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

Speech by Mr Thomas Abe
Managing Director of the Independent Public Business Corporation of Papua New Guinea
at the launch of the Asian Development Bank’s report
FINDING BALANCE: Benchmarking the Performance of State-Owned Enterprises in Papua New Guinea
Port Moresby, September 13,  2012

Ladies and gentlemen, let me thank the Asian Development Bank for producing this important benchmarking study, at IPBC’s request.

Thomas Abe

It will be a helpful contribution to the work we do - I assure you that we will be using it as one of our guides for the reform of Papua New Guinea’s Public Enterprises.

I would like to think that our extensive support for and participation in the study has in turn helped ADB develop a better understanding of the circumstances and issues that we are confronted with.

The need for such benchmarking became clear to me in my previous role as the regulator and in particular my four years’ chairmanship of the East Asia and Pacific Infrastructure Regulatory Forum.

One of the first things I did on being appointed Managing Director of IPBC in August last year was to request that this independent review proceed.

So it gives me great satisfaction to see it completed.

IPBC is at the forefront of reform of state-owned enterprises here, reform that has gathered momentum in the past 12 months and is just now starting to bear fruit.

One of the critical elements of IPBC’s work is measuring our performance and the performance of Public Enterprises against the highest standards possible.

I personally am very strong on setting performance standards – and meeting them.

When I was appointed Managing Director 12 months ago, IPBC lacked direction and its systems and processes were in disarray.

Its ability to assist and support Public Enterprises – and manage and protect the interests of their owners, the people of Papua New Guinea ‑ was severely limited.

One of the first things I did was to insist on corporation-wide Key Result Areas and Key Performance Indicators and the development of a formal Annual Plan and Budget.

We have also decided to produce half-year reports. Our first half-year report has been completed and presented to the Minister, and we are close to finishing our first five-year Corporate Plan.

In addition, IPBC recently developed a set of Key Performance Indicators that we apply to all our Public Enterprises.

The fundamental aim of this is to instill commercial discipline in Public Enterprises to ensure that they are operating efficiently and not wasting or risking taxpayers’ funds.

IPBC is focused on commercial efficiency through quarterly measurement of financial and operating results such as sales growth versus nominal GDP, sales against costs and capex program spending compared to profitability.

IPBC does not require Public Enterprises to provide us with such data for the sake of it: it shows basic weaknesses in Public Enterprise performance and provides us with a guide to appropriate solutions.

The requirement is nothing more than would be expected of public companies anywhere else in the world.

The owners of Public Enterprises – the people of Papua New Guinea – are entitled to nothing less.

Other requirements that Public Enterprises must meet include the determinants of financial and operating performance under four broad categories:

•  Compliance with statutory obligations, such as with the IPBC Act, the Companies Act, the ICCC Act and Public Enterprises’ own acts.
  
•   Provision of timely, accurate and complete information to IPBC, including Annual Plans and Budgets and Quarterly Reports.
•  Implementation of projects on time and on budget, and fulfillment of annual capital expenditure programs.
•   Progress on structural reforms and the development of satisfactory management systems and processes.

So how do we stack up according to the ADB Benchmarking Study?

In some instances the study shows that our Public Enterprises perform as well as or better than their counterparts in other Pacific Island nations. In many other cases they do not.

For example on three key corporate financial measures ‑ profitability, return on assets and return on equity – our Public Enterprises ranked second.

The cost of power supplied by PNG Power to residential customers was the third-lowest. Eda Ranu had the most revenue per employee, followed by Water PNG. PNG Ports had the lowest cost per unit of cargo processed.

But these raw figures hide a multitude of sins.

The cost of funds for Papua New Guinea’s Public Enterprises is artificially low at 4.5% compared with an average commercial rate of 11.4 % over the financial year 2002‑financial year 2009 used for the survey.

The reason for the low cost of funds is the high proportion of advances from the Government and the use of concessional loans from multilateral and bilateral development partners. If real-world interest rates had been used, our Return on equity, for example, would have been halved.

