The Reform of State-Owned Enterprises

The state-owned sector in developing countries tends to be large, diverse, and often - when the Bank gets involved - in a state of illiquidity or on the verge of collapse. While approaches have to fit individual circumstance, experience has shown that the more successful reforms have begun eliminating major price distortions (including interest and exchange rates), halting most new investment, and cutting off most subsidies. Successful implementation depends on proper phasing. While this varies from case to case, one workable sequence is: (i) clarify the state-owned enterprises' (SOE) true situation by eliminating gross price distortions, cutting most subsidies, curbing new investment, and ending preferential access to credit; (ii) begin to rehabilitate, sell or liquidate the 10 to 15 key SOEs that are the biggest budget drain or bottlenecks; (iii) increase competition and eliminate discrimination between public and private firms, and introduce efficiency targets for monopolies; (iv) put the financial system on a market-oriented basis and require SOEs to compete for finance without guarantees in most cases; and (v) liquidate, sell or rehabilitate as needed the remaining enterprises.