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.

Damning SOEs

By MALUM NALU

A NEW study released by the Asian Development Bank on Thursdat has painted a damning picture of state-owned enterprises (SOEs) in Papua New Guinea, saying they have become a liability rather than an asset, The National reports.
 The report highlighted that PNG SOEs absorbed an estimated K700 million in direct government transfers during the financial years from 2002-09, against which they generated a net profit of K500 million, of which only K23 million was paid to Treasury in the form of a dividend.
The PNG SOEs are Air Niugini, bemobile, Motor Vehicle Insurance Ltd (MVIL), National Development Bank (NDB), Eda Ranu, PNG Ports Corporation, PNG Post Ltd, PNG Power Ltd, Telikom PNG Ltd, and Water PNG.
The bank study, “Finding balance, benchmarking the performance of state-owned enterprises in Papua New Guinea”, assessed the impact of the SOEs on the PNG economy as well as those of five other Pacific countries – Fiji, Marshall Islands, Samoa, Solomon Islands and Tonga.
The findings of the study revealed that while PNG’s SOEs had produced net profits that were in the upper range of the SOE portfolios in the six Pacific countries benchmarked, they had done so at a substantial cost to the government in terms of ongoing fiscal transfers and other subsidies.
Painfully, this is at a cost to 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 scare capital on which the (SOEs) provide very low returns, crowding out the private sector, and diverting public funds that could otherwise be invested in such high-yielding social sectors such as health and education, SOEs act as a drag on economic growth,” the report says,
“A chronic lack of accountability has allowed the SOE portfolio to be governed extra legally over most of 2002-11.
“Indeed, of all of the countries participating in this benchmarking study, PNG has demonstrated the lowest level of transparency in the management of its SOE portfolio over the past decade.
“This has begun to change with a notable improvement in disclosure and oversight since late last year.”
Minister for Public Enterprises and State Investments Ben Micah and IPBC managing director Thomas Abe both described SOEs as liabilities to the government at this week’s PNG Advantage investment conference in Port Moresby

Newcrest confident in Golpu project

By MALUM NALU

Newcrest Mining chief executive Greg Robinson says its US$5 billion Golpu project in Morobe province, to be run jointly with Harmony Gold of South Africa, will be its big “change”, The National reports.

He told the Papua New Guinea Advantage 2012 investment conference on Monday that the project – estimated to start in 2019 - would cost US$5 billion and another US$5 billion would be poured into the country over the next 10 years.

“I think that Morobe (Golpu) will be the change for us as we work with our partner, Harmony,” Robinson said.

“It’s a US$5 billion investment that we start work on in 2019.

“Ultimately, we will spend another US$5 billion over the next 10 years.

“There is enormous opportunity.

“That’s going to be a very significant investment for us

Australia's Newcrest, which jointly owns the Golpu mine with Johannesburg-based Harmony, said last week that new exploration work pointed to revised reserves estimates of 5.4 million tonnes of copper and 12.4 million ounces of gold.

This is an increase of 4.7 million tonnes of copper and 11 million ounces of gold compared with previous estimates provided by the companies.

The mine could start producing by 2019, pending results of more studies and various approvals.

The firm will also conduct a study later this year into a neighboring deposit called Wafi.

 Papua New Guinea holds the rights to buy up to 30% of any mineral discovery at Wafi and Golpu.

Newcrest, which controls the Lihir gold mine in New Ireland province, also runs the Hidden Valley gold mine in Morobe province in a 50-50 venture with Harmony.

Robinson said while many mines around the world had short life spans, PNG mines tended to have longer life spans.

“A lot of major developments come with short life, “he said.

“The average life of a deposit is around 10 years.

“The tendency in PNG is that there are very large deposits and they are very long life.”

Robinson, however, pointed out that PNG competed with the global market for investments.

“I think we are lucky, fortunately,” he said.

“PNG competes with the global capital market for investments.”

IPBC promises reforms in public enterprises

By MALUM NALU

Independent Public Business Corporation managing director Thomas Abe yesterday (Tuesday) promised reforms in both IPBC itself and the enterprises it owns.

