Regional : Strengthening State-Owned Enterprise Accountability and Performance

Public sector management / Reforms of state owned enterprises

The knowledge and support technical assistance (TA) will help improve institutional capacity and service delivery for state-owned enterprises (SOEs) and in sectors and economies where SOEs are prominent. In response to Asian Development Bank (ADB) developing member country (DMC) demand, the TA will be coordinated with ADB operations departments and develop SOE diagnostics, SOE knowledge and tools, and institutional capacity for SOE oversight and reform.

The TA is aligned with ADB Strategy 2030 and the draft operational plan for operational priority 6 on strengthening governance and institutional capacity in DMCs. It builds on the meetings and findings of the SOE Working Group, which included high level representation from across ADB and whose acting secretariat is the Governance Thematic Group (SDTC-GOV) of the Sustainable Development and Climate Change Department (SDCC). ADB is launching the TA to support its operational work with SOEs and implement ADB Strategy 2030, which emphasizes SOE reforms and internal governance to improve access to capital and service delivery. The TA is included in SDCC's 2019 results-based work plan.

SOEs have long played an important role in economic development in Asia and the Pacific. Especially prominent in energy, transportation, and finance, SOEs also include major enterprises in mining, manufacturing, food distribution, and other industries. Their share of gross domestic product in Asian economies generally ranges from an estimated 20%40%. Beyond their impact on service delivery and productivity in key industries, SOEs can be an important source of both government revenues and liabilities. SOE governance and performance can ultimately influence the achievement of several sustainable development goals.

Governments sometimes created SOEs in areas like natural monopolies, where they felt the government should retain control. In many cases, governments used SOEs to launch new industries or expand existing ones, even when, historically, the private sector had developed these industries in more advanced economies. Across Asia and the Pacific, SOEs still play a prominent role in operating and expanding much needed infrastructure.

Unfortunately, in too many Asian and Pacific economies, poorly performing SOE sectors effectively hinder sustainable development. Several years of reform have not addressed the causes of this core problem: vulnerability to political interference and corruption; an unlevel playing field with the private sector; and reduced SOE productivity due to soft budget constraints, poor internal and sector governance, and, crucially, little or no real accountability combined with multiple and conflicting objectives. In addition, SOEs may have hidden and contingent liabilities for the national budget.

Underlying these challenges are the root failures of SOE oversight and governance: systematic opacity and a deep resistance to useful disclosure; poorly designed and unfunded policy mandates; and legal and regulatory regimes that are ambiguous, incomplete, and unnecessarily distinct from the private sector. Most importantly, no part of the government has real responsibility for SOE performance or is held accountable for it. The nature of SOEs themselves, the quality of management, and how the state acts as owner of assets drive these underlying causes and the resulting negative effects. These challenges are compounded by the politically sensitive nature of SOEs and potential reforms.

ADB has long worked to address these challenges in its engagements with SOEs. ADB Strategy 2030 and the forthcoming operational plan on strengthening governance and institutional capacity emphasize that this engagement should continue and become more effective.

However, according to a 2018 Independent Evaluation report, supported reforms tended to be piecemeal and few addressed how the state acts as an owner of assets and who carries out that role(s) in the state administration. The Management response to the report supported the recommendations for ADB to strengthen operations dealing with SOE reforms.

ADB's approach to SOE reform is consistent with international experience. For decades, countries around the world made repeated reforms to SOEs. In most countries, these reforms did not sufficiently address root causes and their results were often disappointing. With only partial reforms, countries still experienced limited private sector development; poor delivery of and limited investments in energy, transportation, finance, and other key areas; adverse budgetary impacts; and heightened vulnerability to economic shocks.

After 2000, a growing number of countries focused reforms on how the state carried out its ownership functions. The exercise of these functions was often centralized, sometimes under the ministry of finance or industry, but increasingly in specialized holding companies or equivalent entities. In many instances, these reforms led to greater market contestability as barriers to entry were reduced and competition led to the dismantling or significant downsizing of SOEs, particularly in manufacturing and services. More broadly, these reforms increased commercial orientation, expected returns on capital and investment, transparency, and improved high-level decision-making, board appointment, and other aspects of corporate governance. Countries often pursued these reforms in conjunction with wider reforms to SOE performance management, sector governance, subsidies, public service obligations, and public financial management. Efforts to ensure a level playing field with the private sector often become more effective, as did ongoing corporatization, restructuring, and privatization.

Some economies in Asia and the Pacific led these reforms, which have now spread to others. When SOE governance is more advanced, substantial scope typically remains for further improvement to help access capital markets, increase infrastructure finance and service delivery, and improve reporting on and increased consideration of wider environmental, social, and governance issues.

Service delivery by SOEs strengthened (ADB Strategy 2030)

Improvement of SOE governance and oversight in selected DMCs supported

SOE diagnostics prepared

SOE knowledge and tools developed

Capacity development for SOE oversight and reform supported