How countries can improve performance of state-owned enterprises – IMF

The International Monetary Fund (IMF) on Thursday gave four recommendations on how countries can improve the performance of state-owned enterprises.

The first recommendation given by the IMF was that governments should regularly review if an enterprise is still necessary and whether it delivers value for taxpayers’ money. For example, Germany conducts biennial reviews. The case for having a state-owned enterprise in competitive sectors, such as manufacturing, is weaker because private firms usually provide goods and services more efficiently.

Secondly, Countries need to create the right incentives for managers to perform and government agencies to properly oversee each enterprise. Full transparency in the activities of the enterprises is paramount to improve accountability and reduce corruption. Including state-owned enterprises in the budget and debt targets would also create greater incentives for fiscal discipline. Many aspects of these practices are in place, for example, in New Zealand.

Thirdly, governments also need to ensure state-owned enterprises are properly funded to achieve their economic and social mandates, such as in Sweden.

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This is critical in responding to crises—so that public banks and utilities have enough resources to provide subsidized loans, water, and electricity during this pandemic—and in promoting development goals.

Fourthly, ensuring a fair playing field for both state-owned enterprises and private firms would have positive effects by fostering greater productivity and avoiding protectionism. Some countries already limit preferential treatment of state-owned enterprises, like Australia and the European Union. Globally, a potential way forward is to agree on principles to guide state-owned enterprises’ international behavior.

The fund noted that governments create enterprises to meet specific goals and mandates, such as the provision of water, electricity, or transportation routes that the private sector would not find profitable. However, these mandates are often not appropriately funded, with consequences for people’s lives.

According to the IMF, the relationship between governments and state-owned enterprises is not always straightforward. State-owned enterprises are falling short in many developing countries, where more than 2 billion people remain without access to safe water, and more than 0.8 billion lack reliable electricity.

The recommendations were given in a new report titled “State-Owned Enterprises in the Time of COVID-19”, by Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department, Paulo Medas, Deputy Division Chief in the IMF’s Fiscal Affairs Department, and John Ralyea, Senior Economist in the Fud’s Fiscal Affairs Department.

In a time when governments are facing increasing demands and struggle with high debt, the IMF said a core principle for state-owned enterprises is not to waste public resources.