He told the Papua New Guinea Advantage 2012 investment conference that the reforms focused on providing strong leadership from government by giving IPBC and state-owned enterprises (SOEs) a clear sense of direction, a robust policy and planning framework, and clear implementation guidelines through national executive council (NEC) decisions.

Abe at the PNG Advantage 2012 investment conference yesterday.-Nationalpic by MALUM NALU

On Monday, at the same conference, new Minister for Public Enterprises and State Investments Ben Micah described SOEs as a liability to PNG.

IPBC’s portfolio consists of Air Niugini, bemobile, Motor Vehicle Insurance Ltd (MVIL), National Development Bank (NDB), Eda Ranu, PNG Ports Corporation, PNG Post Ltd, PNG Power Ltd, Telikom PNG Ltd, and Water PNG.

“The minister (Micah) made two very important points that I want to reinforce,” Abe said.

“The first is that it is not business as usual for Papua New Guinea any more.

“Business as usual has been a failure, and it is time to do things differently.

“The second is that there needs to be far greater participation in national-building by the private sector.

“Allow me to be blunt – the state has never had the financial, technical or physical capacity to deliver all the services and infrastructure the nation needs in the time frames required.

“Today, we are even worse off.

“Therefore, IPBC has been engaging much more closely with the private sector during the past 12 months, and we expect to be building on that relationship in the future.”

Abe said the IPBC Act had been amended to improve governance arrangements, increase transparency and accountability and place much greater emphasis on customer service levels and the delivery of affordable and reliable services by public enterprises.

“Since August last year, IPBC has conducted reviews of all public enterprises and has begun assisting them with remedial action,” he said.

“IPBC and public enterprises now have annual plans and budgets for the first time, approved by the IPBC board and by cabinet.

“The annual plans are firmly based on commercial discipline and practices.

“Transparency and accountability have also increased dramatically – the annual plans are now published on the IPBC web site, as is the IPBC Act and the audited accounts.

“I have no doubt whatsoever that this renewed focus on infrastructure development and public enterprise efficiency will bring lasting benefit to the nation and to the private sector’s capacity to operate effectively and profitably.

“I assure you (investors) that we at IPBC are doing everything in our power to change the national and business landscape for the better.

“As the minister said yesterday, I look forward to working with you.”

Manufacturers: Ports becoming obstacle to business

By MALUM NALU

Business is becoming more costly and difficult in PNG because of the time it takes to clear cargo at the port, the Papua New Guinea Advantage 2012 investment conference was told yesterday.

The major concern was the length of time ship waited for clearance, and after that, more time waiting for containers and other cargo to be cleared.

The busy Lae port, which is also affected by numerous bottlenecks.-Picture by PETER BOYD of Riback Stevedores

Manufacturers’ Council of PNG chief executive, Chey Scovell, told a ports forum at the conference that his members, and the entire business community in PNG, were inundated with port problems.

Others on the chair, including Maersk International country manager Bronwyn Piesse and PNG Ports' general manager engineering Larry Hore, admitted that PNG ports were facing a huge problem.

Hore was bombarded with questions and comments when the floor was opened.

“It’s certainly true that ports are facing issues with capacity,” Scovell told the forum.

“We need to have reliable, affordable and available ports services that are competitive.

“Industry in PNG, and the broader consumer services market, needs a feasible platform to undertake business.

“At the moment, the reality is that the ports, like other infrastructure issues, are a genuine concern and a bottleneck to business.

“Vessels are awaiting clearance for seven, eight days, nine days to come into port.

“And when the ship does get into port, there are major issues with getting their containers out of port.

“There’s a whole raft of areas that we’re working on to address these issues.”

Scovell said his council had established a sub-committee within its membership to establish inter-agency dialogue to address the problem.

He said Customs had serious problems in manpower, office space and accommodation for staff to attend to the very serious problems at PNG ports.

“The reality is that it took Customs two years to get an organisational structure that would allow them to meet the demands that prevailed at the time,” Scovell said.

“Residents here would also remember that four years ago, Gary Juffa, the former commissioner for Customs, gave a presentation in which he said that PNG Customs had only 17 officers to perform immigration functions.”

