Commercial reforms to boost Pacific state-owned enterprises

18 July 2016

PRESS RELEASE

Commercial reforms to boost Pacific state-owned enterprises

State-owned enterprises (SOEs) are a significant drain on Pacific island economies, with the returns from most countries’ SOE portfolios not even meeting their capital costs, according to an upcoming Asian Development Bank (ADB) report.

Advance copies of ‘Finding Balance’ 2016, the latest edition of ADB’s landmark assessment of Pacific SOEs’ performance, were shared at the opening of the Pacific Update Conference 2016 which is hosted by The University of the South Pacific (USP).

The report finds SOE portfolios in the eight Pacific countries examined, contributed only 1.8 per cent to 12 per cent to gross domestic product, despite their very large asset base, ongoing government cash transfers, and monopoly market positions. It also finds productivity levels of the SOEs tend to be well below developed country benchmarks.

“Low SOE returns are not unique to the Pacific but are common throughout the developing and developed world,” said Christopher Russell, SOE Expert with ADB’s Pacific Private Sector Development Initiative (PSDI), which produced the report.

“They reveal a fundamental flaw in the SOE model: it is not an effective long-term ownership structure as politicians will avoid commercial decisions that may have short-term political costs,” he added.

The report assesses the performance of SOEs in Fiji, Kiribati, Marshall Islands, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Vanuatu, as well as Jamaica and Mauritius. It finds many countries have made significant progress through commercially-oriented reforms.

Solomon Islands’ SOE portfolio’s return on equity jumped from -11 per cent in 2002-2009 to 10 per cent in 2010-2014. In Tonga, portfolio returns have increased to six per cent from a low of zero per cent in 2009. Overall, seven of the 10 countries examined had seen improved SOE profitability since 2010.

The report also highlights that, while improvements had been achieved, sustaining them has proven impossible in most countries, both developed and developing. Drawing on the experiences of New Zealand and Singapore, the report concludes that increased private sector ownership and operation of SOEs is the only way to lock in reform gains.

Finding Balance 2016: Benchmarking the Performance of State Owned Enterprises in Island Countries will be published in August. It will be the fifth report in the Finding Balance series, which identifies strategies to guide reforms of SOEs, highlighting the importance of finding the right balance between public and private sector roles.

PSDI is a technical assistance facility co-financed by the Government of Australia, the Government of New Zealand, and ADB. It supports ADB's 14 Pacific developing member countries to improve the enabling environment for business and to support inclusive, private sector-led economic growth. The support of the Australian and New Zealand governments and ADB has enabled PSDI to operate in the region for almost 10 years and assist with more than 280 reforms.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusiveeconomic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB in December 2016 will mark 50 years of development partnership in the region. It is owned by 67 members—48 from the region. In 2015, ADB assistance totaled $27.2 billion, including co-financing of $10.7 billion.

The two day Pacific Update Conference will end on 19 July 2016.

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