Management of the World Bank Group institutions would like to thank the Independent Evaluation Group (IEG) for its report, State Your Business! An Evaluation of World Bank Group Support to the Reform of State-Owned Enterprises, FY08–18. Management is pleased to note that IEG’s findings suggest that, on average, the evaluated portfolio met World Bank and International Finance Corporation (IFC) targets for project success, and welcomes the suggestion that efforts continue to be made to improve development effectiveness.
World Bank Management Response
Management notes with satisfaction that World Bank lending, which accounts for more than 90 percent of the evaluated state-owned enterprise (SOE) reform portfolio volume, achieved a success rate of 78 percent, surpassing the target of 75 percent. Factors explaining the success of SOE reform, including both internal variables and external variables beyond World Bank control, resonate well with management. This is particularly true for the conclusion that “design quality and client commitment are frequently identified as success factors across all five types of SOE reform support, although the frequency of other factors varies by area” (see page 37). Over the years, successive management self-assessments have recognized the influence of these variables in project success, independent of country type and sector.
Management agrees with the report’s recommendation to enhance selectivity by more systematically addressing corruption and competition and is already working in that direction. The report shows that only 26 percent of activities are implemented in environments with low control of corruption, suggesting already strong selectivity. Enhanced selectivity should therefore help prioritize the type of support to SOE reform that is better tailored to a particular intervention in the country context rather than excluding countries. Such support should be accompanied, as suggested by the report, by management’s sustained attention to all factors that mitigate corruption’s negative influence on SOE, particularly those within the World Bank’s immediate influence, such as putting a premium on client commitment, stronger supervision, good project design, and sequencing of activities. These considerations are already part of the Systematic Country Diagnostic and the prioritization that takes place during Country Partnership Framework design. This is proven by the fact that the World Bank has achieved, as stated in the report, a success rate of 67 percent even in countries with low control of corruption.
Nonetheless, management recognizes that sustained efforts are needed to ensure a more even application of the selectivity framework.
Management agrees that applying the Bank Group’s fiscal year (FY)18 corporate strategic statement on Maximizing Finance for Development (MFD) and its embedded Cascade approach for SOE reform can help realize private sector solutions, in the right country context. Management notes that although the MFD approach requires creating an environment where private participants can invest through activities that focus, for example, on establishing suitable regulation, a level playing field, or limited public guarantees, it does not in all cases require privatization and ownership reforms. For example, SOEs such as development banks can be used to mobilize private sector finance for development through syndicated lending and risk-sharing facilities. In this case applying the Cascade approach could imply expanding the role of certain SOEs rather than privatizing them in countries where governance and competition frameworks are supportive of effective SOE performance.
Management shares the view that, as it consolidates the application of the Cascade approach (which has only been in place for about two years), enhanced Bank Group coordination is desirable. This collaboration can help better to harmonize diagnostic tools, such as the Integrated SOE Framework (developed in 2019 and now being piloted), the Markets and Competition Policy Assessment Tool (in used since 2016), and the Infrastructure Assessment Program (discussed in the next paragraph). Nonetheless, management believes that the report’s conclusion that collaboration among Bank Group institutions is rare could be misleading. This inference seems to be driven by overfocusing on the World Bank’s lending projects. A great deal of the World Bank’s contribution to the Cascade approach consists of upstream analytic work and policy dialogue, whereas IFC and the Multilateral Investment Guarantee Agency (MIGA) work mostly on downstream privatization or business operations. Hence, the report’s comment about reinforced collaboration refers mostly to a subset of country engagements.
Given the report’s emphasis on analytical tools relevant to SOE reform, management regrets that the Infrastructure Assessment Program has not been discussed but understands why this is so, given its relative newness. A first generation of assessments have now been completed in about a dozen countries, including Bangladesh, the Arab Republic of Egypt, Indonesia, Jordan, Mongolia, Myanmar, Nepal, Romania, Sri Lanka, and Vietnam. Management is currently piloting a version 2.0 to enhance the program by creating a more comprehensive infrastructure diagnostic while still incorporating the important issue of bottlenecks for private infrastructure finance, including public-private partnerships.
IFC Management Response
IFC management welcomes the IEG evaluation of Bank Group support to the reform of state-owned enterprises in FY08–18. The evaluation focused on the financial and energy sectors and provided a comprehensive assessment of the manner in which from FY08 to FY18 the International Bank for Reconstruction and Development, MIGA, and IFC contributed to enhancing development outcomes through their support of the reform of SOEs. IFC management would like to recognize the quality of the analysis in the evaluation and the highly collaborative approach taken by the IEG team overall to make this review comprehensive and constructive. The evaluation used an extensive set of information and data; combining, analyzing and synthesizing information on SOEs across investment and advisory programs. The evaluation also provided useful insights on the effectiveness of various approaches, their success factors, strengths, and weaknesses. The evaluation contributes in many respects to Bank Group efforts to develop more integrated support to SOE reform.
