2025 P 0 L I C Y A ND R E S E A R C H S E R I E S 4 THE REFORM OF STATE-OWNED ENTERPRISES Lessons from World Bank Lending MARY SHIRLEY Country Economics Depanment FILE COPY POLICY, PLANNING, AND RESEARCH POLIY THE WORLD BANK | (3)077- 1 ( r ci vce ftEl liuul) Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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2025P 0 L I C Y A ND R E S E A R C H S E R I E S
4
THE REFORM
OF STATE-OWNED
ENTERPRISES
Lessons from
World Bank Lending
MARY SHIRLEY
Country Economics Depanment
FILE COPYPOLICY, PLANNING, AND RESEARCHPOLIY THE WORLD BANK |
All rights reservedManufactured in the United States of AmericaFirst printing June 1989PRS 4
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Mary Shirley is an adviser in the Public Sector Management and Private Sector Development division ofthe Country Economics Department.
Library of Congress Cataloging-in-Publication Data
Shirley, Mary M., 1945-The reform of state-owned enterprises: lessons from World Bank
lending / Mary Shirley.p. cm. - (Policy & research series; 4)
ISBN 0-8213-1261-81. Government business enterprises - Developing countries.
2. Efficiency, Industrial - Developing countries. 3. World Bank.I. Title. II. Series.HD4420.8.S55 1989 89-14843351.009'2-dc2O CIP
Table of Contents
Summary and conclusions 1The nature of lending 1Policy reform 1The role of the state-owned enterprise sector 2Institutional reform 2Divestiture 3Implementing reforms 4
1 Introduction 5Seeking enterprise efficiency 5Defining the state-owned enterprise sector 6Volume of bank lending for state-owned enterprise sector reform 7
4 Decentralized management of state-owned enterprises 18The role of the government 19State-owned enterprises and the budget 20Improving the institutional framework 20Raising managerial skills 25
iii
5 Holding management accountable 28Gathering adequate information 29Setting objectives, targets, and indicators of performance 29Performance evaluation 31
6 Divestiture of state-owned enterprises 33The lessons of experience 34
AppendicesA Checklist of topics for diagnostic overviewB Minimum financial information for governrment oversightC Statistical tables
Tables1 A comparison of noncommercial entities and commercial state enterprises2 Number of state-owned enterprise reform projects
Figure1 The institutional framework: responsibilities of key oversight bodies and boards of directors
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Summary and conclusions
Although the World Bank has long worked to serve on scarce administrative skills. In thesestrengthen individual state-owned enterprises cases the supply response to structural adjust-(SOEs), the effort to address the wider institu- ment programs will often depend on the successtional and policy environment is relatively re- of the work on state enterprises. A comprehen-cent. From 1978 to June 1988, the Bank approved sive approach may also be the best in countries122 operations with components directed at SOE where the number of SOEs is relatively few orsector reform. The objective of these operations is control is centralized and sector ministries areto enhance efficiency by improving allocation and relatively weak. In larger economnies a compre-use of resources through changes in prices and hensive approach may be neither desirable orincentives, improvements in management, in- feasible. Yet even with a sector-by-sector ap-creased competition, sales, and liquidation. proach the most important first step will be to
The search for SOE efficiency rests on the the- clarify the basic objectives and operating prin-ory that any commercial enterprise, public or ciples of all SOEs.private, will function most efficiently when itstrives to maximize profits in competitive mar- The nature of lendingkets under managers with the capacity, auton-omy, and motivation to respond to market sig- Most Bank lending in this area has taken the formnals, and when enterprises which cannot com- of components in structural adjustment loanspete go bankrupt. Since SOEs typically operate (SALs, 46 percent of approved projects), free-in very different circumstances from these, the standing technical assistance loans (25 percent)Bank has supported reforms that aim to move and sector adjustment loans (SECALS, 20 per-closer to such conditions, including privatizing cent). And recently, it has taken the form ofenterprises in some cases. This effort focuses on policy-based loans directed entirely at publicthe commercial nature of the enterprise. Regula- enterprise reform (PELs: public enterprise ra-tory, promotional, and educational entities that tionalization loans). PELs combine two or moreare sometimes called SOEs must be treated dif- of the following: a quick-disbursing, policy-basedferently. component; slower disbursing technical assis-
SOE sector reform does not mean tackling all tance; and assistance to restructure individualissues or all enterprises at once. In smaller econo- enterprises.mnies where the public enterprise sector plays amajor role, as in much of Africa, a comprehensive Policy reformapproach to the state-owned sector may be thebest way to assure that SOE reforms are coordi- A sound policy environment is critical to success,nated with changes in macro policy and to con- but there are a few pitfalls. One is to focus on the
ills caused by underpricing SOE output and to managers accountable for results including in-ignore the insidious effects of cost-plus pricing. centives and sanctions.Another is to promote trade liberalization with- SOE reform is predicated on agreement thatout preparing SOEs to respond to competition by SOEs should pursue their objectives as efficientlyimproving their management and marketing as possible to maximize their contribution toskills and by giving managers autonomy. development. The use of SOEs to pursue socialOtherwise, potentially viable SOEs may not be goals has often had unintended perverse effects.able to compete, creating a backlash against For example, when SOEs must sell below cost theliberalization. A third is to ignore the potential to result is deficits and debt, growing shortages,increase domestic competition. While a number costly distortions in investment decisions, andof projects eliminate the monopoly status of SOEs, the waste of scarce resources. The inefficienciesfew deal with the factors which discriminate in that subsidies typically engender in SOEs canfavor of state enterprises at the expense of private create costly bottlenecks throughout the econ-- and vice versa. Experience has shown omy. Moreover, if SOE customers are large in-competition is one of the most important dustrial users or the wealthy, the benefits of thepressures for efficiency: it needs to be treated subsidy may not reach the intended beneficiar-systematically. A fourth pitfall is to inject new ies. Rather, if the costs are borne by the taxpayerequity in financially strapped state enterprises and the tax system is regressive, the net effectwithout assuring that this will not be treated as a may be to worsen income inequalities. An im-costless bailout by management. To provide portant reform is to make social goals explicitcapital to an enterprise that is not expected to be and their costs and relation to the budget trans-profitable enough to its equity is, in effect, the parent, to weigh costs against benefits, to de-capitalization of a recurrent subsidy. And equity velop more cost-effective ways to meet such goalshas the disadvantage of not being subject to the and to assure that the SOE is not decapitalized.periodic reappraisal and decision that an annual Reform efforts try to help governments achievesubsidy receives. the proper and elusive balance between SOE au-
tonomy and accountability. This involves tight-The role of the SOE sector ening control in some areas (especially those in-
volving government finance or debt guarantees)The first step is to reassess the role that SOEs and decentralizing decisionmaking in others. Inplay in the economy. This reassessment typically designing controls, a distinction must first beoccurs when structural adjustment is changing made between financially autonomous SOEsthe economic rules and many SOEs are in serious operating in competitive markets - which cantrouble. Not all of these enterprises merit sup- operate with much greater freedom - and mo-port or even survival. Usually there is a core nopolies and enterprises requiring governmentgroup whose efficient functioning is vital to de- funds - which require tighter controls. The spe-velopment (such as electricity or the water) and cific institutional reforms must be carefully tai-another group of clearly nonviable enterprises lored to individual country circumstances, tak-that should be liquidated. In between are many ing into account managerial and administrativeenterprises that may be able to survive as is, or skills and the potential to increase competitionwith some restructuring, and others that cannot and rely on more arm's-length, market-orientedcompete. controls.
The next step is to redefine government-SOEInstitutional reform relations for each category of enterprise, curbing
undue interventions. Figure 1 (see chapter 4)Although the details vary from country to coun- suggests core activities of main agencies involvedtry, the reform of the institutional framework (finance and sector mninistries, holding compa-usually involves: setting clear objectives for SOEs nies, boards, central oversight organizations); itthat can be translated into quantified and moni- also lists other, often counterproductive, taskstorable targets; providing managers with suffi- assigned to these agencies in many countries.cient autonomy to achieve their objectives and be A number of organizational arrangements haveheld responsible for results; selecting managers been developed to increase SOE autonomy bycompetent to operate a commercial venture and creating a buffer between the core ministries andcompensating them adequately; and holding the state firms, including central SOE oversight
2
organizations, holding companies, and boards of Divestituredirectors. While there are ways to increase thelikelihood that these arrangements successfully Countries divest for many reasons. One impor-promote autonomy, experience shows that such tant motive is the desire to improve the enter-institutional mechanisms are seldom sufficient in prise's contribution to development by freeing itthemselves to change govemment-SOE relations. from politically motivated intervention and end-Changes in policy and incentives are usually re- ing the inefficiencies engendered by weak ac-quired to alter the underlying balance of power. countability. But the record of divestiture in
A firm that is given greater independence to developing countries shows relatively few sub-react to rapidly changing markets requires a stantial sales of SOEs or formal liquidations (in-management team that is often very different formal closures are much more common). Re-from the managers of most SOEs. Bank-supported sults have been slower and slighter than expected,projects have tried to improve the appointment and time-bound conditionality on sales has some-process by introducing competitive, merit selec- times proved counterproductive.tion and having an agency nominate and evalu- One early lesson of the divestiture experienceate candidates, while simultaneously changing is the importance of treating divestiture not inthe compensation system to attract and retain isolation or as an end in itself but as part of agood managers. Many operations also support broader program of reforms designed, amongmanagement training, but unfortunately the other things, to: promote a better allocation ofBank's record in this, as in other forms of train- resources, encourage competition, foster a sup-ing, is spotty at best. The more successful train- portive environment for entrepreneurial devel-ing components received far more attention in opment, and develop the capital market. It ispreparation and supervision than the norm, bene- also important to tailor divestiture programs tofited from reasonably well-prepared counterparts, the potential for competition and the develop-and linked training to promotions or pay in- ment of the capital market in different countries,creases. as well as to the administrative capacity of the
The final element of institutional reform - governments involved. In small economies withaccountability - requires: good information; limited capital markets, liquidation, contractingagreed objectives translated into measurable tar- out, leasing, management contracts, efforts togets; a body competent to monitor and evaluate increase competition and the like may be moreperformance; and follow-up. Improvements in effective than sales in curbing an overextendedinformation (upgrading internal management public sector. More work is needed to makeinformation systems, improving auditing stan- these other forms of privatization accessible todards, and streamlining and standardizing re- developing countries, to improve the environ-porting relationships) have been the most imme- ment for privatization, and to strengthen govern-diate and tangible results of Bank operations in ments' capacity to manage sales.this area. Care should be taken to guard against overde-
Performance indicators and targets have proven sign of divestiture programs. There is a risk thattricky to develop in the face of price distortions studies and schemes will provide a convenientand social goals, especially for monopolies. In excuse to postpone action. Formal schemes maysome countries, for example in much of Sub- also interfere with informal closures if govern-Saharan Africa, poor accounts and skill shortages ments reopen closed enterprises in a vain attemptfurther complicate the task of performance evalu- to sell them. Another lesson is the importance ofation. But countries such as Pakistan and Korea transparency when enterprises are to be sold.have had some success with composite indica- Public debate is inevitable; the challenge is totors using adjusted profits and other qualitative have an informed debate that focuses not just ontargets. There is evidence that even a flawed costs, such as employment, but also on the bene-performance evaluation scheme can contribute fits, such as enhanced efficiency or exports. Fi-to efficiency gains, especially if the oversight nally, divestiture programs need to deal with theagency is objective and well-staffed and there are social implications of lay-offs and plant closures,incentives, such as bonuses, linked to perform- as well as develop a realistic approach to financ-ance. The process of negotiating targets and as- ing the costs associated with divestiture (sever-sessing results in itself improves government- ance pay, redeployment programs, settlement ofSOE dialogue and understanding. arrears).
3
Implementing reforms tingmost subsidies, curbingnew investment, andending preferential access to credit; begin to re-
The state-owned sector in developing countries habilitate, sell or liquidate the 10 to 15 key SOEstends to be large, diverse, and often, when the that are the biggest budget drain or bottlenecks;Bank gets involved, in a state of illiquidity. Ef- increase competition and eliminate discrimina-forts to deal with all priority issues lead to a tion between public and private firms, and intro-comprehensive and complex program of reform. duce efficiency targets for monopolies; put theSuccessful implementation depends on proper financial system on a market-oriented basis andphasing. While this varies from case to case, one require SOEs to compete for finance withoutworkable sequence is: clarify the SOEs' true situ- guarantees in most cases; and liquidate, sell oration by eliminating gross price distortions, cut- rehabilitate as needed the remaining enterprises.
4
1Introduction
The Bank has made numerous loans to individ- terprise - public or private - strives to maxi-ual state-owned enterprises (SOEs) aimed at mize profits in a competitive market, understrengthening management. Much of our eco- managers with the autonomy, capacity, and mo-nomic dialogue has focused on improving gov- tivation to respond to competition, and when en-emnment policies and controls over SOEs. But terprises that cannot compete go bankrupt. Inonly since the late 1970s has the Bank used pol- practice, state enterprises seldom face such con-icy-based operations and freestanding technical ditions. They often have objectives different from,assistance loans to address the common prob- and incompatible with, profit maximization. Theylems of state enterprises as a group. The objec- operate in noncompetitive markets; the absencetive of these operations is to increase economic of competition is often a reason for their creation.efficiency by improving both the allocation of Their autonomy is compromised by undue gov-resources (through liquidation and changes in emient intervention. Their managers are notprices, incentives and decisionmaking proce- held accountable for results and are not given in-dures); and the utilization of resources (through centives to improve performance, and the wayincreased competition, better management and managers are selected and rewarded encouragesmanagement systems, improved government- qualities more appropriate to a central bureauc-enterprise relations, and privatization). racy than a competitive enterprise. Finally, non-
The Bank has become involved in these wider viable state enterprises are seldom liquidated.issues largely for pragmatic reasons. Very often Additionally, the proliferation of SOEs' diversethe efforts to improve individual enterprises were activities, some of them of very low priority tothwarted or eroded by defects in the larger policy any stated development policy, has placed anand supervisory environment. The focus on in- untenable burden on the government - both ondividual SOEs meant that fundamental issues, the budget and on its human capital.such as the rationale for the continued existence SOE reform aims to create the conditions thatof the enterprise, or the government-state promote enterprise efficiency:enterprise relations, were sometimes overlooked. "Strive to maximize profits..." In effect, profitAs of June 1988, there were 122 World Bank is a composite indicator that applies positiveoperations underway with components directed weights (prices) to benefits (outputs) and nega-at SOE sector reform. This report presents pre- tive weights to costs (inputs). If the prices areliminary lessons from this experience. correct, a profit-maximizing firm strives to achieve
maximum benefits for minimum costs - the defi-Seeking enterprise efficiency nition of efficiency.
Since many SOEs are monopolies, other tar-In theory efficiency will be highest when an en- gets, such as cost minimization, must be devel-
5
oped. When SOEs have goals different from profit Defining the state-owned enterprise sectormaximization, these goals must be clarified. Thefirst step is to determine whether the SOE is the For operational purposes a state-owned enter-most effective tool to achieve noncommercial prise can be defined as a publicly owned entityobjectives, or whether other, possibly less costly, with a separate legal personality and separatemeans should be sought (such as a direct tar- accounts that earns the bulk of its revenue fromgeted subsidy). the sale of its goods and services. Implicit in this
"in a competitive environment..." Competi- definition is the potential for the company totion is promoted through the breakup of mo- earn a return on its assets. Since many poten-nopolies, reduction of trade barriers, encourage- tially commercial bodies have become so orientedment of exports, and elimination of barriers to toward noncommercial objectives or so depend-private entry. Where competition is not possible, ent on subsidies as to be almost indistinguishablemarket proxies may be sought. For example, from a purely nonprofit body, the entities willpublishing service indicators for utilities or rail- have to be categorized in terms of their potentialways can generate public pressure to improve to earn a positive return, as well as the way suchstandards. enterprises commonly operate elsewhere.
"under managers with the autonomy..." Legal Governments tend to lump commercial statereforms, performance contracts, and the like can enterprises with promotional or regulatory bod-give managers greater control over daily operat- ies under the ambiguous rubric of parastatal.ing decisions and hold them accountable for re- Malawi, for example, has some 40 "statutorysults. Financial and physical rehabilitation aims bodies"; 13 of these are commercial enterprises,at providing the enterprise with the capital and the rest are nonprofit entities, such as the Handi-productive base it needs to act independently in capped Council or the Censorship Board. Bra-competitive markets. zil's Secretariat for State Enterprises must over-
"motivation..." Reforms typically introduce see the operations of 250 commercial public en-managerial incentives linked to performance. terprises (including some of the largest corpora-Recognition alone can be an important spur to tions in the world), and 150 "typical governmentgood performance; bonuses are an additional entities," including rural extension agencies andmotivation as are penalties for poor perform- a film company.ance. Nonprofit, promotional or regulatory bodies
"...and capacity to respond to competition." An require closer scrutiny and a different form ofeffort is made to: select managers capable of accounting, supervision, and personnel manage-operating independently in a competitive, com- ment from a commercially oriented firm. Sincemercial venture; reward them adequately; and the output of such bodies is not judged as easilyprovide them with training and assistance to as a commercial enterprise, inputs must be moreupgrade their skills. tightly controlled. As the government usually
"Nonviable enterprises will be liquidated." This provides part of the funds for current operationsis supported through studies to determine the of these entities, and there are no market forcespotential economic and financial viability of prob- imposing cost control, there must be closer re-lem enterprises and financial support for liquida- view of current expenditures. Lumping non-tion. commercial bodies together with commercial
"Selectively disinvest." Although many private SOEs tends to lead to excessive control of theenterprises in developing countries operate in latter. The oversight agency tends to get boggedcircumstances far removed from the ideal, it has down in administrative trivia and lose a sense ofoften proven easier to promote efficiency in a the relative importance of the issues. The budgetprivate, competitive environment where political of a multimillion dollar company is subject to thesensitivity and visibility is lower, where bureau- same rules and given almost the same attentioncratic decisionmaking is less likely to predomi- as that of a sports council. Table 1 summarizesnate, and where nonviable enterprises stand a these differences and their influence on supervi-greater chance to be liquidated. Privatization sion systems.also cuts back on the proliferation of SOEs and An important reform measure is, therefore, toallows the state to focus on core activities. distinguish between commercial and noncom-
6
Table 1 A comparison of noncommercial Table 2 Number of SOE reform projectsentities and commercial state enterprises
Technical Structural SectorNoncommercial Commercial state Region assistance adjustments PELs' adjustment Total
entity enterpriseAfrica 18 31 8 12 69
Inputs Hard to judge per- Can be judged on theformnance on the basis basis of outputs (pro- LAC 9 12 1 3 25of outputs. duction, profits).
