State-Owned Enterprises and Economic Development in Asia
(Source : Report published by ADB July 2020 , downloaded www.adb.org)
State-owned enterprises (SOEs) make up a significant part of the commercial and policy landscapes of developing economies in Asia. Despite the trend toward privatization and deregulation across the globe over the last 2 decades, SOEs have retained a strong presence in the global economy and play an important role in implementing public policy in many advanced and developing economies. By and large, these institutions have played a typically much larger role in the economic development of developing countries than developed countries.
In many countries, SOEs continue to provide vital infrastructure and public services, such as energy, transportation, water management, and exploration of natural resources. Governments also use them to pursue various economic, social, and political objectives particularly in regions where development has lagged; deliver services to the general population including the urban or rural poor; and address issues of national priority or heightened security.
Although SOEs remain active, the overall trend of state ownership is spiraling downward. State capitalism[i] has pretty much varied in degree and intensity across countries. On average, SOEs account for a higher share of gross domestic product (GDP) in developing countries than in developed countries. For example, in Central Asian countries, SOEs’ share of GDP ranges from 10% to 40% compared with 5% in Organisation for Economic Co-operation and Development (OECD) economies (World Bank Group 2014). In Asia, SOEs account for about 30% of GDP in the People’s Republic of China (PRC), 38% in Viet Nam, and 25% in Thailand. Globally, SOEs account for about 20% of investment and 5% of employment (Kim and Ali 2017).
However, the prevalence of state ownership has also raised concerns about the performance of these enterprises which in certain circumstances may impede competitiveness and growth. For example, SOEs often have access to government support and enjoy soft budget constraint which, when combined with lack of competition and multiple competing objectives, result in low productivity and efficiency compared with private enterprises.
The impact of how well or how poorly these companies perform will inevitably have spillover effects on macroeconomic stability and economy-wide productivity. In many countries, underperforming SOEs have become a fiscal burden and a source of fiscal risk. Loss-making and ineffective SOEs weaken the financial system; and continued lending to unprofitable companies can create contingent liabilities and potentially destabilize the macro economy.
Many countries have taken significant steps to address corporate governance challenges and therefore improve SOE operations. Evidence across countries has shown that better governance and more efficient management lead to lower costs of capital and higher valuation, thus making investments more attractive. Consequently, the efficiency of SOEs and the economy as a whole improves, transactions become more competitive and transparent, and resources are allocated efficiently when the fiscal burden on SOEs is reduced and fiscal risk is managed.
Understanding governance challenges and addressing them is essential in boosting economy-wide productivity and growth. An SOE performs better if it is able to communicate its purpose and objectives and build its capacity to steer and manage resources efficiently. To enhance the delivery of public services and allocation of resources, the government must professionally manage SOEs on commercial terms and steer them away from markets where the private sector is better able to provide services more effectively.
This study explores the abovementioned issues in detail and addresses the policy questions on SOE reforms. It highlights the corporate governance framework of SOEs in selected countries, assesses SOE performance, and examines the implications for each country’s productivity and growth over the long term. The study posits that SOEs will continue to make a significant contribution to economic development in developing countries. But their performance is crucial to economy-wide productivity and innovation driven growth especially as Asia transitions from middle-income to high-income status.
1.2 Definition and Origin of SOEs
There is no universally agreed definition of an SOE.[ii] However, a working definition is that an SOE is any commercial entity in which the government has significant control through direct and indirect ownership. An enterprise that is 100% government-owned is obviously categorized as an SOE. But other enterprises may also qualify as SOEs, such as (1) those in which the government has a majority equity stake; and (2) those in which the government owns a minority stake, but the government retains a controlling vote in major financial and management decisions—as is commonly the case. A variety of other organization models within the SOE sector also includes corporate and noncorporate structures.
SOEs have a diverse and expansive origin. Initially, SOEs were established to address market failure and capital shortfalls, promote economic development, provide public services, and/or ensure government control over the overall direction of the economy by infusing capital and technology into strategic areas or in areas lacking private sector capacity or interest (Chang 2007).
It is important to stress that SOEs basically reflect, and are deeply enmeshed in, the institutions, political history and ideology, commercial landscape, and technological trajectory of a country. These parameters dictate the political economy of SOE reforms. For example, in the centrally planned economy, the state owns not only the dominant or leading enterprises but also those in other sectors, including agriculture. In transition economies where the government plays a relatively dominant role, such as in the PRC, the SOE sector’s symbiotic relationship with the government explains why the sector has remained unusually large. In addition, the perceived failure of privatization has caused many Asian economies to retain large state-owned sectors.
In countries where state-owned banks dominate the formal finance sector, as they typically do in many transition economies, the state directs much of private sector investment, and thus has a considerably wider reach than official statistics suggest. In many countries, subnational governments also own SOEs, which may be only partially recorded in national statistics.
Outside the transition economies, many countries have also favored a large SOE sector at the onset of their independence, for various reasons: (i) distrust of markets and capitalism (in India, for example); (ii) nationalization of assets owned by companies under the former colonial power (in Indonesia); or (iii) concerns that indigenous capitalists are unable to undertake large scale investments (in Singapore). In some cases, regional (subnational) development objectives also provided the impetus for SOE projects (in the PRC and Indonesia). In others, state ownership is the result of the historical processes and inherited institutional conditions of a country. For example, it has been argued that poorly developed financial markets severely constrain investment. Often governments establish SOEs to build basic physical infrastructure; provide essential services such as finance, water, and electricity; generate revenue; control natural resources; address market failures; and curtail oligopolistic behavior. Public enterprises also purposefully promote social objectives— generating employment, enhancing regional development, and benefiting economically and socially disadvantaged groups of society.
1.3 Evolving Role of SOEs
The prevailing policy orthodoxies reinforced the important role of SOEs in at least two respects. First, many advanced economies had already very large SOE sectors, especially in continental Europe, where the state generally owned not only the major utilities (power, telecommunication, transport, and so on), but also banks, airlines, and industrial conglomerates. This model bolstered the ideological predisposition of newly independent countries in Asia and the Pacific. Second, this prevailing policy also embraced import substitution—as theorized by the so-called “Prebisch doctrine”[iii] and the related “Prebisch Singer declining terms of trade” hypothesis.
According to this view, an activist industrial policy is required to guide economic actors toward the desired direction. This model employed tariffs and subsidies among others, as well as direct state ownership, especially in cases where the anticipated investments were not forthcoming, even after generous tariff support. In certain circumstances especially in developing countries, state ownership can be the vehicle through which the state plays an active role in economic development. In several emerging markets for instance, governments have helped build much-needed physical infrastructure and bring about stability in times of crisis and across supply chains, thereby promoting social welfare. Development banks, sovereign wealth funds (SWFs), public holding companies, and many other vehicles of government capital have helped achieve developmental objectives. And when confronted with insufficient private capital base, governments have also used SOEs to promote economic development as well as industrial policy.