IFC management generally agrees with the recommendations put forth by the report. The report’s main conclusions and recommendations are well articulated, and IFC is broadly aligned with these. The evaluation makes the following recommendations: (i) the 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; and (ii) the Bank Group should apply the MFD and Cascade approaches for SOE reform. This would enhance internal coordination and mobilize private financing and capacity, especially for ownership reforms. IFC management is supportive of these recommendations, particularly the focus on the Cascade with its emphasis on the importance of placing due priority to private sector approaches.
IFC management would like to emphasize the importance of corporate governance especially in challenging market environments. While acknowledging that the focus on institutional capacity or governance in client countries that is detailed in this evaluation is important, IFC management believes this should not inadvertently lead to a movement away from more challenging markets, in particular International Development Association (IDA) or fragile and conflict-affected situation (FCS) markets. IFC management appreciates and agrees with the importance placed by IEG on upstream engagement in important IDA and FCS markets, especially those that face challenges related to institutional capacity and governance. Similarly, IFC management appreciates the recognition of the importance of identifying and supporting an appropriate SOE trajectory of reform with different parts of the Bank Group providing support based on the progress made along the reform trajectory.
The role played by IFC investments services in terms of introducing and improving corporate governance principles and practices may have been understated. With respect to IFC’s role in improving SOE operations and governance, every IFC investment in SOEs incorporates a corporate governance action plan that seeks to improve the governance of the SOEs. IFC management would like to also note that IFC’s commercial lending and associated covenants have an important positive impact on SOEs in terms of instilling discipline in SOE operations, in particular by subjecting them (often for the first time) to international commercial banking financial and reporting requirements. IFC management appreciates that IEG has recognized that IFC demands certain standards of corporate governance in investee companies in a similar manner to its attention to social and environmental safeguards and accordingly introduced changes to the evaluation.
IFC management agrees with and would like to reinforce the importance of a common and coordinated effort to implement the Bank Group Cascade approach and to jointly work with the World Bank on the upstream agenda. The Cascade approach will allow targeted support to SOEs by helping to identify which Bank Group entities, products, and interventions are most suited to address specific bottlenecks or achieve development objectives. Moreover, the Cascade provides a mechanism through which the Bank Group can design a clear time-bound trajectory for clients to move from sovereign guaranteed public sector financing to IFC or commercial financing and, wherever applicable, partial and majority private ownership. In line with this perspective, the IEG evaluation specifically states that the “Bank Group could apply the Cascade in offering options for SOE reform that mobilizes private financing capacity through privatization and ownership reform.” This is an important observation as is also the observation that the pace of Bank Group reform related to privatization of SOEs has diminished. Going beyond privatization, the Bank Group should engage in SOE reform that positions the SOEs to eventually graduate from sovereign guaranteed borrowing. One preferred path would be for commercially oriented SOEs to borrow from IFC (directly and through mobilization) and then over time graduate to commercial only borrowing where possible including direct access to capital markets. In this context, IFC Upstream tools could also be used to help guide SOEs along a reform trajectory with targeted support in areas such as: Corporate Governance, Environment and Social Standards, Procurement and Financial Management.
SOEs are considered key to capital markets’ development. IEG notes that SOEs account for roughly three-quarters of the MSCI emerging market index utilities, 59 percent in energy and 44 percent in the financial sector. Given this prominent role, it is clear that SOEs are central to the development of capital markets in most emerging markets. If SOEs that face performance challenges dominate these critical markets, they could potentially limit the development of strong, sustainable capital markets or continue to foster capital market issuances that are implicitly backed by sovereign support. IFC would like to emphasize this associated impact of limited SOE reform on potential capital market development.
The evaluation states that the treatment of competitive neutrality in IFC projects is uneven. The evaluation indicates that although IFC and MIGA policies require verifying that a level playing field for competition exists before engaging with an SOE, attention to competitive neutrality in project documentation is weak and uneven. Two observations are relevant in this regard. Firstly, competitive neutrality is a core part of IFC analysis for SOE investments, with the specific requirement of a level playing field in place for cross-border SOEs and nondisplacement of private sector alternatives in the case of domestic SOEs. Secondly, IFC management would like to emphasize that IFC has a robust policy assessment matrix in place to evaluate each SOE investment’s fit with IFC’s private sector mandate. Competitive neutrality plays an important but not overriding role in this assessment. IFC management recognizes the importance of applying this assessment even more consistently.
