1. MODULE 14 STATE OWNED ENTERPRISES ADB Private Sector Development Initiative Corporate and Financial Governance Training Solomon Islands Dr Ann Wardrop La Trobe University

2. Acknowledgement These materials were produced by the Asian Development Bank’s Pacific Private Sector Development Initiative (PSDI). PSDI is a regional technical assistance facility co-financed by the Asian Development Bank, Australian Aid and the New Zealand Aid Programme.

3. Module 14 Outline 3  Introduction  Special challenges for SOE directors  Accountability  Statement of corporate objectives  Directors’ duties  Duties generally, in particular Conflicts of Interest  Community Service Obligations  What is a CSO?  Objectives of the CSO framework  The regulatory framework and process

4. Module 14 Outline 4  Community service obligations (cont)  Costing CSOs  Contracting for CSOs  Monitoring and reporting of CSOs  Monitoring and reporting for SOEs  Public/private partnerships and SOEs

5. 1. Introduction 5  Special challenges relating to SOEs  SOEs required to operate as a commercial enterprise but they are very different from private companies in important respects: generally provide essential services to the community, this creates particular public interest issues; Incentives in public sector different from that in the private sector – ‘few consequences for poor financial performance and few rewards for profitability’ (Borrowing Policy for SOEs in Solomon Islands, p 10) presence of implicit government guarantee, has implications for the whole economy

6. 1. Introduction 6  Special challenges for SOE directors:  Dealing with multiple goals and sometimes conflicting objectives of different principals in the public sector (e.g. ministries, politicians, bureaucrats, other stakeholders).*  Remaining independent and dealing with possible political interference in management decisions (e.g. proposal to restructure business, but loss of jobs counter to government goals)  Dealing with possible political interference in the appointment of directors to SOEs * Maria Vagliasindi, The Effectiveness of Boards of Direcctors of State Owned Enterprises in Developing Countries (World Bank, 2008)

7. 2. Accountability: SCOs 7  Important method of ensuring accountability of SOEs is the requirement for a SOE to provide a statement of corporate objectives (SCOs)  All decisions relating to the operation of a SOE must be made under the authority of the board of the SOE in accordance with its SCOs (s 6(4) SOE Act)  Section 13 SOE Act sets out detailed requirements in relation to SCOs.

8. 2. Accountability: SCOs 8  Among other things, the SCOs must state for the current financial year and the following 2 financial years:  the objectives of the group  the nature and scope of the activities to be undertaken  the ratio consolidated shareholders’ funds to total assets, and definition of those terms;  The performance targets and other measures by which the performance of the group may be judged in relation to objectives; etc

9. 3. Directors’ duties: generally 9 The general duties of SOE directors are similar to those discussed in relation to directors of companies registered under the Companies Act. The SOE duties are set out in Part 4 of the SOE Regulations 2010.  Duty to act in good faith and in what the director believes to be the best interests of the SOE (reg 17)  Director must exercise powers as a director for a proper purpose (reg 18)

10. 3. Directors' duties 10  Director must not act or agree to a SOE acting in a manner that contravenes:  the SOE Act  the Companies Act (if the SOE is registered under the Companies Act)  its establishing legislation (e.g. the Solomon Islands Water Authority Act) (reg 19)

11. 3. Directors' duties 11  Duty not to engage in reckless trading (see insolvent trading slides) (reg 20)  Must not agree to incurring an obligation unless believes on reasonable grounds the obligation can be met (see insolvent trading slides) (reg 21)  Must not disclose information that obtains in capacity as director or employee of SOE except in certain circumstances (reg 24)  Must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances (reg 22)

12. 3. Directors' duties 12  Reg 23 is also relevant to a director’s duty of skill and care.  It expressly provides that directors of SOEs may rely on reports, statements, and other financial data and other information prepared or supplied, and on professional or expert advice given by employees or professional advisers provided: the director believes on reasonable grounds the employee is reliable or competent regarding the relevant matters or it is within the adviser’s professional or expert competence.

13. 3. Directors' duties 13  SOE directors can also rely on reports, statements etc given by any other director or committee of directors upon which the director did not serve in relation to the matters within the other director’s or committee’s designated authority.  Reg 23(1) also only applies if the director:  acts in good faith;  makes proper inquiry where the need for inquiry is indicated in the circumstances; and  has no knowledge that such reliance is unwarranted.

14. 3. Directors' duties 14  In summary, s 23 expressly provides that a director may rely on reports and other information only where it is reasonable to rely on such information ‘and only after the making of inquiries where the need for inquiry becomes apparent from the circumstances’.*  S 23, however, does not entitle directors to blindly rely on what is provided to them. Directors must still exercise independent judgment in relation to the issues to which the reports relate and should not merely ‘rubber-stamp’ recommendations made by such reports. *Peter Watts, Directors' Power and Duties (2009, 243)

15. 3. Directors' duties: conflicts of interest 15  Directors will be subject to fiduciary duties discussed previously, in particular the duty not to have a conflict of interest. In addition to the common law, the SOE Regulations set out provisions relating to conflicts of interest.