In addition to the declining trend in state ownership and presence in many emerging economies, there is also a tendency for governments to partially divest. Although this reduces government holdings to the degree that these companies no longer fall under the strict definition of SOEs, it does not necessarily imply a corresponding decrease in the ability of such governments to exert influence over these companies.
Moreover, episodes of financial crises have also led some governments to further expand the role of SOEs. For example, the governments of Iceland, the Netherlands, the United Kingdom, and the United States bailed out financial institutions through capital injections and partial or full nationalization to mitigate the adverse impacts of a crisis. It is, however, important to note that these interventions were mostly temporary in nature rather than permanent takeovers (World Bank Group 2014). Nevertheless, the ensuing episodes of financial crises underscored the importance of effectively managing these institutions and maintaining macroeconomic stability.
Following the global financial crisis, state development banks and development finance institutions in several countries also played a countercyclical role, providing credit to private firms that were unable to access funding through private banks and the capital markets. Such was the case in Malawi, Mozambique, and Serbia, wherein new development banks were established.
Some governments are explicitly pursuing policies to promote SOE internationalization. For example, the PRC’s “Made in China 2025” strategy is designed to help improve the export capability of SOEs and make them more competitive globally. The PRC government has introduced measures such as easing red tape, introducing market practices, and consolidating selected SOEs to create larger and more efficient national champions. These companies are also empowered to make major decisions such as on cross border mergers and overseas acquisitions (PwC 2015).
In 2019, 11 SOEs made it to the top 50 of the Fortune Global 500; of these 11 companies, 8 are from the PRC.[iv] Meanwhile, SOEs have also been listed among the world’s biggest capital markets. To raise capital, impose capital market discipline on these enterprises, and dilute state ownership, some governments have listed large and important financial and nonfinancial SOEs in their respective stock exchanges. As a consequence, the initial public offering of these SOEs increased their contribution to capital market development—in 2014, for example, SOEs accounted for 20% of total market capitalization in India, about 30% in Malaysia and Indonesia; and 45% in the Middle East and North Africa (World Bank Group 2014).
In some resource-rich countries, SWFs rose to prominence during the financial crisis. For example, in the face of highly volatile commodity prices and growing current account imbalances in Azerbaijan and Kazakhstan, these funds have proved useful for maintaining macroeconomic stability. Thus, SWFs could also be viewed as a special group of SOEs. As major holders of government debt, these state-owned investment funds are used to mitigate external shocks, implying that SOEs, including SWFs, have also become active in global markets. Clearly, state ownership occurs in various forms: the state could be a majority shareholder, or it could be a minority shareholder and still influence the governance of SOEs (Musacchio and Lazzarini 2012).
These examples show the increasing role of the state in economic affairs and the importance of managing SOEs more effectively without compromising macroeconomic stability.
1.4 Stylized Facts and Data Set
This section presents the stylized facts of SOEs in six Asian countries: Indonesia, Kazakhstan, the PRC, the Republic of Korea, Sri Lanka, and Vietnam, all of which have been selected largely for their diverse experience in SOE management. The Republic of Korea, representing an advanced economy, serves as a benchmark for how the role of SOEs can change effectively through the various stages of development.
Data are extracted from the Orbis database, which defines an SOE as a company in which the government shares 51% of total assets.[v] The data set covers the period 2010–2018, while the number of SOEs varies across countries. For purposes of analysis, however, we have confined our study to SOEs with available financial data.[vi] It is, therefore, important to note that despite the database’s extensive coverage, the data set is by no means fully exhaustive. Hence, the statistics reflecting various aspects of SOE activities should be considered indicative and for illustrative purposes only.
The analysis shows that the prevalence of SOEs across sectors in the sample countries varies considerably. The largest concentration of SOEs is found in the services sector, including public utilities, financial and insurance activities, and in the trade and transport sectors. The significant presence of SOEs in manufacturing is due mainly to the large number of SOEs operating in the manufacturing sector of the PRC (Figure 1.1)
Next, we evaluate the contribution of SOEs by examining their equity. Total equity is the difference between a corporation’s assets and its tenabilities.[vii] Figure 1.2 breaks down by sector the total equity value of the countries in 2010–2018. Distribution of equity depicts a dominance of SOEs in the primary sectors (agriculture and mining); manufacturing; and electricity, gas, and water supply. Collectively, these three sectors comprised about 70% of the SOEs’ total equity value. In other sectors during 2010–2018, construction, trade and transport, information and communication, and financial and insurance activities contribute 10.3%, 6.4%, 4.6%, and 4.7% of total equity value, respectively.
Next, we measure sectoral distribution of output through gross value added. Figure 1.3 shows that during 2010–2018, the primary sector alone accounts for 45.7% of total output. Similarly, the manufacturing; construction; electricity, gas, and water; and information and communication sectors’ contribution to total output during 2010–2018 is estimated to be 12.7%, 13.2%, 7.5%, and 10.3%, respectively. Overall, the contribution of the services sector to SOE output remained around 21%.
In most of the selected developing member countries (DMCs) in our study, SOEs also provide employment opportunities to the labor force. The sectoral distribution of SOE employment shows that the manufacturing sector absorbs 30% of the labor force, followed by primary sectors which employ about 25% of workers. The construction, information and communication, trade and transport, and energy and water sectors also contribute a significant share in employment (Figure 1.4).
1.5 SOEs’ Financial Performance and Objectives
In analyzing the various measures of efficiency and profitability of public enterprises, it is important to interpret SOE financial performance data with great caution. SOEs typically have public service obligations imposed on them, such as price suppression, servicing uneconomic markets, and various employment-related restrictions. They may not have full commercial freedom in their managerial appointments, capital acquisitions, and product mixes. More broadly, the government may regard them as “agents of development,” which entails additional noncommercial obligations.
Viewed in this context, most public enterprises are not expected to be financially profitable since they provide crucial public goods and are engaged in promoting regional development. For example, the provision of public services in remote areas might not be as financially profitable as in urban areas; nevertheless, such services are equally important for inclusive and sustained development.
In many cases the financial analysis of SOEs is practically meaningless, because of the plethora of explicit and implicit subsidies and obligations affecting their operations (Box 1.1). Unlike private enterprises, the government provides various types of subsidy and capital injections to SOEs when their sources of revenue fall short of covering costs or when they are avoiding default. The subsidies may include privileged market power (i.e., restrictions on barriers to entry and other anticompetitive provisions), state-supported or guaranteed access to preferential finance, and sales/contract guarantees. These subsidies may be so large as to crowd out productive private sector investment, as appears to be the case in Viet Nam. Given these various considerations, on net, the profitability and efficiency of SOEs tend to be generally lower than their private counterparts.
