Increasing private sector involvement in Papua New Guinea’s state-owned enterprises (SOEs) would be a ‘powerful mechanism’ for improving the sector’s efficiency, according to a new report by the Asian Development Bank.

PNG state-owned enterprises’ portfolio return on equity (orange) and return on assets (blue), 2002-2014  Source: Kumul Consolidated Holdings, ADB

The report says plans to partially privatise Air Niugini and expand the use of public private partnerships (PPPs) in the power and port sectors should ‘enhance the productivity’ of these sectors.

The ADB report questions the PNG Government’s 2015 Policy on State Ownership and Participation in Commercial Activities, which calls for an expansion of state investment in commercial activities, prohibitions against foreign investors taking controlling positions in SOEs or PPPs, and a ban on the allocation of land titles.

‘One reason for the fall in profitability is that SOEs are being charged market rates for their debt funding.’

This, the authors believe, sends: ‘a mixed signal to investors regarding the government’s attitude towards foreign investment and continued competition from SOEs in commercial activities.’

Assets and profitability

PNG’s SOE sector is expanding quickly, but profitability is falling, according to ADB figures. Between 2003 and 2014, SOE assets grew at an average of 13.7 per cent a year, well above the average of 8.2 per cent in the region (which includes Singapore and New Zealand).

PNG’s SOE assets Source: Kumul Consolidated Holdings, ADB

The ADB report notes that the PNG Government has actively supported the buildup of SOE assets. It says there has been K880 million of debt write-downs and equity injections. Moreover, SOEs have been allowed to reinvest the majority of their earnings rather than pay dividends.

Meanwhile, profitability has worsened. In the 2010–2014 period, return on assets (ROA) was 1.3 per cent, down from 4 per cent in the 2002-2009 period. Return on equity also fell sharply. It was 2.4 per cent with 7 per cent in the 2002–2009 period.

‘The standout SOEs in the 2010-2014 period were: PNG Ports, PNG Power, and Air Niugini.’

One reason for the fall in profitability is that SOEs are being charged market rates for their debt funding. The difference (spread) between SOE and borrowing costs and commercial interest rates is 2.1 per cent. according to the ADB.

‘The Department of Treasury has developed a policy to govern onlending practices to ensure SOEs borrow at market rates.’

Standouts

The standout SOEs in the 2010–2014 period were: PNG Ports, PNG Power, and Air Niugini. ‘These SOEs delivered a net profit of K510 million during the 2010–2014 period, while PNG Telikom accumulated net losses of K129 million,’ the report says.

There is a need to improve transparency and accountability, the ADB report claims. It notes that most SOEs have failed to produce accounts in a timely manner.

‘PPP structures will allow the government to transfer service delivery risk to private partners.’

The report argues that summaries of corporate plans, including details of targets, should be made public.

‘Partial listings on the Port Moresby stock exchange, as is being contemplated for some SOEs, would further support the government’s pledge towards increased transparency.’

PPPs

The report says the Public-Private Partnerships Act (passed in 2014), when fully implemented, will allow the state to leverage private sector finance, technology, and management expertise to expand infrastructure services throughout PNG.

‘Instead of relying solely on public finance, SOEs, and government departments, PPP structures will allow the government to transfer service delivery risk to private partners and, crucially, to build strong maintenance incentives to extend the life of infrastructure assets.’