The evaluation also expressly excludes Bank Group projects that use SOEs to deliver services without having reform as a specified component. It is worth noting that many IFC investments are with SOEs that have benefited from prior reform in relation to governance, environmental and social issues, financial management, or procurement, among others. Such reform has occurred with Bank Group support, through the support of other agencies or has been initiated by governments. IFC supports such SOEs as well-performing utilities or intermediaries that allow access to critical infrastructure services or as a means to access difficult-to-reach segments in an economy. The IEG approach of reviewing only projects envisaging SOE reform may have led to the unintentional omission of several projects that have had strong development impacts. We appreciate in this context that IEG has noted feedback provided in this regard while also indicating that such IFC engagements would not have provided data relevant to the stated overall objective of the evaluation.
MIGA Management Response
MIGA welcomes IEG’s SOE reform evaluation (FY08–18) and finds it significant and important. The report presents many useful findings, and MIGA values IEG’s observations. MIGA thanks IEG for the productive engagement during the drafting of the report and appreciates the willingness to understand MIGA perspectives.
Approaches to SOE reform. The report adopts a broad definition of SOE reform, using five categories at the enterprise level: (i) corporate governance improvements; (ii) business and operation reforms; (iii) strengthening competition and regulation in SOE markets; (iv) privatization and other ownership reform; and (v) macrofiscal and public financial management reforms. Within this framework, the report found that MIGA’s support for SOE reform belonged to two categories: (i) business and operation reforms; and (ii) privatization and other ownership reforms. The report found that MIGA is engaged primarily in the power sector through support of business and operations and ownership reform. MIGA agrees with the findings, based on the report’s broader view of SOE reform. However, MIGA typically assesses its projects not through a specific SOE reform program but through the development impact potential of direct and indirect project outcomes, and the likelihood for facilitating foreign investment through various types of demonstration effects. In particular, MIGA notes that within IEG’s definition are projects that indirectly benefit SOEs, for example, projects where SOEs are offtakers.
Good performance of IDA and FCS projects. The report finds that MIGA played an active and important role in promoting private sector investment through projects in IDA and FCS countries. MIGA notes that the good IDA performance is an important foundation for the MIGA’s FY21–23 strategy, which emphasizes continued support for IDA and FCS as strategic priorities. MIGA notes that the strong IDA and FCS results bode well for the agency’s ambition for further deepen the development impact of MIGA guarantee projects.
Importance of private sector competition. The report appropriately focuses on the role of the private sector in fostering competition. In addition, the report attempted to balance this perspective since in many developing countries SOEs often play a valuable role in providing needed services and products that would otherwise not be available. In the context of these countries—and across a wider range of countries in some sectors (for example, where externalities are present)—private sector competition may not be the paramount factor in achieving significant development impact. As such, there are other measures that may improve SOE performance and achieve greater private sector participation (for example, public-private partnerships) or encourage financial and operational discipline through other means.
Country governance and SOE reforms. The report’s recommendation to apply a selectivity framework for SOE reform that considers country governance conditions (control of corruption) could be viewed as consistent with the Bank Group approach for providing SOE support tailored to project and country contexts, rather than disengaging from projects, sectors, or countries where there is a known potential for high levels of corruption. Although MIGA agrees that a focus on institutional capacity or governance in client countries is extremely important, it should not lead to risk aversion to engaging in more challenging markets, in particular IDA or FCS countries. Instead, these contextual factors should be analyzed at the initial assessment phase as well as at the due diligence phase of the project. Currently, MIGA recognizes the importance of corruption in potentially stymying the expected development impacts of its guarantee projects, and therefore endeavors to assess and address how the significant impediments stemming from various forms of corrupt practices may be addressed or mitigated.
Cascade approach. MIGA appreciates the focus on the Cascade approach in the report and the role it can play in fostering SOE reform. The report found that the experiences in several countries showed the operational promise of MFD and its embedded Cascade approach in power generation, where Bank Group institutions worked together to create conditions that would attract private investment. MIGA notes that that the Cascade approach indeed fosters a Bank Group culture that helps prioritize the Bank Group institution, engagement, or product that will best address the specific development outcomes desired. The Bank Group engagement with SOEs should prioritize private sector solutions or private sector financing, including the use of derisking instruments, such as a MIGA guarantees, before considering other options, including public funding options.