“Performance and Accountability of Privatized Utilities”
A case study on Energy Fiji Limited (EFL) previously known as Fiji Electricity Authority (FEA)
25th July, 2018
Terms of reference
This report is submitted in the fulfillment of the course requirement for ACC906 – Contemporary Issues in Financial Accounting, trimester 2, assignment 2 ,2018. Department of Accounting, Fiji National University.
Privatization was the only way to bail out State Owned Enterprise (SOE) that is financial burdens on the Government. Models used for reforms are at least theoretically supposed to face fewer problems in its application to Public Enterprises because of its efficiency/cost orientation.
A part of this can be explained by the political and economic imperatives of ruling governments in Fiji. This report will look at the need of privatization of public enterprises in Fiji; it will also look at the performance and accountability of privatization in particular for Energy Fiji Limited (EFL).
Key word: privatization, government, Fiji, developing country
In order for a country to achieve a long term economic growth it is essential for it to have a more vibrant and healthy private sector contribution. A healthy economy tends to create market force for employment, investment and development in infrastructure which in return aids in support the public sector to function such as health, education and other services.
The concept of privatization has been absorbed and practiced by many developed and under developed countries to increase and improve the type of services it provides to the public. Privatization has taken its precedence that many government has announced to limit their role in regulating and the lives of the people.
This report will look at the need of privatization of public enterprises in Fiji, prior success rate of privatization of government owned entities. The second part will look at why there is need of privatization or not a need for privatization of Energy Fiji Limited (EFL) in context to Fiji.
There are several theories which support privatization. These are Property Rights, Public Choice and Agency theories. An important implication of a well-defined property rights is that it creates strong individual incentives, a significant factor in the quest for long term growth. The property rights approach concentrates on the differences in the ease of capture ability of economic surplus of a resource and the rights to direct an asset’s use, alter it’s from or transfer its claims among existent and potential owners. This approach explores the differences in incentives between public and private agencies caused by variation in the ability of owners to monitor management and the problems that emerge when the goals of owners and managers diverge (Flynn, 2005). Property rights theorists argue that under state ownership, property rights are poorly defined. In private ownership, focus is on the marketability of property rights, (through securities market) threat of bankruptcy and prevention of the managers from seeking their own advantages. The managers in state owned enterprises are not constrained by this type of control. It is thus, stressed that they are less inclined to maximize profits and attain efficiency (Ramamurti, 2000).
On the other hand, public choice theory underlines problems in the functioning of the government. Managers of public sector are more concerned with maximizing their own power, their prestige and the amount of resources under their control to improve their own interests, instead of improving the efficacy of the state run business (Niskanen, 971). Distortions in both the objective function that managers seek to maximize (Shapiro and Willig 1990) and the constraints they face, through the budget constraints problem (Kornai, 1986), result in lower efficiency under public ownership.
Public managers incorporate to the objective function aspects related to maximization of employment, at the cost of efficiency, and political prestige without facing threat of bankruptcy since it will be the interest of central government to bail the firm out using public budget in case of unwise investments. Shapiro and Willig (1990) also stress that change in ownership changes the structure of information, incentives, controls, affecting operating decisions and thus economic performance. Privatization, by limiting the states’ ability to reduce the enterprises activities, in ways that promote short term political objectives enhances economic efficiency.
Earlier empirical studies such as those by Kay and Thompson (1986); Wortzel and Wortzel (1989) suggested that privatization does not support economic efficiency. Kay and Thompson (1986) argue it is not ownership as such but the interaction of ownership and competition that promotes efficiency. Attempts to increase competition may improve performance of a public firm in an uncompetitive market more than privatization without adequate regulation. Public owned entities maximize an objective function that is weighted average social welfare and bureaucrats’ personal agenda while private, maximize profit, which is a component of social welfare. Public entities are formed to fulfill a specific good or service. Providing the good or service is the goal, not profitability.
