State-Owned Enterprises

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[Response by Sanford Berg, Katharina Gassner, and Anton Eberhard, May 2009]

Due to the mixed (often poor) performance of state owned enterprises in developing (and some developed) countries, there is a clear need to identify and implement governance procedures that will provide strong incentives for cost containment, service quality improvements, and network maintenance and expansion.

Seek Insulation from Politics: A SOE that is driven by politics has a number of characteristics:

• multiple objectives (seldom prioritized),
• responsiveness to short term pressures (from powerful political actors representing particular constituencies or regions),
• (potential) sensitivity to protecting vulnerable groups, but often serves the interests of dominant stakeholders.

Communicate Clear Priorities: When objectives are not prioritized and actual performance is not documented, citizens have no way to evaluate political leaders or the appointed managers of SOEs. Corporatization and commercialization are two strategies for clarifying organizational objectives and improving governance.

Promote Good Governance: The OECD has identified governance principles that promote strong performance and give citizens confidence that resources are being used effectively to meet infrastructure needs.

The state should

• Act as an informed and active owner, with clear responsibilities (and accountability) for setting, implementing, and evaluating policies, all in a professional and effective manner (not through a line ministry, but a government asset ownership agency or Ministry of Finance);
• Promote transparency so that flows of funds and performance are communicated clearly to affected parties (so promised public investments in infrastructure are actually made and impacts are evaluated);
• Select Boards of Directors who will have the integrity, authority, skills, and objectivity that allows them to provide strategic oversight of the SOE; and
• Adopt accounting systems (that include replacement cost information) to facilitate the commercialization process (which is particularly important when inflation is relatively high and technological progress is rapid).

Information and Monitoring Performance: Information is central to the process, though stakeholders have different interests in collecting, auditing, and revealing data. Pardina and Rapti (2007) identify motivations of the operator and the government in using information related to aspects of utility investments and operations, including Asset base, Financial performance, Volume of demand, Tariff Setting, Commercial efficiency, Capital expenditures, Operating expenditures, and Technical efficiency. They summarize the information requirements for business plans and for regulation:

“[R]egulation features a strong information asymmetry between the firm and the regulator in relation to the regulated firm’s underlying costs and market prospects and to the actions taken by the firm that are unobservable to the regulator. So, stating clear and precise rules relating to information generation and exchange in contracts is a crucial element under all contract forms. The same principle does apply to the tools to be used to process and analyze that information. In all cases analyzed, the long-term nature of the regulatory relationship between the firm and the regulator implies that information problems are central and recurrent in nature. It is clear then, that from the outset of the regulatory process—ideally in the contracts—considerable effort should go, prior to the contract, into determining the rules that will govern the management and interchange of information, and the development of tools. Furthermore, to maintain its value, that initial investment in the information gathering and exchange mechanism must be regularly updated, improved, and optimized throughout the life of the regulatory contract.” (p. 77)

Related Questions

• In what ways, if any, should regulators treat SOEs differently than investor-owned infrastructure operators?
  • What issues must be addressed by institutional structures to promote good governance for a SOE?
  • What is Corporatization?
  • What is Commercialization?
  • Since many SOEs in developing countries are inefficient and thrive on patronage, in what ways might commercialization of SOEs improve financial (and operating) performance?
  • Governance: What governance procedures promote strong performance in SOEs?
  • Funding investments: In what ways does privatization help meet the challenges of funding network expansion? To what extent does public ownership help meet the challenges of funding network expansion?
  • ROI: What is the appropriate Return on Investment for a SOE?
  • Incentive Regulation: What are strategies for regulating state-owned enterprises with their unique information issues and strong links to government ministries?
  • Privatization: What is the role of a regulator (if any) in a privatization transaction?