Better Performing, More Sustainable State-Owned Enterprises in Papua New Guinea
Above: Staff in charge of the facility in Kimbe, West New Britain, Papua New Guinea, where an ADB-supported Town Electrification Investment Program is helping to build renewable energy facilities to meet critical electricity supply gaps in six provincial urban centers.
SOEs play a critical role in the PNG economy, delivering electricity and water, banking and insurance, aviation, ports, and communications. PSDI is supporting a broad and significant reform program to improve the management and performance of all 12 SOEs, instituting commercial principles and developing capabilities to pursue them. This will help reduce fiscal risk and improve service delivery.
The 12 enterprises include utilities such as electricity, water, and sanitation; providers of other essential services such as ports, aviation, and telecommunications; and banking and insurance providers. Alongside delivering services to communities, private sector, and public sector customers, these firms represent significant economic investments and are expected to deliver financial returns. In 2015, amendments to the Act which governs SOEs left the enterprises without effective oversight and subject to non-commercial decision-making. Since then, the financial performance of PNG’s SOEs has been in decline while they have accumulated unsustainable levels of debt.
In 2019, the Government of PNG instigated a strategic reform process, to be led by the Ministry of State Enterprises and Kumul Consolidated Holdings (KCH), the entity that holds in trust PNG’s non-petroleum and non-mining assets, in close collaboration with the SOEs. A core tenet of the reform is to place all SOEs on a solid commercial footing, independent of political interference and operating with full transparency, accountability, and ultimately with competitive neutrality. This will help improve financial performance and capacity to provide services effectively.
To underpin this reform agenda, a ministerial committee, chaired by the minister of state enterprises, oversaw the development of the SOE Ownership and Reform Policy. PSDI worked closely with the technical working group supporting the committee to first agree a set of principles from which the policy would be derived. Once the principles were agreed, PSDI prepared a draft policy that aligned with the PPP Act (2014), the Community Service Obligation Policy for SOEs (2012), and the National Competition Policy (2020), and set out new governance architecture for SOEs.
The policy has several core features essential to placing SOEs on a strong commercial footing:
- a governance framework that holds SOEs accountable for commercial results and protects them from political interference that could undermine ability to achieve goals;
- a robust oversight mechanism with KCH—a holding company for nine SOEs with a mandate to manage them for commercial return—as the ministry’s implementing agency;
- a mechanism through which SOEs can deliver noncommercial services mandated by government without compromising their overall commercial targets;
- skills-based director selection and appointment that facilitates the appointment of qualified women to SOE boards; and
- robust SOE corporate planning that requires public disclosure of key performance targets.
KCH worked with PSDI to reflect the policy in a new amendment to the KCH Act. The policy has been endorsed by Cabinet and is now awaiting submission to the Parliament.
KCH General Counsel Erastus Kamburi noted that although the policy attempts to protect SOE boards and management from political interference, implementing it will be challenging. He says while enterprises remain state-owned, efforts to influence their direction and operations can be expected.
“The best we can do—and we’re hoping to do that through legislation—is to minimize that political influence to a level that is manageable, that can be managed by the SOEs,” said Mr. Kamburi. Mr. Kamburi confirmed that the policy aims to “create an environment that is conducive for SOEs to operate as private entities.” Appropriately qualified and experienced management staff and boards will be needed to achieve this.
To support implementation, PSDI prepared a skills-based SOE director selection and appointment process that was endorsed by the KCH Board in March 2020. To facilitate SOE performance monitoring and increase public disclosure, PSDI supported the creation of new guidelines for preparing 3-year corporate plans and statements of corporate objectives, endorsed by the KCH Board in April 2020. The minister will hold ultimate responsibility for SOE oversight, including reporting performance to Parliament, with annual reports covering performance released to the public. The policy also outlines conditions under which new SOE investment should occur, prioritizing service delivery by the private sector, where it is deemed more efficient, including through PPPs.
The policy will drive changes at all levels of SOE management, said Mr. Kamburi. “For SOEs, there will be major shifts in how they are structured—all the way from the Managing Director, to the Board, and across the SOEs.” This could include operational contractions in areas of some SOEs that may become redundant, addressing some “legacy” issues through the reform.
The implications of the policy for the private sector are significant. To date, PNG SOEs have enjoyed monopolies in their respective sectors. Mr. Kamburi said the reforms will open sectors to private sector participation and that early engagement has been positive. SOEs are reviewing opportunities for PPPs, which will also be supported by reforms to the PPP Act and the National Competition Policy. Mr. Kamburi said outcomes that will improve the lives and livelihoods of the PNG population are ultimately at the heart of the reform.
“You can operate in the private sector environment with a profit-orientated mentality. However, service to the people is a major component … When we remove the legacy issues that drag on SOEs and enable delivery with appropriate quality service obligations that are properly costed … you’re looking at services that are going to flow out to people, to the rest of the country.”
The reforms articulated in the SOE Ownership and Reform Policy have been applied in amendments to the KCH Act, which are currently awaiting cabinet endorsement. Mr. Kamburi is circumspect about the process moving forward. “There are a number of hurdles to jump. You don’t always have people who are inclined to change. There are others who resist change. The good thing is that we have started and are moving. However, there is a lot that still needs to be done before we can realize the outcome of this process.”