"State-owned enterprises are a persistent fiscal drain and should be privatized or hard-budget-constrained"

"Es in specific sectors, especially utilities and transportation, in which there is a stronger reason for intervention and the performance of SOEs is closer to that of private firms. These coun- tries have fewer SOEs in areas in which private firms have significantly superior performance (for example, manufacturing). Fiscal Costs and Risks to the Government SOE performance and the realization of fiscal risks from SOEs can significantly affect public finances. Over the years, governments have provided significant support to financial SOEs (mainly capital injections) and nonfinancial SOEs (predominantly recapital- izations and debt assumptions), with the maximum annual support to financial and nonfinancial SOEs reaching 18 and 16 percent of GDP, respectively (updated version of database by Bova and others 2016).19 SOEs that operate in the airline, banking, mining, railway and utility sectors are among those that required costly support. For example, Italy’s national airline is under bankruptcy protection and has received large loans or transfers from the government 19Governments have also provided significant support to private financial institutions and nonfinancial companies, most noticeably during the global financial crisis. SOEs Private Sources: Authorities’ annual reports on SOEs; Natural Resource Governance Institute; Orbis, World Bank, Worldwide Governance Indicators; and IMF staff estimates. Note: The panels illustrate the effect of control of corruption on firms’ performance depending on the type of ownership. SOEs are firms for which the government owns 50 percent or more. The analysis controls for firm-specific characteristics, country-specific variables, and sector where the firm operates. The Control of Corruption Index provides a relative measure of perceived corruption. Data are from 1999 to 2017. SOE = state-owned enterprise. 2 0 Governance: Control of Corruption Governance: Control of Corruption –2 2 0 –2 1. Labor Productivity (Million US dollars per worker) 2. Return on Equity (Percent) Figure 3.17. Governance and Firms’ Performance 0.05 0.10 0.15 0.20 –5 0 5 10 ©International Monetary Fund. Not for Redistribution CHAPTER 3  State-Owned Enterprises: The Other Government 59 International Monetary Fund | April 2020 in the past few years.20 Similarly, South Africa’s government-owned power company, Eskom, is receiv- ing a rolling government bailout of 2⅓ percent of GDP over three years, although the cost may turn out larger (IMF 2019b). In Belarus, over the past years, the government on average provided 1½ percent of GDP in subsidies and about 2 percent of GDP in additional off-budget support (Richmond and others 2019). More broadly, SOE debt levels can pose a risk to public sector finances, even in the absence of explicit government guarantees. In some countries, debt of the SOEs exceeds 20 percent of GDP and in several cases constitutes half or more of the public sector debt stock (Figure 3.18). In other countries, SOE external debt exceeds 25 percent of the countries’ exports of goods and services (see also IMF 2020). Even if the debt was incurred to develop a natural resource, as in oil-exporting countries, the debt may increase the vulnerability of the government to shocks (for example, a fall in oil prices). In addition to debt, SOEs may have significant obligations to private parties through joint ventures, public-private partnerships, and power purchase agreements. The realization"

"• Set limits on SOE borrowing and contingent laibilities • Quantify mandates • Produce a fiscal risk statement or report on SOE sector • Overarching SOE act; ownership policy • Boards with professional members from the private sector • Robust SOE performance management cycle • Fund quasi-fiscal activities through the budget Figure 3.21. Gearing SOE Oversight to Capacity ©International Monetary Fund. Not for Redistribution 66 International Monetary Fund | April 2020 FISCAL MONITOR: POLICIES TO SUPPORT PEOPLE DURING THE COVID-19 PANDEMIC (i.e., competitive neutrality).34 The EU and Australia have some of the most comprehensive approaches. For example, Australia requires SOEs to make compensa- tory payments to the national treasury for regulatory or debt-financing advantages (OECD 2016b). Other advanced economies have made a commitment to competitive neutrality, and most have laws and regula- tions that address potential uneven treatment of SOEs and private firms (OECD 2018a). Several countries have sought to address some elements of competitive neutrality across borders.35 Multilateral institutions have also established disciplines (World Trade Organi- zation) or guidelines (OECD 2015) that touch on the issue of competitive neutrality to varying degrees. A more cooperative solution would be a multilat- eral agreement on general principles to ensure a level playing field between SOEs and private firms. These principles would guide SOE international behavior and recipient-country responses, which would build mutual trust. An approach akin to the Santiago Principles for sovereign wealth funds (International Working Group of Sovereign Wealth Funds 2008) may be worth considering, with appropriate adaptation to SOEs. The principles could cover areas such as transparency on mandates and the type and size of government support. They could also promote nondiscriminatory treatment. Adoption of the principles could be volun- tary, at least initially. Establishing effective principles would require significant technical work and political desire across countries. Detection and satisfactory resolution of SOE competitive advantages requires information that is frequently lacking on explicit and implicit govern- ment support for SOEs, the cost to the SOE of its 34Competitive neutrality is usually defined as a situation in which no entity operating in an economic market is subject to undue competitive advantages or disadvantages (OECD 2012; UNCTAD 2019). Competitive neutrality concerns are not limited to SOEs; they may also apply to nonprofit entities that are active in the mar- ketplace or to private entities receiving government support. 35For example, the Australia–United States Free Trade Agreement contains specific obligations on anticompetitive practices by SOEs. At the sectoral level, recent agreements between the United States and several Gulf countries and a revised EU directive on airline com- petition (EU 2019) have sought to address concerns about unfair SOE competition in the global airline industry. At the regional level, the Comprehensive and Progressive Agreement for Trans-Pacific Part- nership, the agreement between the EU and Japan for an economic partnership (EU-Japan EPA), and the agreement between the United States, Mexico, and Canada each contain a chapter on SOEs that establishes rules to promote fair competition and prevent market distortion by governments. noncommercial mandate (if any), SOE and comparator company finances, and the broader regulatory and legal environment in which the firms operate. Figure 3.22 highlights some of the issues that would need to be addressed to foster competitive neutrality. For example, the costs of an SOE’s commercial"