Box 1.1: Soft-Budget Constraint and Implicit Subsidies
State-owned enterprises (SOEs) often enjoy implicit and explicit government guarantees for borrowing and preferential treatment to sustain their operations. Generally, these companies tend to have easy access to credit and capital injections, as well as various types of subsidies, which puts them at a clear advantage over private sector firms which generally do not have such privileges.
To perform a quantitative assessment of these preferential treatments, we compare SOEs’ actual profits vis-à-vis their “potential profits,” which is defined as the level of profits had these companies attained an “efficient” ROE*, i.e., the efficient risk-weighted cost of equity and basically the long-term average return on equity (ROE) for United States (US) and emerging market economies (PROSPERA unpublished). Typically ROE* turns out to be around 12%.
A finding that SOEs’ actual profits are higher than potential profits suggests that public enterprises are getting an undue advantage from the government, which would explain their higher profits relative to their private counterparts—this can be treated as an implicit surplus. On the other hand, lower actual profits relative to potential profits would suggest forgone profits or the existence of an implicit subsidy. Accordingly, the implicit subsidy/surplus can be calculated using the following equation:
Implicit Subsidy/Surplus = Profit – [Equity x ROE*]
The estimated implicit subsidy (if negative) or surplus (if positive) is based on an assumed ROE* of 12%—which is the 10-year average of ROE on the US stock market (through 2018) and approximately the long-term average ROE for overall emerging markets.a A persistently large and positive (surplus) would suggest that the advantages enjoyed by SOEs (such as state monopoly or cheap financing) outweigh the drags on performance (such as unremunerated public service obligations and governance issues). On the other hand, a largely negative subsidy reflects the amount of “forgone profits” and implies that SOEs are, on net, underperforming. The forgone profits could be considered implicit subsidies.
The following graph provides a comparison of implicit subsidy/surplus for different countries covering the period 2010–2018 (Figure B1.1.1).
In Figure B1.1.1, the horizontal line signifies that actual profits of SOEs are equal to potential profits. Positive deviations from the horizontal line imply an implicit surplus while negative deviations suggest an implicit subsidy. Although SOEs’ actual profits are cyclical in nature, for the purpose of analysis we are focusing on average implicit subsidy or surplus during 2010–2018.
The analysis suggests that in the People’s Republic of China the total amount of implicit subsidies during 2010–2018 was 2.5% of gross domestic product (GDP). Kazakhstan follows at 2.4% of GDP, and Indonesia at 0.6% of GDP. On the other hand, SOEs in Viet Nam during the same period had implicit surplus (1.0% of GDP), indicating state monopoly or cheap financing was made available to these companies.
a The US and emerging market ROEs are from the Damodaran NYU Stern database. http://pages.stern. nyu.edu/~adamodar/ (accessed 8 January 2018). Source: Authors.
1.6 Productivity and Efficiency Analysis
Improved productivity in providing goods and efficiency in delivering services remain the core issues of policy making in both developed and developing countries. Governments worldwide are increasingly under great pressure to upgrade the performance of the public sector and to identify best practices in delivering cost-effective public services.
Given the large presence of SOEs in some developing countries, there is considerable scope for these institutions to contribute to growth and efficiency. Since the public sector output makes up a substantial share of GDP in these countries, any effort to boost economy-wide productivity must also include measures to enhance the productivity and efficiency of these enterprises.
However, improving efficiency does not only mean reducing spending; it also encompasses the entire process of delivering public services in a more cost effective, efficient, and timely manner. Governments will need to rely on several factors—there is no single key driver— to increase the efficiency of the public sector and SOEs. The efficiency with which an enterprise utilizes its resources is affected by market and incentive structure (Jakob 2017). For example, there is ample room for enhancing the efficiency and quality of public service delivery by improving service design and by using markets and competition and new technology.
Since there is no one-size-fits-all formula to achieve efficiency, we draw valuable insights from the diverse approaches adopted by OECD economies since the early 1990s to introduce institutional reforms to the public sector. The main findings of the literature regarding public sector efficiency suggest that measures such as strengthening competitive pressures, transforming workforce structure, improving the size and skills of the workforce, and introducing results-oriented approaches to budgeting and management can be instrumental in enhancing SOE efficiency (Curristine, Lonti, and Joumard 2007).
In the subsequent section, we examine SOE productivity and efficiency by analyzing various measures, which provide valuable insights in understanding SOE underperformance and highlight the areas with significant scope for further improvement.
Productivity Analysis: First, we look at the results of sales per worker across countries. In this context, nominal sales of SOEs in each country are deflated by the respective index of GDP deflators (2010=100), giving us the series of real sales. In the second step, labor productivity is captured through the ratio of real sales to employment in different countries during 2010–2018 (Figure 1.5).
The analysis shows that productivity growth was highest in the Republic of Korea (13.3%) followed by the PRC (10.2%). In all other countries, labor productivity declined between 2010 and 2018. Changes in labor productivity can be attributed to either changes in labor productivity of the individual sectors or the structural shift in resources between contracting and expanding sectors. The results reveal that the growth in labor productivity mainly originated from productivity increases in individual sectors. On the other hand, the contribution of structural change, i.e., the movement of labor from low to high productivity sectors has remained limited (Table 1.1).
Efficiency Analysis: Governments across the world operate in an increasingly complex and unpredictable environment and are striving to improve access to and quality of public services while also ensuring value for money. Since SOEs are increasingly important actors in developing countries, more and more attention has been focused on the issue of SOEs performing efficiently. In the following section, we analyze various aspects of SOE efficiency.
Asset Turnover Ratio: To measure the efficiency with which SOEs in different sectors utilize their assets productively, we use the asset turnover ratio for the period 2010–2018. The asset turnover ratio measures the efficiency of a company’s assets to generate revenue or sales. It is equal to net sales divided by total or average assets of a company. Table 1.2 presents the average assets turnover ratio during 2010–2018 for different sectors. A company with high asset turnover ratio operates more efficiently compared with other firms in the same industry. Hence, a higher ratio indicates a more efficient use of assets, while a lower ratio indicates that the firm in that industry is not utilizing its assets efficiently. Industries with low profit margins tend to generate a higher ratio, and capital-intensive industries tend to report a lower ratio.
In the manufacturing sector, SOEs in the Republic of Korea have a higher assets turnover ratio (1.3) compared with similar firms in other countries. Companies engaged in providing construction, information and communication, public administration, and education services in the Republic of Korea also performed better during 2010–2018 compared with similar companies in other countries.
