOEs is the best way to sustain improved performance.

“Committing to a reform agenda that increases private sector participation in SOEs and service delivery is the most effective way to lock in gains,” said PSDI SOE Reform Team Leader Laure Darcy.

Promoting SOE reform across the Pacific

Findings and recommendations from Finding Balance 2016 were presented in Fiji in July, PNG in September, Marshall Islands in October, and Solomon Islands in November.

The report’s launch in Port Moresby was hosted by the Port Moresby Chamber of Commerce and Industry and attended by the PNG Treasurer, New Zealand High Commissioner, USA Ambassador, and approximately 80 members of the business community, along with local media. 

Ms Darcy told attendees PNG’s SOE portfolio profitability has declined steadily since 2005, producing an average return on assets (ROA) of 1.3% and average return on equity (ROE) of 2.4% between 2010 and 2014, down from 4% and 7%, respectively, between 2002 and 2009. She said reforms to ensure SOEs are compensated for delivering non-commercial services, allow for competition among service providers, and support public-private partnerships would improve these results, if implemented.

“Sustained improvements to PNG SOEs’ service delivery will require greater private sector participation and competition,” she said.

At the Marshall Islands presentation, PSDI SOE Expert Christopher Russell told attendees that, despite comprising 17% to 20% of the country’s total capital stock, SOEs contributed only 5.3% to GDP in 2014. Along with compromising private sector growth, he said the losses Marshalls’ SOEs generate are a considerable drain on the national budget: government transfers to SOEs over 2010-2014 were $43.9 million, representing 9.1% of government expenditure. He noted Marshall Islands’ SOEs’ performance had improved slightly in recent years, with ROA and ROE in 2010-2014 averaging -3.7% and -8.1%, respectively, up from -5.8% and -13% in 2002-2009.

“A plan for greater improvements in the performance of Marshall Islands’ SOEs exists in the form of last year’s SOE Act,” said Mr Russell. “The Act established a broad reform agenda that has been proven to work in other Pacific island countries.”

In Honiara in November, Ms Darcy explained how the 21% turnaround in Solomon Islands SOEs’ ROE came from a reform program that incorporated financial restructuring, tariff increases and improved collections, privatization and liquidation, and compensation for providing non-commercial services. While it was still the best performing portfolio in the Pacific in 2014, returning 9% on equity and 6% on assets, Ms Darcy warned that its recovery remained fragile.

“Sustaining these gains and improving the performance of all Solomon Islands SOEs will require continued implementation of, and compliance with, the SOE Act,” she said.