Inputs must be more Flexibility in input de- EMENA 3 8 1 8 20carefully controlled. cisions. Asia 0 5 1 2 8
Budget Government must Current operations Total 30 56 11 25 122decisions provide the funds or funded from own re-
current operations. sources. Note: Approved as of June 1988.No market or con- Return on investment a. Includes public enterprise rationalization/rehabilitation loans,sumer forces for cost of more interest than public enterprise institutional development projects, and publiccontrol. current budget. enterprise sector adjustment loans.
Current expenditures Management is closer others (power or water supply); and some aremust be more closely to management of ascrutinized. private firm. more prone to social objectives that increase the
SOEs' financial dependence (transport).Personnel Management is closer Personnel rules In smaller economies where the public enter-
to management of a should allow SOEs to prise sector plays a major role, as in much ofgovernment depart- compete with private Africa, a comprehensive approach may be thement. sector and react flexi-
cbility to dianging best way to assure that SOE reforms are coordi-Personnel rules and marketst nated with changes in macro policy. In thesecompensation system cases the supply response to structural adjust-closer to civil service.
ment programs will often depend on the stateenterprise reform. This does not mean that allenterprises and issues have to be tackled at once.
mercial bodies for analytical and operational To the contrary, where government capacity ispurposes. Both Brazil and Malawi, for example, weak it is important to focus on the (typicallyare in the process of separating oversight of com- small) number of economically strategic enter-mercial and noncommercial parastatals. The ob- prises and to sequence reforms. A comprehen-jective of this exercise is to focus on the commer- sive approach may also be best in countries wherecial nature of state enterprises, not to denigrate the number of SOEs is relatively few or control isthe value of promoting a commercial orientation centralized and sector ministries are relativelyin other types of parastatals. Since efficiency weak (Thailand, for example). In larger econo-gains in commercial SOEs will have the largest mies (such as India) a comprehensive approachimpact on the economy and the budget, reform may be neither desirable nor feasible. Yet evenefforts should focus first on these. with a sector-by-sector approach the most impor-
The choice of whether to include in the reform tant first step will be to clarify the basic objectivesoperation all potentially commercial SOEs, only and operating principles for SOEs with top deci-nonfinancial SOEs, or only those in an economic sionmakers since meaningful reforms usually gosector must be made on a case-by-case basis. In beyond the scope of a single sector or ministry.treating SOEs as a sector, the focus is on thegovernment as owner. The approach to these Volume of Bank lending for SOE sectorownership problems varies most according to reformwhether the SOE is a monopoly or competitive,and financially independent or dependent on the At the end of June 1988, there were 122 projectstreasury. These traits, of course, vary, since cer- with major components aimed at reforming statetain sectors (industry or agriculture, for example) enterprises (see table 2) by changing the policyallow more opportunity for competition than environment, altering the relations between the
7
government and the enterprise, and divesting amount earmarked for state enterprise reformSOEs. They may also assist in restructuring indi- has been rather small: $2.4 million on averagevidual enterprises. (see appendix table C-4). Not surprisingly, the
The Bank's experience with this type of reform focus on SOE sector reform has grown with pol-is relatively recent. The oldest effort at SOE sec- icy-based lending; it has been a component in 56tor reform is the Senegal parastatal technical as- SALs (see appendix table C-3). The approval ofsistance loan approved in 1978. Excluding struc- the Mauritania PEL in 1985 marked the advent oftural adjustment loans (SALs), most projects were a new form of policy-based loan totally directedapproved after March 1982, and most are not yet at state enterprise sector reform. Since then PELscompleted (see appendix table C-2). The experi- have been approved in Benin, Jamaica, Niger,ence is also geographically concentrated. The and Morocco, and more recently in Ghana, Mali,Africa regions have been the most active in pur- Congo, and the Philippines. The projects tend tosuing this sort of reform (69 of the 122 projects) be large and to combine one or more of the fol-followed by Latin America and the Caribbean lowing components: a quick-disbursing, policy-(LAC, 25 projects). based component; slow-disbursing technical as-
Until recently many SOE projects were free- sistance; and assistance to restructure individualstanding technical assistance loans; hence the SOEs.
8
Reforming the policy framework
Sound macroeconomic policies are critically im- IMF initiative. Generally Bank projects haveportant to the health of both public and private stressed the need to move to efficiency pricingenterprises. In turn, state enterprise reform is (prices equal to the economic cost of the last unitcentral to the success of structural adjustment in sold plus a mark-up to clear the market) andeconomies where the sector is highly influential. have provided assistance to determine what thoseCertain policy issues - especially pricing, labor, prices should be. A study of tariffs in West Af-trade, and finance - are particularly pertinent to rica suggests, however, that more emphasis needsSOEs. Even though governments may not be to be put on improving collection and on simplerready to change policies overnight, a recognition approaches rather than on long-run marginal costof the fundamental reforms required and agree- (LRMC), particularly in the data-scarce countriesment on a timetable for change must be the start- in Africa,2 and lengthy and costly LRMC studiesing point for reform. Projects that attempt to have not been effectively translated into betterintroduce institutional changes without this un- revenues because of collection and productionderstanding run the risk of, at best, undermining inefficiencies.the improvements the project is meant to sup- Price increases are often needed to end furtherport, and at worst, actually hardening a wrong decapitalization of the firm and to avoid budgetpolicy stance. A key barrier to the success of drain, waste, and distortion associated with arti-performance contracts in some West African coun- ficially low prices. Still it is important to avoidtries, for example, has been the failure to first automatic cost-plus pricing, and to provide in-establish the basic policies. The principles for centives for management to look for cost reduc-designing policies to encourage efficiency and tions as diligently as price increases. As one ob-growth have been well documented in other Bank server notes: "...if governments allow public en-papers; this section summarizes aspects of these terprises to operate as profit centers, they hadpolicies that have become issues in SOE sector better make sure that the prices managers face inreform.' designing and implementing their business strate-
gies come pretty close to reflecting true opportu-Pricing nity costs to society...If public enterprises do not
operate in competitive markets or if government-Clearly a critical element of any SOE reform is to administered prices faced by public enterprisesmove to market pricing wherever competition is do not approximate real social opportunity costs,possible and to develop criteria for monopoly then in most cases it would be preferable to treatpricing. Most of the Bank operations in table 2 them as cost centers."3 In Turkey, for example,either address the issue directly or assure that it monopoly enterprises improved their financialis being dealt with through some other Bank or situation and reduced the budget burden by rais-
9
ing prices, but an Operations Evaluation Depart- Workers in state enterprises, particularly un-ment (OED) report questions whether there were skilled or semi-skilled workers, have special privi-any efficiency gains. This means that, in addition leges compared to their private counterparts into pricing formulas, more attention should be many countries. Not only do they enjoy a highergiven to developing and implementing cost mini- degree of protection from layoffs but they alsomization targets and comparing prices with bor- are paid as much or more than equivalent privateder prices for tradeables. For example, unit cost workers. For example, unskilled Nigerian work-targets can be set in reference to benchmark indi- ers in SOEs were paid 95 percent of the wage ofcators from other countries and the firm's own their private counterparts in 1982 (versus 49 per-past performance. Additionally, prices might be cent for senior management); laborers in Zam-based on border prices for tradeables and the bian parastatals received 144 percent of those inenterprise allowed to retain part of any surpluses the private sector in 1983 (versus 91 percent forit can generate by reducing costs. professionals); and a manual worker with less
Greater emphasis on the institutional structure than a 10th grade education earned 33 percentfor tariff setting is also warranted. Ideally, tariff more in a state enterprise in Thailand in 1983approval should be vested in an entity free of than a similar worker in a private firm (while anarbitrary political influences, competent to re- executive earned 6 percent less). This situationview tariff decisions and provide an extemal check tends to raise wage expectations for less skilledon the SOE's efficiency, and required to respond workers in both public and private firms, threat-quickly and fairly. Many of the more recent proj- ening external competitiveness and slowing jobects in West Africa set tariff and efficiency targets creation. Introducing fair but more disciplinedthrough a performance contract system modeled labor policies in SOEs can thus benefit both pub-on the French contract plan. The experience has lic and private firms and increase productive em-not been an unqualified success, but it seems to ployment opportunities.be a move in the right direction. Furthermore, the rise in wages for bottom
grades is often combined with a freeze at theLabor policy upper levels, compressing the wage scale. For
example, the differential between managementIn many countries labor laws are drafted to apply and the lowest paid unskilled worker in Ghanaequally to public and private enterprises, but they in 1985 was only 2.2, compared to 4.0 in 1982.are enforced more strictly in SOEs. In other cases While fringe benefits increase the differential, thisSOEs are subject to civil service rules or to a sort of rapid compression contributes to vacan-parallel system. Generally these systems are rigid cies, lower morale, reduced discipline, and lowerand bureaucratic. This, plus the political visibil- productivity among senior staff. A manager whoity of public employment and SOEs' easy access is earning little more than his driver will be un-to government subsidies or guaranteed credits, derstandably cool toward efforts to increase re-contributes to the labor problems typical in most sponsibility and accountability. In such cases,state enterprises: redundant workers and rigidity changes in compensation practices are a prerequi-in the size of the labor force; strong upward pres- site for efficiency improvements.sure on wages at lower levels, and wage com- More and more countries have begun to recog-pression between the top and lowest grades. nize the need to shed excess workers and to give
At first glance, state enterprises would not ap- greater flexibility to SOE management in hiring,pear to be a major source of employment in most firing, and setting wages. While there have beencountries, since SOEs are typically more capital- substantial layoffs in such countries as Ghana,intensive than private enterprises. The nonfinan- Niger, and Senegal, governments are often un-cial enterprises' share of nonagricultural employ- derstandably reluctant to face the short-term so-ment is 5.5 percent in Latin America, 15.7 percent cial costs, particularly in times of economic stag-in Asia, and 18.7 percent in Africa - an overall nation or decline. Bank projects have begun to13.9 percent.4 These data, however, understate deal with this issue; for example, the Benin proj-the importance of SOE labor policy. Since SOEs ect creates a training and redeployment fund forare an important and highly viable source of workers laid off from SOEs being restructured oremployment in the modern sector, they tend to closed. The financial costs of layoffs can also be ahave a strong impact on labor policies in the pri- problem. For example, Ghana (which laid offvate sector. 29,000 staff from the Cocoa Marketing Board
10
alone) may find it hard to raise the resources be expanded, even in relatively small markets.needed to finance the generous severance pack- Conditions in ten of the SALs and six of theages agreed to by the SOEs in earlier collective SECALs reviewed call for the elimination of statebargaining agreements.5 monopolies or monopsonies. One common re-
sult of the removal of monopoly status is for theCommercial policy SOE to wither away. In Somalia, for example,
after the Agricultural Development CorporationThere is ample evidence that any enterprise, lost monopoly power in maize and sorghumpublic or private, operates more efficiently when marketing, its share in purchases of these cropsfaced with a competitive market. Since SOEs dropped to 1.6 percent. In other cases, SOEstend to be large in relation to the local market, the respond favorably to competition. When privateopportunities for domestic competition may be traders were allowed to compete with the publiclimited, especially in smaller economies. Bank food importer in Niger, not only did prices fallprojects have long recognized the importance of and foodstuffs become more widely available butinternational competition as a spur to greater the SOE improved its performance and made aoperatingefficiency. But whenencouraging trade profit for the first time.liberalization, SALs have sometimes given in- Surprisingly few projects deal with the prob-adequate attention to the other factors required lem of putting public and private competitors onfor state enterprises to respond to increased com- equal terms. One exception is the Niger SAL,petition with increased efficiency. If the SOE is which supported the abolition of the exemptionmanaged by bureaucrats rather than business- of SOEs from the minimum tax on turnover. Al-men, if it has never developed marketing or fi- though SOEs operate under all the handicapsnancial management skills, if it is not permitted mentioned above, they typically also enjoy ato respond to competition by cutting costs through number of privileges vis-a-vis domestic competi-layoffs and closures, if its capital base has been tors: explicit or implicit government guarantee oferoded by past government pricing policies, if it debt, access to government subsidies or loans,cannot collect from its creditors, then a poten- tolerance of arrears on taxes or other payments,tially viable firm may not be able to compete. favored position in public procurement decisions,This can increase the budget hemorrhage and and tax exemptions (although private firms cancreate a backlash against further trade reforms. often more easily evade taxes or labor and otherIn some cases, these problems can be solved by laws). Moreover, in some countries an SOE can-improving the institutional environment and the not be declared bankrupt or subject to forcedmanagement of the SOE. In others, privatizing execution by creditors. As a result, on the onethe firm may be a rapid way to improve its capac- hand, the SOE may need assistance to overcomeity to compete since it addresses many of these the effects of years of price controls, inadequateproblems simultaneously. Reforn operations equity, and overindebtedness. On the other hand,should attempt to orchestrate stimulus - trade legal and regulatory changes may be required toliberalization - and response - SOE improve- remove discrimination in favor of state firms.ments or divestiture. This argues for linkingtrade liberalization in SALs with operations with Financinga longer time-frame to address these issues.
Besides trade liberalization, encouraging SOEs Reforms in financial policy - increasing compe-to export also provides important pressures for tition in the banking sector, moving toward mar-efficiency. A study of India's Hindustan Ma- ket-determined interest rates, assuring the inde-chine Tools found that even a small exposure to pendence of state-owned, as well as private, bankscompetition in export markets (8 percent of sales) in determining credit policy - all create specialcontributed to the company's dynamnism and problems for SOEs. On the one hand, state enter-professionalism. While this has not been specifi- prises have usually enjoyed privileged access tocally addressed in SOE components, the Bank credit and government guarantees, unlimitedfrequently promotes outward-oriented policies overdraft facilities, and funds at low or zero cost.(such as reasonable exchange rates, duty draw- Because of what Hungarian economist Janosback schemes, easing export licensing, and so on) Kornai calls the soft budget constraint, SOE man-in adjustmnent operations. agers feel little pressure to control costs or con-
Finally, the scope for domestic competition can serve funds. Underpricing capital (often encour-
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aged by an overvalued exchange rate) also con- sessing the economic benefits and potential prof-tributes to the misallocation of resources, the se- itability of an SOE as a prerequisite for financiallection of excessively capital-intensive projects, restructuring, and then by enforcing a reasonablegrowing SOE indebtedness, crowding out of pri- dividend policy. In practice, few countries havevate borrowers in local capital markets, and a done this: Chile, which requires a 5 to 10 percentgeneral tendency to expand the scope of public return on assets as a dividend from its SOEs, isoperations. On the other hand, SOEs often have one of the exceptions. At the very least, financialbeen created with little or no equity and then restructuring of a poorly managed SOE shouldforced to borrow to cover operating deficits or to be delayed until new management has producedfinance all of their investments with debt because and begun to implement an action program toof government pricing policy. Furthermore, past increase operating income.laxity in payment policy has typically resulted in To eliminate the insidious effects of the softinterlocking arrears between SOEs and the state, budget constraint, subventions should be endedand within the state enterprise sector. wherever possible and SOEs required to borrow
These circumstances make it difficult suddenly principally from banks and to pay the opportu-to switch to a market-oriented financial policy. nity cost of capital. The effort to reduce subven-Since charging SOEs correct prices for their capi- tions may thus also entail a reexamination oftal would make the financial situation worse, re- some social welfare programs. A competitive in-form operations must lay the groundwork by: dependent banking system is a key factor in in-developing matrices of arrears and canceling off- troducing financial discipline. Banks which aresetting debts, restructuring the capital base of competent and free to manage their own portfo-some enterprises by converting government debt lio and subject SOEs to the same financing crite-to equity, injecting new capital to reduce the debt ria as private enterprises can take on much of theoverhang, canceling arrears to the banking sys- burden of monitoring and supervising competi-tem and suppliers, and renegotiating the terms of tive SOEs. Developing an arm's-length relation-the debt. Debt-equity swaps are another interest- ship between the government and the financialing way to address the problem, both for foreign institutions -particularly state-owned financialdebt (for example, Chile) and domestic arrears institutions - is thus a critical part of restructur-(for example, the municipalities' debt with Por- ing. This complicates the reform process since intugal's electric company). most borrowing countries the banking system
Care should be taken to assure that an enter- lacks this autonomy, and in many the banks areprise benefiting from financial restructuring or on the verge or in the throes of bankruptcy. Nev-new equity is economically viable, potentially ertheless, these reformns are unavoidable since inprofitable and subject to financial discipline. In many cases the banks have become the main proptheory, this issue could be addressed by first as- for inefficient public - and private - firms.
