In his economic update last week, Papua New Guinea’s Treasurer, Don Polye, called for more public-private partnerships to drive the PNG economy. As the O’Neill government prepares to create an umbrella trust to oversee State-Owned Enterprises and their partnerships with private enterprise, Rowan Callick lays out the test for their success.

Rowan Callick, Asia-Pacific Editor, The Australian

The relationship between business and government has veered, during Papua New Guinea’s 150 years or so of contact with the broader world, between a battle-field and an intimate dance, with the government’s many businesses often being both at once.

The development process usually involves government leadership, in capital, management and naturally regulation, in pioneering areas that initially appear too costly or troublesome for business to risk.

However, in PNG’s case there was rarely enough money during the colonial era for government to build that economic – and even social – infrastructure base.

‘But in most cases, levels of service remained poor by international standards, and few if any of the companies paid tax or returned revenues … to government.’

Nevertheless, the PNG authorities got on with setting up state owned enterprises (SOEs) to form the motor for modernity: power, telecommunications, water, ports, airline, radio, road construction, and the rest.

At independence, the Somare government – whose closest model was Tanzania – extended this list, including by taking on the assets of the Australian government’s Commonwealth Bank and rebadging it the PNG Banking Corp (PNGBC).

Poor service

As PNG’s private sector increased in size – reflecting the rapid growth of both the country’s population and the resources sector – it grew frustrated with the cost and, often, the poor service provided by the SOEs, with their monopoly grip on core inputs.

In the late 1980s, The World Bank urged corporatisation and privatisation in the interests both of efficiency and of staunching the wastage of taxes on grand, money-losing “business” ventures.

As a result, PNG embarked on a form of corporatisation, establishing boards for most of its SOEs and notionally, other corporate essentials including annual reports and a target of turning a profit. But in most cases, levels of service remained poor by international standards, and few if any of the companies paid tax or returned revenues in some other way to government – with the striking exception of the minority stakes in resource projects.

Board seats were often well remunerated, sometimes prestigious, and thus highly sought out and contested. The boards were often answerable to Ministers. This provided a handy extension of political patronage power. Managers were usually better paid than in the public service from which they had mostly come. The reforms tended to stop at this form of corporatisation.

‘The logic of this trend is for those umbrella organisations still in state hands, but usually corporatised to some extent, to retreat further to become regulators rather than operators.’

The arrival of the government led by Sir Mekere Morauta triggered a more rigorous approach, with its core result being the privatisation of the PNGBC, and its merger with Bank of South Pacific, to create the country’s biggest financial institution, one now in private hands.

The establishment of a PNG stock exchange was a further step that would, it was hoped, provide a mechanism through which funds could be raised to privatise further SOEs. But while the exchange has steadily bulked up, there has been only modest privatisation action since then.

Now PNG Power is doing deals with private power producers – in another example of the steadily building push of the private sector into the SOE world, not principally through direct privatisation these days but through being commissioned or licensed to run parts of those industries that had long been state run.

SOEs as regulators

The logic of this trend is for those umbrella organisations still in state hands, but usually corporatised to some extent, to retreat further to become regulators rather than operators.

As an interim step, Prime Minister Peter O’Neill – himself a successful businessman, and accountant, before a politician – is aiming to restructure the government’s resource holdings and its SOEs ready for the September sitting of Parliament.

He intends to realign the many government businesses and assets into three agencies ‘so there can be no political interference in the future, in mining, gas and oil, and “investment”’.

The music has changed but the dance goes on, and behind it, in boardrooms and in political salons, battles. The test of success lies in whether PNG’s productivity, competitiveness, and capacity to create jobs, rise as a result.

Rowan Callick is the Asia-Pacific Editor of The Australian