Catalog

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p. 22 of 34 BACK | NEXT Executive Summary Introduction Good governance defined The elements of good governance The Bank’s concern with governance quality The Bank’s approach to governance issues Promoting the elements of good governance in Bank operations Building governance capacity Public sector Management Public enterprise management and reform Public financial management Civil service reform Participatory development processes Legal frameworks Information openness The Bank’s modalities for enhancing governance in DMCs Resource implications Reporting arrangements

Governance: Sound Development Management : Promoting the elements of good governance in Bank operations : Building governance capacity

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Public enterprise management and reform

At a fundamental level, public enterprise reform should begin with consensus-building in respect of an appropriate role for the state in a market-friendly economy. Downsizing the public sector may not be an end in itself, but is likely to result from an unbiased examination of which goods and services are provided better by private institutions. At the same time, the ability and willingness of governments to trim profitable state-owned enterprises could depend on the availability of other sources of revenue. Where this is the case, enlarging the tax base would help smooth the path of public enterprise reform. While problems in the management of public enterprises can occur anywhere, they may be particularly acute in the former centrally planned economies that are undertaking the transition to market-oriented systems and in South Asian DMCs.

The reassessment of the rationale of a public enterprise and its economic prospects could result in a confirmation of its continued validity or in a recommendation for reform. If the former, the focus would be on ensuring more effective operations. This may require increased autonomy in day-to-day functioning (say, through conversion to a joint stock company), on the one hand, and greater accountability (to its principal shareholder, the government), on the other. Reconciling these twin goals may involve shifting from ex ante (or input-oriented) controls to ex post (or output-oriented) ones. Further, as a rule of thumb, state-owned enterprises serving commercial ends could be made to maximize profits, while those that are monopoly providers could concentrate on minimizing costs instead. Reform of public enterprises could follow several directions. In some cases, liquidation may be the answer, with market mechanisms taking over the function previously rendered by the enterprise concerned. In others, it may be decided to merge two or more enterprises and rationalize their operations. For some, privatization may be the preferred option, though this is often the most difficult decision to implement, on account of the political and social costs involved. Typically, the process of privatization takes longer to complete than is originally anticipated. Nevertheless, an extended, but successful, program for divestiture is better than an underprepared privatization that fails or is thwarted. The damage caused by the latter could sap the will of the government to pursue other privatizations, and thus reduce the momentum for economic liberalization.

Where privatization is the chosen route, experience suggests some ground rules. Creating a competitive operating environment for the enterprise concerned should normally take priority over the objective of increasing government revenues in the short run. Hence, public monopolies should not normally be replaced by private ones. Enterprise sales should be transparent, and assets should be evaluated by an independent firm to avoid the danger that only political insiders have accurate assessments of plant capacities and liabilities. Labor should be invited to participate in the process, to avert subsequent organized unrest. For the same reason, the proceeds of divestiture could be used for social safety nets or other social purposes (and/or for priority investments in physical infrastructure). The sale of shares to local financial institutions and individuals could also help garner political support for privatization. Public disinvestment should not crowd out local capital markets, but be used instead to stimulate them. The success of the Bank’s efforts to assist public enterprise reform depends largely on two preconditions: first, the commitment of governments to improve public sector operations; and second, movement towards an appropriate macroeconomic and sector policy framework (including trade liberalization, exchange rate decontrol, and market-oriented interest rates, and other basic prices in the economy).

Box 2 provides two examples of the Bank’s activities in the field of public enterprise reform.

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