On the other hand, SOEs in wholesale and trade performed well in the PRC and Viet Nam and have higher asset turnover ratios. Likewise, SOEs in sectors such as mining and quarrying, electricity and gas, transportation and storage, and accommodation and food services performed better in Viet Nam. As discussed earlier, a lower ratio of companies in the same industry indicates poor efficiency, which may be due to poorly utilized fixed assets or relatively poor inventory management.
Allocative Efficiency of Capital: To analyze the allocative efficiency of the capital employed by SOEs, we use return on capital employed (ROCE), a ratio that captures the profitability and efficiency with which SOEs use their capital. ROCE is the operating profit or loss before tax as a share of capital employed. Hence, this measure basically captures the efficiency by which the sum of shareholders’ equity and debt are deployed to generate profits.
The analysis suggests wide disparity in the use of capital employed by SOEs in different sectors. For example, average ROCE during 2010–2018 ranges from 0.8% in financial and insurance activities to 11.8% in mining and quarrying sector. Prominent sectors with relatively higher ROCE are manufacturing (9.5%), electricity and gas (9.2%), construction (8.9%), information and communication (9.9%), and professional and administrative services (7.1%). On the other hand, SOEs operating in water supply and sewerage, accommodation and food services, and financial and insurance services have lower ROCE, implying less efficient use of capital (Figure 1.6)
Allocative Efficiency of Labor: Next, we analyze the allocative efficiency of labor employed by SOEs in different countries and compare it with private firms. Allocative efficiency of labor captures how efficiently SOEs and private firms allocate labor for different activities. We basically compare the average cost of labor per capita in SOEs vis-à-vis private enterprises. The average cost of labor includes basic salary, taxes, benefits, allowances, contributions, and other perks and bonuses of all employees including top management. The analysis reveals that in general allocative efficiency of labor for SOEs across our sample countries is lower than their private counterparts. On average, cost of labor per capita in SOEs has remained higher than in the private firms (Figure 1.7).
While SOEs incur larger labor costs than private firms in all countries, the difference is more pronounced in the PRC, Indonesia, and Sri Lanka where average cost of labor per capita is significantly higher than in private firms. On the other hand, in the case of Viet Nam, cost of labor is marginally higher than their private counterparts.
1.7 Return on Equity and Profitability
In this section, we examine the return on equity (ROE) and profitability of SOEs. A comparison of ROEs indicates that on average SOEs lag behind private firms in profitability, which implies that SOEs have not succeeded in generating profits from the money shareholders invested. The analysis shows that generally the rate of return for private firms is higher than public companies (Figure 1.8).
In the Republic of Korea, the ROE of private firms is substantially higher than that of SOEs. The average ROE during 2010–2018 for private firms was 8.6% compared with 3.5% for SOEs. A similar trend is observed in other Asian countries except for Viet Nam and Indonesia where the ROE of SOEs is higher than that of private firms. It is important to note that in most countries, SOEs are often privileged to have access to credit and receive various types of government subsidies, which precludes a level playing field for private firms.
Hence, the higher ROEs of SOEs do not necessarily reflect good performance but may be a result of the advantages given to them by the government. Next, we compare the ROE for SOEs and private listed companies across different sectors and countries. For this purpose, we compute the percentage point differences between the ROEs of SOEs and private companies (Table 1.3).
Generally, the analysis shows that SOE profitability is significantly lower than privately owned firms in similar sectors. For example, the ROE of SOEs in the agriculture sector is about 17.1 percentage points lower than privately owned firms in Viet Nam. Similarly, SOEs in other countries have shown varying degrees of underperformance. SOE underperformance is more pronounced in Kazakhstan where the industry sector ROE is about 33.7 percentage points and the services sector is 25.8 percentage points lower than private companies. However, services sector firms in the PRC have smaller differences in their ROEs relative to private enterprises. The analysis corroborates the viewpoint that generally SOE performance and efficiency lag behind their private counterparts. As discussed, SOE underperformance can be partly attributed to the government’s provision of soft budget constraint and various types of subsidies which do not incentivize SOE management to work in a competitive environment. On the contrary, private enterprises often operate in a competitive market which helps improve their efficiency.
Next, we analyze the earnings before interest and taxes (EBIT) margin of SOEs. EBIT is operating earnings over operating sales, which enables entrepreneurs to understand the true costs of running their company. Lower EBIT margins indicate lower profitability, which could either be an outcome of the competitive landscape in which case all firms in an industry have lower profits or the result of lower sales and higher costs. Since taxes vary by location and are not part of day-to-day core operations, using EBIT allows the comparison of companies on a level playing field.
Table 1.4 provides sector-wise EBIT margins for different countries. For example, in the Republic of Korea, the EBIT margin is higher in construction, business services, and public utilities. Comparison across countries reveals that in financial services, real estate, public administration, and other services, EBIT is much higher in the PRC than in other countries.
1.8 Quality of Output
This section evaluates the quality of output and public service delivery of SOEs across countries. In the absence of detailed data on SOEs’ quality of output, we use infrastructure data. Additionally, since most SOEs are engaged in providing various infrastructure-related services, a comparison of infrastructure ranking across countries could provide some insight into the quality of the SOEs’ output (Figure 1.9).
Figure 1.9 shows that in all aspects of infrastructure development, the Republic of Korea outperformed other countries. The higher quality of infrastructure could also indicate good performance of the public enterprises providing these services, which may partly explain the Republic of Korea’s higher economywide productivity compared with other countries. One way to enhance output quality is to galvanize SOEs by promoting competition among public and private companies.
The evidence corroborates the view that competition is more important than ownership—in the 1980s for example, the Republic of Korea succeeded in improving quality of services by increasing competition among companies. In this context, the government set up a new state-owned telecommunication company which competed with existing SOEs in providing international call services, thus enhancing the quality of services. Competition could also be increased by liberalizing a sector dominated by private enterprises and letting it compete with SOEs that are supplying a partial substitute.
For example, in the United Kingdom, following the liberalization of bus services in the 1980s, the government allowed bus services to compete with the state owned rail company thereby enhancing the quality of public services. Another way to promote competition is to push SOEs to export and compete internationally and domestically, like the Republic of Korea did with the Pohang Iron and Steel Company (POSCO) in the 1970s. The company started production in 1973 and by the mid-1980s, it was considered one of the most cost-efficient producers of low-grade steel in the world (Chang 2013).