16. 3. Directors' duties: conflicts of interest 16 SOE Act Regulations 2010 (25-27) Reg 25 provides that immediately upon becoming aware that the director is interested in a transaction or a proposed transaction, directors must enter in the interests register and disclose to the board:  the nature and monetary value of the director’s interest; and  if monetary value can’t be quantified then the nature and extent of that interest.

17. 3. Directors' duties: conflicts of interest 17  A director does not have to enter the interest in the register or notify the board if:  the transaction or proposed transaction is between the director and the SOE; and  the transaction or proposed transaction is to be entered into in the ordinary course of the SOE’s business and on usual terms and conditions. Reg 25(2)

18. 3. Directors' duties: conflicts of interest 18  A director can enter a general notice in the interests register to the effect the director is:  a shareholder  director  officer or  trustee of a named company or other person and is to be regarded as interested in any transaction the SOE has with that named company or other person. Reg 25(3)

19. 3. Directors' duties: conflicts of interest 19  Such a general notice is sufficient disclosure of interest under the regulations for that transaction.  The board must notify the Accountable Ministers in writing within 10 days of the disclosure of an interest to it together with a copy of the entry on the interests register.  The Responsible Minister must table in the National Parliament a copy of the notice within 5 days of receiving the notice. If Parliament is not sitting the notice must be lodged with the Clerk.

20. 3. Directors' duties: conflicts of interest 20 What a director must not do if ‘interested’ (reg 27):  A director who is interested in a transaction or proposed transaction may not:  vote on a matter relating to the transaction; or  attend a meeting of directors at which a matter relating to the transaction arises and be included in a quorum; or  sign a document in relation to the transaction on behalf of the SOE; or  do any thing in his or her capacity as a director in relation to the transaction.

21. 3. Directors' duties: conflicts of interest 21  Failure of a director to comply with the obligation to notify the board and enter the details in the interests register will not of itself affect the validity of a transaction entered into by the company or the director (reg 25(4)).  Office of director of SOE vacated if person holding that office fails to comply with the conflict regs 25 – 27 (reg 12(1)(g).  If the company is also registered under the Companies Act the provisions regarding conflicts under the Companies Act will also apply to the extent they are not inconsistent with the SOE Act.

22. 3. Directors' duties: conflicts of interest 22  Appointment of directors and conflicts  Regulation 11: a preferred candidate must provide the Accountable Ministers with a written notice, among other things, disclosing the nature and extent of all interests that he or she has at that time or is likely have in matters relating to a SOE.  A person who has any conflict of interest that is of such significance that it would impede the person’s ability to carry out his or her duties as a director of the SOE is disqualified from being appointed or holding office as a director of a SOE (reg 12(1)(i)).

23. 4. Community Service Obligations 23 What are community service obligations? A CSO is a non-commercial service or product purchased by the government on behalf of the community. A non-commercial service or product is one which ‘a commercial entity would not elect to do on a commercial basis, or which it would only do commercially at higher prices’ (SOE Policy Framework, p 2)

24. 4. Community Service Obligations 24 For example: The government wants to supply electricity at the same price throughout the Solomon Islands although it costs more to supply electricity to some areas than others. The government can decide to create a CSO relating to electricity provision so the same price is paid by all.

25. 4. Community Service Obligations 25  A policy framework concerning CSOs has been developed:  For documents relating to regulation of CSOs see http://www.mof.gov.sb/GovernmentFinances/Communit yServiceObligations.aspx http://www.mof.gov.sb/GovernmentFinances/Communit yServiceObligations.aspx  Objective of the framework is to improve performance of SOEs and to ensure: ‘Government understands the true costs and benefits of providing a CSO and so can make better decisions about using SOEs to achieve policy objectives.’

26. 4. Community Service Obligations 26 Objectives of framework (cont) are to ensure:  ‘delivery of CSOs does not negatively impact the performance incentives of SOEs or their commercial results;  CSOs are…delivered at least at cost whilst also meeting the appropriate product/service standards); and  CSOs are effective (measured through outcomes) in achieving their identified social goals’ CSO Policy Framework for the Solomon Islands, p2

27. 4. Community Service Obligations 27 The regulatory framework:  The Responsible Minister (RM) can direct a SOE to provide a CSO (SOE Act, s 8(1)).  However, in making a direction the RM must act in accordance with the SOE regulations.  A CSO that is not made consistently with the regulations is null and void (that is, of no effect).

