Back to cover

State Your Business!

3 | Recommendations to Address Outstanding Challenges in SOE Reform

Highlights

Building on lessons from the two focal sectors, this chapter examines two areas where the World Bank Group can learn from successful features of state-owned enterprise (SOE) reform and, by addressing outstanding challenges, enhance selectivity and improve internal coordination for SOE reforms.

The Bank Group faces two key challenges in its work on SOE reform: selectivity and consistent coordination and implementation of its corporate strategy.

The Bank Group should reconsider how it engages in countries where initial conditions for success do not prevail: where there is weak control of corruption and where there is a lack of competitive neutrality for SOEs.

Recommendation 1: The World Bank Group should apply a selectivity framework for SOE reform support that considers country governance conditions, control of corruption, and sector and enterprise-level competition.

This evaluation generally finds positive experiences when Bank Group institutions collaborate on SOE reform.

The spirit of Maximizing Finance for Development is not fulfilled if the menu of options supported does not include the full range of private sector solutions, including ownership reform and privatization.

Recommendation 2: The Bank Group should apply Maximizing Finance for Development and its embedded Cascade approach to SOE reform. This would enhance internal coordination and mobilize private financing and capacity, especially for ownership reforms.

Enhancing Selectivity: Corruption and Competition

Two key findings of the evaluation on the conditions for successful engagement to support SOE reforms are that the Bank Group has more successful outcomes in countries with better control of corruption and that SOEs perform better in both focal sectors (and in general) where competitive conditions prevail at the sector and enterprise levels. Both can be incorporated into approaches to selectivity and mitigation of risks when planning for SOE reforms.

The Bank Group’s SOE reform portfolio is concentrated in countries where it is more likely to succeed, but a substantial minority (26 percent) of interventions are in countries with weak control of corruption, where all types of reforms are less likely to succeed. This raises questions about how the Bank Group should engage to enhance the likelihood of success of SOE reforms.

Competition and competitive neutrality at SOEs’ sector and enterprise levels are vital to SOE performance, yet Bank Group analysis on competition has been insufficient. The Bank Group has an array of valuable strategic and diagnostic instruments on competition but has used them infrequently. The MCPAT, which is the Bank Group’s main tool to diagnose competition issues, has covered only nine countries and one subregion during the evaluation period. In addition, a small number of CPSDs to date have deployed the MCPAT framework. Although IFC and MIGA policies indicate the need in many cases to verify that a level playing field for competition exists before engaging with an SOE, attention to competitive neutrality in project documentation is generally weak and uneven.

Recommendation 1: The World Bank Group should apply a selectivity framework for SOE reform support that considers country governance conditions, control of corruption, and sector and enterprise-level competition. First, the Bank Group should adopt a more selective approach toward SOE engagement in countries with weak control of corruption, giving full attention to internal and external factors of success. Findings suggest that the Bank Group could ramp up engagement with clients where success is more likely. In conditions of weak control of corruption, one option would be to engage first in addressing overall governance quality before attempting SOE reform. Where disengagement on SOE reform is not possible or desirable, close attention is needed to the factors that may mitigate corruption’s negative influence on SOE reform success, including selectivity toward clients who display commitment, stronger supervision, good (and simple) project design, and sequencing of activities. Next, the Bank Group should gear up capacity to conduct competition analysis, especially at the project level. The importance of competitive neutrality (the idea that SOEs should be on a level playing field with potential private competitors), especially considering IFC policy and (to a far lesser extent) MIGA policy, indicates a need to ramp up project-level analysis by carrying out competition assessment more systematically and by applying substantial up-front analytic capability to project-specific work on competitive neutrality. This would allow for greater selectivity toward competitive conditions that enhance SOE performance and for establishing up-front mitigating measures if competitive conditions were not conducive to success.

SOE Reform through Coordinated, Consistent Application of MFD and the Embedded Cascade Approach

This evaluation generally finds positive experiences when the Bank Group collaborates internally on SOE reform both through joint diagnostic (CPSDs and MCPATs) and joint operational approaches. For example, IEG found in several case studies a collaborative approach consistent with the Cascade approach, where the World Bank, IFC, and MIGA work to their comparative advantages, but these cases are infrequent. At the corporate level, there is room to spell out the implications of MFD for how Bank Group institutions can work together to support SOE reform systematically. This is particularly important for privatization and ownership reforms to address governments’ increased requests for support in these areas and considering the importance of mobilizing private financing in them. Although the Bank Group’s SOE diagnostic and strategic work includes a high incidence of recommendations on ownership and privatization, the SOE reform portfolio includes few privatization projects.

Recommendation 2: The World Bank Group should apply the MFD and its embedded Cascade approach to SOE reform. This would enhance internal coordination and mobilize private financing and capacity, especially for ownership reforms. First, the Bank Group should further develop and harmonize its diagnostic frameworks applied to SOE reform. This requires developing shared framing tools such as an Integrated SOE Framework and CPSD modules treating private sector options, including privatization and PPPs, for addressing SOE performance challenges. Second, the Bank Group could apply the Cascade approach, offering clients options for SOE reform that mobilize private financing and capacity through privatization and ownership reform. Along with recommendation 1, given appropriate country and sector conditions, there is greater room to apply the Cascade approach through a greater degree of and more routine coordination by World Bank, IFC, and MIGA that builds on their respective comparative advantages. This can be piloted as a sequential process, with upstream interventions focusing on any needed policy and regulatory reforms to create a level playing field for private entry and investment, combined with downstream use of Bank Group instruments to catalyze and mobilize private financing. With careful M&E, such a pilot could inform future efforts to realize the MFD and its Cascade more fully as a systematic approach to SOE reform.