Meeting other social economic goals like job creation, providing industrialization, defending national interests make public entities less economically efficient. Lack of clearly defined objectives and the absence of an adequate reward and incentive system that create organizational culture that is in conflict with economic efficiency
Public to Privatization
The move from public to privatization began in early 1980’s by UK and New Zealand which was later recognized and practiced by many under-developed countries in 1990’s.
The term privatization refers to the transfer of state owned entities to the private sector. As per definition the reason for such moves were to improve efficiency and productivity of the enterprise. There had been considerable debate on the justification of definition of privatization over the past decade as there were cases of public to privatization transition failing.
In Fiji, privatization came into government policies after the 1987 political up evil. The government had been pressured to privatize few of its entities due to recession and lower economic growth after 1987 coup.
In early 1990’s the Fiji government through its public sector reform privatized few of its entities Post and Telecommunications Department being the first, which was divided into Telecom Fiji Limited and Post Fiji Limited in 1996. The other enterprises included Fiji Pine Commission incorporated Fiji Pine Limited and National Marketing Authority as National Trading Limited which collapsed after its incorporation. The recent privatization consisted Fiji Electricity Authority to Energy Fiji Limited (EFL) in 2018.
Background of Energy Fiji Limited
FEA established under the Electricity Act 1966 and commenced operations on 1 August 1966. It is a wholly Fiji government owned and is responsible of delivering electricity to 90% of country’s population.
It is the responsible body for enforcing Electricity Act and regulation and standard setting. It is also responsible for registering licensed installers, suppliers and electricians.
In 2010 the cabinet approved the restructuring of FEA, which consisted of partial privatization and divestment of government shares.
FEA’s performance prior to Privatization
As per the report from the Standing Committee of Economic Affairs report on FEA’s financial performance before privatization for the year 2016 reported a profit after tax of $59.6m even though the nation faced one of the major tropical disaster TC Winston.
The Permanent Secretary of Public Enterprises stipulated that the restructure was to deregulate the energy sector in Fiji and reduce government obligation, also to provide efficient energy sector which is private sector inclusiveness.
Benefits and performance of privatization of FEA
Some of the benefits consist of:
• reduced enforcement and admin cost
• more consistent regulatory decision making
• reduced compliance cost for business tax payer and consumers
• effective utilization of economic resources
• more profitable due to investor driven
• maximum utilization of infrastructure and services
According to the board chair Dakshesh Patel by bringing in good, strong technical partners will give additional capacity which is essential for the business to grow.
Prime Minister Voreqe Bainimarama stated the divestment will put FEA in a stronger positon.
“It will mean greater private sector engagement that will attract partnerships rather than capital alone – partnerships that can help reduce our vulnerability to shifting energy prices by boosting renewable energy sources in Fiji.”
Critiques of privatization of FEA
For any government restructure from public to privatization has its own limitations, in terms of Fiji past results has indicated failed implementation in few of its privatization venture which consisted of National Trading Limited and Government Shipyard and Public Slipways.
Academics and political parties have also raised questions on the need for the privatisation when the entity is performing well at its initial stage. Professor Narsey argued and stated “We should note that privatizing shares in a natural monopoly may also hurt electricity consumers (residential and industrial) through higher electricity prices to generate sufficient profits for private investors.” (Narsey,2016)
Mr Chaudhry party leader of Fiji Labour party also argued that FEA was operating well in its initial condition and there was no need for privatization he expressed fear that privatization will lead to higher electricity tariffs for domestic and commercial customers as it would be investor driven. (Why corporatize FEA, 2018)
The public sector has often been labeled as inefficient in providing services. The causes of inefficiency are bureaucracy and red tape. The solution proposed is to privatize the operation so that the private sector can provide services more efficiently. However, the public will expect high tariffs. Private sectors know how to use assets at optimum level whereas public sectors at maximum level. While, the public will get quality and government will not worry about risks, it would still be best for government to monitor price control to best suit the Public.
Why corporatize FEA (2018, May 8th)), FLP. Retrieved from: http://www.flp.org.fj/why-corporatize-fea/
“Privatizing FEA: If it ain’t broke, don’t fix it” (FT 29/10/2016)
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