Bank’s report points to S.O.E.s

Samoa’s State Owned Enterprises (S.O.E.s) continue to hamper Samoa’s economic growth, according to the Asian Development Bank (A.D.B.).

In its report, Finding Balance 2014: Benchmarking the Performance of State-Owned Enterprises in Island Countries, launched yesterday, the Bank found that while there had been some gains in regards to Samoa’s S.O.E, most continue to be a drag.

The report was launched at the Samoa Country Registry in Apia by A.D.B. Vice President Stephen P. Groff, ahead of the Third International Conference on Small Island Developing States (S.I.D.S.).

According to the A.D.B., engaging the private sector through public-private partnerships and privatisation is crucial to improving the performance and service delivery of S.O.E.s.

"The study reflects A.D.B.’s ongoing commitment to economic development in our member countries, an important element of which is continued thought leadership on S.O.E. reforms," said Vice-President Groff.

“Reforming the S.O.E. sector is vital as it improves basic service delivery, reduces the costs of doing business, and creates opportunities for private investment."

The Bank reports the study says S.O.E. reforms can bring immediate benefits, as in the Solomon Islands where S.O.Es showed an average 10 per cent return on equity in 2010-2012, compared to a return of -11 per cent from 2002-2009.

“The remarkable turnaround is attributed to increased privatization, public-private partnerships, financial restructuring and efforts to place SOEs on a sound commercial footing,” it reports.

“In Samoa, S.O.E. privatization has delivered much needed investment and competition, with improvements to service delivery-particularly in the telecommunications and broadcasting sectors."

“Despite these gains, most S.O.E.s continue to be a drag on growth in island economies."

“Finding Balance 2014 identifies key strategies to guide future policy on S.O.E.s, highlighting the importance of finding the right balance between public and private sector roles.”

Looking specifically at Samoa the A.D.B. reports that Samoa was once regarded as an aggressive S.O.E. reformer in the Pacific, but the pace of reform has slowed.

“Since the mid-1980s, half of its S.O.E.s have been restructured,” the report reads. “During 2001–2004, the government adopted international accounting standards, enacted a new S.O.E. law, and approved the S.O.E. Ownership, Performance, and Divestment Policy advocating the divestment of all nonstrategic S.O.E.s."

“The government has reconfirmed this policy in successive publications of its key planning document, the Strategy for the Development of Samoa (S.D.S.)."

“However, there have only been two privatizations since 2007—SamoaTel and Samoa Broadcasting Corporation."

“The 2012–2016 update of the SDS lacks any substantive S.O.E. reform targets.”

The report hones in on ministerial interference in S.O.Es saying while important steps have been taken to strengthen S.O.E governance, but ministers continue to exercise undue influence over board decisions.

“The 2010 establishment of an independent director selection panel and passage of the Composition Act in 2012 resulted in all ministers resigning from S.O.E. boards, and 180 new director appointments."

“While the S.O.E. Act prohibits non-directors from influencing board decisions, ministers and Cabinet have historically had significant operational control over the SOEs."

“The recent reforms should lessen direct ministerial control over SOE board deliberations and make Cabinet directions more transparent, yet early indications are that ministers— individually and collectively through Cabinet—continue to intervene in SOE matters. “This is contrary to the SOE law.”

In its report the A.D.B. cites examples of what it terms “inappropriate ministerial interference”.

“There are numerous examples of inappropriate ministerial influence, both pre- and post-passage of the Composition Bill,” the Report reads.

“Cabinet was active in supporting—if not driving—a series of noncommercial investments by the Samoa Ports Authority. The resulting ST$24 million debt burden, combined with the poor profitability of the investments, drove the company toward insolvency. It was rescued with a ST63 million government transfer in 2012."

“In March 2010, Cabinet directed the Agricultural Stores Corporation to transfer land valued at ST$2.7 million to another S.O.E., for a consideration of ST$0.80."

“In 2012, the Samoa Airport Authority was directed by the responsible minister to discount the rent charged to a private sector tenant for a large section of airport land.”

Moreover, the Bank reports that there have been no significant variations in individual S.O.E. performance over recent years.

“There have been no significant variations in individual SOE performance over recent years,” the report reads.

“Two historically profitable SOEs, Samoa Shipping Corporation and Polynesian Airlines, have seen a sharp decrease in profitability since 2010, but the balance of the portfolio has generally been stable."

“The five largest SOEs represent 71 per cent of the total assets, but only six of the 15 S.O.E.s generated a profit in 2012.”

In addition to this the A.D.B. found Samoa’s S.O.E. portfolio continues to perform well below the government’s target of seven per cent Return on Equity (R.O.E.), that the rate of return on the ownership interest of the common stock owners.

“Average R.O.E. and R.O.A. (Return of Assets, that is how profitable a company's assets are in generating revenue) for Financial Year (F.Y.) 2002–F.Y.2012 was 0.1 percent,” the report reads.