1.9 Public Asset Management and Macroeconomic Risks
In many developing countries, large deficits and contingent liabilities of SOEs are major reasons for high and rising government deficits. The global financial crisis was a painful reminder to governments to not only improve the effectiveness of SOEs but also to maintain ample fiscal space for applying an effective fiscal stimulus. As SOEs contribute significantly to economic development in emerging markets, their poor performance especially as they incur heavy losses, poses substantial macroeconomic risks to fiscal policy and financial stability. In some countries, SOEs have accumulated large amounts of debt particularly in the energy and transport sectors. Large debt and rising contingent liability along with a poorly regulated banking sector can potentially destabilize the finance sector, with negative spillovers likely affecting overall economic performance.
The quality of public asset management is one of the crucial building blocks that divide well-run countries from poorly governed countries. Better management is not just about financial returns, but other important social gains as well. It is worth emphasizing that a systematic assessment of the public sector’s assets across countries can increase transparency and accountability and provide valuable insights into their evolution over time (Detter and Folster 2015).
Introducing international best practices, such as transparency, proper accounting, and realistic balance sheets,[viii] can be particularly helpful in improving the quality and worth of public assets. Recent research by the International Monetary Fund (IMF) (2018) comprising 31 countries and covering 61% of the global economy suggests that with proper management, even a higher return of only 1% on public wealth worldwide can add about $750 billion annually to public revenues. Similarly, professional management of public assets such as SOEs among central governments can raise returns by as much as 3.5% and generate an extra $2.7 trillion worldwide. These are substantial gains and are more than the total current global spending on national infrastructure for transport, power, water, and communications combined (Detter and Folster 2015).
Recent episodes of financial crises have exposed many countries to external demand shocks and reemphasized the importance of effective management of public assets and SOEs. The huge size of public wealth across countries and the scars from the global crisis underline the necessity to effectively manage public assets. Further, it is also essential for governments to rebuild their balance sheets by reducing debt and investing in high-quality assets (Detter and Folster 2015). For example, once governments understand the size and nature of public assets and start managing them efficiently, the potential gains could be as high as 3% of GDP a year. These are quite substantial gains and roughly equal to annual corporate tax collections across advanced economies (IMF 2018).
It is, however, important to note that the long-term objective of governments is not merely to maximize the net worth of public assets, but to provide quality goods and services as well. Nevertheless, effective asset management allows governments to raise expenditures during times of crisis and help maintain macroeconomic stability. Viewed in this context, governments that believe their net worth is too low to ensure these objectives may choose to improve the net worth of public assets as one of their operational goals. Empirical evidence corroborates the fact that financial markets consider governments’ asset positions in addition to debt levels when determining borrowing costs.
One way to gain insight on the health of the government’s public finance is to examine its public sector balance sheet. As empirical evidence shows (Figure 1.10) countries that have a strong balance sheet and professional management of public assets have had a quick economic recovery (IMF 2018).
Figure 1.10 shows that economies entering a slump with a strong balance sheet and with ample fiscal space are better able to mitigate the impact of the recession and are quick to recover. Economic recovery in these economies started approximately after the second year from the start of the recession. On the contrary, those with a weak balance sheet suffered the adverse impact of the recession on a relatively longer scale and started to recover only four years after the recession began.
This discussion shows that a systematic analysis of the public sector’s balance sheet and that of its assets provides a broader fiscal picture beyond debt and fiscal deficits. As a result, governments and policy makers are in a better position to allocate resources optimally. Effective asset management enables governments to identify risks and take remedial measures in due time rather than deal with the consequences after problems occur. Hence, efficient management of public assets and SOEs not only help improve fiscal position but also quality of public service delivery.
1.10 Reforming and Restructuring SOEs
Early SOE Reforms and Privatization: Evidence from the 1970s and 1980s suggest that, on average, SOEs in many countries have performed poorly compared with private firms, partly because of the difficulty reconciling multiple policy goals. The ensuing heavy financial loss becomes an unsustainable burden on the public budget and banking system. Consequently, various governments since the 1980s have introduced reforms such as exposing SOEs to competition, imposing hard budget constraint, and introducing institutional and managerial changes. As a result, many SOEs were commercialized and eventually corporatized into separate legal entities, and governments developed performance contracts with SOEs to monitor performance and hold managers accountable for results (World Bank Group 2014).
Many developing countries have drafted laws to regulate SOE operations in an effort to improve SOE performance. But without meaningful corporate planning and independent management, many laws and regulations virtually proved to be a pro forma exercise not much relevant to enhancing the performance of public enterprises. In several countries, frequent transfers of managers, directors, and supervisors also diminished the commitment to meet the long-term needs of these enterprises. Even so, SOE managers generally had to face a number of disincentives to adapt to new challenges—especially as many of these companies were insulated from market signals, with their prices controlled, their market protected, and for whom government loans were readily available.
The early reforms introduced by governments across the globe produced some improvements but fell short in implementation. Generally, autonomy in commercial decision-making remained limited, and more importantly, employing financial discipline during a period of hard budget constraint proved difficult without the corresponding restrictions on SOE borrowing from the banking system and from state-owned banks in particular. Implementing performance contracts with SOE management also proved problematic and produced mixed results.
The modest outcome of reforms led many countries to privatize SOEs. During the 1990s and in the early 2000s, financial and nonfinancial SOEs were privatized through various means such as auctions, strategic sales, vouchers, public stock offerings, and management and employee buyouts. The privatization of SOEs was perceived to be a means to eliminate SOE deficits from the national budget, attract private investors with capital and managerial know-how, and achieve efficiency gains through SOE reforms. As a result, the number of SOEs globally declined.
However, privatization was often handled poorly, creating wealth for a few and sometimes leading to high prices for essential goods and services. In developing countries, privatization of SOEs raised concerns and roused sensitivities about foreign ownership of strategic enterprises, and generally proved to be unpopular with the public because of higher infrastructure tariffs and employment losses. As a consequence, widespread privatization stopped around 2000 (World Bank Group 2014).
In the aftermath of the 2007–2008 global financial crisis with capital markets in turmoil, investors’ interests waned and SOE privatization slackened. Governments bailed out failed banks and public enterprises in emerging markets including the PRC, contributing to a dramatic increase in government purchases of corporate equity which had already started in 2008 (Reverditto 2014). Ironically, the crisis itself triggered a new debate on the effective role of government in economic affairs from which emerged a growing interest in public enterprises (World Bank Group 2014).
