State-owned enterprises (SOEs) are a significant drain on Pacific island economies, with the returns from most countries’ SOE portfolios not even meeting their capital costs, according to a new report from the Asian Development Bank (ADB).
The Finding Balance 2016 report finds SOE portfolios in the eight Pacific countries examined contributed only 1.8% to 12% to gross domestic product, despite their very large asset base, ongoing government cash transfers, and monopoly market positions. It also finds productivity levels of the SOEs tend to be well below developed country benchmarks.
“Low SOE returns are not unique to the Pacific but are common throughout the developing and developed world,” said Christopher Russell, SOE Expert with ADB’s Pacific Private Sector Development Initiative (PSDI), which produced the report. “They reveal a fundamental flaw in the SOE model: it is not an effective long-term ownership structure as politicians will avoid commercial decisions that may have short-term political costs.”
The report assesses the performance of SOEs in Fiji, Kiribati, Marshall Islands, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Vanuatu, as well as Jamaica and Mauritius. It finds many countries have made significant progress through commercially-oriented reforms. Solomon Islands’ SOE portfolio’s return on equity jumped from -11% in 2002-2009 to 10% in 2010-2014. In Tonga, portfolio returns have increased to 6% from a low of 0% in 2009. Overall, seven of the 10 countries examined had seen improved SOE profitability since 2010.
The report also highlights that, while improvements had been achieved, sustaining them has proven impossible in most countries, both developed and developing. Drawing on the experiences of New Zealand and Singapore, the report concludes that increased private sector ownership and operation of SOEs is the only way to lock in reform gains.
Finding Balance 2016: Benchmarking the Performance of State Owned Enterprises in Island Countries is the fifth report in the Finding Balance series, which identifies strategies to guide reforms of SOEs, highlighting the importance of finding the right balance between public and private sector roles.
PSDI is a technical assistance facility cofinanced by the Government of Australia, the Government of New Zealand, and ADB. It supports ADB's 14 Pacific developing member countries to improve the enabling environment for business and to support inclusive, private sector-led economic growth. The support of the Australian and New Zealand governments and ADB has enabled PSDI to operate in the region for almost 10 years and assist with more than 280 reforms.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB in December 2016 will mark 50 years of development partnership in the region. It is owned by 67 members—48 from the region. In 2015, ADB assistance totaled $27.2 billion, including cofinancing of $10.7 billion.