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Determining SOE roles and objectives
SOE sector reform requires the government to * The rules of operation for SOEs expected toreassess the role that its SOEs will play in the remain public (such as autonomy, accountability,economy and, on that basis, the scope of the sec- objectives, and evaluation).tor. The impetus for SOE sector reform typically A number of Bank operations have tried toarises when structural adjustment has changed specify the objectives of individual SOEs withoutthe economic rules of the game and many state a general agreement on the objectives and oper-enterprises are in serious trouble. Not all of these ating principles of the state-owned sector. Gen-SOEs merit support or survival. In all countries, erally, this has proven a lengthy and not verythere is a core group of enterprises whose effi- fruitful exercise. For example, one of the reasonscient functioning is critical to the adjustment that performance contracts in Senegal took asprogram and which are likely to remain public in long as three years to negotiate was the need tothe near future. Although this varies, it usually negotiate the basic principles of SOE operation inincludes such SOEs as electricity companies, rail- each contract. While theoretically it is simple toways, telecommunications firms, very large ex- insist that government's first role as owner is totraction enterprises, and so on. There is another state clearly what it expects from its enterprises,group of clearly nonviable firms that should be institutional and political factors work againstliquidated: typically these include small retail clarifying objectives. Bank operations have de-outlets, state farms, and marketing boards. In veloped a number of tools to help focus this ef-some African countries, such as Tanzania, the fort, including diagnostic studies, classificationnumber of enterprises in this category may be of SOEs, and legal reforms.large. Quite a number of enterprises fall betweenthese two extremes, some of them able to survive Diagnostic overviewunder the new economic rules, some of themneeding assistance to adapt, and some that should Even though the problems are already wellbe liquidated. known, there seems to be no substitute for put-
The composition of these three groups will ting all the issues and recommendations togetherdepend on government decisions about the role in a single document. This diagnosis need not beof SOEs and the principles under which they lengthy or elaborate, especially if the issues haveoperate, including: been studied piecemeal in other exercises. In* The pricing, commercial, labor, and finance some cases, it may be most appropriate to reviewpolicies discussed above. the issues and recommendations in earlier stud-* The sectors to be reserved for the state (if any). ies and examine the reasons government failed toWhich SOEs will remain public, which will be act or its reform effort failed. (A checklist of pos-liquidated, and which will be privatized. sible topics is given in appendix A.)
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Once the government has assessed the funda- cies" was considered viable.) Potential viabilitymental objectives for which the enterprises were should be based on an assessment of future eco-created, and determined that these goals are still nomic and financial viability after agreed policyvalid, it can decide which enterprises should reforms, taking into account the benefits of con-remain public, and of these, which need restruc- tinued operation against the costs of needed fi-turing and which should be privatized or liqui- nancial or physical restructuring.dated. The government then classifies the SOEs It is not necessary that all firms be classified atand sets a timetable for action. Governments the outset. Rather than emphasizing a perfecttend to classify enterprises as "strategic" or "es- classification, stress should be put on quick ac-sential" and "nonstrategic" or "unessential." Bank tion to liquidate, sell or restructure some of thestaff usually attempt to divide enterprises into extreme cases. Otherwise, the reform tends topotentially viable or nonviable. For example, in lose momentum and to stall over a classificationSomalia the government adopted the following that risks becoming an academic exercise.classification and action plan:
C-ategory Action The legal framework
A. Essential/strategic, Retain in public sector. Some developing countries have drafted generalviable.
B. Essential/strategic, Retain, take specific steps to SOE law to underline the basic principles of SOEnonviable. improve. operation. In Turkey, for example, a good deal of
C. Nonessential/non- Divest in whole or in part tostrategic, viable. the private sector. effort was devoted to encouraging such legal re-
D. Nonessential/non- Liquidate. form. In other countries (Peru, for instance) thestrategic, nonviable, effort has been directed instead at placing more,
A similar classification was applied to agricultural or most, of the SOEs under the commercial codeparastatals in Madagascar by the Ministry of as a way to emphasize that state enterprises areAgricultural Production and Agricultural Reformn, to behave as if they were private and develop awhich defined its terms as follows: "strategic" more efficient set of rules. Although much de-meant that the enterprise fulfilled a priority role pends on the legal heritage of the country, gener-for the state carried out activities which "for the ally the promotion of competition and nondis-moment and under present policy conditions, crimination will be best served by putting as manycannot be undertaken by any other mechanism." SOEs as possible under the same law as private"Viable" meant that the enterprise either did now firms, ra ther than by creating a special legal statusor could conceivably (under present policy for state firms. Of course, the commercial codeconditions and without fundamental would also need to be reviewed to assure that itmacroeconomic changes) run along commercial supports enterprise efficiency.lines at a profit. The success of legal reforms depends on suffi-
Obviously, these definitions leave many areas cient political will. In addition, there is amplefor subjective interpretation. "Strategic" is by its evidence of pronounced cultural differences innature a subjective category; it may mean that the attitudes toward legal doctrine and practice.enterprise is seen as fulfilling a crucial military or These need to be assessed before devoting timeeconomic role, or it can also mean that the politi- to details of legal reform. While a few operationscal costs of disinvestment outweigh the potential may have placed too much weight on legalbenefits. "Viability" is not very clear-cut either. changes, more often SOE reform projects haveA private firm will usually be liquidated if it is overlooked the need for legal changes to supportinsolvent. Insolvency can be straightforward, government's policy pronouncements or failedwhen a firm is unable to meet its maturing obli- to budget for the time such changes can require.gations, or it can be a judgment, when total lia-bilities exceed the fair market value of assets. But Individual SOE objectivesan SOE may be insolvent because the govern-ment failed to capitalize it adequately. Or it may Once the role and scope of the SOE sector hasbe solvent because it had access to subsidized been decided, the next step is to reform the rela-funds or enjoys monopoly privileges. (Under the tionship between the government and its statedefinition in Madagascar, an enterprise that enterprises.6 This involves four actions:earned financial profits at great economic cost * Set clear and attainable objectives compatiblebecause of distortions created by "present poli- with the commercial operation of the firm.
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* Give management greater autonomy over the their financial and other obligations and to es-operation of the firm and select managers ca- chew ad hoc interference in the enterprise; in ex-pable of operating independently. change, the SOE accepts negotiated performance* Establish clear rules and procedures for gov- targets.emnment involvement in decisionmaking. Contracts between the enterprise and the gov-* Hold managers accountable by negotiating tar- emient have been used in France since the lategets, monitoring and evaluating results, and 1960s. There the contracts have changed in na-rewarding managers and staff on the basis of ture over time but have basically served as a wayperformance. to establish a dialogue between the SOE and the
government and to clarify the SOEs' objectivesCorporate planning and operating framework. Contracts have subse-
quently been used (with Bank support) in Sene-Some governments have attempted to set SOE gal and more recently in Morocco, Tunisia, Ma-objectives and medium-term strategy by requiring dagascar, Congo, Cameroon, C6te d'Ivoire, Mali,enterprises to prepare corporate plans (India, and Togo. Recently, the device has been appliedPakistan, and Thailand, for example). But all too outside of francophone countries, in the Gambia,often this turns out to be a pro forma exercise India, and Bangladesh.since meaningful corporate planning requires The only experiences of any length are in Francemanagement with independence, continuity, and and Senegal. Experience there shows that thecommitment. SOE managers face a number of quantified performance targets set in the contractdisincentives and obstacles to adapting to are less important than the process of preparingmedium-term changes in their environment. and negotiating it. The agreements can help bothSOEs are insulated from market signals, prices parties to translate vague intentions into quanti-are controlled, their market is protected, or loans fiable goals. Contracts also make the costs ofare readily available, and the penalty for failure achieving objectives more transparent, thus al-is remote. New investments must pass lengthy lowing a more rational consideration of costs andbureaucratic approval procedures. Frequent ro- benefits. Also, the two-way nature of the nego-tation of managers, directors, and supervisors re- tiations increases both sides' understanding ofduces the commitment to or understanding of the operations and constraints of the other.long-term needs. Labor laws or social welfare Some of the disadvantages include: the factaims may take precedence over the firms' long- that governments can (and do) so easily violateterm health. These obstacles have led many ob- contract without sanction; the time it can take toservers to recommend that the state avoid or negotiate the documents (two to three years indivest ownership in industries such as electron- France and Senegal) and their complexity; theics, where dynamic adaptation to changing con- heavy skill and information burden in countriessumer tastes is paramount, particularly for firms where these are in short supply; and the fact thatwhich export. the contract can assist only a small proportion of
Ideally, a corporate plan should analyze the the total number of SOEs at a time. There is someenterprise's environment and how it is likely to not very robust evidence that Senegalese enter-change, and enunciate the corporate goals and prises with contracts had lower operating costsstrategies for the future. It should include targets than those without. Moreover, a majority of SOEand benchmarks for monitoring achievement and managers of enterprises with contracts in Sene-an investment program. While the plan can be a gal regard the contract as helpful in allowinguseful means of negotiating objectives with gov- them autonomy to operate more commercially.emnment, its primary purpose is as a manage- The experience so far provides several lessonsment tool. As such it must become a part of the on the use of performance contracts. First, thecorporate culture and be reflected in the annual contract should be one part - and not the cor-budgets and investment projects. nerstone - of any reform effort. Not only should
the general principles of SOE operation have beenPerfornance contracts agreed to before any contracts are negotiated but
also the enterprise should have developed a vi-One of the appeals of performance contracts7, as sion of its future and its strategy that fits in theopposed to corporate plans, is the two-way nature government's macro strategy. Contracts shouldof the obligations. Governments pledge to meet be started on a pilot basis and the experimental
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nature of the instrument should be recognized. complex and lengthy, in part because they try toThe use of extemal consultants should be mini- take into account the uncertain financial and eco-mized; the value of the device is its promotion of nomic environments. Initial contracts, in par-a dialogue between owner (government) and ticular, should not strive to be all-encompassingmanagement. and perfect. It is also useful to shorten the inter-
Second, care should be given to the choice of vals of review and modification of the contractenterprises for performance contracts. Enterprises process. The underlying idea of the contract isoperating in a competitive environment without quite simple: agree with the enterprise what ita heavy social service burden usually do not need should do and what it needs in order to do it.contracts; they can be regulated by the market The fulfillment of the contract rests especially onwith minimal government supervision over in- the commitment of the two sides, but particu-vestments and debt. A finding from the French larly the govemment, to honor their obligations.experience has been confirmed in Africa: the A more complex contract will not fare any betterweaker the firm and the more difficult the eco- than a simple one if that commitment is lacking.nomic context, the harder it will be to negotiate acontract. Yet govemments typically wish to ap- Noncommercial objectivesply contracts to their poorest performers. Gov-emments would be better advised to choose an Governments cite many reasons for creatingenterprise in less than critical financial condition, SOEs.8 Quite a few - the promotion of certainparticularly at the outset, as a pilot exercise to test sectors, the generation of income for the treasury,the method. the need to offset econornic dominance by for-
Third, nonpayment, or long delays in payment, eign or certain national interests, and the regula-contribute to poor enterprise performance, espe- tion of monopoly power - should in principlecially in Africa. Many contracts attack the prob- be compatible with the efficient operation of alem directly by stipulating amounts and payment commercial entity. But other reasons, called hereschedules for govemment. When, as often hap- noncommercial objectives, create problems thatpens, government is unable to honor the financial need to be taken into account. These objectivesobligation, the entire contract is called into ques- include the use of state enterprises to promotetion. One problem is a lack of realism about the development of certain regions, to create jobs,government's financial constraints; another is a or to redistribute income. This often involveslack of good faith on the government's side. Both keeping redundant workers, selling goods andare hard to overcome, but recent contracts in Se- services at below market prices, or keeping opennegal have tried to approach this issue by identi- uneconomic facilities.fying the services which will be suspended in The most effective way to promote an enter-case of nonpayment. Some contracts also oblige prise's efficiency is to require it to seek to maxi-the government to budget a specific line item to mize profits in a competitive environment. Incover anticipated payments to the enterprise con- theory this need not rule out the possibility ofcerned. It is also important to have a supervisory using SOEs to pursue certain social or noncom-body strong and competent enough to push the mercial objectives as well. For example, an enter-financial authorities to honor their obligations. prise might be required to locate in a remote area
Fourth, the relation of the contract to the gov- in order to promote regional development, andernment and SOE budgets should be structured then told to maximize profits. The problem iscarefully. In some countries the contract process that the SOE's level of profits will be less than if itis totally separate from the budget process, which were located in a more appropriate area, and itnot only places the contract in jeopardy of being will be hampered in its efforts to compete even ifdisregarded in the budget decisions but also places it operates at peak efficiency. To try to solve thisa heavy negotiating burden on management. The problem the government may decide to give theagreements reached in the contract should be enterprise a transfer to cover its added costs (or,honored in other decisions. This also means that in the worst case, to protect the enterprise fromdecisionmakers, especially the Finance Ministry, competition). But such transfers are notoriouslymust be party to the negotiations or be otherwise hard to calculate and there is ample evidence thatbound by the contract. the existence of a subvention leads to declining
Finally, while the French have simplified their productivity; the cost of meeting the social goalscontracts over time, the African contracts remain can be used to cover up poor performance. If the
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government imposes social objectives and fails to the worst offenders have been those agriculturalprovide offsetting transfers, however, enterprises commodity boards which, in an effort to keepare forced to cover the cost through borrowing or prices low to the urban consumer and to provideby eating up their capital stock, deferring mainte- employment to an often bloated staff, purchasenance and replacement investments. Since this products at prices below market and even belowhides the cost of the social welfare goal to the cost. Such behavior tends to further impoverishbudget for a time, it can encourage governments the rural poor - the underclass in most develop-to continue programs that they can ;11 afford. ing countries - and cause farmers to stop pro-
The use of SOEs to promote social goals can ducing commodities in which the country has ahave unforeseen perverse effects. When SOEs comparative advantage.are required to keep prices artificially low, the Most governments embarking on reform pro-result is spiraling budget deficits and debt as grams have come to recognize, first, that somewell as growing shortages, costly distortions in social objectives are beyond their current meansinvestment decisions and waste of scarce re- and, second, that in many cases SOEs are not thesources. When SOEs must hire excess workers to best way to pursue such goals. But in the shortpromote employment, the result is a fall in SOE run it can be politically difficult to dismantle suchlabor productivity and the creation of a labor programs and developing alternative ways toelite; unskilled laborers may end up earning more meet social welfare goals takes time. Reformthan in the private sector. The inefficiencies that efforts should try to make the social goals ex-subsidies tend to engender in SOEs create bottle- plicit, calculate costs carefully, and finance thenecks throughout the economy that are much added costs through the budget rather than allowmore costly than a more direct subsidy. Further- the SOE to be decapitalized. Agreed indicators ofmore, since SOE customers are often large indus- performance should then be carefully monitoredtrial users, wholesalers or the upper and middle to try to keep any offsetting transfers from erod-classes, they - not the poor - may benefit most. ing efficiency. For example, one way to encour-The costs of the subsidy are shifted from the age productivity despite price controls may be toconsumer to the taxpayer, or, if the deficit is fi- evaluate performance on the basis of trends innanced through inflationary monetary expansion, constant- or shadow-priced profitability (see be-to the public at large. Given the regressive na- low). Governments should be assisted in assess-ture of taxes in many developing countries and ing the costs and benefits of such programs andthe impact of inflation on the poor, the net effect developing alternative, less costly ways to meetmay be to increase income inequalities. Probably their social welfare goals.
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4Decentralized management of state-ownedenterprises
The developing countries that have been most Malawi approves every appointment or promo-successful in promoting efficiency (Chile or Ko- tion and has issued guidelines on the amountsrea, for example) have pushed competition wher- that its SOEs can spend on uniforms; the Bureauever possible, followed appropriate pricing poli- of Public Enterprises in India at one point issuedcies for monopolies, and relied on arm's-length, specifications for factory perimeter fencing. Notperformance-oriented controls which focus on only are small decisions more tightly controlledoperating efficiency. They have also benefited than major ones but large and powerful enter-from an ample supply of skilled administrators prises are often left to spend millions withoutand managers. being held accountable, while smaller SOEs are
Circumstances in the rest of the developing hamstrung. Managers of powerful enterprisesworld make it harder to implement the same bypass the control agencies and appeal directlysolutions. Many of the economies of Sub-Saharan to top authorities (who typically appoint them).Africa, for example, are characterized by large ZIMCO, the holding company that overseesnumbers of SOEs which usually dominate the Zambia's large copper monopoly (ZCCM), forsmall local market and are protected from import instance, does not even have a representative oncompetition. In the face of this monopoly power, the ZCCM board; instead the chairmnan of ZCCMand to achieve social goals, governments have sits on the board of ZIMCO.attempted to control the enterprises through ex- In some developing countries excessive auton-tensive regulation and elaborate institutional omy has become the more serious cause of poorstructure. Skilled manpower to staff the agencies performance. A number of countries in Latinand manage the SOEs are in short supply. Typi- America (Brazil or Argentina, for example) andcally the controls fail to function as expected and elsewhere (such as, the Philippines) have beenstifle managerial initiative or accountability with- struggling to control state enterprises, many ofout increasing the government's ability to achieve which enjoyed monopoly powers and privilegedits stated aims. Even in countries which do not access to credit and earmarked taxes. Until re-suffer from shortages of administrative skills, cently many were able to evade effective govern-efforts to control SOE decisions have not had the ment oversight when contracting debt, creatingdesired effect on efficiency. Typically, oversight subsidiaries, making investments, and so on. Foragencies spend inordinate amounts of time ap- example, until the creation of a special state sec-proving trivial decisions best left to the manag- retariat in 1980, Brazilian authorities did not haveers: line-item budgetary expenditures, invest- adequate information on the number of enter-ments in routine maintenance, relatively small prises, much less their plans and performance.purchases, and promotions or dismissals. For The challenge is to establish a delicate balanceexample, the Department of Statutory Bodies in between autonomy and accountability. Simply
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put, accountability is meaningless without au- that finer issues have little immediate relevance.tonomy, for how can a manager be held respon- The more widespread problem is to begin to iden-sible for enterprise performance unless he has the tify the layers of control that need to be peeledfreedom to decide? But autonomy without ac- away and establish a timetable for action.countability is license. Governments tend to em- Since the autonomy that can be afforded to abrace control and accountability and ignore their competitive, financially independent firm is ob-pledge to increase managerial autonomy. More- viously greater than that granted to an insolventover, the effort to increase autonomy may be enterprise or a monopoly, increasing competi-hampered by the fact that reforms are usually tion eases the government's oversight burdenenacted in times of austerity, when decisions tend while creating pressure for efficiency. Thus, asto become more centralized. And the existing le- market solutions take effect, the government willgal framework may allow government discretion need to reduce direct controls and allow manage-to intervene at will and may make needless inter- ment to respond to competition. One schemeventions mandatory. It is important, therefore, to used in Portugal, Thailand, and Zambia for or-build safeguards, legal and procedural, against chestrating the introduction of market-orientedundue intervention, and to develop a program to policies with reductions in controls is to classifygrant SOEs greater independence as competition SOEs according to this market (competitive orand skills increase. monopoly), and whether and how much gover-
ment financial support they receive.The role of the government Financially independent firms are those that
do not require treasury support for current orThe first step is to clarify what decisions the gov- capital operations, and that can borrow withoutemnment should or should not be involved in. government guarantee. Since few SOEs in devel-Based on the experience of private conglomerates oping countries fit this description or operate inwith subsidiaries, Leroy Jones of Boston Univer- fully competitive markets, the classification is asity has suggested the following: dynamic one with relatively more autonomy- Set the basic objectives (fundamental objectives, granted to SOEs as they move closer to the idealsuch as make a profit or diversify into new export competitive and independent firm.areas or privatize part of the activities). A competitive, financially independent SOE can* Appoint the managing director and the board be given a profitability target at the beginning ofmembers. the year (plus supplementary indicators for plan-* Evaluate performance. ning, maintenance, and so on, as needed) and* Reward or penalize the managing director for permitted to set prices and determine expendi-his performance. tures. The government would review only major* Review financing decisions that affect public investments (above a predetermined ceiling),funds (for example, requests for government quarterly reports, performance evaluations andequity, debt with government guarantee, rein- annual accounts. Monopoly prices would be regu-vestment of profits versus payment of dividends). lated. At the beginning of the year a price for-* Use long-range planning and coordination mula or a ceiling would be established. The SOEacross units (for example, to determnine indus- could adjust prices according to the formula. Totrial, energy or agricultural policy and develop exceed the ceiling the monopoly would be obligedsector plans or decide to phase out activities that to present supporting evidence to the pricingmight be best left to the private sector). authority, which would have a fixed period (say* Do nothing else. a month) to object before the increase went intoIf the enterprise is a monopoly, the government effect. Financially dependent firms would alsowould also need to regulate pricing decisions. be required to submit a budget and investment
Some might question some of the specifics in plan for approval.this list, arguing that the board should appoint Typically a number of state enterprises willthe managing director and that government remain monopolies, either because they are natu-should also review major investment programs ral monopolies, because they dominate a smallwith an important macroeconomic impact even if market with high import barriers the govern-totally self-financed. But most countries are so ment is unwilling to reduce, because they are thefar removed from granting anything like the only local producer of nontradeables where bar-degree of independence implied in these actions riers to entry are high, and so on. In small econo-
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mies, such as those in Sub-Saharan Africa, mo- powers ceded by government) and investmentsnopoly SOEs are likely to dominate the state- should be more tightly controlled. In makingowned sector in the near term even with trade investment decisions governments should con-reforms. Thisdoesnotprecludethepossibilityof sider not only the feasibility and desirability ofincreasing their autonomy while protecting the the project but also the viability of the enterprise.consumer through a more arm's-length, perform- Pakistan, for example, sharply curtailed invest-ance-oriented system. Indeed, more selective ments in new industrial SOE projects because ofcontrols are especially important in these coun- the enterprises' failure to operate their existingtries where government capacity is stretched thin. capital stock efficiently.