Modern SOE Reforms: Worth noting also from the viewpoint of improving the performance of public enterprises is that privatization is not the only option. Other intermediate solutions are available as well, such as for example: (i) the government can sell some shares of an SOE and still retain majority control; (ii) the government can retain its whole or majority ownership and contract out management only in certain sectors; or (iii) the government can restructure SOEs and make them more efficient drivers of growth. Indeed, evidence indicates that restructuring is often more important than privatization (Chang 2013). The Philippines’ case study provides invaluable insights about the importance of private sector participation and reforms, which helped transform a loss-making public company into a commercially viable entity (Box 1.2).[ix]
Box 1.2: SOE Reforms – Manila Water
The Metropolitan Waterworks and Sewerage System (MWSS), a state-owned enterprise (SOE) in the Philippines, tells the story of how improving governance and fostering competition have enhanced public service delivery. The MWSS is an interesting example of how the public–private partnership concept can be used to transform a once ailing public company into a commercially viable one.
Before the 1997 reforms, the underperforming MWSS was burdened by large debts. Unable to invest in much-needed water system improvements, it provided poor water quality and intermittent supply. System losses due to poor service and leaks in 1997 amounted to almost 60%, while water coverage was a mere 67%, of which only 26% had 24/7 water supply. In addition, non-revenue water hit almost 60%. The government was unable to increase water tariffs because customers were unwilling to pay for poor service. Furthermore, the MWSS suffered from poor financial performance. Eventually, the Philippines faced a severe water crisis triggered in part by the events that followed El Niño during the 1990s.
Prompted to resolve the crisis, the government selected the concession model to introduce reforms. This led to two separate concession agreements with Maynilad and Manila Water for waterworks rehabilitation, both spanning 25 years. It divided Metro Manila into two areas—east and west. The government assigned Manila Water to be responsible for the east zone and put Maynilad in charge of the west. It introduced reforms and brought in investments in both hard and soft infrastructure and adopted a corporate-style governance, aiming specifically to improve water delivery and wastewater services to existing customers, enhance operating efficiency, and expand service coverage.
As a result of the reforms, water coverage in 2002 increased to 82% for Manila Water and 78% for Maynilad from only 67% before the privatizations. Water availability rose to 21 hours from under 17 hours, and the quality of water improved significantly. The reforms also succeeded in bringing in efficiency gains while reducing operational costs. Likewise, the ratio of staff to 1,000 connections fell from 9.8 to 4.1.
Source: Authors, based on Chia et al. (2007)
In many developing countries, SOEs are generally attached to a sector ministry, with the Ministry of Finance often playing the key role. However, the oversight of sector ministries often appears to be questionable, and combined with rampant interventions, undermines the performance of public companies.
These ministries are responsible for making decisions pertaining to SOE investments and expansion, which directly influence the quality of public service delivery. But, improving the oversight and the caliber of these ministries is a difficult and challenging task. Malaysia is an example of successful SOE restructuring where state investment funds oversee SOEs or governmentlinked companies (GLCs) (Box 1.3).
Box 1.3: SOE Restructuring – A Case Study of Malaysia
Malaysia’s experience in restructuring and managing SOEs, or government-linked companies (GLCs) in Malaysian nomenclature, provides interesting insights inthe use of key performance indicators (KPIs), linking the performance of SOEs to remuneration of management.
In 2004, the Government of Malaysia embarked on the Transformation Program, a comprehensive reform program of GLCs. The government aimed to improve the performance of GLCs and convert them into profitable, financially self-sufficient enterprises. The program adopted realistic objectives in line with international best practice.
Overall, five key factors contributed to the success of GLC transformation:
- the establishment of a government body with a clear mandate and objectives in relation to enhancing the performance of GLCs;
- development and monitoring of KPIs;
- sound accountability framework for delivering results;
- strong focus on profitability; and
- appointment of qualified professionals.
A central body in the Transformation Program was the Putrajaya Committee on GLC High Performance chaired by the deputy finance minister and comprising representatives of all key SOE shareholders and experts. Shortly after its establishment in 2005, the committee produced in 2006 a guidebook, Blue Book: Guidelines on Announcement of Headlines KPIs and Economic Profit (OECD 2016). The book established KPIs to be reported by GLCs in a consistent manner, aligning expectations at all levels.
The book tasked every GLC to annually file KPIs concerning its financial, nonfinancial, organizational, and operational goals, which were audited and benchmarked with comparable international peers. Based on the audit, the committee analyzed causes of underperformance and was able to mitigate weaknesses in a timely and targeted manner.
In addition to KPIs, the committee introduced performance-based contracts and compensation schemes, along with a change in the composition of GLC board members and senior management. The Malaysian government upgraded the legal and operational framework of the GLCs to corporatize them and infused into GLCs newer management practices from the private and public sectors.
The new management received a clear mandate along with indicators to improve SOE performance. Performance-based contracts linked GLC performance to the remuneration of GLC management, which meant that management had similar incentives as those in the private sector.
These reforms helped instill a performance-based culture and improved GLC management, which subsequently translated into higher GLC profitability— between 2004 and 2014, 20 of Malaysia’s largest GLCs operating overseas tripled their market capitalization.
Source: Authors, based on OECD (2016)
One way to improve oversight is to introduce a central SOE organization, while reforms are introduced to sector ministries. To minimize the ad hoc ministerial interventions in SOE matters, some developing countries have introduced a central oversight or coordinating organization. This central body typically reports only to the President or Prime Minister, the cabinet, or a special interministerial group. By breaking the one-on-one relationship between the sector ministries and the managing director, the central coordinating organization introduces a check and balance against political intervention.
Despite rather mixed reviews of its track record, such an organization can be beneficial to improving the coordination between different stakeholders. Lessons from the experience of different countries suggest that the central oversight body would be more successful if it has a small and dedicated staff, the full support and backing of the competent authority, and a clear mandate to deal with relevant ministries.
To maintain a balance between autonomy and accountability, governments in some developing countries have established holding companies by creating conglomerates, thereby increasing the size and power of SOEs vis-à-vis ministries—this can work in favor of autonomy. However, there are certain pros and cons for such an arrangement. For example, by exploiting economies of scale, these holding companies can work more efficiently in the international capital and export markets than smaller companies. In such a setup, it is relatively easier to liquidate a nonviable subsidiary than a freestanding SOE; at the same time, these holdings also provide an effective buffer against political interference.
On the negative side, large holdings comprising mainly unrelated subsidiaries often tend to become very political and bureaucratic in nature. If there is still political interference, these huge conglomerates may promote monopolistic or oligopolistic behavior. Under such circumstances, instead of closing nonviable operations, these holdings may shift funds, inventories, and skilled staff from profitable units to nonperforming units, keeping alive nonviable firms and thus
dragging down the performance of the holdings (Shirley 1989).
1.11 Relevance of SOEs in Asia’s Next Transition
Developing Asia’s economy has grown robustly at 6.9% per annum during 1970–2019. A comparison of per capita incomes across the region suggests that in the early 1960s, a majority of the population was living in low-income economies; however, by 2018, most of them lived in middle-income countries.
