Finding Balance 2014: Benchmarking the Performance of State-Owned Enterprises in Island Countries

Publication | August 2014

Reforming state-owned enterprises in the Pacific is a vital step needed to create private investment opportunities, reduce the costs of doing business, and improve service delivery in the local economies.

State-owned enterprises (SOEs) continue to constrain Pacific economies. They absorb scarce capital, suffer low productivity, and often provide high cost and low quality services. SOE reform is vital to create private investment opportunities, reduce the costs of doing business, and improve service delivery.

Policy makers around the world are aware of SOEs’ chronic underperformance, fiscal costs, and negative impact on growth and poverty alleviation. Consequently, efforts to reform SOEs have been ongoing for decades. This experience demonstrates that privatization, supported by robust regulatory arrangements, is the most effective mechanism for long-term improvements in state assets’ productivity. However, full privatization is not always politically feasible nor the most suitable reform mechanism; partial privatization [public listings, joint ventures, and public–private partnerships (PPPs)] can also help improve SOE performance.

About this report

This fourth study of Pacific SOE performance also assesses SOEs’ impact on island countries outside the Pacific. It evaluates SOEs in Cabo Verde, Fiji, Jamaica, the Marshall Islands, Mauritius, Papua New Guinea, Samoa, Solomon Islands, and Tonga—identifying key performance drivers and reform strategies to guide future policy action.

Finding Balance was produced by the Pacific Private Sector Development Initiative, a regional technical assistance facility cofinanced by ADB, the Government of Australia, and the New Zealand Government.

Highlights

The SOE portfolios in the nine island economies participating in this study are dominated by infrastructure service providers (e.g., airports, seaports, power, water, sanitation, broadcasting, postal services, and telecommunications), but also include a range of other commercially oriented undertakings such as transport and banking. The study reveals that, while SOEs are often established to address perceived market failures or increase accountability in public service delivery, these goals are rarely achieved.

None of the nine SOE portfolios produced a sufficient return to cover capital costs between 2002 and 2012. Only five produced average returns on assets and equity above zero over this period.

This study provides very clear lessons:

  • As long as SOEs remain under government control, the risks of political interference and noncommercial decision making remain high;
  • Governments have tried to address this fundamental flaw by creating legal, governance, and monitoring frameworks to mimic the conditions and incentives faced by private sector firms. 
  • Comprehensive SOE frameworks only lead to improved SOE performance if the political will to implement them exists;
  • SOEs perform best in an environment supporting full commercial orientation, with strong governance, performance incentives, and hard budget constraints. Each of the nine countries has some elements of this, but all depend on political support for implementation; and
  • SOE performance deterioration is directly linked to weakened political commitment to protect and enforce the commercial imperative.

Contents 

  • Foreword
  • Executive Summary
  • Introduction
  • Profile and Economic Impact of the State-Owned Enterprise Portfolios
  • Country Diagnostics
  • Challenges of State-Owned Enterprise Reform
  • Best Practices and the Way Forward
  • Appendixes