The TA will build on the analytical work prepared under ADB's regional Private Sector Development Initiative (PSDI), which produced a 2011 comparative study tracking the performance drivers of the SOEs in the Fiji Islands, Marshall Islands, Samoa, Solomon Islands, and Tonga. It will also complement the work currently underway and supported by PSDI to improve the governance frameworks of the SOEs, in particular through director training. The TA will support the work of the SOE Monitoring Unit of MOFT in piloting new CSO guidelines in two SOEs, and subsequently rolling out the guidelines to the remaining SOEs in the portfolio. This will require close collaboration with the SOEs to agree CSO costing methodologies, and with MOFT to agree contracting, financing, and monitoring mechanisms.
Capacity building will be a key focus of the TA. The aim will be for the consultants to support the work of the Ministry of Finance's SOE Monitoring Unit as they roll out the CSO guidelines across the SOE portfolio. In addition, specific training activities are included in the TA to help counterparts master the necessary technical skills, particularly with respect to the use of costing methodologies and contracting approaches.
|Project Rationale and Linkage to Country/Regional Strategy
The Solomon Islands SOEs absorb large amounts of scarce capital on which they provide very low returns, divert government resources away from vital social investments in health and education, and drive up the costs of doing business where they are the sole service providers. The Solomon Islands SOE portfolio is one of the poorest performers in the Pacific in terms of return on equity (ROE), with an average return of -13.9% for FY2002 FY2008 and accumulated losses of SI$184 million ($24 million) during the same period.
Poor SOE performance is rooted in a lack of commercial orientation of the SOEs, unfunded community service obligations (CSOs), and a weak accountability framework. Profit objectives are often diluted by the notion that SOEs must deliver CSOs without due compensation. This distorts the performance incentives of the SOE and confuses the decision-making process of its board of directors. The appointment of Members of Parliament on the SOE boards of directors further complicates the operating environment and independence of the SOEs, because these directors often have strong incentives to support CSO delivery without adequate compensation. To operate efficiently, SOEs should have unambiguous profit objectives and a transparent mechanism to identify, contract, and finance any CSOs. Without this, SOEs cannot set and meet performance targets and the government cannot make informed policy decisions related to CSO assignments, quality and efficiency of CSO delivery, and SOE performance.
The current SOE Act was enacted in 2007. Subsequently, SOE Regulations were promulgated in 2010, establishing a robust framework for the commercial management of the SOEs. Implementation performance has been poor, however, due to a lack of capacity within the SOEs and the Ministry of Finance and Treasury (MOFT), combined with low political commitment to enforce the provisions of the law. It now appears that the current government and Minister of Finance and Treasury are committed to pursuing a substantive SOE reform agenda. The Regional Assistance Mission to the Solomon Islands (RAMSI) has provided substantive TA for developing detailed guidelines for CSO framework implementation. The RAMSI-funded TA will pilot the CSO guidelines in two SOEs, namely Solomon Islands Postal Corporation (SIPC) and Solomon Islands Broadcasting Corporation (SIBC). This TA is due to close in June 2011. The Government has requested ADB support to continue this assistance to ensure full implementation in the pilot SOEs and roll-out the CSO guidelines to the other six SOEs. The work will be led by the SOE Monitoring Unit of MOFT, and supported by the proposed S-TA.