This experience has motivated policy makers and governments to prepare for Asia’s transition to high-income status. Can Asia’s success guarantee a similar transition from middle income to high income and can the improved performance of SOEs facilitate the transition?
Experience across economies has revealed the structural difference of middle-income and low-income economies, and that graduation from middle income to high income can be quite challenging. An examination of the Asian economies that have transitioned successfully to high-income status suggests that improvement in productivity played an important role in their transition and in sustaining high growth over a longer period. For example, in Asia, Singapore; Hong Kong, China; the Republic of Korea; Taipei,China; and Malaysia are the only economies that have transitioned to high-income status (Figure 1.11).
Empirical evidence reveals that to meet the challenges of middle-income transition, countries need more cutting-edge technologies and frontier innovation to sustain knowledge diffusion as their income levels rise. This would require greater investments in human capital and research and development (R&D) thereby allowing countries to adopt globally existing technologies.
Another priority would be to ensure that the relatively more productive enterprises in an economy are able to engage in and reap the benefits of the latest innovations. In Figure 1.12, the comparison of per capita income and the innovation score reveals that economies already in advanced stages of development tend to score better on innovation. On the other hand, lower-income and middle income economies also score lower on innovation. This suggests that economies that have adopted policies promoting competition and a level playing field perform better in producing quality products.
The capability to innovate and to bring innovation successfully to the market is crucial in improving the global competitiveness of DMCs. However, it is equally possible for economic growth and other macro factors to affect innovation activities, implying that in practice both innovation activities and economic growth can bring about the other, and therefore there is a potential for feedback relationship between the two (Maradana et al. 2017).
To promote innovation-led growth, DMCs should ensure the growth of innovative enterprises to an efficient scale and also encourage the entry of new firms while discouraging the survival of less-productive entrepreneurs. The political economy and the quality of existing institutions will likewise play a more prominent role as a country approaches the technology frontier (Aghion and Bircan 2017).
The prevalence of SOEs and state ownership in developing countries suggests that governments should promote policies that create a level playing field and a sense of dynamism in public companies to foster innovation. This will require a balance between the SOEs’ objectives and the services that private entrepreneurs are better able to produce. The idea is that policy objectives and instruments should be tailored to a country’s level of development and the strengths and weaknesses of its innovation system. More importantly, governments need to increase R&D expenditure to promote a culture of innovation. DMCs can enhance such a transition through reforming SOEs and making them an efficient driver of growth.
An examination of economies that have transitioned successfully from lowincome to high-income status reveals that the role and nature of the public sector changes in parallel with the stages of development. For example, at early development stages when the private sector is not yet fully developed, the public sector can play a significant role in promoting economic development.
During this stage, governments often have relatively better human capital, and public policies and programs mainly focus on identifying key development bottlenecks and coordinating capacity-building efforts in infrastructure and human capital. With weak private financial institutions, it is also challenging to secure financing for large-scale projects, and private investors remain reluctant. In such cases, government financing and SOEs could take the lead in providing the necessary infrastructure for economic development. The Republic of Korea’s experience emphasizes the importance of the changing role of the public sector in different stages of development (Box 1.4).
Box 1.4: The Role of the Public Sector – A Case Study of the Republic of Korea
The Republic of Korea is a classic case demonstrating the usefulness and merits of government flexibility in adopting a different role at each phase of development. In the early stages of development, governments typically select the sectors to invest in. However, as economies develop and modes of production become more complex, the role of the private sector increases.
Economic development in the Republic of Korea can be divided into three distinct phases. During the first phase (1962–1979), the government played a major role in leading development and mobilizing resources to promote economic development. In the second phase (1980–1989), government control became indirect and implicit, rather than explicit. At the same time, the private sector rapidly grew, increasing its investments especially in the finance sector. In the third phase (1990 to present), the government became a facilitator while the private sector took the lead. After the Asian financial crisis in 1997, it became clear that government failure brought more danger than market failure, thereby diminishing the government’s role in the economy (Figure B1.4.1).
For example, in the early stages of development, the government was active in selecting sectors and supported economic growth mainly by increasing the inputs of labor and capital. Despite extensive state intervention in economic affairs, the government managed to contain corruption and rent-seeking. More importantly, as market capacity and the state and non-state actors changed, their respective roles began to shift as well. The 1997 economic crisis provided an opportunity to introduce market-based discipline, clean up massive nonperforming loans, improve corporate governance, promote competition, and strengthen the social safety net.
As the private sector grew stronger, the focus of government support shifted to “indicative” targeted industries, and assistance was confined to research and development efforts and to promote private sector development. Additionally, the government invested massively in information technology and infrastructure and succeeded in improving science and technology capacity and in facilitating productivity-led growth.
The Republic of Korea’s economy evolved throughout the development process— relying initially on factor-driven growth before transitioning to productivity led growth in which the private sector played a more dominant role. More significantly, government policies instilled a sense of competition and dynamism, enabling the public sector to compete and improve its delivery of public services. The government provided a level playing field to promote the private sector, addressed the problems of innovation and coordination externalities through public–private partnership, and helped promote productivity-led growth.
Source: Authors, based on Lim (2011) and IDB (2015).
Empirical analysis[x] based on the Orbis database for the selected countries in our study also corroborates the probability of significant gains when factors of production are allocated more appropriately. The results reveal that with improved corporate governance and efficient utilization of resources, SOEs’ output in Kazakhstan and Indonesia can be expanded by at least 17% and 32%, respectively. Similarly, in the PRC, at least 9% additional output can be produced with a similar level of input. On the other hand, both Sri Lanka and Viet Nam, which are far away from the efficient frontier, can substantially enhance SOEs’ output with proper allocation of resources (Figure 1.13).
The foregoing discussion suggests that with proper allocation of resources, the output of SOEs and public service delivery can be improved substantially in countries within the efficient frontier. DMC governments should make best use of available resources to improve SOE performance, thus helping enhance the quality of public services. Productivity-induced growth is not only important in coping with the challenges of middle-income countries, it is also crucial in bridging the gap between nations.
Governments will need to employ state-of-the-art technology and find ways to make enterprises more efficient and innovative. Furthermore, a level playing field and a competition-oriented environment will encourage private sector entrepreneurs and new firms to come forward and help achieve innovation led growth.
1.12 Pathways to SOE Reform
Countries have adopted different approaches to SOE reform, as dictated by political preferences, general economic conditions, institutional capacities, interactions with international development agencies, and several other factors. There is no “one-size-fits-all” approach to SOE reform. As noted, some countries have opted for a “big bang” approach to privatization during their transition from a planned to market-oriented economy. In other countries, external factors have been significant, such as the PRC’s reforms as a condition of World Trade Organization entry, and Indonesia’s reforms as part of its 1997– 1998 IMF crisis rescue package.
