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Ministerial interference with Boards [The Fiji Times, 15 Oct 1999]

29/03/2012

  In recent weeks, we have seen the Chairman and Members of Boards, and Chief Executive Officers, resigning over what they see as interference by Government Ministers in the day-to-day management of public enterprises.

The Ministers see themselves as merely carrying out the political mandate given them by the 1999 General Election, with Boards and CEO’s failing to comply with legitimate Ministerial instructions.

While both sides would appear to have some legitimacy, the real underlying problem is thatFiji is facing a very new situation, with a change of Government attempting to change fundamental policies for its public enterprises, without consensus ground rules.

It is urgent that the political parties agree on broad principles, setting out how Boards and management of public enterprises can be appointed, directed on policy, changed, or allowed to resign honourably, without compromising their professional integrity.

When ground rules on Boards not clarified

The problems in the Housing Authority (and Airports Fiji Limited)  illustrate all that can go wrong when the ground rules are not clarified, and when Ministers do not first reach consensus with their boards on what are legitimate policy guidelines and what constitutes unwarranted interference in the day-to-day running of the enterprise.

The People’s Coalition promised that the interest rate on home loans for Housing Authority low income borrowers would be brought down to 6%, a socially desirable and perfectly acceptable objective.

But how does Housing Authority achieve the 6% target for lending when Home Finance and the commercial banks charge considerably higher than 6%, and the latter also have many commercial advantages?

Home Finance and commercial banks make housing loans to wealthier clients, with better collateral, better incomes, better repaying capacity, fewer defaults, higher individual loans, and fewer loans per million dollars lent.

Home Finance and the other commercial organisations are therefore inherently more profitable than Housing Authority.    Assuming similar costs of  funds, administrative efficiencies, and commercial profitability targets, Housing Authority would, in fact, need to charge higher interest rates than the other lending organisations.

When ordered to bring their interest rate down to 6%, the HA Board and management understandably asked the Government for a subsidy to make up the difference between 6% and their normal commercial lending rate.

Government refused the subsidy and  threw in some short-term assistance: subsidised short-term loans (which means that the real cost is being paid elsewhere), Public Trustee funds (which ought to have been more profitably lent out but were not) and some surplus funds, earning minimal rates of interest, which could be lent to HA at lower than 6%.

HA Board and management these were short-term sources which could not be sustained over the long-term.  Eventually, owners of the Public Trustees funds, the currently underemployed funds, the FNPF surplus funds, would all require higher rates of interest, and would refuse to subsidise low income borrowers for housing.

Economists would generally agree that the burden of this legitimate social objective should fall on all the public tax-payers, not on any one particular group.

Therefore, the simplest, most transparent, and accountable way of achieving the 6% target is for  Government to provide the appropriate interest subsidy.

It is unreasonable for Government to demand that the HA Board and management achieve a financial target considerably lower than that offered by all other commercial lenders.  This cannot be a sustainable “policy guideline”.

Always conflict between commercial and social objectives

Government should remember that one of the prime causes for the unsatisfactory performance of many public enterprises was the mixing up of commercial social objectives, in a non-transparent and non-accountable manner.

When asked why public enterprises were not financially successful, the management would have the excuse that Government’s social objectives undermined their financial performance.

When asked why they were not achieving social objectives, the excuse used to be that their commercial targets would be  compromised.

It is good economics that public enterprises should completely separate out, their commercial objectives and performance criteria, from their social objectives and performance criteria.

Subsidies should be transparent: how achieve it with Housing Authority?

Any subsidies required to achieve the social objectives should be funded through a transparent, measurable, and accountable grant from Government, while the performance of management could be held up to commercial criteria.

What therefore, could be legitimate interest rate policy guidelines from Government to Housing Authority?

For a start, the starting base lending rate for Housing Authority must be that charged by the other commercial lending institutions.

The base could be lowered to reflect any long-term availability of lower interest sources of funds for HA.  The base could be also lowered if Government accepts that HA will make less than the commercial rates of profit (for example, just break even).

But the base rate would need an upwards adjustment because of the expected higher administrative costs of lending to large numbers of low income clients, with lower individual loans, and higher default rates.

If the final adjusted target rate for HA is then still higher than the 6% that the Governing parties promised in their election manifesto, then Government should simply subsidise the difference between that and 6%, for their particular low income target group of borrowers.

The performance of the HA Board and management could then be fairly assessed according to the target rate, and their overall financial performance.

It is not a legitimate and sustainable “policy guideline” for Government to order the HA Board and management to achieve a commercial target, which the private sector  commercial providers of comparable home loans, are unable to achieve, nor expected to achieve.

All Public Enterprises face same problem: boards and management can resign

The problems of the Housing Authority are probably replicated across other public enterprises, such as electricity, water, ports and airports.

Of course, when a new Government comes in,  its overall policy directions for the  public enterprises may be changed, and fundamentally at that.  But it makes sense to first have full consultation with the Boards and management.

If Board Members and/or management are unable to agree with the new policy directions, then they should be given fair opportunity and reasonable time (especially for management) to resign with honour, and without harming their professional integrity and reputation.

Need political co-operation to sort out ground rules for boards

I doubt if Government has sorted out the broad policy issues for any of the Boards with which it is now having so many problems, or with most of the Boards under Government control.

Fiji has a very small pool of people who can serve competently and with integrity, on the boards of our many public enterprises, which comprise a very large and strategic parts ofFiji’s economy.

There is a very real danger that unnecessary conflicts over the management of the country’s public enterprises will create undesirable economic instability, whenever there is a change in Government or Minister.

The appointment of Board Members (and their removal) must follow consistent principles, to ensure continuity in professional management, and to ensure that the professional reputations of Board Members or management are not unfairly harmed.

The Governing parties and the Opposition Parties need to get together (just as they did with the Korolevu Declaration) to work out consensus rules on Board membership, Board policies, relations with the relevant Ministries, and code of ethics and good practice for Board Members.

Other issues also

Should board members be told what legitimate path they should follow (apart from quietly resigning without the public knowing why) if they disagree with Board decisions or if they feel uneasy about what is going on?

Could a simple guideline on this have saved a hundred millions in the NBF disaster?

Board members are usually told what money they will receive for contributing as a board member.

But do board members know the extent of personal liability if they are party to a Board decision which results in financial disaster for the tax-payers?

Clarification of some of these issues might make individuals think again before accepting membership of boards.

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