Finding Balance: Benchmarking the Performance of State-Owned Enterprises in Papua New Guinea

This is the first state-owned enterprise (SOE) benchmarking study to include Papua New Guinea (PNG). It has been undertaken at the request of the government of PNG in order to inform its efforts to improve SOE performance and contribute to the increased transparency in the sector.

The findings of the study reveal that while PNG's SOEs have produced net profits that are in the upper range of the SOE portfolios in the six Pacific countries benchmarked (PNG, Fiji, the Marshall Islands, Samoa, Solomon Islands, and Tonga), they have done so at a substantial cost to the government in terms of ongoing fiscal transfers and other subsidies, and to the detriment of the poorer segments of the population due to the generally poor quality of the services provided and limited range of delivery. By absorbing large amounts of scarce capital stock on which they provide very low returns, crowding out the private sector, and diverting public funds that could otherwise be invested in such high-yielding social sectors as health and education, SOEs act as a drag on economic growth.

The SOE reform experiences of all of the countries participating in this study provide some very clear lessons:

• Sustained political commitment is vital to successful reform.
• Continued financing of poorly performing SOEs does not restore their profitability, and often creates negative performance incentives.
• There is a clear link between weak governance arrangements and poor SOE performance.
• The most successful SOEs are those that operate on strict commercial principles with consequences for poor performance.
• The private sector has the capacity to invest in SOEs and to deliver CSOs.

The key to successful SOE reform is therefore to infuse SOEs with private sector discipline, competitive market pressures, and clear consequences for nonperformance. This forces SOEs to meet their costs of capital and divest any activities that are not commercially viable. When SOEs remain under public ownership, the process of "commercialization" is incremental and, where political commitment to ongoing reform is weak, can be reversed. Privatization, in contrast, is immediate; it relies on a transfer of ownership to accelerate, intensify, and lock in the benefits of commercialization. Full privatization, however, is not always politically feasible nor the most suitable reform mechanism. In these cases, partial privatization (such as joint ventures and public-private partnerships) can help improve SOE performance.