PACIFIC PRIVATE SECTOR DEVELOPMENT INITIATIVE

SOE REFORM AND PPPs

FOCUS AREA OVERVIEW | AUGUST 2016

STATE-OWNED ENTERPRISE REFORM AND PUBLIC-PRIVATE PARTNERSHIPS State-owned enterprise (SOE) reform is crucial to private sector development. SOEs continue to play an important role in many Pacific island countries. Many absorb large amounts of scarce capital on which they provide very low returns. While some provide essential public services, many others operate as purely commercial ventures and crowd out the private sector.

OVERVIEW

Reforming SOEs and implementing public-private partnerships (PPPs) creates opportunities for private investment, reduces the costs of doing business and improves basic services by introducing private sector discipline and competitive market pressures into the SOE sector. Through a combination of legal, regulatory, governance, and monitoring reforms and the introduction of increased private sector participation, the performance of SOEs and infrastructure service delivery is improving in the Pacific. PPPs expand the capacity of SOEs to deliver infrastructure and related services and also allow governments to contract directly with the private sector without the involvement of SOEs. ADB has been working with Pacific island countries on SOE reform and PPPs for more than a decade. Key in driving this agenda has been the publication of PSDI’s Finding Balance series. Each edition of Finding Balance offers in-depth analysis that tracks the challenges, achievements and best practices in SOE reform in ADB’s Pacific developing member countries, providing a unique benchmark with which to measure progress and share lessons learned. Four editions of Finding Balance have now been published and a fifth will be released in September 2016. Each study drew on the insights provided at regional SOE leaders seminars convened by PSDI. In late 2016, PSDI will publish three case studies examining the operations of different Pacific SOE sectors. The case studies will look at water, wastewater and sewage; solid waste management; and franchise shipping.

OUTCOMES AND RESULTS

COOK ISLANDS In November 2011, PSDI reviewed the legislative, governance, and monitoring framework for Cook Islands’ SOEs. In July 2012, the Government of Cook Islands endorsed the resulting gap analysis recommendations. In March 2013, implementation was suspended as the government sought to clarify several issues. After a further review in July 2013, updated recommendations were submitted to the government in August 2013. PSDI remains ready to support implementation.

OUTCOMES AND RESULTS

PSDI has provided ongoing support for SOE reform activities in Fiji since 2007. Fiji has participated in all five of PSDI’s Finding Balance SOE benchmarking studies. PSDI provided peer review and implementation support to an ADB technical assistance project on SOE reform that ran from 2012–2013 and supported SOE restructuring and outsourcing, and capacity building of monitoring agencies.

CURRENT AND FUTURE PROJECTS

FIJI

Following the national elections in September 2014, PSDI has been supporting the Ministry of Public Enterprises in assessing partial divestment options for several SOEs, including Fiji Electricity Authority and Airports Fiji Limited. In both cases, regulatory implications and the impact of community service obligations are important considerations for structuring the planned divestments, which are expected to be transacted in 2016-2017. In 2015, the ministry also asked PSDI for support in developing an SOE policy framework and in reviewing the Public Enterprise Act and Public-Private Partnership Act. This work is ongoing and part of a larger collaboration with the Government of Fiji to develop SOE restructuring, divestiture and PPP programs.

ASIAN DEVELOPMENT BANK Pacific Private Sector Development Initiative Pacific Liaison and Coordination Office Level 20, 45 Clarence Street, Sydney, Australia

Tel +61 2 8270 9444 • Fax +61 2 8270 9445 [email protected] • @ADB_Sydney_PSDI www.adbpsdi.org • www.adb.org/plco/psdi

PSDI works with ADB’s 14 Pacific developing member countries to improve the enabling environment for business and address constraints to private sector development in support of sustainable and inclusive economic growth.

PSDI is a regional technical assistance facility co-financed by the Asian Development Bank, the Government of Australia, and the Government of New Zealand.