28. 4. Community Service Obligations 28  It is an OFFENCE for a person to knowingly direct or encourage a director or board of a SOE to make a decision that a SOE perform a CSO other than in accordance with the Act or regulations.  Can be fined up to $50,000. (s 8(4))  Also an offence for a director of a SOE to knowingly make or take part or attempt to make or take part in making a decision that a SOE perform a CSO other than in accordance with the Act and any regulations. Can be fined up to $50,000. (s 8(5))

29. 4. Community Service Obligations 29  Very important for directors to understand the process that must be undertaken for CSOs.  Part 6 of the SOE Regulations sets out the process (regs 33 – 37)  Accountable Ministers (AMs) submit CSO proposal to the SOE;  SOE must within 10 working days give AMs an estimate of the cost of the SOE providing the CSO Estimate must take into account all information and include a ‘prudently conservative view of likely contingencies…’

30. 4. Community Service Obligations 30  [insert name of trainer]: costing of CSOs;

31. 4. Community Service Obligations 31  After receiving the cost estimate the AMs may approve it or not;  If they don’t approve it, then the AMs may amend the proposal and resubmit the proposal;  If an estimate is approved, AMs must give notice in writing to the SOE of the approval and the SOE must provide the CSO in accordance with the notice given by the AMs.

32. 4. Community Service Obligations 32  There may be a competitive tendering process for a CSO (unless that is not possible, e.g. the CSO relates to a monopoly like electricity). The policy framework states that tendering is the preferred approach to procuring CSOs.  Competitive tendering must follow procedures set out in the Financial Instructions 2010, see http://www.mof.gov.sb/ReportsNew/FinancialInstru ctions.aspx

33. 4. Community Service Obligations 33  Contracting for CSOs  There is a policy document to assist in preparation of draft contracts for CSOs, see http://www.mof.gov.sb/GovernmentFinances/CommunitySer viceObligations.aspx http://www.mof.gov.sb/GovernmentFinances/CommunitySer viceObligations.aspx  Contracts should apply principles that apply to contractual arrangements in the private sector (Contracting for CSOs p 2) Key difference, however, is as service provided to community the contract should provide for complaint handling mechanisms.

34. 4. Community Service Obligations 34  Monitoring and reporting of CSOs  Policy framework on CSOs provides that the following information about CSOs must be in the SOE’s annual report:  ‘identify and describe each CSO product or service delivered;  The quantity (i.e. number of units) of CSO products or services delivered;  The revenue received for undertaking each CSO;  The actual cost of carrying out the CSO(s), in per unit and aggregate terms; and

35. 4. Community Service Obligations 35  Statistical information on, and assessment of, all other performance criteria/measures agreed to in CSO contract

36. 5. SOE reporting and monitoring 36 SOEs are required to provide detailed reporting that enables monitoring and accountability. S 13 referred to above regarding SCOs also has various reporting requirements contained within it. E.g a SOE is required to  provide a statement of principles adopted in determining the annual dividend;  Provide an estimate of the current commercial value of the Crown’s investment in the SOE group and a statement of the manner by which that value was assessed.  SOEs required to provide an annual report but also a half-yearly report; SOE Act ss 14 & 15

37. 5. SOE reporting and monitoring 37  Must provide audited consolidated financial statements for the financial year and auditor’s report on the financial statements required, s 14(1)(a) &(b)  Reports tabled in parliament, s 17  Government assistance to be disclosed and quantified, s 16  Where information tabled in Parliament, the SOE must separately and independently publish that same information within one week of tabling by publishing a summary in the Gazette and in a newspaper circulating in the Solomon Islands and making full copies available free of charge at the offices of the SOE.

38. 5. SOE reporting and monitoring 38  Other information must be provided to accountable ministers if requested (unless it is information relating to an individual employee or customer if the information supplied would enable the identification of the person concerned), s 19  Disclosure of sensitive information protected under s 21

39. 6. Public/private partnerships 39  Public/private partnerships refers to contractual arrangements between the government and private institutions to provide public services or facilities.  Contractual arrangements can take many different forms but key element is the significant private- financing element of PPPs.

40. 6. Public/private partnerships 40  PPPs are in between full privatisation and traditional procurement arrangements but a key element of PPS is the sharing of risk between the private and public sector.  A well known form of PPP is where a private company builds, operates and transfers a public sector asset back to the public sector at the end of a concession period. Public sector assets could include a road, tunnel etc. For other forms see handout.

41. Public/private partnerships 41  Some benefits of PPPs said to include:  New source of capital that reduces public borrowing and direct spending  Accelerates projects delayed for want of sovereign resources  Efficient delivery of projects resulting in lower prices  Increased labour productivity as less politicised  Better infrastructure delivery where public finances constrained  Less political interference  PPPs not prevalent in developing countries, none in the Solomon Islands currently.