SOEs and the budget Improving the institutional framework
It is important to change the way SOEs are treated Figure 1 gives a quick overview of some of thein the budget. First, governments must refrain responsibilities assigned to different state bodiesfrom reviewing detailed, line-item expenditures and boards of directors in SOE decisionmaking.in the budget. If the SOE is competitive and does The core responsibilities are those common tonot require financial support, the budget should most countries and critical under most circum-only provide supporting information on how the stances. The other functions are typical to manyenterprise intends to achieve its targets; it should countries and some may be counterproductive.not be subject to approval beyond the board of Besides these bodies in the table, there are others,directors. If the SOE requires government sup- of course: the labor ministry or civil serviceport or is a monopoly, the minister of finance will commission may oversee personnel policies; theapprove the budget, but again the government central bank may need to approve borrowingshould not get involved in controlling current and foreign exchange allocations; the commerceexpenditures. or trade rninistry may issue export and import
Second, the SOE budget should not be consoli- licences; the public auditors will either supervisedated into the federal government budget, since or carry out SOE audits; parliamentary comrnit-this not only invites intervention in the details of tees may evaluate performance and investigateenterprise planning, it leads to rigidities and costly problems.delays in SOE decisionmaking, forcing the man-ager to get ministerial permission for even minor The core ministrieschanges in line-item expenditures. On the otherhand, subsidies, transfers, payments for SOE Virtually all developing countries have attachedgoods and services and other expenses must be the SOEs to a sector ministry, with the financecorrectly budgeted. One bottleneck to reform ministry playing a key role. In French- and Span-has been the failure to adequately plan and allo- ish-speaking countries, where the system of dualcate sufficient resources to cover the costs of ad- tutelle or tutellage is the norm, financial deci-justment: payment of SOE arrears, severance and sions are referred to the finance ministry andredeployment costs, restructuring, explicit subsi- other decisions to the sector ministry. In somedies to cover the cost of meeting government- cases a Minister of Portfolio further complicatesmandated social welfare objectives, and so on. the reporting relationships. The Bank's reform
Finally, performance evaluation should not efforts have attempted to improve the quality offocus on a comparison of actual with budgeted this oversight by shifting from a priori to a pos-expenditures (Why did you buy eight instead of teriori control, safeguarding against de facto orseven trucks?) but rather on a comparison of effi- de jure intervention in decisions that are in theciency and profitability achievements with tar- realm of management or the board, streamlininggets. (Why did your return on equity fall? Why reporting relationships, and creating a more in-was your down time 20 percent higher than your formed and better trained group in the sector andcompetitors¢?) finance ministries to review the SOEs. This is an
The basic principle of these proposals is that essential, but time consuming task. While it isself-financed, operating expenditures should be too early to judge the outcome of these efforts,under less control, while government-financed some lessons are clear.expenditures (including those financed with First, the key role of the finance ministry, espe-government guaranteed debt or through taxing cially in present times of austerity, cannot be
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Figure 1 The institutional framework: responsibilities of key oversight bodies and boards ofdirectors
Central SOEFinance ministry Secfor ministry organization Holding company Board
Review and approve Set sector policy Evaluate and monitor Appoint board and Approve budgets andSubventions Review and approve performance managing director corporate plansInvestments which corporate plans and Suggest follow-up to of subsidiaries Approve annual
Dividend payments Other functions trends and macro- accounts, and on quarterly basiseconomic impact borrowing of and advise manage-
Other functions Serve on board Improve coordination, subsidiaries mentNominate or appoint government Approve creation or Approve investments
Serve on board management team oversight dissolution of Approve majorApprove monopoly and much of Board Safeguard managerial subsidiaries procurement
prices Approve budgets autonomy Do company Nominate or appointApprove budgets Approve borrowing Standardize reports corporate plan and managementApprove borrowing Approve major and maintain central approve subsidiary Approve majorApprove sales, liqui- procurement data bank plans changes in corpo-
dation or creation of Recommend creation, Develop files on rate policy vis-a-visSOEs sale, or dissolution candidates for Other functions staffing marketing
Evaluate and monitor managerial slots internal controlsperformance Shift funds, invento- Approve sales of
Other functions ries, other assets assetsfrom subsidiary to
Approve budget subsidiaryApprove investments Borrow and distributeApprove personnel funds
actions Provide centralizedSet sectoral standards services (training,
for labor policy and computerized MIS)corporate practices Appoint or second
key officers (financedirectors) tosubsidiaries
overlooked. A principal problem of the first Se- tor ministries are usually the main culprits. Theynegalese parapublic project was the failure to also tend to be advocates of SOE investment andgive enough importance to finance in determin- expansion, ineffective instruments for perform-ing SOE policies. An SOE oversight body was set ance evaluation, and centers of resistance to di-up to help implement decisions, but responsibil- vestiture. Improving the calibre of these minis-ity for policy formulation in Senegal still rests tries is a difficult task, especially where skills arewith finance. In the short run, the weaknesses scarce. Some countries (Brazil, Zambia) havethat often exist in the finance ministry can be virtually bypassed the sector ministries, withpartly compensated for by a capable central SOE varying degrees of success. In most countries theorganization, which can do the analyses required noncore activities of these ministries (see figurefor informed decisionmaking. In small African 1) need to be curtailed and the areas of permis-countries where skills are in short supply in gov- sible intervention defined. Central SOE organi-emnment, it may make sense to put such an SOE zations can be a way to improve oversight quickly,organization in the finance ministry. But for the while reform efforts can focus on those sectormedium term a program to upgrade the calibre ministries where the link between governmentof financial analysis will be needed. policy and SOE is especially strong (such as en-
Improving the sector ministries' oversight of ergy).SOEs is more problematic. In most countries Public enterprise ministries or ministries ofwhere excessive intervention is rampant, the sec- portfolio have not proven very effective in most
21
countries. They suffer from the same weaknesses ning Ministry, which has been successful in curb-as the sector ministries, and lack the detailed ing the excesses of an overly autonomous sector,understanding of the sector. In the worst cases, has about 60 professionals to 250 enterprises. Thethey are purely an added layer of control since National Investment Board (NIB) in the Gambiathe SOE must still report to the sector ministry as has five professionals to monitor 17 enterprises.well. Like multisectoral holding companies, they The appropriate number of staff depends on thetend to become bloated bureaucracies focusing decision about the organization's functions; theon administrative controls. aim should be to create a small nonbureaucratic
elite.Central SOE organizations Second, the organization should have access to
the highest level of power; to deal credibly withThe central oversight or coordinating organiza- ministers of industry or finance, or directors of
tion has been created or improved in a number of petroleum or mining monopolies, it will need topprojects (among others, Ghana, Mali, Senegal, backing. In the Gambia, the NIB has access to thePakistan) as a way to avoid ad hoc ministerial president through the secretary to the cabinet. Inintervention in the enterprise. These organiza- Mali, the BEP reports to an interministerial com-tions often answer to the office of the president or mittee. In Ghana, the head of the State Enterpriseprime minister, the cabinet or a special intermin- Commission is a member of the cabinet. Eitheristerial group. An interventionist ministry can be the head of the organization or the person thetaken to task for not playing by the rules and not organization reports to must assure that its opin-taking into account the wider interests of the econ- ions are considered before any major SOE deci-omy. By breaking the one-on-one relationship sion is taken by government. This means accessbetween the sector minister and the managing to the economic cabinet and in smaller and hier-director, the oversight organization creates checks archical countries ultimately to the head of state.and balances against political intervention. It also The choice of location is driven by this need forworks to coordinate the multiple actors involved access and the kind of power the organization isin SOE decisions. given. In Brazil and Mauritania it is in the plan-
Thetrackrecordoftheseorganizationsismixed. ning ministry; in Congo it is the ministry of fi-The oldest - the India Bureau of Public Enter- nance; in Kenya and Burundi it is in the office ofprises -has been described at different times as the president.being supportive and a spur to efficiency, highly Finally, its mandate should be clear; the deci-interventionist and bureaucratic, and ineffectual sions it can or cannot be involved in and its rela-and generally ignored, depending on who was in tionship with the relevant ministries should becharge of the bureau and of the ministry of fi- spelled out. It should not be given functionsnance to which it is attached. The Bank's experi- which overlap with other agencies. Besides theence with such bodies is recent and inconclusive core responsibilities shown in figure 1, the deci-but shows clearly that the existence of such or- sion on just how much power such an organiza-ganizations is not enough in itself to assure the tion should have will vary from case to case. Inright balance between SOE autonomy and ac- some countries (the Gambia, for example) thecountability. Nevertheless, an SOE organization SOE organization is purely advisory. In Brazil,can be helpful in reducing and coordinating in- Secretaria de Controle de Empresas Estataistervention, especially if certain lessons are taken (SEST) approves and monitors SOE budgets andinto account. all foreign and domestic credit operations, as well
First, it should be small and very well-staffed. as proposals to create, expand or liquidate stateThe ratio of staff to enterprise is a factor in how enterprise. SEST sets firm ceilings for major ex-much the organization may be tempted to inter- penditure categories which are summarized invene in decisions that should be management's an annual SEST budget authorized by the Presi-prerogative. Moreover, there is little point in dent.creating the organization unless the quality of its The arguments for giving the organization de-work is assured. This is another reason for small cisionmaking powers are: it is (or should be)size, particularly where skills are scarce. The staffed with some of the best available people toBureau of Public Enterprises (BEP) in Mali has make decisions; it is freer of political pressuressome seven professional staff to oversee 58 SOEs. than the traditional agencies; and if it is small andThe State Enterprise Secretariat in Brazil's Plan- focused on performance, it will be less likely to
22
intervene than the ministries. In smaller coun- or by centralizing training, for example); they can
tries (and countries with few enterprises) it is function more effectively in international export
also argued that, since the country has too few and capital markets than smaller firms; it can be
skilled people, the ministries should relinquish easier to liquidate a nonviable subsidiary than a
their powers to the SOE organization. The argu- freestanding SOE; and they can be an effectivements against the powerful SOE organization are: buffer against political interference. But hold-the ministries will never relinquish their powers, ings, especially very large conglomerates that
so the SOE organization will simply add another combine unrelated subsidiaries, tend to becomelayer; the checks and balances system is better very political, bureaucratic and control-orientedserved by an advisory body than a decisionmak- in their own right. Moreover, holdings may pro-ing one; and shifting powers will not prevent mote monopolistic or oligopolistic behavior. And,
abuse of power - the SOE organization will just rather than close nonviable operations, they mayreplace the mninistry as the interventionist body. shift funds, inventories, and skilled staff fromAlso, in countries with large and powerful SOEs, profitable to unprofitable companies, keepinga central organization may be hard-pressed even alive nonviable firms and thus dragging down
to monitor the sector adequately; decisions should the performance of all subsidiaries. Accountabil-usually rest with sector ministries which deal ity can become a serious problem; in some coun-
with a manageable slice of the sector. tries funds are diverted in the holding for cross-Thus, the decision of how much power to give subsidization between enterprises in ways that
a central SOE organization depends on: the size become difficult or impossible to trace. Finally,and scope of the sector; the calibre of sector min- holdings interpose an additional managerial layer
isterial oversight (can the country afford to leave where skilled managers may be in short supply.the decisions in the hands of these ministries?) One way to guard against these abuses is toand how long it will take to improve; the support avoid the large multisectoral holding company,the organization will receive from its supervising such as Italy's Instituto per la Ricostruzione In-entity over the long run (an organization advis- dustriale with its 600,000 employees. Instead,ing a powerful official or body should not need smaller, sectoral holding companies might beits own power base); the scarcity of skills in the bencficial, with proper safeguards against mo-country; and whether power can be realistically nopoly power. Another is to limit the size andtransferred. powers of the front office. The Zambia Industrial
and Mining Corporation has only 20 people in itsHolding companies front office to oversee 72 enterprises and is pro-
hibited from shifting resources from one subsidi-In some cases (Egypt, Portugal, Zaire) govern- ary to another. It operates more as an SOE over-ments have expressed interest in establishing or sight organization than as a holding company.reforming holding companies. Just by creating Holding companies clearly are not a panacea.
