Do state-owned enterprises (SOEs) help or hinder economic progress? That’s a question Satish Chand, Professor of Finance in the School of Business at the University of New South Wales, was asked to consider at a recent business forum.

PNG Power’s Rouna 2 hydropower station, the subject of maintenance work earlier this month. Credit: PPL

Do state-owned enterprises (SOEs) help or hinder with economic progress? Those businesses in Port Moresby, Alotau, Buka and Bialla which, just this month, have had to deal with power outages might well be pondering that question.

Satish Chand believes the answer depends very much on the environment in which an SOE operates and, critically, on how government manages its SOEs.

‘We do know, however, that a state-owned enterprise that persistently makes losses will not be in a position to fulfil its mandate. We also know that state-owned enterprises are often created to provide services that the private sector cannot provide,’ he observes.

History

UNSW’s Professor Satish Chand

Chand is well placed to draw conclusions about Papua New Guinea’s state-owned enterprises. At the turn of the millennium, he worked under PNG’s former Prime Minster Sir Mekere Morauta to devise a privatisation policy for the twenty SOEs that existed in PNG at that time, during a period of great economic stress.

This led to the sale of Ilimo Poultry Farm Ltd and the Papua New Guinea Banking Corporation (PNGBC), and the creation of the Independent Public Business Corporation (now Kumul Consolidated Holdings) to manage PNG’s remaining SOEs.

‘As soon as the private sector is able to step in and fill that void, then the challenge for the State is to step away.’

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The loss-making PNGBC was sold in 2001 to Bank South Pacific for K230.6 million, with the State keeping a minority stake.

With the benefit of hindsight, Chand says there’s no question that this sale helped access to banking services in PNG.

‘In my assessment, it was one of the most successful [SOE] sales ever, all around the world. BSP now has a market capitalisation on the ASX of AUD$2.3 billion (K5.75 billion). It paid taxes last year to the State of K450 million. It is the bank that has got the biggest reach on the country. It serves six Pacific nations.’

It would take a brave person, he says, to suggest the old PNGBC could have achieved such an outcome.

The State’s role

Chand believes that the State only has role to step in only if the private sector is not already providing a service, ‘and then the State remains in that enterprise for the period when the private sector is absent.’

However, the State needs to get out of that business as soon as it can.

‘Consolidated SOE debt was estimated to be K5.1 billion as of the end of December 2020’

‘The State needs to work as an incubator and a venture capitalist that attracts service delivery into the economy … and, as soon as the private sector is able to step in and fill that void, then the challenge for the State is to step away.

‘I think that challenge is going to remain in PNG looking ahead.’

Reforms

On Chand’s criteria, several of PNG’s 12 current SOEs look suitable for some form of privatisation.

Indeed, the PNG Government is working on exactly this problem currently, with assistance from the Asian Development Bank, which is financing its US$150 million (K528 million) State-Owned Enterprises Reform Program.

In the ADB’s view, PNG’s SOEs are a major drag on government finances, with some of the largest – PNG Power, Kumul Telikom and Air Niugini – all making losses in 2020.

‘Consolidated SOE debt was estimated to be K5.1 billion as of the end of December 2020, of which K1.9 billion was commercial debt,’ says a recent ADB assessment of the sector.