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Wednesday, March 04, 2009

State Owned Enterprises (SOE) Workshop - Reform Opportunities in the Capital Market - 19 Feb 2009

The capital market can help Government in improving efficiency and performance of state owned entities (SOEs). Some of these opportunities include enforcing financial and corporate discipline, as well as having better access to relatively cheap capital both locally and abroad. The recent successful capital raising cases of Pleass Beverages and Yatu Lau are good examples.

However, before any of this is possible, Government needs to get its house in order by imposing a performance-based framework for SOEs. The dismal performance of SOEs (see below) is not a new thing in Fiji, and this is due largely to a lack of clear goals, political interference, lax financial discipline and the question of competency of those on SOE boards.

The following are areas the government needs to work on, before SOEs could seriously look at accessing the capital markets:

  • The government of the day needs to seriously assess its policies and reconcile it with its portfolio of SOEs and see which ones are key components in its strategic plan. Any non-strategic SOEs will need to be divested from to save government from wasteful spending.

  • Policies and regulatory frame-works need to be in place and current to address the issue of investment in/divestment from these SOEs.

  • And reformation of SOEs will need political will to implement.

Contingent upon government’s strategic goals, SOEs can be commercialized, form partnerships with the private sector, have competitors injected into the industry if it is operating under a monopolistic framework, or have the SOE fully privatized (divestment). The idea behind SOE commercialization, minus government subsidies (usually SOEs operated like a business but were at the same time heavily subsidized by government which gave them an unfair advantage over the private sector. This promoted gross inefficiency and a resultant high percentage of non-performing SOEs) is to promote efficiency, profitability and a performance based culture.

Valuable lessons can be learned from New Zealand’s SOE reform success in 1987. Between 1987 and 1990, Telecom New Zealand reduced staffing levels by 47% while at the same time increasing productivity by 85% and profitability by 300%. New Zealand Post reduced its workforce by 30% while increasing the rate of next-day delivery within the country from 80%-98%. At home, Amalgamated Telecom Holdings Ltd, an ex-SOE (formerly known as Post & Telecom) is proof that restructuring and ultimately privatization does improve performance. In fact ATH commands 49% of market cap and has the second most traded stock on the South Pacific Stock Exchange. It is also the 1st listed company to adopt the Code of Corporate Governance and ATH recorded the highest total return of 60.67% in 2008.

The following are key areas that SOEs will need to prepare themselves before access into the capital markets is possible:

  • Strengthening of corporate governance
    To avoid conflicts of interest, government as the owner of SOE should not allow its representatives to be sitting on the board. Ideally, the board should be made up of independent directors who have commercial skills and experience. Secondly, there should be performance-based contracts for management and lastly eliminating payments to directors on the board who are there by virtue of holding another office (ex officio).

  • Clarifying mandates
    SOEs must operate with a consistent commercial mandate, free from political interference. Both government and the SOE must be clear on their respective roles and their obligations. This should also be supported by a statement of corporate intent (SCI) to support these arms-length relationships and provide performance monitoring and accountability tools.

  • Implementing robust frameworks for community service obligations (CSO)
    CSO (this generally refers to the provision of essential services, like electricity, water, infrastructure development etc) should be delivered on a full cost-recovery basis. This means that CSOs will need to be rigorously identified, costed, contracted, and monitored for delivery. This is probably one of the most “touchy” areas in SOE reformation and will need all the political will the Government can muster to fully implement the necessary changes.

  • Imposing financial discipline
    Commercialized SOEs should operate under the same hard budget constraints as private sector firms. This ensures prudent spending, better accountability & transparency and ultimately better efficiency for the SOEs core operations. This is where the SOEs business plan (statement of corporate intent and corporate plan) come in handy.

Types of SOEs that may be considered for privatization

Once SOEs have been reformed it is important that Government have a clear understanding of which SOEs are strategic components of its long-run policies and which are not. For non-strategic SOEs, these should be put through the final step of reformation, which is to become privatized (divestment).

A look at privatization of SOEs globally reveals that that these SOEs deal largely in:

  • Basic utilities (e.g. electricity, water, gas etc).
  • Information Technology & Communication.
  • Major capital infrastructure (e.g. airports, ports, roads, rail-railroads).

This is also the growing trend locally, which started with the privatization of P&T to ATH. In fact, at a workshop on SOE reformation that was held at the Holiday Inn on the 19th of Feb 2009, the Ministry of Public Enterprises revealed their plan of having 5 SOEs taken to privatization by next year. Even though the Ministry of Public Enterprises did not reveal any specific names, it is instructive to note two SOEs that attended, Post Fiji Ltd and Airports Fiji Ltd.

Year end earnings of selected state owned entitities in Fiji ('99-'04)
State Owned Entities2004 ($)2003 ($)2002 ($)2001 ($)2000 ($)1999 ($)
Fiji Shipbuilding Corporation Ltd(183,155)(269,235)(304,495)(145,399)N/AN/A
Viti Corps LtdFS not submittedFS not submitted(249,539)(643,545)(581,273)(645,641)
National Trading Corporation LtdN/AN/A(9,000)(2,000)(344,000)(692,000)
Fiji Hardwood Corporation Ltd (FHCL)(2,354,370)(3,668,944)(1,841,914)(2,972,423)(2,938,350)(3,981,910)
Rewa Rice LtdFS not submittedFS not submitted(241,550)121,399(328,039)2,412,967

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