The tendency at independence for the government to contemplate direct ownership and management of industrial and agricultural enterprises was soon moderated (except for mining), and by 1978 the minister for Finance (Julius Chan) had invited the IMF to review Papua New Guinea’s non-financial public enterprises (Whitworth 1993, 5). In the following year Chan himself chaired a committee of inquiry whose report, The Role of Government in Development, criticized the tendency for the government to assume activities properly pertaining to the private sector (Ministry for Finance 1979).
The IMF’s report was written by R. H. Floyd (1979), who noted that apart from the four main utilities, all other non-financial government enterprises had lost money, and that even the utilities were under-performing relative to the opportunity cost of capital (i.e. rates of return in the private sector). Floyd’s key argument was that economic efficiency requires that prices paid by consumers for goods and services should cover the full opportunity cost of resources used as inputs, and that if services are proposed to be provided at prices fixed at below cost-recovery levels — as implicitly mandated by the constitution’s Five National Goals — the government should provide explicit subsidies to the enterprise through the budget. He also recommended that to avoid hidden subsidies, state enterprises should be subject to the same taxes and duties incurred by the private sector, and that their investments should be determined within the overall framework of the government’s capital expenditure budget (Floyd 1979, 24–39; Whitworth 1993, 7–8).
The Floyd Report met with a mixed reception. Only one of its recommendations was adopted immediately (ending of the exemption from company tax of the Harbours Board and Electricity Commission in 1980). Trebilcock (1982) criticized Floyd’s proposal to make the government responsible for determining the enterprises’ capital spending. It was not until 1983 that the crucial principle of commerciality (cost-based pricing and abolition of tax and import duty exemptions) was adopted for all four of the utilities, namely, Air Niugini, Harbours Board, Elcom, and Post and Telecommunications Corporation (PTC), which were thereafter known as the Commercial Statutory Authorities (CSAs).
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).
The 1983 NEC decision directed the CSAs to pay dividends to the government from 1984 equal to 50 per cent of the previous year’s after-tax profits. Initially this was complied with, at least for as long as the CSAs earned profits, but with adjustments in cases where the CSA obtained cabinet approval for netting off subsidies on unprofitable services it had been obliged to undertake without ever receiving the promised explicit budget subsidy. In this respect, also, the CSAs’ performance began promisingly but without achieving the target, with total dividends paid by all four reaching K11.7 million in 1989 (the first year of a recorded subsidy) (World Bank 1992, 178). Thereafter dividend payments to government disappeared along with their profits.
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 price controls. 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.
Nevertheless there is some evidence of improvement in the productivity of the CSAs between 1984 and 1991. For example, they employed 6,636 persons on gross revenue of K208.7 million in 1984, or K31,449 per employee, and 7,259 persons for revenue of K369 million in 1991, or K48,656 per employee, an improvement of K17,207 (over 50 per cent) in revenue generated per employee. The average in 1991 conceals the dispersion between the capital intensive Air Niugini’s K74,082 per employee and the Harbours Board’s K34,339 per employee) (World Bank 1992, 178; Whitworth 1993, 1).
The government’s rationale for subjecting the CSAs to prices justification was that each was supposedly a monopoly, but that was more by law (telecommunications, power, harbours) than from any evidence of falling marginal costs preventing new entrants to these industries. Even where some degree of competition existed, as on Air Niugini’s domestic routes, price controls were enforced on both Air Niugini and its private sector competitors. However there are few if any absolute monopolies — for example, Elcom’s declining efficiency led most large buildings and other big power users to install their own generators during the 1990s, an airline monopoly may well have to compete with other forms of transport such as shipping, and privatized harbours (e.g. in Lae and Madang, Rabaul and Kavieng, Alotau and Port Moresby) would have been able to compete with each other for traffic and for new ‘foot-loose’ industries to locate in their vicinity (see also Department of Finance and Planning 1992, 19).
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. 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).