PACIFIC PRIVATE SECTOR DEVELOPMENT INITIATIVE

SOE REFORM AND PPPs

FOCUS AREA OVERVIEW | AUGUST 2016

CURRENT AND FUTURE PROJECTS

KIRIBATI PSDI has continued to provide peer review and support for the Government of Kiribati’s SOE reform program. In June 2014, under a separate ADB technical assistance project, PSDI participated in a multi-donor mission to review SOE reform progress and plan deliverables. In 2015-2016, Kiribati participated in PSDI’s Finding Balance benchmarking study for the first time since the biennial exercise began in 2009.

OUTCOMES AND RESULTS

REPUBLIC OF THE MARSHALL ISLANDS PSDI supported the development of an SOE reform policy, which Cabinet endorsed in April 2012. Based on the policy, the SOE Bill was drafted with substantial PSDI advice and input. The bill is designed to strengthen SOE governance and commercial orientation and support government efforts to improve SOE performance. It was passed by Parliament in 2015. PSDI will support the implementation of the bill. The Marshall Islands has participated in the 2011, 2012, 2014, and 2016 Finding Balance studies on the comparative country performance of SOEs. The studies have raised awareness of the fiscal cost of the SOE sector in the Marshall Islands and will support the Government of Marshall Islands’ implementation of the SOE Act.

OUTCOMES AND RESULTS

FEDERATED STATES OF MICRONESIA On request from Pohnpei Utilities Corporation (PUC), PSDI undertook an analysis of PUC’s options for outsourcing its power, water, and wastewater operations. The analysis included PPP opportunities. PSDI presented the analysis to PUC management in June 2014, which was endorsed by the board in late 2014. Implementation assistance is now being considered by ADB as part of its broader country partnership strategy.

OUTCOMES AND RESULTS

NAURU PSDI provided technical assistance to the government to restructure the Republic of Nauru Phosphate Corporation’s senior executive management. This included assistance with recruiting a new chief executive officer (CEO) who began in October 2011. PSDI also supported the development of a new organization structure for senior management and board of the Nauru Utilities Corporation (NUC) and Nauru Rehabilitation Corporation (NRC), including assistance with new CEO and other senior management recruitment. NUC’s new CEO took up his position in June 2012. Followup performance review assistance for the NUC CEO, and recruitment of a new NRC CEO, was provided under separate ADB funding. NRC’s new CEO was appointed in November 2013.

CURRENT AND FUTURE PROJECTS

PALAU PSDI continues to support Palau’s development and implementation of an SOE policy. The first public consultation on the draft SOE policy was held in November 2013 and the second in April 2014, and the policy was endorsed by the President in late 2014. It calls for the commercial operation of all three of Palau’s SOEs, the establishment of a contracting framework for community service obligations, and the removal of elected officials from SOE boards. In 2016, PSDI has been providing technical support to review options for private investment and operation of the Koror airport through a PPP mechanism. With the Palau Chamber of Commerce, PSDI has developed a corporate governance strengthening program. This began in April 2014 and is ongoing. PSDI also assisted the newly merged power and water utility with their articles of incorporation and CEO selection process.

CURRENT AND FUTURE PROJECTS

PAPUA NEW GUINEA (PNG) In September 2014, Parliament passed the PPP Act, which was developed with PSDI support. The act will allow a PPP program to form, enable PPP transactions to be prepared in a transparent and predictable manner, and reduce risks to private sector participation. Since its passage, PSDI has developed an implementation strategy, a PPP project pipeline, a business plan for a PPP Centre, position descriptions, a project development facility concept note, and supported the development of regulations. These efforts are aimed at operationalizing the supporting institutions necessary for the implementation of the act before its gazettal.

