State-owned enterprises during a crisis: assets or liabilities?

The COVID-19 pandemic has brought back into focus the role of state-owned enterprises (SOEs) during a crisis; do they help support distressed economies or are they a drain on precious public resources that can be better used elsewhere? Across the world, the pandemic-induced global recession has forced countries to rescue their respective SOEs through measures such as debt restructuring and debt relief. But is this the right thing to do? Should governments step in to save SOEs? Are they too big to fail? Should they not be capable of supporting themselves like any other enterprise?

If anything, COVID has generated a new discussion on the urgency for SOE reforms. Over the past two decades, SOEs have been among the largest and fastest expanding multinational companies. According to an IMF study, in the last 10 years itself, SOEs have increased in importance among the world’s largest corporations: at $45 trillion, their assets are now 50 percent of total global GDP, and they play a huge role in most economies. Many countries are relying on SOEs to maintain employment and keep their economies moving. As such, governments can no longer allow SOEs to fail and frequently rush to help distressed ones.  In many recent examples, national airlines received massive capital and operating injections to stay financially viable.

SOEs are directly and indirectly involved in the fight against COVID, producing ventilators, masks, and even vaccines.  Companies such as Boeing and Airbus take on medical-supply functions. The electricity generator in Indonesia provides subsidized power to 30 million customers at the request of the Government. In Albania, Bosnia and Herzegovina, North Macedonia, and Serbia, governments are providing utility bill waivers to vulnerable populations (ILO 2020). In Africa, governments of Nigeria and Angola have negotiated with utility companies not to shut off energy supplies due to non-payment (All Africa 2020). African countries have designed interventions to ensure energy access, such as full-cost suspension or absorption of energy payments (Ghana, Liberia, Mali, Niger, and Nigeria), subsidy or reduction of electricity costs (Uganda, Burkina Faso, and Ghana), and more incentives for renewables (Nigeria, Burkina Faso, and Kenya) (Akrofi and Antwi 2020).

A recent World Bank note describes how SOEs can play a critical role, by bringing relief to the population, staying resilient to shocks, supporting economies in distress and providing jobs. Our note offers sequenced suggestions on what governments can do to ensure SOEs can be part of a rapid and targeted crisis response and support the recovery period that follows. It describes measures at the central government level to better equip SOEs’ systems, calibrate risks, and instill controls in large-scale crises. Individual entities can champion reforms to build up their risk-management systems and ensure business continuity and resilience in emergency situations. One size does not fit all: measures can be introduced in their entirety, or in stages.

Here are some of the main actions as described in the note:

• During the crisis: People come first, especially the most vulnerable. Assist with maintaining access to essential services to citizens; review subsidy programs; look at the effects of the crisis on the entire SOE portfolio, develop scenario-based financial plans for the sector; and lean in on instruments for anti-corruption and monitoring.
• Post-crisis: The crisis is shedding light on what is working or not. Strengthen performance evaluation systems (they are often inadequately specified) and bolster accountability and transparency requirements such as publishing an annual report on the entire portfolio.
• During recovery: Immediate response may have papered over some deep-set issues. This calls for substantive action to bring in the private sector, when possible, focus the portfolio down on where there is a real need for government ownership, and increase the formal governance environment. All this can be supported by a clear statement of the reasons for ownership.

At the individual SOE level, there are important actions to be thought through and acted on, such as:

• During the crisis: To help find the pathway through the pandemic and beyond, SOEs should continue to run financial scenarios, maintain continuity of service, and put in place efforts to shore up supply chains. The scenarios will require labor market flexibility and a reconsideration of investments. Increased transparency about the use of resources and service delivery is important.
• Post-crisis: It is likely that countries will vary in dealing with the crisis aftermath. In Sweden, for example, SOEs are looking for separate allocations for short-term public policy needs to define clearly the usual commercial activity from the public policy activity. Coming out of the crisis, SOEs need to prepare and regularly update their financing and borrowing plans to ensure sufficient liquidity under normal and crisis circumstances, contemplating measures, and sources for emergency funding.
• During recovery: The case has been made that SOEs need to be better prepared for future crisis. They should be mandated to prepare emergency and business continuity plans in a coordinated manner, while executives from relevant SOEs should be part of government emergency-management teams.

Even as SOE reforms move at a slow pace, with various interests making it hard to implement swift action, the recent crisis has shown how important a well-run SOE sector can be. Governments will continue to own SOEs because of underlying public policy reasons and the crisis has brought some of those reasons to the surface. With the pandemic very much at the forefront of our collective minds, the time to address long-standing challenges is now.

Read more in the World Bank Note on "Building SOE Crisis Management and Resilience: Emerging Practices and Lessons Learned During the COVID-19 Crisis".