Introduction:: Research over the last few decades has established that the performance of SOEs suffers because of two critical reasons.
1) One, SOEs are tasked with multiple objectives: in addition to financial profitability, they are expected to absorb surplus labour, develop priority markets, sectors and regions, and fulfil other socio-economic objectives.
2) Two, SOEs are subject to plural controls. As a result, their managers are expected to meet conflicting demands from multiple stakeholders.
To remedy these two critical problems, SOEs need to be provided with an efficient autonomous structure and an incentive-linked performance evaluation system.
Improving SOES:: Improving SOEs’ autonomy is no longer rocket science. Forty years ago, a broad framework for the delegation of powers was set out by two authors – Oliver Williamson for multi-divisional firms in 1975 and Elliot Jacques for general hierarchies in 1976. Their recommendations, which have stood the test of time, are that government as the owner of SOEs should do five things and not do one thing..
The government should “set objectives, appoint the chief executive officers, evaluate the performance according to those objectives, reward and penalise the chief executive officers according to their evaluation, provide resources (finance), and conduct long-range planning and coordination among units”. And they must not do (almost) anything else. The last don’t is more important than the first five do’s because it is so often violated, making it impossible to hold managers accountable for performance.
Two plans to manage SOEs,
Contra Plan and Signaling system for Public Enterprises that was designed and implemented in Pakistan and also number of other countries like South Korea, India, Mexico and Phillipines:: Globally, two systems are recognised. Under the performance contract system — called Contra Plan and designed by Simon Nora, adviser to President Charles De Gaulle — managers of the leading French SOEs signed a contract with government representatives to ensure performance under a plan. The second one, which evolved from the French Contra Plan, is the Signalling System for Public Enterprises that was designed and implemented in Pakistan and also replicated in a number of other countries, like South Korea, India, Mexico and the Philippines. The system is based on clearly quantifiable targets, negotiated and mutually agreed to at the beginning of the period, which are linked to pre-agreed performance incentives to mangers and embodied in a formal performance contract..
It is supported by a management information system that enables monitoring and a corporate planning system that provides a long-term framework for performance improvement. The most important benefit of the latter is to assist in identifying units to be privatised based on a strategic analysis of long-term potential rather than political considerations.
This six-point outline can serve as a broad framework for constructing a desirable autonomy structure for the public enterprise sector:
Recommendation of Asian Development Bank::
1) Therefore, to improve SOE performance, developing countries in Asia must ensure separation between the ownership and management functions of SOEs.
2) Second, they must chart clear and quantifiable short- and long term goals, and appoint autonomous and competent management to strategize how to achieve these goals.
3) Third, SOE management must institute transparent and independent monitoring and evaluation mechanisms to share regular performance reports of SOEs with all of their key shareholders and suggest improvements whenever needed.
4) Finally, SOEs must attract qualified and talented people to join their ranks with competitive salary packages. These employees should be rewarded for better performance and penalized for chronic underperformance to establish a professionally competitive work culture to improve SOEs’ efficiency and profitability.
State-owned enterprises (SOEs) often make up the country’s megainfrastructure projects and remain a critical source of employment and economic growth in developing Asian countries.
SOEs’ performance has declined vis-à-vis private companies, largely because of
1) corruption,
2)mismanagement,
3)technical incompetence of their staff.
To improve SOEs’ performance efficiency, developing countries must appoint competent and autonomous management bodies to oversee SOEs’ day-to-day operations.
SOE management bodies should set clearly delineated, realistic, and time-bound goals.
Unlike private enterprises, SOEs’ performance evaluations must entail their profitability as well as social benefits.
SOE management must encourage a competitive work culture by hiring and retaining talented individuals through competitive compensation packages and performance-based bonuses.
SOE And Corruption::
In a recently published OECD report on ‘State-Owned Enterprises and Corruption’ [https://doi.org/10.1787/9789264303058-en] concluded that almost half of the SOEs reviewed had experienced at least one case of corruption in the last three years. Average losses from corruption in nearly half of the companies surveyed amounted to 3 percent of annual corporate profits.
In preparing the study, the OECD surveyed some 350 SOEs in 34 countries, identifying high-risk areas of corruption and the main impediments to reducing corruption.
SOEs linked to natural resources, and to the postal, energy and transportation sectors are more vulnerable to corrupt practices. Violations of data protection and privacy, fraud and receiving bribes were deemed the most problematic issues. Instances of corruption most frequently cited often involved mid-level managers and lower-level employees..
Lack of a culture of integrity in the political and public sector, and to inadequate leadership from the SOEs’ top management.
Most SOEs employ a host of rules, codes and guidelines to reduce the risk of corruption. But these measures are often imperfect or incomplete.
How to tackle it: Enterprises need to better follow international standards such as the OECD’s Guidelines on Corporate Governance of SOEs. Fiscal transparency, disclosure of subsidies as well as embedding integrity in SOEs’ performance assessments and contracts can play a key role in that regard..
For instance:
In Italy, the Italian National Anti-Corruption Agency and the Ministry of Finance have issued formal rules and procedures to prevent corruption, while each SOE must nominate an official who is personally accountable for preventing corruption;
SOEs in Mexico must demonstrate that they have implemented anti-corruption mechanisms such as internal controls, audit committees, and codes of ethics;
In Chile, a dedicated working group preselects suitable candidates for nomination to the boards of SOEs, for the consideration of the Council of Ministers.
SOEs and Government Influence::
SOEs are also vulnerable to weak governance and corruption because of potential conflicts between the ownership and policy-making functions of the government, and undue political influence on their policies, appointments, and business practices. This highlights the importance of implementing effective accountability and integrity mechanisms in SOEs such as codes of conduct, whistleblower policies and complaints mechanisms, internal and external audit, and a robust disciplinary and sanctions regime.
Transparency International’s 10 Anti-Corruption Principles for State-Owned Enterprises, 2017).