PACIFIC PRIVATE SECTOR DEVELOPMENT INITIATIVE

SOE REFORM AND PPPs

FOCUS AREA OVERVIEW | AUGUST 2016

PAPUA NEW GUINEA (PNG) (CONT’D)

CURRENT AND FUTURE PROJECTS

PSDI presented updated Port Moresby and Lae Airport PPP assessments to the National Airports Corporation in November 2013, and completed a detailed PPP options study for the new Lae Port in May 2014. Since the Lae Port analysis was completed, ADB’s new Office of Public-Private Partnership has been in discussions with the government to offer transaction support. PSDI will continue to provide input into ADB infrastructure project designs to identify potential PPP opportunities and ensure their consistency with PNG’s Community Service Obligation (CSO) Policy for SOEs. The CSO Policy for SOEs, which was developed with PSDI support, was approved by the National Executive Council (NEC) in December 2013. The Policy requires full transparency in identifying, costing, contracting, and financing CSOs. The NEC directed the policy to be piloted in three SOEs, work which PSDI has been supporting since mid-2014 in collaboration with an interdepartmental working group. Of the three SOEs selected for the pilot, one—National Airports Corporation—has been able to provide the necessary data to develop detailed CSO cost estimates and a CSO contract was prepared in the fourth quarter of 2015. The CSO working group intends to use the first successful CSO contract and underlying methodology to expand the application of the policy to additional SOEs in 2016. Since January 2016, PSDI has been collaborating with PNG Power to introduce renewable energy in isolated diesel centers on a PPP basis. This work builds upon a call for expressions of interest launched by PNG Power in early 2015 and aims to conclude PPP agreements using solar energy in selected sites. PNG participated in the 2012, 2014, and 2016 Finding Balance SOE benchmarking studies. The October 2014 launch of the study in Port Moresby generated substantial press coverage and public debate around the role of SOEs in the economy. PSDI is engaged in ongoing dialog with PNG’s Department of Public Enterprises to define measures that could strengthen the legal and regulatory framework for SOEs.

SAMOA

OUTCOMES AND RESULTS

Samoa has participated in all five of the Finding Balance studies. The studies have raised awareness of the poor performance of Samoa’s SOEs and led to an increase in SOE reform impetus. The enactment of the Composition Act in early 2012 triggered the restructuring of all SOE boards to remove elected officials. This reduced the number of public servants and elected officials serving as SOE directors; in 2010, almost 50% of SOE directors were either ministers or public servants, by 2013 only 11% were public servants and none elected officials. The June 2015 round of SOE director appointments saw 188 persons apply for 102 vacancies. The move to professional boards will reduce political influence, strengthening SOEs’ ability to implement their commercial mandate. In 2012, the Government of Samoa requested PSDI support for the privatization of three SOEs: Agriculture Stores Corporation (ASC), Polynesian Airlines (Investment) Limited (PAIL), and Samoan Shipping Services. Cabinet approved PSDI’s recommended sales strategy for ASC but the Privatization Committee, appointed by Cabinet, opted for a more complex sales process. The sale of ASC was completed in April 2016. PSDI’s privatization scoping paper for PAIL was submitted in October 2012, but the transaction has not proceeded. In April 2014, an SOE Minister was appointed. PSDI had long advocated for the creation of this position. PSDI provided advice to the new minister and the Ministry of Finance on how best to undertake the responsibilities of this new role. PSDI also provided advice on changes required to the SOE Act to support the SOE Minister’s role and tighten transparency and accountability. The amendments were enacted in January 2015. In June 2014, PSDI prepared an SOE ownership, performance, and divestment policy update, which was endorsed by Cabinet in January 2015. In the first half of 2015, support was also provided to the SOE Monitoring Division to strengthen the selection and appointment of directors and to develop a director performance evaluation tool. PSDI provided policy support for the new Ministry of Public Enterprises, which commenced operations in July 2015.

CURRENT AND FUTURE PROJECTS

SAMOA At the request of the government, a privatization options paper was prepared for Public Trust Office, Samoa Post, and Samoa Housing Corporation. The paper was submitted in September 2015 and the ministry is reviewing its recommendations and the need for any amendments to the SOEs’ establishing acts to facilitate their sale. At the request of the ministry, PSDI undertook a review of proposed amendments to the Public Bodies Act. PSDI submitted its recommendations in August 2016. PSDI is also supporting the development of a public-private partnerships program. At the request of the ministry PSDI reviewed proposed amendments to the Public Bodies Act and submitted its recommendations in August 2016.