conglomerates and thus increasing the size and It is not unusual for countries to introduce hold-power of the SOE vis-a-vis the ministries, hold- ings in one reform, remove them in another, rein-ing companies can work in favor of autonomy. troduce them, and so forth (Pakistan, Egypt). InThus, there is considerable difference in the inde- deciding whether an SOE holding companypendence of SOEs in Mexico, where most state would be beneficial, the following factors shouldenterprises are not part of holding companies, be considered:and in Brazil, where holdings are common. * The amount of competition likely if a holdingMoreover, subsidiaries of state holdings are of- does or does not exist. In most cases, any actionten explicitly exempted from some of the con- which reduces competition should be avoided,trols exerted over directly owned enterprises. For although a holding could conceivably reduceexample, managing directors of Malawi Devel- domestic competition but allow the conglomer-opment Corporation subsidiaries are not held to ate to compete in export markets.the standardized compensation system for SOE * The size and maturity of the SOEs. Large, ma-managers and hence earn more than the manage- ture enterprises are less likely to benefit from thement at headquarters. conglomerate than small, new and vulnerable
There are pros and cons to this institutional firms. Rather, there is a real risk of a holding ofarrangement. In its favor, holdings can exploit powerful firms becoming itself too powerful.economies of scale (by doing bulk procurement * The size and diversity of the holding. Large,
23
unwieldy groups tend to become inefficient and and assure that meetings are fully attended, asbureaucratic in the private as well as public sec- well as to reduce the financial burden of thetor. (Witness the trend toward smaller groups in board to the SOE.the United States.) * Appropriate qualifications for directors should* The nature of administration in the country. If be spelled out and enforced. Directors should bethe government is interventionist, poorly staffed encouraged to nomninate new members. Whereand paralyzed by red tape, can these traits be necessary (Sub-Saharan Africa) directors shouldguarded against in the holding? receive training. Directors should be dismissed
for incompetence.Boards of directors * Directors should have fixed terms of three to
five years with a staggered turnover to assureA small board of directors, composed largely of continuity and avoid the situation where all boarddirectors appointed in their own right (rather than members are up for reappointment every twoas representatives of government ministries), who years.are properly qualified and compensated and take * Boards should meet quarterly or at most sixthe job seriously can be an important asset to a times a year except in emergencies and shouldcompany. In principle, government can then be always produce a report.encouraged to decentralize power to the board as * Directors should be compensated adequately.a way of depoliticizing decisions and taking the * Management should be required to submit acompany's interest into account. report and other appropriate information to di-
Few governments have completely relinquished rectors prior to meetings.ministerial representation on the board, permit- * The board should be evaluated by the SOE or-ted the board to hire and fire the CEO, or allowed ganization or the line ministry on those aspectsit to exercise all the responsibilities shown in fig- of performance that the board had (or shouldure 1 without further approval; the exceptions are have had) knowledge of and influence upon andsubsidiaries of holding companies. The experi- dismissed for inadequate performance.ence of Pakistan is illustrative (even though unre- * Government representation on the boardlated to any Bank project). There the boards of should be kept to a minority and in no caseindustrial SOEs are legally the ultimate authority should a senior official chair the board since thatfor many major decisions, but in practice major destroys its collegial nature and makes it an armdecisions are usually cleared informally first with of the ministry.the appropriate ministry. * One individual and alternate should be desig-
Furthermore, there are limits to the amount of nated as the representative and be held to thepower a government can realistically be expected same standards of preparation and performanceto delegate to a board of directors. Boards of as the other members.9
private companies in developed countries have Some SOE reform projects have devoted con-frequently not acted in the shareholders' best siderable effort to the organizational changes justinterest, even where directors are held liable for described. Yet some of these same projects havefailure to do so. In the United States, for example, neglected decisionmaking processes, such asapparently well-qualified boards of private and budget, which are critical in SOE autonomy.public companies have on occasion failed to pre- While new organizational arrangements canvent decisions that were not only damaging to the contribute to increasing autonomy and accounta-business but to society at large. Clearly, the board bility, organizational changes by themselves arecannot be the only way to hold management ac- never a sufficient condition for improvements incountable, particularly when public monies are at efficiency. Many countries have a long history ofrisk. Another problem in smaller countries is the introducing, eliminating, and changing organi-difficulty of finding sufficient qualified directors zations with little impact on performance. Corre-from the private sector whose interests do not sponding changes must also be made in the pol-conflict with the welfare of the SOE. icy environment and the content and rigor of
Nevertheless, SOE boards can play a more con- supervision; meaningful SOE reform is usuallystructive role particularly if the following guide- part and parcel of structural or sector adjust-lines are observed: ment.* The board should be small (seven to nine direc- Institutional change is a complex issue and ittors ideally) to conserve on the skill requirements would be foolhardy to generalize about how to
24
approach it. Nonetheless, the established rules of usually be avoided. The skills of a bureaucrat areinstitutional development offer useful guidelines not those of a businessman and every effort shouldfor most circumstances:'" be made to distinguish the two careers. SOE* Attempt to work with existing institutions and managers should not be paid the same salary asprocesses to avoid bureaucratic proliferation and civil servants and they should face greater re-the creation of parallel structures and procedures. sponsibility and risk; a seconded civil servant* Avoid creating temporary bodies that are ex- who has the option to return to his ministry de-pected to disappear after the reform; they tend to fies this premnise. The CEO should be allowed tobecome permanent. appoint, or at least nominate, his top staff. It is* Prepare for the second (or third) best. (For difficult, if not impossible, for a CEO to commandexample, can the new organization still make a a team selected and appointed by a ministry.contribution even if its ideal staffing, budgeting, Reducing the rotation of SOE managers is an-or functions change, or will it become a bottle- other important reform. Immature companiesneck in its own right?) operating under considerable uncertainty particu-* Beware of the institutional history. (For ex- larly need continuity of top staff. Yet some coun-ample, have they created and eliminated SOE tries allow every new sector minister, or at leastholdings in the past? Can this effort succeed where new administration, to appoint new CEOs. Whenothers have failed?) ministers (and in some countries governments)* Assure that the institutional changes are part of have an average tenure of less than two years, thea broader adjustment process which will change impact on performance is severe. Giving manag-policies, decisionmaking procedures, and the loci ers a fixed-term (three years at least) renewableof responsibilities, and not just "reshuffle the contract may be one way to reduce turnover, butboxes on the organizational chart." it has not been widely used in the public sector.
In many developing countries, particularly inRaising managerial skills Sub-Saharan Africa, the pool of talent to manage
SOEs is small because the number of entrepre-Clearly these reforms will only be effective if neurs is small. This situation can be eased some-management is competent to operate a commer- what by merging, liquidating and selling enter-cial state enterprise. Thus, some reform pro- prises, and by tapping private managerial skillsgrams take the appointment - or nominating - through leases and mnanagement contracts.powers away from political authorities and vestthem in a technical oversight agency or board of Compensationdirectors. But few officials have been willing torelinquish this political power. (An exception Experience shows that SOE compensation doesseems to be made for SOE holding companies, not have to be on a par with the domestic privatewhich have won the right to nominate, if not sector in order to attract and retain good profes-appoint, the managers of their subsidiaries, while sionals. Managers and staff in countries as di-government appoints the CEO.) Even if the deci- verse as Pakistan and Mexico stay in state enter-sionmaker is political, however, the appointment prises because they offer greater opportunitiesdecision need not be. SOE oversight organiza- and stature than family-dominated private busi-tions should be empowered to specify the quali- nesses. (There are exceptions, of course; in par-fications required, to conduct a management ticular, where skills are internationally traded,search and to comment on the qualifications of such as petroleum engineers.) In both countriescandidates or to nominate a list of candidates. the compensation package exceeds a minimumWhere feasible, a more public appointment proc- threshold level that allows SOE staff members toess where the qualification of the candidates and achieve a basic standard of living that they see asthe skill requirement of the job are widely known their due. When it falls below that threshold, ascan also help prevent the appointment of inade- happened some years ago in Pakistan, for ex-quate managers. ample, turnover increases markedly.
A good performance evaluation system can Unfortunately, most governments do not seekimprove the quality of management, if poor per- this threshold or even attempt to understand theformers are fired, denied bonuses or at least not market for professionals. Instead, many develop-promoted. ing countries place SOE managers and nonunion-
The secondment of civil servants to SOEs should ized staff under the civil service pay scale or un-
25
der a parallel, uniform system. Here again ex- tribute in the first instance, training will helpceptions are often made for holding companies create the dynamic, adaptive attitude requiredor very large SOEs. This approach has several for sustained improvement.disadvantages: it does not reward managers on Besides formal courses and seminars, trainingthe basis of performance (instead, compensation from suppliers, contractors, and purchasers canusually depends on the size or economic impor- also be useful (convincing government to allowtance of the SOE); the system is typically rigid greater access to foreign suppliers may be a nec-and inflexible and pay policy is not adapted to essary first step toward increasing technologythe vastly differing conditions and needs of the transfer). Twinning an SOE with a similar, moreSOEs or the skills market; the differential be- developed enterprise elsewhere has proven suc-tween top management and workers is often in- cessful in providing advice and training to man-adequate to motivate the manager; and the link agement as well as staff in Tanzania and Ecua-with the civil service results in compensation too dor, for example. Joint ventures can also makelow to attract, retain, and motivate skilled man- an important contribution to training local staff ifagers (or other professionals). the initial agreement includes transfer of know-
Furthermore, low pay and weak accountability how.invite abuse, for which SOE managers tend to Twelve of the 41 approved public enterprisehave ample opportunity. One response is lavish loans and technical assistance projects supportfringe benefits; a more insidious outlet is corrup- training programs. Part of this training is man-tion. The government typically responds by agement training expected to be provided bytrying to regulate fringe benefits and putting prior consultants whose main task is to design man-controls on financial decisions, which further agement systems. Under such circumstancesincreases the system's rigidity and impairs the consultants tend to neglect training in favor ofperformance of the enterprise. their operational assignment. For that reason the
To solve these problems, the most important first Senegal parapublic loan developed a sepa-step is to move away from a rigid link to the civil rate training program for management (and ac-service. Most governments will insist on a ceil- countancy). Unfortunately this program alsoing which is a multiple of the top civil service encountered problems (according to the projectrank, but may accept greater flexibility within completion report):that ceiling. The best system is one in which the * The program proved overly ambitious and dif-compensation package and increases are decided ficult to administer and supervise.enterprise-by-enterprise on the basis of the SOE's * The training provided, especially overseas train-situation and its performance. The problem of ing, did not always meet the practical needs ofabuse is best met through the introduction of a those being trained.performance evaluation system. If managers can * The trainers were often not motivated - ab-be held strictly accountable for results, the ten- senteeism was high.dency to squander money will be curbed far more * No permanent training program resulted andeffectively than through prior controls. training ended with the project.
* The trainers were diverted to other tasks thatTraining did not always benefit trainees.
Another problem, common to Sub-Saharan Af-Although private enterprises in developing rican countries, is the low level of preparation of
countries invest a great deal of money and effort trainees. For example, experts assigned to trainin management training, SOEs seldom do; more members of Congo's Commissiariat Nacional auxattention is paid to technical expertise than Comptes in the oversight of SOE accounts had tomanagerial requirements. SOE management teach basic accounting. Most CEOs will not havetraining is especially important in helping the this problem, but their management team may bemanagers adapt to the new rules of the game. very weak.Managers who have operated for years in pro- These issues are not new." A few lessonstected markets with restricted autonomy cannot include the need to:be expected to respond automatically to competi- * Design a separate training program based ontion and freedom by cutting costs, seeking new realistic expectations tailored to the length of themarkets, trimming staff, closing production lines, assignment (instead of expecting consultants withand so on. While technical assistance can con- other tasks and without training skills to provide
26
training as an automatic part of their assignment). * Assure that the target group is properly moti-* Choose an appropriate target group which vated to take the training seriously by providingstands to benefit from the training (local staff the right incentives.with appropriate positions of responsibility). * Design phase-out or continuation mechanism.
27
5
Holding management accountable
The problems in holding managers accountable Elsewhere assistance has also been provided toare straightforward: improve information on the macroeconomic* The available information does not give a clear impact and performance of the SOE sector. Andand accurate picture of performance. in a few countries with the necessary administra-* There are no standards by which to judge re- tive skills (notably Pakistan and Korea) moresults. sophisticated systems of performance targeting,* There is no organization assigned and compe- monitoring, and incentives have been imple-tent to evaluate performance. mented.* There are no procedures to follow up on the The early experience with performance evalu-evaluation. ation in Pakistan and Korea shows that even tech-* The managers face many constraints in how nically flawed indicators seem to have a benefi-much they can affect performance. cial impact on efficiency and definitely raise theThe solutions are not simple. Evaluating the attention paid to performance by both manage-performance of a manager who faces admini- ment and government. These systems have con-stered prices, social welfare objectives, and gov- tributed to a marked improvement in the flow ofemmental interventions, and who lacks the power timely, standardized, and easily analyzed data.to lay off workers or close down lines, is very The elements of performance evaluation are:tricky. Some ingenious and sophisticated schemes * A reliable and timely flow of appropriate stan-have been developed to deal with these problems dardized information.- with mixed results. * Agreed objectives and targets and specific cri-
Still, performance evaluation is unavoidable. teria for evaluation.If good performance goes unrewarded and bad * An objective oversight body to monitor per-performance unpunished, it should surprise no formance and evaluate results, and a decision-one that productivity stagnates or drops. More- making body to act on this evaluation.over, a good monitoring and evaluation system * Procedures to follow up on the evaluation,is essential for informed policymaking. Without which usually includes a managerial incentivesuch a system government is in the dark about program.the effects of its policies on SOE performance. Financial intermediaries can also play an im-
The Bank's approach to performance evalu- portant role as a check on SOE performance. Anation has been tailored to fit country circum- independent banking system that can freely as-stances. In Sub-Saharan Africa the focus has been sess management and creditworthiness whenon improving information and accounting at the deciding on loans also gives clear signals as toenterprise level and generating a timely flow of a performance. Government intervention in creditfew key indicators to government authorities. decisions has thus robbed SOEs of an incentive to
28
improve managerial performance as well as dis- has experience only with government audits. Iftorted the allocation of resources. that office can provide adequate service, it should
compete with private firms for the SOE market.Gathering adequate information Improvements in information have been the
most common components of Bank-supportedThe most immediate, tangible achievement of reforms, having produced the most concrete re-Bank SOE ieform operations has been improve- sults in the short run. For example, the programments in information. This involves strengthen- of audits under the first Senegalese parapublicing internal management information systems, project contributed not only to the flow of reli-including the introduction of cost accounting, able data (SOEs have begun to produce quarterlytraining of accountants and auditors and devel- and monthly financial statements) but also to aoping a streamlined flow of timely and accurate strengthening of local accountancy. By creatingdata in usable format to government oversight demand, the program led a number of Senegaleseagencies. Yet despite considerable improvement, accountants to return from abroad; it also set newSOE information in some countries (particularly accountancy standards and promoted joint ven-in Africa) is not sufficient, timely or accurate tures between local and international firms.enough to manage an enterprise properly, much A sample of the most basic information a stateless supervise a group of enterprises. The first 17 enterprise should supply for government over-completed audits of SOEs in Congo, for example, sight is shown in appendix B. If the enterpriseshowed that the national accounts underestimated cannot supply these data its control systems arethe real deficit of the sector. not adequate to manage the firm efficiently and
Commercial state enterprises should be re- top priority should be given to upgrading itsquired to comply with at least the basic account- management information system.ing standards required of private enterprises, and Another problem for public and private firmsgovernment may need additional information for alike is the lack of full inflation accounting. Someoversight. In some countries the government has developing countries, especially in Latin Amer-designated a public accountancy office (or ac- ica, do partial adjustments for inflation, but thiscountant general) as the auditor. This should be is usually limited to revaluation of fixed assets.resisted in most cases for several reasons. First, Inflation can have a major impact on other itemsthe decision about auditing firms should nor- intheaccounts,includingtheprofitandlossstate-mally be a management decision. The require- ment. There have been several Bank studies ofment should be that management choose from this problem which recommend the productionamong firms certified by the public accountant of supplementary inflation-adjusted accounts ingeneral's office and that the auditor's report countries where inflation is important."2
should go to that office, the board, and desig-nated oversight agencies. If any of these are dis- Setting objectives, targets, and indicators ofsatisfied with the quality of the audit or feel there performanceis evidence of management collusion with theauditors, they can appoint their own auditors or Performance indicators should give managers athe accountant general's office can undertake its clear signal about desirable behavior and judgeown investigation. them on the outcome. The indicators should be
Second, government should be discouraged few, nonduplicative, easily measured, andfrom imposing a public monopoly in any field weighted as to priority. The long history of per-where competition could help insure quality; formance evaluation in the Soviet Union andauditing is no exception. This should not pre- Eastern Europe shows the problems caused byclude efforts to promote the local profession by partial indicators: production targets fail to sig-encouraging enterprises to use local firms through nal managers to conserve costs or control quality;tax advantages or the like, by encouraging local cost targets lead to neglect of items such as main-offices of foreign firms to train nationals in ac- tenance or training; combinations of production,counting, and by helping to find funds to de- quality, and cost targets make it virtually impos-velop accountancy training. Third, the services sible to calculate a composite picture of perform-provided by the accountant general's office are ance. One message from this history is the virtueoften inadequate, since the office is usually a of profits since profits are a weighted indicator ofmonopoly, lacks the necessary skilled staff, and revenues minus costs. But, of course, there are
29
defects with profits as well: many SOEs face indicator. But since this happy state is seldomimperfect or no competition; SOE input and out- achieved, an intermediate solution may be to useput prices are often administered and far removed cost or quantity indicators. Railway action plans,from efficiency prices; there are differences be- for example, typically include physical indica-tween profitability as measured by the private tors (locomotive availability, staffing ratios) andsector and public profitability; and SOEs have cost minimization targets. Often internationalobjectives which differ from, and may conflict benchmarks are used for comparison. The prob-with, profit maximization. 1em is that multiple indicators give confused sig-
A number of schemes have been developed nals and are hard to evaluate, while partial indi-which allow governments to evaluate noncom- cators distort performance. Cost minimizationpetitive enterprises despite price distortions, such targets, for example, can cause managers to ne-as the French total factor productivity measure glect expenditures with high rates of return.'(which is being studied for use in Egypt) or the Nevertheless, even a flawed evaluation is betteruse of constant- or shadow-priced profits (devel- than none. Less distortionary indicators can beoped but not yet applied in Pakistan). These introduced gradually, following an effort to con-sorts of indicators are both data- and staff-inten- vince management and government of the valid-sive and require a fairly sophisticated understand- ity of the more sophisticated schemes.ing. This raises the question of whether it makes Even under perfect competition the private ac-sense to begin with such schemes for potentially counting profits will need to be adjusted to be acompetitive enterprises. (In both Egypt and Paki- useful measure of efficiency. The original designstan such schemes are being considered for in- of the Pakistan system used public profits, de-dustrial public enterprises.) fined as:
Rather, the first step should be to increase com- Private profits after taxpetition and decontrol prices wherever possible. + taxesThis allows potentially competitive enterprises + depreciationto be evaluated on the basis of financial profits, + interestso efforts can be focused on developing more so- - nonoperating incomephisticated schemes for evaluating natural mo- - opportunity cost of working capitalnopolies. This is especially important since mo- Taxes are added back in since this is a returnnopolies, such as utilities or railroads, are usually from government's point of view. This avoidssome of the most important SOEs in terms of givingSOE managersarewardforreducingtaxes.size, impact on the rest of the economy, and Depreciation is added back because including itbudget drain. Furthermore, competition exerts would penalize newer plants vis-a-vis older ones,its own strong pressures for improvement, but cause profits and profitability to increase (assum-monopolies require the sort of market proxy that ing no new investment) without any increase inperformance evaluation can provide. efficiency, and reward public enterprises for un-
Efficiency indicators are not a panacea, of derdepreciating or changing their accountingcourse. Besides requiring good data and skilled practices. Interest is added back because changesevaluators, they can be hard to explain. in interest payments do not reflect changes in
Pakistan has been calculating constant-priced efficiency but transfers from one part of societyprofitability for several years, but targets are set to another. Moreover, the capital structure isand bonuses awarded principally on the basis of usually beyond SOE managers' control. Thecurrent priced profits. This is despite the fact assumption is that enterprise investment and debtthat many of the enterprises being evaluated are decisions are best handled through separatemonopolies with cost plus pricing. Government control systems designed to assure the mostofficials and SOE managers found it hard to ac- efficient allocation of capital. Nonoperatingcept that an SOE showing a rise in profits in income is excluded since it does not reflectconstant prices and a fall in current would be operatingefficiency. Andfinallyachargeisaddedrewarded, while an SOE with the opposite trend for the opportunity cost of working capital (inwould not. Pakistan this was figured as about 105 percent
There are simpler forms of monopoly evalu- times inventories plus cash, demand deposits,ation than shadow- or constant-priced profitabil- accounts receivables and the like). Here theity. If prices could be set to approximate costs to assumption is that managers can control theirsociety, then simple financial profits could be the working capital. Finally, the enterprise is charged
30
for fixed capital by including fixed operating as- take into account the quality of service or to givesets in the denominator. a longer time horizon. Under the Korean per-
In Pakistan the government decided not to use formance evaluation system, for example, 30 per-public profitability but to judge enterprises prin- cent of the target is composed of qualitative indi-cipally on the basis of unadjusted profits after cators: corporate planning, research and devel-taxes. This has distorted the evaluation in some opment, management information systems andcases. For example, several enterprises have been internal control systems and the quality of serv-able to achieve an A-grade only because of non- ice.operating income, such as interest on deferredforeign credits. Others have achieved their tar- Performance evaluationgets through a drop in interest due to govern-ment debt relief. Although the Experts Advisory Judging from the experience of Pakistan andCell (EAC), which administers the evaluation Korea, the agency empowered to implement thesystem, has worked to correct these anomalies, performance evaluation system must be expert,this has been of necessity an ad hoc operation. objective and credible, and have the ear of a
One reason the government of Pakistan de- powerful official (or officials). The Pakistani per-cided not to use public profits (or, for that matter, formance evaluation system, which has been inconstant-priced profits) was the understandable place for six years, has been applied only to in-worry that these adjustments would allow un- dustrial SOEs under one ministry (the Ministryprofitable companies to meet their targets, so that of Production); the EAC is a semiautonomousthe treasury would have to subsidize the cost of agency attached to the ministry. It has a reputa-the SOEs' bonuses. For the same reason all the tion for being autonomous and objective and itstargets used in Pakistan are based on break-even evaluations are taken seriously by the ministeror better. This raises a more fundamental issue and hence the managers. The EAC was able tosince, regardless of how profits are measured, attract skilled professionals because it is outsidethere are strong arguments for rewarding man- the civil service limitations on salaries. The factagers who improve the efficiency of unprofitable that the EAC is funded by a levy on the enter-firms. A drop in losses may often be more benefi- prises adds to its independence and the serious-cial to the treasury than a comparable increase in ness with which it is treated.profits and, from a managerial point of view, a In Korea, the Public Enterprise Evaluation Bu-reduction in losses is typically harder to achieve reau works closely with a research institute tothan an increase in profits. Furthermore, it is develop the performance indicators. At the endalways difficult to attract good managers to of the period, the SOEs that are part of the systemmoney losers, even more so if they cannot expect are required to submit their own evaluations ofto receive bonuses until they achieve break-even. their performance. An ad hoc management evalu-The Pakistani officials are studying this problem ation task force composed of people from privateand are considering such schemes as creating a business, the state enterprises, and research insti-fund with money from surplus firms to finance tutes then reviews the documents and consultsthe bonuses of deficit firms. with the enterprise before doing its own evalu-
A common objection to evaluating SOEs on the ation. This evaluation is then submitted to thebasis of profits is that state owned firms have Management Evaluation Council, composed ofmany other objectives different from, and per- relevant ministers and commissioners from thehaps in conflict with, profit maximization. Quite private sector. The high-level political supporta few objectives are met simply by the existence for this system, the involvement of an outsideof the firm (national or state control of a sector or research institute, and the opportunity givendevelopment of an industry neglected by private management to do its own evaluation, have allbusiness) and need not affect profit. The adjust- contributed to the widespread acceptance of thisment to profits described above can avoid unde- system among the Korean enterprises. Also note-sirable profit seeking (tax evasion or interest ar- worthy is the attention here and in Pakistan tobitrage). If an SOE serves a noncommercial ob- training government and enterprise officials injective that affects its profits, government should the rationale and workings of the system . 4
give the enterprise a subsidy to cover the cost or Follow-up is critical if the evaluation is to bereduce its target accordingly. And in some cases more than an academic exercise. The final evalu-supplementary indicators should also be used to ation must take into account the difference be-
31
tween the enterprise's performance and manage- gory. This has been an important motivatingment's performance. Thus, if government did factor in Pakistan, less so in Korea where thenot allow management to lay off workers or to recognition and honor awarded to good perform-raise prices, the manager should not be penal- ance are highly important.ized for not meeting a profitability target. In The performance evaluation should also revealPakistan these factors are brought out during a a number of problems that are government -
review meeting between government and man- rather than management - related: ministerialagement to discuss the draft evaluation; in Korea intervention, failure to provide promised fund-they are highlighted because the SOE does its ing or loan guarantees, noncommercial objectivesown evaluation. that prevented the enterprise from meeting its
In both systems bonuses are awarded on the targets, and so on. The evaluating agency couldbasis of the SOE's performance ranking. Thus, produce an overview report on the sector as aeach performance indicator is weighted and the whole pointing out performance shortfalls due toenterprise receives a composite indicator of these common factors and suggesting remedies.achievement. All the firms are then ranked in The Pakistani and Korean systems have not beencategories according to their composite indicator used much for this purpose, but that could changeand a bonus of a certain number of months' pay as the systems become established. Much sim-is awarded to managers of firms in each cate- pler systems could also serve this purpose.
