A study on state-owned enterprises (SOEs) in three Pacific countries has revealed that they absorb up to 25 percent of the scarce resources in their respective economies, yet contribute to only 2-6 percent to economic growth.
In a publication titled: "Finding Balance: Making State-Owned Enterprise Work in Fiji, Samoa and Tonga", the Asian Development Bank (ADB) highlighted the predominant poor performance of SOEs in these countries and emphasised the importance of reforming them so that they play a more significant role in economic progress.
"Reforming the SOE sector is vital for private sector development, as it will create opportunities for private investment, reduce the cost of doing business and improve basic services by introducing private sector discipline and competitive market pressure into the SOE sector," said ADB's director General Pacific Department, S.Hafeez Rahman, in his foreword.
"Finding the balance between the roles of the public and private sectors is the theme of this report."
The ADB said that over the past decade, Pacific islands governments have introduced important policy reforms to improve the environment for the private sector. These, it added, had begun to translate into increased investment and economic growth, "but much more needed to be done".
"SOEs continue to play an important role in many Pacific islands countries," said Rahman.
"They absorb large amounts of scarce capital, on which they provide very low returns. While some provide essential public services, many others operate purely as commercial ventures and crowd out the private sector. Most have performed poorly."
ADB's work with regional governments on their SOE sectors spans over a decade, and the three countries treated in this study have been identified to have had long histories of SOE reforms, as well as "broadly similar SOE portfolios and legislative frameworks".
"A core finding of the study has been the scale of the economic cost of the SOE sector, and the progress that can be made in reforming SOEs where the political will do so exist," said Rahman.
The resulting "significant and unsustainable strain" exerted by under-performing SOEs upon these economies is seen to deny other social sectors of potential state focus and spending.
"From 2002 to 2006, SOEs' portfolio average return on equity was -0.7 percent in Fiji, -0.5 percent in Samoa, and 7.7 percent in Tonga," said the study.
"In each country, this rate is substantially below the profitability target set by the government, demonstrating that SOEs cannot cover their costs of capital."
To illustrate this point, ADB revealed that during the 2002 to 2006 financial years, governments provided new funds for under-performing SOEs through cash transfers, debt forgiveness, and assets donations totalling US$81 million in Fiji and US$43 million in Samoa, while in Tonga, there were no additional contribution. In return, the SOEs generated losses of US$18 million in Fiji and earnings of US$1 million in Samoa and US$21 million in Tonga. The performance was well below government target returns of US$298 million in Fiji, US$61 million in Samoa and US$27 million in Tonga.
These earning shortfalls, together with new investment in SOEs, totalled US$397 million, US$102 million in Samoa and US$6 million in Tonga.
Against this scenario, health and education spending during the same period amounted to some US$919 million in Fiji, US$102 million in Samoa and US$112 million in Tonga. 
The ADB blames weak governance arrangements, conflicting mandates, absence of hard budget constraints and lack of transparency and accountability as the main contributing factors to the general failure of these public companies.
The ADB report further slated the common perception that SOEs played essential roles in the delivery of public services, saying this was "overstated".
"While some SOEs in Fiji, Samoa and Tonga provide core public infrastructure services, many others engage in purely commercial activities. Almost all have performed poorly. The purely commercial SOEs, which are engaged in activities such as banking, shipping and retail, crowd out the private sector.
For this reason as well as their low returns, they are a poor use of public funds. Continuing government funding for and ownership of these SOEs should be questioned," it said.
"Many SOEs were established to carry out a mix of commercial and non-commercial activities, including services that the private sector could not or was not willing to provide. Markets, however, evolve.
"Just as the trend once moved from having government structures deliver core public services towards relying on SOEs to provide those services, countries are now increasingly turning to service contracts.
"This trend towards service contracts, which can be delivered by either public or private companies, represents an international best practise. Among ADB's Pacific developing member countries, Fiji and Tonga have been early adopters of the practice, having successfully tendered out the delivery of transport services to the private sector."
The way forward, said ADB, should be a rethink of SOE roles to national economies and reforms geared towards either full or partial privatisation.