“Samoa is one of only three countries in the benchmarking sample to show no material improvement in portfolio R.O.E. for F.Y.2002–F.Y.2012, despite access to subsidised credit — 7 percent below the commercial rate on average — and an estimated $134 million in government transfers.”

The Bank says government transfers to S.O.E.s during 2002–2012 were equivalent to 2.6 per cent of Samoa’s Gross Domestic Product averaged over the period.

“This contrasts sharply with Tonga, where the SOEs made a $14 million net contribution to government,” it says.

“The social and economic cost of subsidising underperforming State Owned Enterprises (S.O.E.s) is significant—government transfers equate to 53 per cent of the total spending on health.”

“The government continues to support loss-making (and insolvent) S.O.E.s through soft loans, or investments directed through Samoa National Provident Fund, Development Bank of Samoa, or the Accident Compensation Corporation.”

The Asian Development Bank (A.D.B) reports that while Samoa has a robust legal, governance, and monitoring framework for S.O.E.s, it has never been fully implemented.”

“As has been demonstrated in Solomon Islands, S.O.E. performance would improve if the government fully implemented its S.O.E. Act,” the A.D.B. reports.

“This should be supported by publishing S.O.E. accounts and achievements against key performance targets. Increased disclosure would allow increased stakeholder engagement and scrutiny of S.O.E. performance and commercial returns.”

The Bank also noted the issues the Unit Trust of Samoa (U.T.O.S.) has faced in an effort to meet its overhead costs.

“Since 2011, the U.T.O.S. has become a major source of subsidized S.O.E. loans,” the report reads.

“To generate revenues to meet its overhead costs, U.T.O.S. has embarked on an aggressive financial disintermediation program, raising funds from the public and local institutions and lending the money to S.O.E.s at below commercial rates.

“The government guarantees the loans to the S.O.E.s. U.T.O.S. is not only crowding out lending to the S.O.E.s by commercial banks but, by providing subsidized loans to S.O.E.s, it also gives the S.O.E.s a competitive advantage.”

“Provision of subsidised loans may encourage S.O.E.s to undertake or continue noncommercial investments.”

“By June 2013, the U.T.O.S had ST52 million in outstanding loans to S.O.E.s and government-owned commercial businesses.”

In its report the A.D.B. further highlighted the problems U.T.O.S. bought to the table saying it distorts the market and S.O.E. behaviour.

“U.T.O.S., established in 2010 under the Prime Minister’s sponsorship, was intended as a vehicle for ordinary Samoans to participate in S.O.E. privatisations,” according to the report.

“The Trust’s first investment was 25 per cent of the privatized SamoaTel, funded by a ST7.9 million government loan.”

“While its prospectus identifies other S.O.E.s as potential investments, no further privatisations have been completed.”

“To meet its ST500,000 annual operating costs, U.T.O.S. has been forced to seek alternative investments.”

“By the end of F.Y.2013, U.T.O.S. issued ST11.2 million of units to investors and borrowed ST41.0 million from Accident Compensation Corporation, Samoa National Provident Fund, Samoa International Finance Authority, Parliamentary pension scheme, and other S.O.E.s all controlled by the government and lent ST52.4 million to various S.O.E.s and government owned commercial businesses.”

The A.D.B. says U.T.O.S.’ liabilities are generally long term, while its loans are short term, resulting in a significant maturity and interest rate mismatch.

“UTOS distorts the market and SOE behavior as follows,” the Bank reports.

“It unfairly competes against the commercial banks, it influences interest rates and commercial banking sector liquidity and loans to S.O.E.s are covered by a free government guarantee - normally the government charges S.O.E.s for guarantees.”

“(Furthermore) S.O.E.s do not need to meet commercial credit criteria, U.T.O.S. profits are tax free, the government guarantees for the S.O.E. loans and returns from the SamoaTel investment represent a fiscal risk for the government, taxpayers are effectively funding distributions to unit holders and S.O.E.s receive “cheap” money, and may be tempted to invest poorly.”

On a more positive note, the A.D.B. did note the recent appointment of a minister to oversee the S.O.E. portfolio

“The Minister of Finance will focus on the fiscal oversight of SOEs, including their impact on the government’s financial position,” the report reads.

“The SOE Minister will focus on the ownership interest: governance, the return on investment, long-term organisational health, and effective financial and operational monitoring.”

“This very positive development should improve monitoring effectiveness.”

It also noted the encouraging step the Government took in privatising the Samoa Broadcasting Corporation.

“A little over 1 year after the sale, the new owners reported improvements in almost all aspects.”

“In the first year after acquisition, the company profited sufficiently to pay the new owners a dividend. “

“In the second year, the directors elected to retain the profits in the business for reinvestment.”

“This sale demonstrates that privatization can bring immediate operating benefits and improved profitability, and also that state-owned enterprises can be sold for fair value even when making losses.”

“Purchasers will value a business based on how they will manage it and the business opportunities they can identify, not on the success or failure of the previous owners’ business strategies.”