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Divestiture of state-owned enterprises
Divestiture can mean: liquidation, both formal rate than public ones, but also because commonand informal forms of mothballing, whereby SOE managerial deficiencies are expected to beoperations are suspended, but the enterprise re- less likely in the private sector: slow decision-tains a legal and economic life; privatization of making due to political-bureaucratic require-ownership through the sale of the firm as a going ments, a preoccupation with processes rather thanconcern or of all or part of the assets; and privati- results, a neglect of markets and clients, and azation of management through leases and man- management environment in which reward isagement contracts. Privatization can also be a only remotely related to performance. More-much broader concept, encompassing: the gen- over, financial transactions between governmenteral reassigmnent of property rights from the and private firms are expected to be more trans-state to the individual (as in Chinese agriculture); parent, and hence more carefully considered.contracting out the delivery of public services to Fourth, increased popular participation in thethe private sector (garbage collection and clean- ownership of national assets is an important con-ing of public buildings are common examples); sideration in some countries (Chile, for example).and cutbacks in state activities to allow room for Fifth, some governments see privatization as aprivate initiatives. way to raise revenues (one of the reasons given
Divestiture has recently become a common fea- for sales in Thailand, for instance). And finally,ture in SOE reform programs in developing coun- divestiture is important as a way to reduce fiscaltries, for a number of reasons. One is the upsurge and credit pressures by getting rid of unprofit-in interest in divestiture in the developed world, able SOEs through liquidation and sales.most notably in Britain, but also recently in Italy, Despite this widespread interest, substantialSpain, and France. Second is a sense in some sales of assets and/or equity in SOEs have oc-countries that the state sector has become too curred in only a few developing countries so farlarge, that peripheral endeavors are diverting (notably Chile and Bangladesh). Moreover, thepublic money and managers away from priority enterprises privatized have usually been small inactivities of government, and that divestiture can terms of assets or employment; most are in thereduce the management burden of SOEs on the manufacturing or services sectors and were pre-state. A third reason is the hope that divestiture viously in private hands.'swill lead to more innovative management which Formal liquidations are also few; more com-will see unfolding opportunity more quickly and mon are informal closures. Instead of shuttingseize it more aggressively, and will generally use down the SOE, selling off its assets, and legallyresources more efficiently. Divestiture is seen as ending its existence, governments tend to closea force for efficiency not only because nonviable the firm, cut off most or all subsidies and newprivate firms are likely to have a lower survival credit, and gradually reduce the staff through
33
attrition. The company may be allowed to meet even though the second tranche disbursement ofits payroll through the sale of inventories or pe- SAL 11 was cancelled at the request of the govern-ripheral activities (for example, workers at a ment, five of the seven scheduled divestituresclosed sugar mill in Panama were using the com- were completed. In other countries (Ghana, Phil-pany's trucks to sell transportation services). ippines, and Senegal) divestiture has proceeded
Divestiture has become an increasingly com- more slowly than expected during project de-mon part of Bank operations. As of June 1988 sign.there were some 58 Bank operations in 31 coun- Although there are no solid studies of post-tries with major components supporting divesti- privatization performance, there are some en-ture (see appendix tables C-9 and C-10). Most couraging anecdotes. In Jamaica, the divestiture(67 percent) of the operations are adjustment of the telephone holding company led to a 55loans. Over two-thirds are in sub-Saharan Africa, percent increase in outgoing international calls.which partly reflects the preponderance of ad- In Panama the privatization of the seed SOE ledjustment loans in that region. The most common to the emergence of private seed distributors andcomponents focus on preparation for divestiture: a decline in prices; the privatized airline is ex-inventories of assets, liabilities, and the like panding its fleet.(Jamaica or Morocco); assistance to formulate On the other hand, there are also discouragingobjectives and strategies (Niger, Turkey, or Zaire); outcomes. SOEs have been closed without legalreadying SOEs for sale by developing a plan to authorization and assets sold without adherencesettle arrears (Congo) or through restructuring to competitive bidding procedures in some cases.(Sudan). The Bank has also provided support to There have been sales to parties lacking the nec-create and strengthen the institutions working essary managerial capacity, experience or techni-on divestiture (Togo, Ghana, the Philippines). cal expertise, and deals granting the buyer spe-Conditionality aimed at the liquidation and pri- cial privileges. In one case a cigarette manufac-vatization of specified SOEs is a less common turer was granted heavy protection, with confis-condition: 11 operations have conditions calling catory taxes on competing production and afor liquidation, five for the sale of assets or shares, monopoly on both production and imports. Taxand one for a management contract. exemptions, subsidized loans, and lax enforce-
Conditionality related to divestiture can be hard ment of the terms of the deal have been recordedto design. Divestiture can be hard to define; in several countries. In these cases the efficiencysupposedly liquidated firms have tended to rise gains from the transaction are likely to be far lessfrom their ashes. Sales depend on a buyer as well than when the privatized enterprise is forced toas a seller and setting a time limit for sales may compete and pay the opportunity cost for capital.injure government's negotiating position. Time- The ultimate success of privatization effortsbound conditions can also lead governments to should be judged not in terms of the sale or con-try to divest marginal firms or not to adequately tract itself, or the price paid to the government, orprepare and implement the program. even the survival or expansion of the enterprise.
The outcome of these operations is difficult to Rather, the test is whether there are positive netassess. Data are sometimes poor and conflicting, benefits to society. Since privatization is a rela-and no rigorous studies of the performance of tively new and experimental activity for mostdivested enterprises have yet been done. Fur- governments of developing countries and sincethermore, divestiture has taken considerably underdeveloped economies may not have all thelonger to implement than planned and many necessary conditions for success, these benefitsprograms are still in early stages. A preliminary are by no means assured. Preliminary reviews ofreview indicates that some countries, for example, experience suggest ways to maximize the netJamaica, Guinea, Niger, Panama, and Togo, have benefits.substantially implemented their privatizationprograms. In Guinea, 90 of 170 SOEs had been The lessons of experiencedivested as of mid-1987. In Jamaica, 32 of the 45firms on the list for divestiture had been privat- First, divestiture should be viewed not as an endized, leased or dissolved by November 1987 and in itself, but as one of many means to help gov-the value of assets sold (nearly J$500 million) was ernments increase the efficiency of both govern-much larger than the tranche condition (requir- ment and business. Thus, divestiture should noting sales of at least $150 million). In Panama, be pursued in isolation but as part of a broader
34
programofreformsdesigned,amongother things, shares in SOEs may be a way to promote theto: promote a better allocation of resources, en- stock market and bring in new savers, but thiscourage competition, foster a supportive envi- will need to be done carefully to protect the in-ronrent for entrepreneurial development, de- vestor. Stock markets are developed not just be-velop the capital market, and the like. While this cause the value and number of shares traded areseems an obvious point, the pace of privatization larg,e but also because the sophistication of infor-has not always been well orchestrated with the mation, analysis, and regulation is high. Further-removal of distortions and development of a sup- more, spreading share ownership among a largeportive environment. The recent action of the number of small investors will not assure theTogolese government, which has been in the fore- strong guidance needed to turn a firm around.front of privatizers, is illustrative. The govern- The purchasers of stock in an SOE are likely toment became concerned about the pace of di- assume that the government is providing anvestiture and the nature of the arrangements con- implicit guarantee of their share value, and in-cluded, and announced a pause in privatization deed the government may feel obliged to inter-to take stock. The Bank has supported this pause vene if the value falls.and in SAL III is concentrating on eliminating Fourth, the design of a strategy for divestitureremaining policy distortions and reforming the and the classification of SOEs to be liquidated,industrial incentive system. sold, leased, and so on, have been useful in clari-
Second, divestiture programs need to be tai- fying the government's objectives and approach.lored to individual country circumstances. For There is a trade-off, however, since the moreexample, in much of sub-Saharan Africa, where comprehensive the approach, the slower the proc-the Bank has been especially active in supporting ess is likely to be, and the more costly. Agree-divestiture, small market size may severely limit ment among the many actors will be harder todomestic competition and the capital market may achieve and a good deal of expensive advice maybe weak or nonexistent. This makes it harder to be required to decide on a comprehensive pro-find buyers with sufficient capital, especially since gram. In some countries the potentially market-foreigners and even some citizens (e.g., Chinese able SOEs can be identified relatively quicklyminorities in some Asian countries or Asians in without lengthy formal classifications. StudiesEast Africa) may be considered unacceptable and schemes may offer a convenient excuse topurchasers. There is also the risk of a concentra- postpone action in some cases. Moreover, thesetion of wealth and income that can result from formal schemes may interfere with informal clo-private placements. For example, the Chilean sures if authorities feel encouraged to take SOEsgovernment sold 232 state enterprises (and re- out of mothballs in a possibly vain attempt to sellturned to their owners another 250) over 1974-82, them. Care should be taken not to replace infor-for little equity. The sales strengthened the con- mal actions with formal commnitments.trol of industrial enterprises by banks, leading to Fifth, the administrative capacity of govern-severe distortions in lending policies. The gov- ments involved in privatization requires specialermnent had to intervene and is now selling some attention. There is a danger that the governmentof the same enterprises again through its newly may make a poor bargain. Managing a privatiza-expanded capital market. In these circumstances, tion program is a complex matter. Governmentother forms of divestiture might be more success- officials seldom have needed skills or admnini-ful, such as liquidation, elimination of SOE mo- stration to handle such programs. Moreover,nopolies and special privileges (often the first they may not be in a strong bargaining position.step toward informal liquidation of noncompeti- They are often publicly committed to privatiza-tive firms), contracting out of activities previ- tion; their enterprises may be unattractive; andously handled within government, or leases and they may have limited information or experiencemanagement contracts.16 Assistance will need to in selling enterprises. Under such circumstances,be provided to governments to make these alter- there is a risk that assets will be undervalued andnatives accessible. highly favorable financing will be made avail-
Third, the problem of weak capital markets just able when enterprises or shares are sold. Leasesmentioned has been a key constraint on divesti- and management contracts may be hard to man-ture. The financial prerequisites for divestiture age; costs are not easily tracked or anticipated;need to be assessed more carefully and be a part and the absence of an equity stake reduces theof the design of programs of sale. The sale of commitment of new private management.
35
Some sort of central administrative unit is and the costs, including foregone activities. Itneeded to oversee the privatization process and should be clarified that certain transition costskeep decisionmakers informed. The unit requires will have to be met regardless of ownership; ifspecial skills and often will need to hire experts the firm is to be efficient, excess labor, fo-r ex-from law firms, consulting companies, and mer- ample, may have to be laid off. The divestiturechant banks. Moreover, the Bank's experience debate in most countries is too much about costshas shown that ministries are typically reluctant - unemployment, increased imports, and liqui-to pursue vigorously the privatization of their dating modern enterprises. Benefits have to besubordinate enterprises. With a central unit, re- added to the dialogue if acceptance is to spread.sponsibility for privatization can be vested in a Seventh, the immediately visible social costs ofgroup with an interest in its success. Such a body privatization can be severe in the short run, whilecan do the analytical work necessary to decide the growth of benefits and increases in employ-between liquidation and divestiture and to make ment and investment do not appear until later.economically rational choices about the terms of Bank projects are only beginning to find ways tothe sale, the subsequent privileges for buyers, address the social implications of divestiture. Inand so on. For example, Bangladesh created a Senegal, for example, a fund has been created toDivestment Board to decide on sales and a work- ease the transition of laid-off workers; similaring group to value assets and recommend prices efforts are under way in Benin and the Sudan.to the board; Jamaica created a Joint National Finally, the divestiture programs should includeInvestment Commission assisted by a Divestment a realistic assessment of costs and a feasible fi-Secretariat. nancing plan. For example, not only can layoffs
A sixth, and related issue, is transparency. entail considerable costs, especially where SOEsExperience shows that there will be a debate on have previously agreed to generous severancethe merits of divestiture, regardless of whether packages, but there may also be costs associatedinformation is hoarded or released. The chal- with settling arrears, rehabilitating SOEs prior tolenge is to make the debate an informed one. sale, and so on. The proceeds from sales of assetsMore should be known, for example, about how are not always sufficient to cover these costs inmuch implicit and explicit subsidizing goes on, addition to other liabilities.