Continuous financial support from the Government comes at its own cost, of course – as they say, there is no such thing as a free lunch.

The most important thing to say about these handouts is that in no case did they result in better services or a faster rate of provision of services to rural areas.

That is an extraordinary fact. We as taxpayers have tipped hundreds of millions of kina into Public Enterprises for no net benefit.

In fact service delivery standards have declined and the extension of services into rural areas has proceeded at the usual snail’s pace.

The ADB estimates that in the period covered by the survey, the Government has made cash infusions across all Public Enterprises totaling about K700 million yet ths money has not brought any substantial improvement – in fact things have gone from bad to worse

At the start of the period, 2002, Post PNG had only just been rescued from insolvency. It is still reliant on IPBC for life support.

bemobile is also being kept alive by cash injections from its shareholders, including the Government through IPBC.

PNG Power has been using its borrowings not to generate revenue but simply to keep operating.

Telikom has been borrowing illegally.

MVIL has invested funds illegally and its investment portfolio is under-performing.

Each and every Public Enterprise requires capital injections once again.

Ladies and gentlemen, every kina that we provide to non-performing Public Enterprises is a kina that brings negligible benefit.

The ADB survey estimates that every kina invested in our Public Enterprises produced seven times less output than the same kina invested in the rest of the economy.

Furthermore, every kina that we provide to non-performing Public Enterprises is a kina that does not go to where it is needed most – to hospitals, aid posts and clinics, to schools and universities, to crime prevention, to agricultural extension, and so on.

And because the impact of funds spent on Public Enterprises is low compared to, say the education or health sectors, Public Enterprises are actually a drag on economic growth and national development.

The survey shows that Papua New Guinea’s Public Enterprises contributed 1.9 percent to Gross Domestic Product compared to 6.2 percent in Samoa, 5.5 percent in Tonga, 3.3 percent in Fiji and 2.1 percent in the Republic of Marshall Islands. Only the Solomons’ Public Enterprises contributed less than us.

These statistics are the reason that the current reform of IPBC and Public Enterprises MUST be fully implemented and MUST be followed through with political decisions on the future of reformed and recapitalised Public Enterprises.

The ADB’s Benchmarking Study has provided some signposts for the way forward.

For example it states:

“In PNG as in the other countries, the poor performance of the SOEs is due to weak governance arrangements, conflicting mandates, the absence of hard budget constraints, and lack of accountability.

“SOEs do not operate with the same efficiency incentives as private sector firms; there are few consequences for poor financial and operating performance and few rewards for achieving profitability targets.

“It is therefore not surprising that the best performing SOEs are those that operate in an environment that demands a full commercial orientation; and with strong governance arrangements, high levels of transparency, performance incentives, and hard budget constraints.”

I believe that the initiatives IPBC has undertaken in the past 12 months as part of the Government’s reforms are robust first steps.

But clearly there is a long way to go, with many hurdles to overcome.

The first hurdle is deciding what we want to achieve – where we hope to be when we reach our destination.

I want IPBC to be a world-class organisation, operating commercially to world standards and thereby providing world-class services and infrastructure to the people of Papua New Guinea.

In that context I note that the Benchmarking Study confines itself to PNG and five other Pacific Island nations.

As a first step, that is fine.

But we cannot just stop once we have hit a target that is good enough for Papua New Guinea, or good enough for a Pacific Island nation.

That has been part of our problem over many years. My view is that we must aim for the centre of the target – the bullseye.

Next time this exercise is undertaken, I would like to see some South-East Asian enterprises – for example in Indonesia, the Philippines, Malaysia, Cambodia, Laos and Vietnam ‑ included in the comparisons, or an even broader benchmarking base covering other developing economies.

Regular benchmarking will help improve our performance, and create tangible benefits for the nation.

Once again I wish to commend the ADB team for this timely and important report.

Thank you.