The pandemic has highlighted the role of the public sector in saving lives and livelihoods. State-owned enterprises are part of that effort. They can be public utilities that provide essential services. Or public banks that provide loans to small businesses. But some are also struggling and adding to the burden on government finances. These range from national oil companies that are dealing with a large fall in oil prices, to national airlines without enough passengers traveling.
Most people encounter state-owned enterprises every day. They are likely to provide the water you drink, the electricity you use, and the bus or metro you ride to work or school. They come in all shapes and sizes. Some are fully owned by the government and some are jointly owned with private investors.
Our new Fiscal Monitor delves into this other government. How have state-owned enterprises evolved in recent decades? How can countries get the most out of them? At their best, they can help countries achieve economic and social goals. At their worst, they need large bailouts from taxpayers and hinder economic growth. Which version you get boils down to good governance and accountability.
Big and complicated
State-owned enterprises are present in all countries. In some, like China, Germany, India, and Russia, they number in the thousands.
They are major players in many economies. For example, state-owned enterprises undertake 55 percent of total infrastructure investment in emerging and developing economies.
Some are also multinationals, operating around the world. The share of state-owned enterprises among the world’s 2000 largest firms doubled to 20 percent over the last two decades, driven by state-owned enterprises in emerging markets—their assets are worth $45 trillion, equivalent to half of global GDP.
The relationship between governments and state-owned enterprises is not always straightforward. Governments create the 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. 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.
Public banks are another example. Governments, such as in Brazil, Canada, Germany, and India have asked their public banks to help alleviate the impact of the current pandemic. However, many public banks have a poor record in promoting economic development (their main goal) and may take excessive risks, which leaves economies and people more vulnerable to crises.
Governments also struggle to effectively monitor state-owned enterprises. Many lack the capacity to do so. Poor transparency in public banks’ and enterprises’ activities remains an obstacle to accountability and oversight. This can lead to a buildup of large and hidden debts with governments having to bail them out, sometimes costing taxpayers more than 10 percent of GDP.
In these cases, the enterprises tend to underperform relative to their private sector peers. Drawing from a sample of about 1 million firms in 109 countries, we find that state-owned enterprises are less productive than private firms by one-third, on average. This weak performance is partially due to poor governance: productivity of these enterprises in countries with perceived lower corruption is more than three times higher than those in countries where corruption is seen as severe.
The internationalization of state-owned enterprises has also intensified concerns that they have an unfair advantage over private firms because of government support including cheap loans or tax benefits. This worry has long been present in domestic markets, but it has recently spilled across national borders and could fuel protectionist measures.
Bang for the taxpayer’s buck
In a time when governments are facing increasing demands and struggle with high debt, a core principle for state-owned enterprises is not to waste public resources. We make four main recommendations for how countries can improve the performance of state-owned enterprises:
- 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.
- 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.
- Governments also need to ensure state-owned enterprises are properly funded to achieve their economic and social mandates, such as in Sweden. 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.
- 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 stakes are high. Well-governed and financially healthy state-owned enterprises can help combat crises such as the pandemic and promote development goals. However, to deliver on these, many need further reforms. Otherwise, the costs to society and the economy can be large.