PACIFIC PRIVATE SECTOR DEVELOPMENT INITIATIVE

SOE REFORM AND PPPs

FOCUS AREA OVERVIEW | AUGUST 2016

OUTCOMES AND RESULTS

SOLOMON ISLANDS Solomon Islands’ SOE portfolio has undergone a remarkable turnaround over the past six years. Rates of return on both assets and equity, which were negative from 2002-2009, are now positive, demonstrating what can be achieved with strong government commitment to SOE reform. Solomon Islands participated in Finding Balance, PSDI’s comparative study on Pacific SOEs performance, in 2011, 2012, 2014, and 2016. PSDI supported the Solomon Islands SOE monitoring unit in implementing a CSO framework and drafting CSO contracts for selected SOEs from 2011 to 2015. These have been instrumental in improving the financial performance of the SOEs. Their implementation has required ongoing training of SOE and Ministry of Finance officials responsible for SOE monitoring. PSDI also supported the development of statements of corporate objectives by SOEs, shared accounting services for the smaller SOEs and several privatizations (Solomon Island Printers in 2012, Sasape Marina in 2010 and Home Finance in 2008).

CURRENT AND FUTURE PROJECTS

In June 2016, PSDI released a regional benchmarking study on port tariffs and productivity, which revealed recent tariff hikes and productivity losses at Solomon Islands Port Authority had made it one of the poorest performers in the region. The study served to inform a national debate on port commercialization. PSDI continues to provide assistance toward the implementation of the SOE Act and supporting regulations and the development of individual SOE restructuring strategies. The current government, elected in 2014, has yet to endorse a program of SOE reform, but will develop an SOE capitalization policy. PSDI has been providing input to this policy, which could formalize the government’s views on SOE performance, restructuring and privatization, including through PPPs. An evaluation of the community service obligation framework for SOEs in Solomon Islands was published in July 2016.

CURRENT AND FUTURE PROJECTS

OUTCOMES AND RESULTS

TIMOR-LESTE PSDI supported the preparation of a PPP policy and laws, with the first decree law approved by the Council of Ministers and promulgated in 2012. The amendment to the first decree law and the second decree law were both approved by the Council of Ministers in 2013 and both were promulgated in early 2014.

Since early 2014, PSDI has been assisting the government with implementation of the PPP policy and legal framework. In 2012–2013, PSDI financed a PPP pre-feasibility analysis for the Dili Water Supply System, which concluded that a PPP could be structured to improve service delivery. The government endorsed the recommendations in early 2014 and is now funding a full PPP feasibility study. PSDI has been supporting the Dili Water Supply System’s PPP Unit in managing the study, which will be completed in the third quarter of 2016, and is expected to set up a competitive tender for a PPP contract in 2017. This work is being undertaken in parallel with ADB’s Urban Water Supply and Sanitation Enhancement Sector Project and the Directorate of Water and Sanitation’s ongoing system upgrade planning. In addition to the onthe-job training provided through this PPP project, PSDI developed detailed procedures and guidelines for the PPP Unit and is supporting its evaluation of other potential PPP opportunities, in particular in the power sector.

OUTCOMES AND RESULTS

TONGA PSDI has supported a broad based SOE reform program affecting all of Tonga’s SOEs. This included: • preparing an amended SOE Act and providing governance training; • developing a director performance appraisal system and a skills based director selection process; • developing and implementing community service obligation guidelines; and, • providing training to assist with implementing the amended SOE Act. Tonga is the first of ADB’s Pacific developing member countries to publish SOE financial and operational performance information in the local press.

