State owned enterprises constrain island countries economies according to an ADB report that was released early this month.

State owned enterprises (SOE) absorbed large amounts of scarce government capital, are generally very low in productivity and often very limited in their service coverage, the report reveals.

Tonga, one of nine island countries where the ADB conducted the study to assess the impact of SOE on their economies, has 14 public enterprises with a total government assets of $284 million.

The ADB report, titled "Finding Balance 2014, Benchmarking the Performance of State-owned enterprises in Island Countries" is the fourth of its kind for six Pacific island countries, but the first for Cabo Verde from the Atlantic Ocean; Jamaica, Caribbean and Mauritius, Indian Ocean.

The nine island states which are covered in the report are Fiji, the Marshall Islands, Papua New Guinea, Samoa, Solomon Islands, Tonga, Cabo Verde, Jamaica and Mauritius.

Tonga has pursued a broad-based SOE or Public Enterprises PE reform program since 2002.

Under its reform program the Tonga government privatized two of its Public Enterprises, and amended the Public Enterprise Act in 2010, stopping members of Cabinet and the Legislative Assembly from being members of boards of Public Enterprises.

Deterioring profits

Despite these reforms, the profitability of enterprises that were included in the study deteriorated during 2011-12. The Tonga Communications Corporation (TCC) made a loss in 2011.

Only Tonga Power Ltd and the Tonga Development Bank posted return in equity in excess of 5% in the 2012 financial year, well below the government's target of 10% Return on Equity and the return required to compensate the government for the portfolio's risk-adjusted cost of capital.

Conflicts of interest

The report pointed out that government appeared reluctant to hold directors accountable for performance, because of family connections, but if government is determined to achieve better SOE performance it must manage such conflicts of interest.

However, before parliament ended its four-years term, it passed a motion resolution for members of Cabinet and Parliament to be allowed to become members of the boards of Public Enterprises.

Attractive

The House justified its decision after it was revealed that directors of these boards received exorbitant salaries. For this motion resolution to be implemented parliament has to amend  the Public Enterprises Act 2010 that banned members of Cabinet and Parliament from being board directors.

Tonga's Public Enterprises are: Friendly Islands Shipping Agency, Ports Authority, Tonga Airports Ltd, TV and Radio Tonga, Tonga Communication Corporation, Tonga Cable Ltd, Tonga Development Bank, Tonga Forest Products Ltd, Tonga Post, Tonga Power Ltd, Waste Authority, Tonga Market Ltd, Tonga Water Board and the Tonga Assets Management.