Friday, 6 May 2011

The PNG Gov's history with price controls

Although a few of you may find certain (if not in its entirety) the notion of privatising state-owned enterprises (SOEs) in Papua New Guinea in particular, then I think this paper by Timothy Curton of Australia National University (ANU) called "Privatisation Policy in Papua New Guinea" will demonstrate why the Mekere Government was adamant on a privatision policy during his term (1999-2002). However, this process was stalled when Somare came into power immediately after.

Commercial Statutory Authorities (CSAs) such as Elcom (Now PNG POWER), Air Niugini and Harbours Board throughout the lifetimes have been subject to an over-regulated market mechanism by the State.

Have a look at p.6:

The cabinet’s decision (National Executive Council 163/1983, 1–5) defining
the government’s future relations with the CSAs also laid down that they
should only undertake new investments if they earned at least the rate of return to be laid down from time to time by the minister for Finance in the
annual budget, and that if a CSA wished to undertake a non-commercial
investment for ‘social/political reasons’, it should seek a subsidy through the budget to cover any losses incurred by the investment. The minimum rate of return was announced only once in a budget, and that budget was rejected (in 1985), but the minister for Finance had in 1984 advised each CSA that an ‘appropriate’ rate of return would be in the range of 16–22 per cent already permitted to the private sector on price-controlled items (Whitworth 1993, 25). These prescribed rates of return were rarely achieved by any of the
CSAs. The average return on investment (ROI) of all four CSAs between 1985
and 1989 varied between a low of 11.1 per cent in 1985 and a high of 13.1
per cent in 1986 (World Bank 1992, 178). Those were the good years: from
1994 onwards Elcom’s operating profits were usually less than its interest
payments (partly because price controls prevented tariff increases to cover
higher costs of imported fuel after the devaluation of the kina in 1994) and
its ROI fell below 5 per cent, while the PTC’s fell to 4 per cent in 1995,
and Air Niugini incurred only losses after 1994 (World Bank 1999, 148–149).

So only if CSA's made a return of between 16-22% percent (of which none of them even achieved together), then they would be able to make new investments!

Curtin continues on p.7:

The NEC decision had directed the CSAs to prepare annual rolling forward five-year capital investment programs for approval by cabinet, and this was complied with until they were corporatized in the late 1990s. The decision further stated that legislation would be drafted enabling the CSAs to vary their prices and charges to the level needed to achieve the required rates of return, but subject to the ‘price justification’ procedures laid down in the Prices Regulation Act. The force of the cabinet’s decisions on pricing and investments was considerably weakened by this failure to grasp the nettle of freeing the CSAs from the government’s pricecontrols. As the years went by, the CSAs found it more and more difficult to gain timely
approval for price increases from the secretary of the Finance or Treasury Department, in his role as price controller, and this largely explains the CSAs’ worsening profits performance noted above. But even in the good years their overall gross margin (i.e. total revenue less
operating costs as a ratio of total revenue) was less than 20 per cent, whereas the private sector would aim for 40 per cent; and this shortfall reflected operating inefficiencies, inadequate sales relative to their large capital investments, and over-staffing.

p.8 continues:

It is evident that the response of the government in 1983 to the growing
difficulties of the CSAs in the 1970s and early 1980s was not to contemplate
privatization, which was rarely mentioned as a possibility, except by
Trebilcock(1982, 115), but to accept Floyd’s restructuring proposals by
turning them into quasi-autonomous entities free to behave as if they were private sector firms, subject however to restrictions on price setting and
staff emoluments. The implicit contradiction between Floyd’s commercialization of the CSAs and their continued public ownership was either not noticed or justified on the grounds that given equal commercial efficiency public monopolies would somehow be
more benevolent than private monopolies.

Does this sound familiar (Curtin,p.8):

Both the CSAs’ autonomy and their ability to operate as if they were privately owned began to be eroded in the 1990s, for increasingly their boards and top management became the creatures
of the current minister, and if he was removed or transferred to a new ministry,
the new incumbent soon acted to replace both board and top management (Millett 1993, 27).


No comments:

Post a Comment

Do you agree, disagree or want to rant?

Then leave a comment!