9. Reform of state-owned enterprises in
developing countries
| (24606)
10469/03
COM(03) 326
| Commission Communication: The Reform of State-Owned Enterprises in Developing Countries with focus on public utilities: The Need to Assess All the Options.
|
| Legal base | — |
| Document originated | 3 June 2003
|
| Deposited in Parliament | 11 June 2003
|
| Department | International Development
|
| Basis of consideration | EM of 9 June 2003
|
| Previous Committee Report | None
|
| To be discussed in Council | No date set
|
| Committee's assessment | Politically important
|
| Committee's decision | Cleared
|
Background
9.1 This Communication complements a separate Commission Communication
on support for developing the business sector in third countries.[19]
In this Communication, the Commission proposes that the EC should
be more actively involved in improving the performance of state-owned
enterprises (SOEs) and in the reform of SOEs in developing countries.
The Commission Communication
9.2 For some years developing countries have been under heavy
pressure to reform their SOEs. The Commission says that improving
the performance of these enterprises can have a major impact on
developing countries' prospects of achieving the Millennium Development
Goals, through reduced fiscal deficits, increased economic growth,
and improved provision of essential services such as water. Special
emphasis is given to public utilities because of the substantial
impact that the provision of basic services such as transport,
electricity and water has on the competitiveness and growth of
the economy and on public health, and thus on poverty reduction.
9.3 The Communication reviews the reasons behind the build-up
of a large public sector in developing countries, highlights the
need to reform SOEs, discusses the risks and benefits of reform
options, suggests guidelines for best practice for both recipient
governments and donors, and makes recommendations for greater
involvement by the EC in the reform process.
9.4 The reasons advanced for reforming SOEs include:
- In financial terms, SOEs in developing countries generally
perform very poorly, entailing a heavy fiscal burden for the State.
- The provision of goods and services by SOEs is often deficient,
with limited access, especially by the poor, to basic services
such as water and electricity.
- SOEs generally suffer from severe management problems through
political interference and lack of capacity.
9.5 The principal options for reform include commercialisation,
that is improving the management but retaining public ownership,
privatisation, and various types of Public Private Partnership.
The Communication argues that there are no universal blueprints
but that it is essential for all options to be looked at in a
particular country or sector and a choice to be made based on
the needs, capacity and resource constraints of that country.
It is equally important to identify clearly the risks inherent
in reform of SOEs. These include the possibility of increased
tariffs and connection fees, worsening of the condition of low-income
households, the possibility of quality of service and access to
services not improving, and political criticism if there are job
losses through restructuring of the SOEs, loss of national control
to foreign multinationals, or problems with transparency and corruption.
9.6 The Communication identifies guidelines and key issues to
reduce risks and increase the success of SOE reform:
- Governments need to define their objectives clearly.
- Before deciding on reform, governments need to examine all
the options.
- Transparency in both design and implementation is critical
to minimise corruption and maximise public confidence in the reform
process.
- Competition should be introduced wherever possible as this
has positive results in terms of prices, service expansion and
quality which benefit the consumer.
- Design of the regulatory framework and monitoring of post-reform
performance are key issues, particularly when competition is not
feasible as in the case of natural monopolies such as large public
utilities.
- A good investment climate is required.
- Reform should include an appropriate social protection strategy
to mitigate job losses, reduced access to services, or increases
in poverty.
9.7 The Commission says that, though it has often linked its budget
support programmes to the conditions placed on countries by the
International Monetary Fund and the World Bank, and been in close
and constructive talks with these institutions, it has not always
been explicit on the specifics of SOE reform included in the adjustment
programmes supported by those organisations.
9.8 The Commission recommends that the EC play a larger role in
reform of SOEs in developing countries. The EC should:
- engage in a closer dialogue with governments and the IMF/World
Bank on SOE reform;
- become a more active partner in designing SOE reform which
contributes to poverty reduction and sound macroeconomic frameworks;
and
- increase the Commission's capacity to provide high-quality
technical assistance to governments on SOE reform.
The Government's view
9.9 The Secretary of State for International Development (Baroness
Amos) comments that the Government agrees that improving the performance
of SOEs makes a major contribution to progress towards the Millennium
Development Goals through its positive impact on the competitiveness
of enterprises and economic growth and improved access by the
poor to basic services such as water and electricity. She comments:
"Under-performing State-Owned Enterprises crowd out the private
sector from entering major segments of the economy, and attract
disproportionate amounts of public resources such as bank credit
and technical support. Improving the performance of State-Owned
Enterprises will therefore lead to economy-wide gains in enterprise
efficiency and productivity and should enhance the effectiveness
of the EC's support programmes for the development of the business
sector generally.
"As the EC has long been involved in funding and reforming
State-Owned Enterprises in developing and transition countries,
the Communication does not, fundamentally, represent a new policy
departure. The objective is to develop policy guidelines and
approaches that will enhance the efficiency, effectiveness and
impact of EC programmes in this area.
"The Communication in fact represents a valuable contribution
by the Commission to clarifying the key policy issues in State-Owned
Enterprise reform and defining practical guidelines for successful
reform programmes. DFID regards as particularly important the
need for governments to define their objectives clearly and identify
the costs, benefits and risks of reform; the need to examine the
feasibility of all reform options; the critical importance of
transparency in the reform process; the design of an appropriate
regulatory framework; and the inclusion of an appropriate social
protection strategy to mitigate any negative effects of reform
such as job losses. Donors should help governments set clear
priorities for State-Owned Enterprise reform from multiple options,
achievable goals, and realistic timescales, taking into account
the political complexity of reforms. They should also identify
and support the key agents for change in this process.
"In this regard, DFID agrees that the EC should play a more
active role in discussions at country level with governments,
other donors and the IMF/World Bank prior to any State-Owned Enterprise
reform to ensure that the design of reforms fully contributes
to PRSP[20] objectives
and sound macroeconomic frameworks. The Commission should also
strengthen its capacity to provide technical assistance to governments
for the design and implementation of State-Owned Enterprise reform."
Conclusion
9.10 The Secretary of State describes this document as a valuable
contribution by the Commission to clarifying the key policy issues
in the reform of state-owned enterprises and defining practical
guidelines for successful reform. The Commission's Communication
on development of the business sector in Third Countries, which
it describes as complementary to this paper, also provides a useful
contribution on an issue which it is right for the Commission
to be addressing.[21]
In both documents it provides ideas on how it could make a more
streamlined and stronger contribution on behalf of the EC. These
will be discussed in the Development Cooperation Working Group
in the coming months before being taken at a future General Affairs
and External Relations Council.
9.11 We clear the Communication.
19 (24607) 9649/03; see paragraph 10 of this Report. Back
20
Poverty Reduction Strategy Papers. Back
21
See paragraph 10 of this Report. Back
| 