36
7Implementing reforms
The state-owned sector in developing countries The remaining SOEs should then begin to fendtends to be large, diverse, and often - when the for themselves. Special privileges should beBank gets involved - in a state of illiquidity or removed, state monopolies ended, and competi-on the verge of collapse. While approaches have tion (with domestic and foreign firms) encour-to fit individual circumstance, experience has aged, market pricing permitted, and managersshown that the more successful reforms have given flexibility to react to market signals. Enter-begun by eliminating major price distortions prises that cannot compete should be liquidated,(including interest and exchange rates), halting sold or at least permitted to wither away. Thismost new investment, and cutting off most subsi- process, more or less, has been followed in Tur-dies. These actions clarify the enterprises' true key with the support of five SALs. It has metsituation, which facilitates decisionmaking. Stud- with some success: an operational loss of 0.9ies of industrial SOEs in Tanzania and Egypt percent of GNP in 1980 was turned into a profitfound a surprising number of firms showing of 1.8 percent in 1985, subsidies and investmentsnegative value-added in international prices. in manufacturing have fallen in real terms.Trying to make sensible decisions about rehabili- This process is not a neat one and as it getstation or new investment under such circum- under way discontinuities will begin to arise. Thestances is nearly impossible. The questionable next phase will have to deal with the more press-viability of a number of Zambian SOEs, for ex- ing medium-term reforms. (Any studies or tech-ample, was much clearer after pricing and trade nical assistance needed to lay the basis for theseliberalization and the introduction of the foreign reforms should have been undertaken in the ear-exchange auction. lier phases.) The institutional framework will
The second step is to identify key enterprises, have to change along the lines described above.in terms of revenue generation or budget drain, This is a long process that should start by creat-employment, and linkages to the rest of the econ- ing or strengthening some central oversight ca-omy, which need rehabilitation and are likely to pacity to monitor the process and advise on theremain in the state sector for some time. In most rules of the game. It should focus first on assur-countries no more than 10 or 15 enterprises are in ing that resources flow to priority enterprisesthis group; typically they include electric, water, only and that management of these enterprisespost and telecommunications, and railroad com- begins to improve.panies, and some mining or industrial firms that Reforms in the financial system will also be-cannot be privatized easily. (It usually includes come pressing so as to put state and private en-state financial institutions, discussed below.) The terprises on an equal and competitive footing, torehabilitation effort should focus first on meeting assure an arm's-length relationship betweenthe emergency needs of these critical firms. banks and the state, and to create an effective
37
mechanism for the efficient allocation of resources. tial stumbling block varies from country to coun-Next, as market pressures build some of the try. Francophone African countries, in particu-
implicit decisions must become explicit. In other lar, tend to have strong legal traditions whichwords, government will need to decide whether they are reluctant to change. In Togo, for ex-the noncore enterprises will be sold, liquidated ample, the government's reluctance to changeor rehabilitated. Now that price distortions are the law left in place heavy ex ante controls thatfewer, the cost and benefit of rehabilitation and slowed or stymied reform efforts in the Port ofcontinued public operation can be more easily Lome. In the end an outside consulting firm wasdetermined. Some viable enterprises which can- asked to arbitrate the dispute and ruled that thenot compete because years of public operation legal reforms should be enacted.have left them decapitalized or without propermanagement may need financial and technical Commitmentassistance, which could come from the public orthe private sectors. A combination of circumstances has created a
This sequence is by no means a blueprint. In favorable environment for SOE sector reform:some countries the process begins with divesti- the lesson of SOE reforms in developed countriesture. The government may be ready to divest and the successes of market-oriented strategiesand feel there is a window of opportunity. In among developing countries; the acute financialcountries where the policy framework is sound crisis which has raised the economic and politicaland the SOE sector is small, institutional reforms costs of doing nothing; and the installation of amay have first priority. Reform programs that number of new, reform-minded governments. Yethave tried to address all these reforms simultane- commitment is temporary and must be enhancedously have had scant success. Comprehensive, through such actions as the following:17
blueprint approaches have proven counterpro- a Identify winners and losers in the reform proc-ductive in this sensitive area and efforts to re- ess and work to build understanding of and com-solve the government's administrative weakness mitment to reform through workshops, seminars,with large amounts of technical assistance have and the structure of project leverage.seldom succeeded. * Balance the long-term nature of institutional
reform with the politician's short-term frameworkImplementing legal changes by building in quick payoffs and focusing on
actions where prospects for success are high. ForA systematic assessment of existing legal frame- example, emergency rehabilitation of a few vi-work is necessary at the outset to have a sound able SOEs could be done first, with longer-termbasis for proposing reforms. There is also a com- restructuring to begin later. In Congo the reformmon tendency to underestimate the time required has focused on ending SOE monopolies, and theto enact legal changes, and these have become a quick response of private producers (in pharma-major bottleneck in some countries. Often gov- cies, for example) has helped build support.ernments agree to reforms in principle but hesi- * Avoid perfectionism and comprehensiveness,tate to take more visible step of amending a law. where that might lead to lengthy start-up and
The degree to which legal changes are a poten- slow, troubled implementation of the reforms.
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Endnotes
1. See, for example, Rudiger Dornbusch and need to be accompanied by internal improve-F. Leslie C.H. Helmers, The Open Economy (World ments in the management of finance, production,Bank, 1986); Mohan Munasinghe and Jeremy investment, and personnel. Such good businessWarford, Electricity Pricing (Johns Hopkins Uni- practices, which do not differ markedly whetherversity Press, 1982); George Tolley, Vinod Tho- the firm is public or private, are beyond the scopemas, and Chung Ming Wong, Agricultural Price of this paper.Policies in Developing Countries (Johns Hopkins 7. Based on John Nellis, "Contract-Plans: AnUniversity Press, 1982); John Cody, Helen Assessment of Their Utility as Performance Im-Hughes, and David Wall (eds.), Policies for Indus- provement Mechanisms in Public Enterprises"trial Progress in Developing Countries (Oxford Uni- (World Bank Discussion Paper 48, February 1989).versity Press, 1980); and the World Development 8. See Armeane Choksi, "State Intervention inReports. See also John Nellis, "A Review of Pub- the Industrialization of Developing Countries:lic Enterprise Reform in Adjustment Lending," Selected Issues" (World Bank Staff Working Pa-paper presented at Symposium on Adjustment per 341, 1979) and John Nellis, "Public Enter-Lending, World Bank, April 1989. prises in sub-Saharan Africa" World Bank Dis-2. De Anne Julius and Sarah Becker, "Public cussion Paper 1, 1986.
Enterprise Price Formation in West Africa" (Feb- 9. See also Mahmood Ayub and Sven Hegsted,ruary 1986). See also De Anne Julius and Ade- Public Industrial Enterprises: Determinants of Per-laida Alicbusan, "Public Sector Pricing Policies: formance, World Bank Industry and Finance Se-A Review of Bank Policy and Practice" (April ries, Vol 17, 1986, annex II.1986). 10. See Arturo Israel, "World Bank Technical3. Richard Mallon, "Public Enterprise Pricing Notes," 1-6.
Policy," HIID Development Discussion Paper 129 11. See, for example, World Bank, "Handbook(February 1982). on Consulting Services" (Operations Evaluation4. Peter Heller and Alan Tait, "Government Department, September 1985); and Francis Le-
Employment and Pay: Some International Com- them and Lauren Cooper, "Managing Project-parisons" (IMF, 1984). Related Technical Assistance: The Lessons of5. Some of the reforms being tried in central Success" World Bank Staff Working Paper 586,
governments are also applicable to SOEs. See 1983.Barbara Nunberg, 'Public Employment and Pay 12. See, for example, Frank Veneroso andPolicy Issues in Bank Lending: An Interim Re- Martha de Melo, "Inflation Accounting and itsview of Experience" (PPR Working Paper 113, Policy Implications for Portugal's Public Enter-Country Economics Department, October 1988). prises" (June 1986), and James Tybout, The Alge-6. For these reforms to be effective they will bra of Inflation Accounting World Bank Discus-
39
sion Paper, Development Research Department, to Pakistan" UNDTCD, conference paper, Paki-July 1984. stan, November 1981, and Mary Shirley, "Paki-13. A related problem is asymmetric counting. stan: Assessment of the Industrial Public Enter-For instance, if an SOE is given three targets prise Performance Evaluation System" PPR Work-based on minimization of wages, reduction of ing Paper 160, March 1989.employees per ton, and reduction of financing 15. For more information see Elliot Berg andcharges, labor costs are being counted twice, capi- Mary Shirley, "Divestiture in Developing Coun-tal costs once. The result would be a bias toward tries" (World Bank Discussion Paper 11, 1987).capital-intensive production. 16. The possible approaches to divestiture and14. For more on the Korean system, see Young the attendant issues are covered in detail in Char-Park, "A System for Evaluating the Performance les Vuylsteke, "Techniques of Privatization ofof Government Invested Enterprises in the Re- State-Owned Enterprise," Vol. 1 World Bankpublic of Korea" (World Bank Discussion Paper Technical Paper 88, July 1988).3,1986). On the Pakistan system, see Leroy Jones, 17. See Richard Heaver and Arturo Israel."Towards a Performance Evaluation Methodol- "Country Commitment to Development Projects"ogy for Public Enterprise with Special Reference World Bank Discussion Paper 4, November 1986.
40
Appendix A Checklist of topics for diagnosticoverview
Performance
Financial: profitability, debt and liquidity, arrearsMacroeconomic impact: production, value added, exports, imports, employment, wagesFiscal impact: contribution to tax revenues; subsidies and other current transfers; equity, grants, loans
and other capital transfers; dividend payments; share of public internal and external debt
heavily import dependent)Government interference in internal operating decisions; bureaucratic delays and red tapeSelection of inappropriate managers and directors; frequent turnover of managers; lack of managerial
incentives and accountability; insufficient compensationChanges in market, adverse trends in relative prices, exhaustion of raw materials, civil war, cutoffs in
essential services (power, water, transport, fuel,) or in the supply of inputs
Past reform and reasons for success or failure
Strategic issues of state ownership
Size and role of state-owned sector; objectives of government involvement; how objectives and role ofsector may have changed over time: efficacy of using SOEs to achieve various objectives (low SOEprices versus target income subsidy, or nationalization of a sector versus regulation)
Classification of enterprises by nature (commercial or noncommercial), market (monopoly versus com-petitive), dependence on Treasury support
Principles of classification of SOEs to be closed, rehabilitated, privatized in whole or in partDivision of labor with private sector: removal of discrimination and barriers to competition between
public and private enterprises
41
Macro policy issues affecting SOEs
PricingLaborFinance and investmentTrade
Institutional framework
Present set-upMain actors and responsibilities, formal and informal (role of ministries, boards, holding companies,
management, parliament, others)Procedures for making major decisions (pricing, investment, personnel)Reporting relationships (flow of information)
Improving the institutional framework through:Setting clearer objectives and targetsBetter division of responsibilities and coordinationDecentralization, greater managerial autonomy where appropriateImproving accountability
Policy reformInstitutional changesDivestitureFinancial restructuring and rehabilitationUpgrading managerial capacityInternal management systems
Phasing reforms and selecting priority enterprises
42
Appendix B Minimum financial informationassembled by government oversight agencies
Flow of funds analysis Government impact analysis
Net profit Subventions+ Depreciation +Advances= Funds from operations + New loans+ New borrowings - government + New paid-in capital+ New borrowings - other = Total cash received from government+ New paid-in capital= Total funds available Debt repayment
+ Interest paidCapital expenditures + Taxes(Repayment of debt to government) + Dividends(Repayment of debt, other) + Other+ Total debt repayment = Total cash paid to government
Less dividends paid+ Other Net cash impact on government= Total funds used
Net change in working capital
Ending net working capital
Note: Adapted from an internal Bank document.
43
Income statement Income statement total assets
Commercial revenue Commercial revenue+ Subventions Subventions= Total revenue Total revenue
Costs of goods soldDirect costs Other administrative expenses+ Other admninistrative expenses Depreciation+ Depreciation Total operating expenses= Total operating expenses Operating profit
InterestOperating profit Taxes- Interest Net profit- Taxes Net profit/net worth- Exceptional items Government cash flow/total assets- Net profit
Percentage of revenue analysisBalance sheet
Nonsubvented revenueOther current assets Administrative expenses+ Inventory Total operating expenses= Total current assets Interest
Net profit+ Net fixed assets+ Other assets Balance sheet/total assets= Total assets
Other current assetsOverdrafts Inventory+ Other current liabilities Total current assets= Total current liabilities Net fixed assets
Other assetsAdvances and other Total assets = 100%+ Long-term loans - government+ Long-termn loans - others Overdrafts- Total long-term liabilities Other current liability
Total current liabilityNet worth Advances
Long-term loans - governmentTotal liabilities and net worth Long-term loans - other
Total long-term liabilitiesRatio analysis Net worth
Liquidity
Net working capitalCurrent ratioWorking capital/total assletsQuick assetsQuick ratioInventory turnoverDebt service coverageLong-tern debt/equityGovernment investment/total assets
Niger (PE SECALNiger (PE TAL)Rwanda (TAL)Togo (TAL III)
Note: Includes technical assistance loans and public enterprise loans approved as of June 1988; exdudes SALs and SECALs.
Table C-3 SALs with state-owned enterprise components
Africa Burundi I Kenya II Togo III EMENA PakistanBurundi 11 Malawi I Zaire TunisiaCARI Malawi 11 Turkey ICAR 11 Malawi III LAC Bolivia Turkey IICongo Mauritania Chile I Turkey IIIGabon Mauritius I Chile II Turkey IVGambia Mauritius ll Chile III Turkey VGhana Niger Costa Rica YugoslaviaGuinea I Sao Tome Dominica Asia Korea 11Guinea 11 and Principe Jamaica I NepalGuinea Bissau Senegal I Jamaica II Philippines IIvory Coast I Senegal 11 Jamaica III Thailand IIvory Coast II Senegal III Panama I Thailand IIIvory Coast III Togo I Panama IIKenya I Togo II Uruguay
Note: Approved as of June 1988
46
Table C-4 Value of SOE component in TALs Table C-5 Time from preparation to Board(in $ million) approval in TALs and PELs
SOE SOE as a Months Months MonthsTotal amount percentage identify appraisal identifyloan of loanl of total Region to appraisal to approval to approval
Country amount credit loan/creditAfrica 8.5 8.9 17.4
Senegal II 11.0 11.0 100 (25)&Senegall 6.3 6.3 100Turkey 7.6 7.6 100 LAC 6.2 8.3 14.5Sudan 9.0 4.5 50 (10)Ecuador 8.0 3.3 41Malawi I 1.0 0.4 40 Asia 36.0 17.0 53.0Burundi 7.5 3.0 40 (1)Mali 10.4 4.0 38Chile 11.0 4.1 37 EMENA 3.8 9.5 13.3Togo III 6.2 2.0 32 (4)Panama 5.0 1.4 28Jamaica 1 6.1 1.6 26 Average 13.6 10.9 24.6Madagascar 5.7 1.4 25 (40)Brazil 29.0 6.4 22Peru 10.2 2.2 22 Note: Number of operations in parentheses.Malawi 11 1.5 0.3 20 a. Mali Private Enterprise Sector Adjustment has not beenCongo I 11.0 1.7 15 included in the above table due to an unusually long identi-Ivory Coast 16.0 2.4 15 fication period. The project was first identified in NovemberPakistan II 7.0 1.0 14 1982, and was finally approved in June 1988.Argentina 18.5 2.5 14Guinea Bissau 6.0 0.8 13Togo Il 3.5 0.4 11Jamaica 11 9.0 1.0 11Guinea 9.5 1.0 11CAR 11 8.0 0.8 10Mauritania 11 4.6 0.4 9Congo 11 4.0 0.3 8Pakistan 1 7.0 0.5 7Rwanda 4.8 0.3 6Costa Rica 3.5 0.2 6
Average 8.3 2.4 29
Note: Approved as of June 1988
47
Table C-6 Principal components of state-owned enterprise reform projects
General Policies
Credit and Government/PEPricing labor investment Debts Divestiture
Benin (PEL) Benin (PEL) Congo (PEL) Congo (PEL) Benin (PEL)Congo (PEL) Congo(PEL) CongolI Ghana (PEL) Congo (PEL)Ghana (PEL) Ghana (PEL) Ghana (PEL) Jamaica (PEL) Ghana (PEL)Jamaica (PEL) Mali (PEL) Jamaica Mali (PEL) JamaicaMadagascar Niger (PE SECAL) Mali (PEL) Mauritania (PEL) Mali (PEL)
(review) Niger (PE TAL) Morocco (PEL) Morocco (PEL) Niger (PE SECAL)Mali (PEL) Philippines (PEL) Niger (PE SECAL) Niger (PEL) Niger (PE TAL)Niger (PEL) Sudan Philippines (PEL) Philippines (PEL)Morocco (PEL) SenegalPanama
(study)
Note: Table includes technical assistance loans (TALs) and public enterprise loans (PELs) approved as of June 1988. It excludesSALs and SECALs
Government state-owned enterprise relations
Contract ReviewlImproving Central information National plans and revision incontrol Diagnostic and monitoring level similar Board of legalagencies surveys systems training agreements directors framework
Argentina Argentina Benin (PEL) Argentina Benin (PEL) Argentina ArgentinaBenin (PEL) CAR Brazil Brazil Burundi Mali (PEL) Congo (PEL)Brazil Congo (PEL) Burundi Burundi Congo Morocco (PEL) EcuadorBurundi Guinea Bissau Congo Chile Ghana (PEL) Ghana (PEL)Chile Mali Congo (PEL) Ghana (PEL) Ivory Coast JamaicaCongo (PEL) Morocco (PEL) Ecuador Madagascar Mali (PE SECAL) Jamaica (PEL)Guinea Bissau Niger (PEL) Ghana (PEL) Mali Mali (PE TAL) Mali (PE SECAL)Jamaica Panama Jamaica Mali (PEL) Mauritania (PEL) Mali (PE TAL)Mali Peru Jamaica (PEL) Mauritania (PEL) Mauritania II Mauritania (PEL)Mali (PEL) Mali (PEL) Niger (PEL) Morocco (PEL) Niger (PE SECAL)Morocco (PEL) Morocco (PEL) Senegal Niger (PE SECAL) Niger (PE TAL)Niger (PEL) Niger (PEL) Senegal II Niger (PE TAL) Philippines (PEL)Pakistan Pakistan Senegal II SudanPakistan II Pakistan II Togo IIPeru PanamaPhilippines (PEL) PeruSenegal SenegalSenegal II Senegal IISudan SudanTogo II Togo III
48
Rehabilitation of individual state-owned enterprises
Recovery Strengtheningplansl management Management Enterpriserehabilitation through and financial Diagnostic Capital kvelprograms consultancy audits studies support training Divestiture
Benin (PEL) Burundi Benin (PEL) Argentina Benin (PEL) Argentina Benin (PEL)Brazil Congo (PEL) Brazil Benin (PEL) Madagascar Brazil ChileBurundi Chile Congo CAR II Mauritania 11 Burundi Congo (PEL)CAR Ecuador Congo (PEL) Congo Niger (PEL) Chile Ghana (PEL)CAR II Ghana (PEL) Ivory Coast Congo (PEL) Turkey Congo (PEL) GuineaCongo Jamaica Jamaica (PEL) Ecuador Ecuador Jamaica (PEL)Congo (PEL) Jamaica 11 Madagascar Jamaica Ghana (PEL) Jamaica 11Guinea Madagascar Mali (PEL) Malawi Guinea Mali (PE SECAL)Jamaica Malawi Morocco (PEL) Malawi 1I Jamaica 1I Mali (PE TAL)Jarnaica (PEL) Malawi 1I Niger (PE SECAL) Mali (PEL) Mali (PEL) Morocco (PEL)Mali Mali (PEL) Niger (PE TAL) Mauritania (PEL) Mauritania (PEL) Niger (PE SECAL)Mali (PEL) Mauritania (PEL) Peru Mauritania 1I Morocco (PEL) Niger (PE TAL)Mauritania (PEL) Peru Philippines (PEL) Niger (PEL) Rwanda Philippines (PEL)Mauritania II Sudan Senegal Senegal 11 Senegal SudanMorocco (PEL) Turkey Senegal 1I Sudan Senegal 1I Togo IIINiger (PE SECAL) Togo ll Togo III SudanNiger (PE TAL) Togo III Togo IIIPhilippines (PEL) TurkeySenegal 11SudanTogo II
Increasel charges;lsbeaire Liberalize reduce automaticpricstariffs trade access to credit
Bolivia Burundi BoliviaBurundi CAR Burundi 11Burundi 1I Congo (study)
(study) Costa Rica CARCAR Guinea CAR IICAR 11 (study) Guinea Bissau Chile IIICongo Guinea 11 CongoCosta Rica Ivory Coast II GabonGambia Ivory Coast III GambiaGuinea Jamaica I GhanaGuinea Bissau Jamaica 11 GuineaIvory Coast H Jamaica III Guinea BissauIvory Coast III Kenya I Guinea IIJamaica I Korea Ivory Coast IJamaica II Malawi III Ivory Coast IIIJamaica HI Mauritius II Korea 11Korea 1I Nepal NigerMalawi I Niger PanamaMalawi 11 Panama Senegal lINepal Panama 11 Togo IIINiger Sao Tome TunisiaPanama and Principe Turkey IPanama 11 Senegal 11 Turkey 11S.o Tome Thailand I Turkey III
and Principe Thailand II Turkey IVSenegal III Togo IIIThailand I Turkey VThailand 11 ZaireTurkey ITurkey 11Turkey VUruguayYugoslaviaZaire
Note: Approved as of June 1988.