What follows here are illustrations of various options drawn from country experiences and organized around the general objective of improved enterprise efficiency, consistent with the national development objectives of inclusive and sustainable growth.
- Hard budget constraint. This option is an essential prerequisite for SOE reform—SOEs must manage their operations within defined financial parameters. Budget constraints impose a discipline on the management of SOEs. They also protect the country’s fiscal position. The absence of hard budget constraint was the single most important explanation for the occurrence of hyperinflation in transition economies (such as Viet Nam), when SOEs, and state-owned banks in particular, accumulated very large deficits which in turn central banks monetized. An explicit provision for contingent liabilities is also essential, within and beyond the SOE sector.
- Transparency. SOE operations are frequently not transparent. The direct subsidies they receive are often not reported in the government’s budget, and the indirect subsidies are not costed. Politically, the absence of public accountability makes reform very difficult.
- Explicit costing for public service obligations. SOEs typically carry many public service obligations (PSOs), which need to be explicitly costed and accounted for in any SOE performance evaluation. In most cases, such estimations are relatively straightforward. If a state-owned electricity utility is required to service customers (or a segment of them) at an uneconomic price, the difference between the market price and regulated price is the cost of the PSO. Similarly, if an SOE transport provider is required to provide below cost services (for example, as an alternative to a congestion tax), this PSO can likewise be estimated.[xi]
- Public asset management. Professional and better management of public assets can increase transparency and accountability and lead to higher financial and social gains. Experience across countries suggest that professional management of public assets allows governments to raise expenditures during times of crisis and help maintain macroeconomic stability. Recent episodes of financial crises have further underscored the importance of effective management of public assets and SOEs. Hence, efficient management of public assets and SOEs not only help in improving the fiscal position but also in raising the quality of public service delivery.
- The importance of competition. The regulation of SOEs that operate in competitive markets is relatively straightforward. The performance of SOEs can be benchmarked against private sector competitors, factoring in any subsidies and PSOs. As a corollary, it is important to remove any regulatory constraints on competition (e.g., barriers to private sector entrants). For tradable activities, this also includes ensuring that import competition operates without hindrance. This is an important area of work for the region’s nascent competition commissions.
- SOEs and “natural monopolies.” SOEs are frequently found in sectors that may be described as having “natural monopoly” characteristics, that is, with a declining long-term average cost over all feasible levels of output. In practice, the definition of a natural monopoly is not straightforward. For example, electricity generation and transmission were once considered to be such a case, and therefore best suited to a sole supplier. However, new solar generation technologies are radically changing the sector’s economics. The same applies to mobile telephony services. For other cases of natural monopolies, mainly in the utilities sector, regulation is a key issue whether or not the sector is state-owned. The appropriate policy regime is one in which an independent, arms-length regulator monitors and, if necessary, determines pricing and service quality. Such a body of course assumes high-level governance capabilities. To improve the public service delivery, governments should introduce professional management and enhance the corporate governance of SOEs.
- Sequencing matters—getting privatization “right.” As argued above, privatization is one possible SOE reform option. However, it should be regarded as the final step in the process, after all the preliminary reforms have been completed. These include establishing an appropriate regulatory/competitive framework, accurate and transparent financial reporting, and explicit costing of any remaining PSOs.
Privatization remains a politically controversial issue in several countries. In these cases, opening the SOE sector to private sector competition is a more palatable option, as in the case of the 1997 reform of Manila Water. If privatization is to be pursued, it is also crucial to handle the process of divestment in an open, competitive, and nonpolitical environment that maximizes the return to the state. There are well-documented cases, mainly in the transition economies in which SOEs are disposed of at highly concessional prices to the politically well-connected (termed “insider privatization” in the PRC). In such cases, it is arguably preferable not to proceed with privatization.
1.13 Summing Up
SOEs are major commercial entities, invariably larger than commonly realized, and typically more important in developing Asia and Pacific economies than in the advanced economies. They are particularly important in sectors that have weak competitive pressures, and in sectors such as mining and natural resources that are commonly bedeviled by governance problems. Their size and their generally indifferent performance highlight the importance of reform.
There is no template or single path to reform, as approaches will differ depending on institutions, history, and political preferences. However, there are common elements of a reform agenda, including the importance of hard budget constraint, financial accounting transparency, competitive market structures, and a regulatory framework that protects the public interest. It may be the case that privatization is the preferred approach, but this will be effective only if the necessary prerequisites are in place.
[i] State capitalism is an economic system in which the state plays a dominant role in different sectors through government ownership and control.
[ii] Throughout this study, the term “SOE” is defined in different ways across countries. In Malaysia and Singapore, for example, the term “government-linked corporation” (GLC) is widely used. In Viet Nam, the term
“equitization” refers to SOEs that have been corporatized.
[iii] The Prebisch–Singer hypothesis argues that the price of primary commodities declines relative to the price
of manufactured goods over the long term, which causes the terms of trade of primary-product-based
economies to deteriorate.
[iv] Fortune. Global 500. https://fortune.com/global500/2019/search/.
[v] The Orbis database provides a comprehensive, wide-ranging, and consistent data set for state-owned and
private companies, thus making comparison across countries reliable
[vi] Orbis covers all the listed companies. However, not all listed companies share information about their financial statistics. For consistency, analysis is limited to those SOEs for which financial data are made available to the Orbis database. The number of SOEs with financial data is much smaller than the number of listed companies.
[vii] In the world of finance, the term equity generally refers to the value of an ownership interest in a business, such as shares of stock held. On a company’s balance sheet, equity is defined as retained earnings, plus the sum of inventory and other assets, and minus liabilities
[viii] The public sector balance sheet consists of the assets and liabilities of general government and public
corporations, including the central bank. Hence, it brings together all of the accumulated government
controlled assets and liabilities (IMF 2018)
[ix] It is worthwhile to note that after 18 years of MWSS privatization, water supply has significantly improved.
Nevertheless, the current arrangement is far from perfect, and Metro Manila still experiences water shortages.
On top of that, the government has recorded about 38 million cases of diarrhea annually due mainly to poor
sanitation and hygiene. Tap water is still not safe to drink. The government is once again considering to revisit
the concession agreement and introduce further reforms to improve the quality and quantity of water.
[x] These results are based on the data envelopment analysis which captures the operational efficiency of SOEs
in the selected countries. Appendix A1.2 provides more details.
[xi] It is important of course to benchmark the full cost of the service against some independently agreed figure,
not the one a possibly inefficient SOE provides. In the case of incomplete markets (for example, information
asymmetries), these prices may not be readily available. International benchmarks can be an option.