PACIFIC PRIVATE SECTOR DEVELOPMENT INITIATIVE

SOE REFORM AND PPPs

FOCUS AREA OVERVIEW | AUGUST 2016

TONGA (CONT’D)

OUTCOMES AND RESULTS

PSDI supported the partial liquidation of Tonga Print Limited in October 2013. PSDI also assisted with the corporatization and commercialization process of the Small Industries Centre, which was commercialized in September 2012, and TEQM Limited, which is expected to be commercialized in 2016. PSDI developed restructuring recommendations for Tonga Communications Corporation, which Cabinet approved in August 2013, but has not implemented. In the first quarter of 2014, at the request of Tonga Water Board, PSDI undertook an outsourcing scoping study, the implementation of which was completed in 2015. PSDI funded the placement of an SOE expert within the Ministry of Public Enterprises for three months at the end of 2014 to provide transactional support and capacity building, to advise on Tonga Forest Products Limited’s financial restructuring and privatization options, and to assist Tonga Broadcasting Commission to identify and cost community service obligations (CSOs). With PSDI’s assistance, Tonga has become the first country in the Pacific to develop SOEspecific financial targets based on the ministry’s assessment of risk and required return. PSDI also supported the development of a SOE Ownership, Divestment, and Reform Policy, that was adopted by Cabinet in 2014. PSDI has also worked closely with ADB and donor partners to design SOE reform policy actions for inclusion in joint donor program based grants. Through ongoing policy dialogue with PSDI, Tonga agreed in 2015 to undertake further SOE restructuring and governance reforms. PSDI drafted an SOE ownership and divestment policy that identifies seven high priority divestments and includes reform plans for the balance of the SOEs. Cabinet endorsed the policy in the third quarter of 2015. PSDI has also supported the government’s governance reforms and provided policy advice in the development of shared SOE boards. Throughout 2015–2016, PSDI provided advice on privatization options for Tonga Forest Products Limited, culminating in the government’s agreement in May 2016 to enter into a 50-year concession contract with private sector interests to invest in, manage, harvest, and replant the SOE’s forestry assets. Tonga has participated in all five Finding Balance studies.

OUTCOMES AND RESULTS

TUVALU In 2012 and 2013, PSDI provided peer review and high level support to ADB’s Pacific Subregional Office (SPSO) with the development of a management contract for the government-owned Vaiaku Lagi Hotel. PSDI also supported SPSO on the merger of the Tuvalu Philatelic Bureau, Tuvalu Post Office, and Tuvalu Ticketing Office into one entity.

VANUATU

CURRENT AND FUTURE PROJECTS

PSDI supported preparation of an SOE reform policy, which was approved by Cabinet in October 2013. The policy has guided the development of an SOE bill that will place SOEs on a firm commercial footing and enhance governance, monitoring, and accountability frameworks. The bill has been drafted with substantial PSDI input and oversight. It was considered by Cabinet and the Government plans to introduce the bill to Parliament in November 2016. Throughout 2014, PSDI supported a separate ADB technical assistance (TA) project on SOE reform in Vanuatu. The project concentrated on eight SOEs identified as reform priorities, for which it developed restructuring proposals, assisted in bringing audited accounts up-to-date, and identified and costed community service obligations. On completion of the project, four of the SOEs were selected for either liquidation or partial privatisation. Cabinet papers were prepared and in some cases approved by Cabinet, but following the change of Prime Minister and Minister of Finance in June 2015 Cabinet determined to reconsider all recent decisions. PSDI is now working with the Ministry of Finance to progress the privatization/liquidation of two of the SOEs. It is expected that the transactions will be complete in 2016-2017. In collaboration with the ADB TA, PSDI provided governance training for SOE directors, capacity building for the SOE Monitoring Unit, and the development of an SOE director performance assessment tool. At the government’s request, PSDI completed a public-private partnership assessment for a proposed new slipway in Q4 2014. The study confirmed that no public investment in slipway facilities was required as private investors were already expanding existing infrastructure and competition existed in the sector.