50
Institutional reforms
Improveinformation Implementation
Employment Management and Improve ofand salary and financial monitoring SOE action plans!practices audits systems management recovery plans Liquidation Divestiture
Burundi 11 CAR 1I Burundi Burundi II Burundi II Burundi BurundiCAR Gabon Burundi 11 CAR II CAR Burundi II CARCAR II Ghana CAR Chile CAR 1I CAR CAR IICongo Guinea 1I CAR II Congo Chile III CAR II Chile IIDominica Ivory Coast I Dominica Dominica Congo Congo CongoGabon Ivory Coast III Gabon Gabon Dominica Costa Rica Costa RicaGambia Jamaica I Ghana Ghana Gabon Gabon GabonGhana Jamaica III Guinea II Guinea Bissau Ghana Ghana GambiaGuinea Malawi I Ivory Coast II Guinea II Guinea Guinea GhanaGuinea Bissau Mauritius II Kenya I Ivory Coast II Guinea Bissau Guinea II GuineaGuinea 1I Niger Malawi I Korea II Guinea II Niger Guinea IIIvory Coast I Senegal III Niger Malawi II Ivory Coast I Panama Jamaica IJamaica II Togo I Pakistan Mauritania Ivory Coast III Panama II Jamaica IIMauritius I Togo II Senegal Ill Niger Jamaica I Senegal ll Jamaica IIIMauritius 11 Togo III Togo I Senegal I Jamaica 11 Senegal III Malawi IIINepal Togo III Senegal III Jamaica III Togo I NepalNiger Turkey III Thailand 11 Malawi I Togo 11 NigerSenegal Turkey V Togo II Niger Togo III PanamaTunisia Uruguay Togo III Philippines I Zaire Panama 11Turkey II Turkey II Sao Tome Sao TomeTurkey III Turkey V and Principe and PrincipeTurkey IV Uruguay Senegal II Senegal I1Zaire Togo III Senegal III
Uruguay Togo ITogo llTogo IIITurkey VZaire
51
Table C-8 State-owned enterprise reform in structural adjustment loans
Country Reform measures Loan amount (US$m)
Bolivia Increase tariffs and prices; monitor 50.0expenditures and borrowings of major SOEs.
Burundi Liquidations; rehabilitation; create national 15.0service in charge of PEs; prepare diagnosis 16.2of private sector; prepare strategy plans forPEs; develop information system; implementsectoral policies including price liberalization,increase decentralization. Create intervention fund.
Burundi Adoption of PE decree on legal framework; liquidate 90.04 PEs; sign performance contracts; rehabilitationprograms for 4 PEs; hotels; studies on price/tariffs,incentive system, privatization, financial flows betweenState/PE; implement MIS; strengthen MINPLAN; strengthencivil service; strengthen Ministry of Labor.
Central African Divestiture/restructuring and rehab. action 14.0Republic I plans; eliminate arrears, restore financial 16.0
discipline; improve PE efficiency; ceiling onpersonnel growth; strengthen Government'smonitoring ability.
Central African Performance analysis of major PEs; PE audits; 40.0Republic II freeze on new PEs; reduce staffing; settle
cross debt; clarify responsibilityfor preparing 3-year PIP; tariff policy;action plan for institutional legal frameworkstudy; standard procedure for privatization;continue privatization for agreed PEs; liquidate;rehabilitate 3 PEs; train civil servants; transferredundant civil servants and freeze staffingplans; reinforce wage bill; reorganize ministriesof Plan, Commerce, Industry, Rural developmentand SMEs.
Chile I Coordination of SOE investment plans and 250.0macroeconomicpolicies; study on SOE management.
Chile II Continue divestiture program. 250.0
Chile III Banking sector study. 250.0
Note: Approved as of June 1988
52
Country Reform measures Loan amount (US$m)
Congo Divestiture; financial restructuring and 70.0discipline; banking sector reforms; staffreduction and personnel management; adoptlegislation for management contracts, newprocurement procedures, redefine PE statutes,Government relations and oversight structures.Rehabilitation measures for selected PEs.
Costa Rica Completion of action plan on divestiture of 80.0CODESA portfolio. FERTICA and strengthenmanagement of CATSA under TAL; completeprogram of reorganization and policy improvementsunder TAL. Tariff levels to be adjusted periodicallyto a level sufficient to cover operationalexpenditures, debt service, and reasonableshare of investment.
Dominica Implementation of appropriate public sector to wage 3.0policy; organization to increase productivity, examineprogram to merge manpower requirements; IDC, TouristBoard; strengthen PSIP; strategy for upgrading agriculturalextension service.
Gabon Submission of budgets to Ministries of Planning, 50.0Economy; Air Gabon program contract; study ofparapublic sector; liquidation/privatization of9 PEs; studies of 34 PEs; restructuring for parapublicsector; staff freeze; negotiations on contracts; salaryreduction in parapublic and civil service.
Gambia Divestiture and rationalizationplan, economic 5.0and financial feasibility studies, and actions tosecure majority private equity participationin venture; performance contracts with 3 SOEs.Tariff increase.
Ghana Rationalization plan of COCOBOD - prepare budget, 34.0retrench plantation workers, divest 52 plantations;freeze on new SOEs; action plan for pricingautonomy; identify SOEs to be incorporated; divestitureplan for 30 SOEs; establish new State EnterpriseCommission; corporate plans for 14 SOEs; identifyarrears and cross debts for 14 SOEs; rationalize civilservice salaries; develop skill mobilization scheme;approve 1987 retrenchement program; establish ProjectManagement Unit; high level SAL team.
53
Country Reform measures Loan amount (WS$m)
Guinea I Prepare and approve divestiture strategy action 25.0plan for industrial SOEs; liquidate 19 industrial and4 non-industrial SOEs and EPCOAs; agree SOE workingcapital, credit and foreign exchange provisions; suspendAir Guinea's international services; review statutes ofpublic utilities; revise autonomy provisions in port,airport and railway statutes; revise mining sector legaland taxation arrangements; revise Air Guinea's statute;review and enhance incentives for private sector jobcreation; remove SOE employees from civil service rolls.
Guinea II Liquidation decree; privatize agreed SOEs;commission to recommend privatization;restructure SOEs in hotels and transport; improvelegal, institutional framework; revise civil service statute.
Guinea Bissau Comprehensive diagnosis of PE sector; reduce real 10.0wage bill through reducing civil service; strengthenEAGB (electricity firm) increase tariff; abolish statemonopoly oncrop purchases - reform parastatal tradingfirms; transfer parastatal retail outlets to private sector;encourage expension of private sector trucking;strengthen National Bank capabilities.
Ivory Coast I Institute financial controls and limit external 150.0borrowings; realign salaries; divest shares inSOEs; audits of selected SOEs; implement enterpriseaction plans.
Ivory Coast II Price liberalization; improve information/ 250.7monitoring system; rationalize government/SOErelations, including legal framework, recovery plans,program contracts, and tutelage system; improvemanagement; restructure agricultural SOEs.
Ivory Coast III Targets for reducing transfers from government to 250.0private enterprise sector; restructuring plans for5 PEs; management audits; extend system of contractprograms to 4 PEs; improve accounting system andreinforce system of "Tableaux de bord" for 31 key SOEs;decentralize procurement procedures.
Jamaica I Increase prices; divest unprofitable SOEs; management 76.2audits of selected SOEs; implement enterprise action plans.
Jamaica II Increase prices; implement enterprise action plans; 60.2privatize selected SOEs; reduce staffing; limits on new SOEs.
Jamaica III Increase prices and tariffs; implement action programs 55.0for six SOEs; management audits of selected SOEs; reviewand revise financial targets; divest unprofitable SOEs.
54
Country Reform measures Loan amount (US$m)
Kenya I Improve monitoring system; issue guidelines 55.0on growth of SOE sector.
Kenya II Improve procedures for evaluating SOEs for 130.9for Treasury investments.
Korea II Improve public sector efficiency, managerial autonomy 300.0in budgeting, personnel and procurement. Developperformance evaluation system; transfer some SOEs toprivate sector; eliminate subsidized credit to SOEs; increaseprices.
Malawi I Increase prices and tariffs; management audits of selected 45.0SOEs; implement enterprise action plans; liquidatesome SOEs; improve information/monitoring system.
Malawi II Implement studies for operational and financial 55.0improvement of SOEs; annual reviews of financialaccounts; increase tariffs and user charges.
Malawi III Tariff increases; improve effectiveness 30.0of DSB in monitoring financial operations; action 40.0plan to remove PE deficits. Asset rationalization.Monitor MDC's performance; medium-term corporateplan prepared.
Mauritania Study of state portfolio and action program; improve 15.0channels for public competitive bidding and 27.4management decision processes.
Mauritius I Redeploy personnel in three major SOEs; restructure 15.0goals; improve efficiency.
Mauritius II Redeploy personnel in three major SOEs; management 40.0audits of selected SOEs; implement new accounting system.
Nepal Action plan for privatization and/or managerial reform 50.0of PEs; awards and penalties for managers.
Niger Personnel statute for PEs; revise parastatal labor laws; 20.0legislation to adjust ministries; rehabilitate 2 PEs - finaldecision on 3 PEs; reduce products subject to price controls;eliminate cross debt; decision on consolidating responsibilitiesof NIGELEC and OFEDES; complete CNCA auc't, improvedebt collection; cost recovery study; civil service study.
Pakistan Implement system for evaluating SOE performance, 140.0provide incentives, including parastatal labor laws;information base and performance indicators.
55
Country Reform measures Loan amount (US$m)
Panama I Reduce domestic cement price; terminate pricing 60.2arrangement between cement companies; liquidateand privatize selected SOEs; study cost reduction.
Panama II Close and divest SOEs. 100.0
Philippines Formulate industrial restructuring 200.0program for 5 major sectors.
Sao Tome and Principe New tariff structure for electricity, water; plan to 4.0restructure viable PEs; uniform accounting system. 3.0
Senegal I Privatize selected SOEs; implement program-contracts; 60.0staff reduction plans; reform agriculture sector by reducingState intervention (changes in credit, financial assistanceto farmers).
Senegal II Privatize/liquidate PEs: improve data, reporting; 20.0clarify government sector relations; reconcile 44.0cross arrears; finalize contract-plans; improve control of SOEs.
Senegal III Strengthen management and institutional setting 45.0for PE sector; privatize/liquidate. Implement audit 40.0restructuring; redefine role of BOD. Program to strengthenintemal planning, control systems, financial accounting;reduce subsidies; contract-plans; reconcile arrears; reformsupervision system.
Thailand I Increase tariffs. 150.0
Thailand II Increase prices; efficiency, management 175.5improvements; liquidate unprofitable SOEs.
Togo I Liquidate, privatize selected SOEs; management 40.0audit selected SOEs; improve programming, revenuemonitoring and expenditures; annual report on SOEs;accounting system and initiate regi..dr audits.
Togo II Improve management, government/SOE relations; 10.0survey domestic arrears of SOEs and restructure,privatize, or liquidate SOEs; annual report on majorSOEs; audits and studies of SOEs.
56
Country Reform measures Loan amount (US$m)
Togo III Reorganize MISE - reevaluate regulationof PEs; supervise SAL 45.0program; elaborate MIS for SOEs; reassess privatization strategyand identify priorities for 1989-90; privatize select PEs - legalaudit of 16 PEs, restructure remaining PEs; restructure arrears;debt swapping agreements; continue audit for 16 PEs - auditaccounts for OPAT - reduce operating costs and adopt newstructure; revise state role in light of SOE needs; negotiate man-agement of hotels; rehabilitate CFT; abolish monopoly on rice,sugar, tobacco; reorganize CEET (energy).
Tunisia Control real wage growth in pulic sector - limit 150.0subsidies and restructure economic justificationfor major public sector projects.
Turkey I Eliminate government -controlled prices, use 200.0market forces; improveefficiency and productivity of SOEs.
Turkey II Liberalize prices; reduce drain on public funds; 300.0reduce staffing; improve management (selectionon merit, competitive pay) and delegation ofauthority; sector organization changes;depoliticize government/SOE relations, managementselection and behavior.
Turkey III Reform law to liberalize employment and 304.5salary practices; limit hiring; improve information/monitoring; publish audited accounts.
Turkey IV Set parameters for new legal and institutional framework, 300.8with focus on decentralization; liberalize employment,salaries; limit employment growth; attention to accountingand auditing.
Turkey V Review of selective privatization of SOE assets;liberalize prices and imports; improve monitoringsystem; personnel regime; introduce modernmanagement techniques, planning and training.
Uruguay Maintain real public enterprise prices; 80.0restructure railway, water companies;legislation to associate PLUNA (airline) withprivate carriers; action to strengthen banking.
Yugoslavia Price liberalization; improve 275.0financial accountability of enterprises.
Table C-9 Number of Bank projects with Table C-10 Bank projects with divestituredivestiture components components
Country SALs SECALs, TALs PELsb Total Loan amountCountry operation ($ millions)
Africa AfricaBenin 1 1 Benin PE Rehabilitation 15.0
Burundi SAL I 15.0Burundi 2 2 SAL II 90.0CAR 2 2 CAR SAL T 14.0Congo 1 1 2 SAL II 40.0Gabon 1 1 Congo SAL 70.0
PE ID 15.2Gambia 1 1 Gabon SAL 50.0Ghana 1 2 1 4 Gambia SAL 5.0Guinea 2 1 3 Ghana Export Rehabilitation 76.0Guinea Bissau 1 1 Id. SECAL 28.5Madagascar 2 2 PEL 3405Malawi 2 2 Guinea SAL I 25.0Mali 2 2 SAL II 65.0Mauritania 1 1 TAL I 9.5Niger 1 2 3 Guinea Bissau SAL 10.0S~o Tom6 Madagascar Industry and Trade 67.0Sao Tomd PS Adjustment 125.0
and Principe 1 1 Malawi SAL II 55.0Senegal 2 2 SAL III 30.0Sudan 1 1 Mali PE SECAL 40.0Togo 3 2 5 Mauritania PEID 9.5
Mauriania PETAL 16.4Uganda 1 1 Niger SAL 20.0Zaire 1 1 2 PE SECAL 60.0Zambia 1 1 PE ID 5.5
EMENA ~~~~~~~~~~~~~~~~~~~~~TAL 12.0EMENA Zambia Industrial Reorientation 20.0Morocco 1 1 LACTurkey 1 1 Costa Rica SAL 80.0
Subtotal 1 0 0 1 2 Chile SAL II 250.0TAL 11.0
Haiti Economic Recovery 40.0Asia Jamaica SAL I 76.2
Nepal 1 1 SAL II 60.2Pakistan 1 1 SAL III 55.0Philippines 1 1 2 PE SECAL 20.0
TAL 1I 9.0Subtotal 1 2 0 1 4 Panama SAL I 60.2
SAL II 100.0Total 30 9 8 11 58 TAL 5.0
EMENAa. Indudes only industry, economic recovery, and export Turkey SPARL 32746.0rehabilitation SECALS. Asiab. Includes private enterprises rationalization loans, public Nepal SAL 50.0enterprise sector adjustment loans, and public enterprise in- Pakistan Export Development 70.0stitutional development projects. Philippines Economic Recovery 300.0
GovernmentCorporations 200.0
Note: Approved as of June 1988.
58
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