Scovell said very little had changed since in Customs’ manpower, office space and accommodation for staff.

CPL: Hard to attract international retailers to PNG

By MALUM NALU

Attracting international retailers into PNG will get harder if the country’s outlook doesn’t make it easier for them, according to City Pharmacy Ltd chairman Mahesh Patel.

Patel, who runs PNG’s largest supermarket chain, told the Papua New Guinea Advantage 2012 investment conference in Port Moresby yesterday that global players were also reluctant to enter PNG due to perceived and real security issues.

 Patel (right) with Esso Highlands managing director Peter Graham (left),  Newcrest Mining chief executive Greg Robinson, and Deloitte PNG managing partner Lutz Heim at the conference yesterday.-Nationalpic by MALUM NALU

“And they are also reluctant if their own assessments indicate unrealistic volume expectations and superficial sales targets,” he said.

“No significant international retailer wants to spend its shareholders’ cash on more than 5% of their operating costs just on security and insurance just to penetrate the market.

“I reiterate, the supply chain from garden, to manufacturing, to retail and household is a problem that has to be addressed from a national perspective.

“For a developing nation, it is the most-critical issue hampering business growth and local prosperity.

“For most people, the means of making an honest living is selling raw products to an accessible market or retailers – for a better price.

“This is not happening, because of high costs to everyone in the chain.”

Patel told of CPL’s buying fresh vegetables in the Highlands and air freighting them to Port Moresby.

“We charter an aircraft five times a week to bring fresh vegetables to sell in Moresby,” he said.

“It’s the fastest and most-reliable mode of transportation, so the perishable items are as fresh as we can deliver.

“Our customers and clients expect this and we strive to deliver on our promise.

“I have now assumed a key role in the supply chain as a charter management specialist.

“Thankfully, I am not a pilot, or the temptation would be for me to fly and pick up the vegetables myself.

“The problem is not restricted to the Highlands…it’s across the country!”

Patel said high import duties and in some specific categories, government restrictions on new entrants as a policy to protect local manufacturers, was another problem.

“It’s an issue that the ICCC (Independent Consumer and Competition Commission) has recognised and is addressing, as we see in public reports and debate on rice, sugar, and chicken,” he said.

“The list goes on.”

Central Bank: IPBC should review portfolio

By MALUM NALU

The Bank of PNG believes the Independent Public Business Corporation (IPBC) should review its portfolio, according to Governor Loi Bakani.

In a speech delivered on his behalf by assistant governor Gae Kauzi at the Papua New Guinea Advantage 2012 investment conference, Bakani said the government – through IPBC – should decide which industries to privatise and which to be sourced out.

Ironically, this was just Minister for Public Enterprises and State Investments, Ben Micah, admitted that public enterprises were a liability to PNG.

“The IPBC should review its portfolio and decide which of the industries it controls should be fully or partially privatised and which of their operations should be sourced out,” Bakani said.

“Such a decision on its own will attract large amounts of investment funds into the country.

“It can become a catalyst for major investor interest in channeling investments into the country, and the development of new investment institutions and instruments.”

Bakani said in infrastructure development and implementation, the systems were in place and the private sector was fully involved as a partner.

“In this case too, there were too many claims and accusations of misuse of public funds, lack of detailed planning, and non-delivery of projects to their specifications,” he said.

“It is the role and duty of government to ensure that public funds are used only for approved projects productively and efficiently.

“There is much more to it: the government should decide in which areas it should source out to the private sector, the activities.

“One good example is the power generation industry.”

Bakani said the government and public sector should concentrate on improving and maintaining service delivery of public goods such as health, education and infrastructure.

“This will encourage investment in economic activities and financial services by both the public and private sectors in the rural areas for inclusive growth,” he said.

“The government has to plan in great detail, and professionally, the pace of implementation.

“The decisions it takes are very wide-ranging, complex, and very costly.

“It has to ensure that the very large amounts of resources that will have to be allocated to each and every one of the above sectors are used efficiently, and under close scrutiny and control.”