State-owned enterprises: reform them or keep funding them?

Advocates SOE reform—not continued funding—with hard budget constraints, debt restructuring, competition, and governance improvements to boost efficiency and stability.

The IMF (2016) advocates comprehensive reform of state-owned enterprises—particularly in China—rather than continued unconditional funding. It emphasizes hardening budget constraints by phasing out implicit government guarantees, restructuring highly indebted SOEs through debt triage and allowing nonviable firms to exit, and introducing greater competition in state-dominated sectors. These reforms are conditioned on strengthening corporate governance, aligning managerial incentives with shareholders, eliminating noncore social objectives, and repositioning the state as a capital investor—not an operator—to improve efficiency, resource allocation, and financial stability.

Advocates SOE reform — not blanket funding — to curb fiscal risks and ensure competitive neutrality, conditioned on governance upgrades, transparent mandates, and social safeguards.

The IMF (2020) advocates reforming state-owned enterprises (SOEs) — particularly through improved governance, pricing mechanisms, and fiscal risk management — rather than continuing unconditional funding, given the substantial fiscal risks SOEs pose, including high debt levels (up to 20% of GDP in some cases), costly bailouts, and distortions to competitive neutrality. Reforms are conditionally supported where they enhance transparency, professional board oversight, performance management, and explicit mandates, especially in sectors like utilities and transport where public intervention may be justified; however, the IMF warns against subsidizing underperforming SOEs in competitive sectors like manufacturing without structural improvements. The Fund emphasizes that reforms must be accompanied by safeguards for vulnerable populations and integrated into broader fiscal frameworks, including fiscal risk statements and limits on SOE borrowing.

AIIB supports reforming SOEs—not privatizing them—to improve governance, fiscal responsibility, and climate alignment while preserving their role in infrastructure finance.

The AIIB acknowledges the critical role of state-owned enterprises (SOEs) in mobilizing infrastructure finance—especially in EMDEs—and recognizes their efficacy in large-scale, climate-sensitive projects, but stresses that SOEs must undergo rigorous reform to address governance weaknesses, fiscal risks, and climate alignment. It explicitly rejects blanket privatization as often politically unrealistic and potentially counterproductive for GHG-intensive assets, where public ownership may better ensure emissions accountability and net-zero transitions. Instead, the Bank advocates targeted SOE reforms—including mixed-ownership models, institutional supervision upgrades, commercial/public categorization, and strengthened corporate governance—to enhance bankability, financial discipline, and developmental impact without abandoning public stewardship. These reforms are conditioned on country-specific institutional capacity and the strategic need to balance infrastructure delivery with fiscal sustainability and climate goals.

AIIB supports continued SOE funding only when paired with robust governance reforms to ensure fiscal sustainability, bankability, and competitive neutrality—rejecting blanket privatization but insisting on accountability.

The AIIB's 2023 working paper acknowledges that state-owned enterprises (SOEs) play a significant and often necessary role in infrastructure development—especially in emerging markets—due to their capacity to mobilize finance, fulfill public mandates, and operate in regulated or high-barrier sectors where private firms are reluctant or unable to enter. However, it also highlights substantial risks associated with poorly governed SOEs, including fiscal vulnerabilities from accumulated debt, crowding out of the private sector, misallocation of credit, and weaker financial performance—particularly in institutional weak environments. While recognizing privatization as one policy option with empirical support for improved performance, the AIIB explicitly states that privatization is 'not always the optimal or feasible policy solution' and instead emphasizes governance reform, transparency, and making SOEs 'bankable' to attract development finance responsibly. The stance thus conditions continued SOE funding on credible reforms that enhance fiscal sustainability, competitive neutrality, and market-based management.

Advocates SOE reform and privatization as essential, but accepts temporary government funding conditioned on governance improvements and fiscal risk mitigation.

The ADB in 2004 supported SOE reform—including privatization, restructuring, and improved governance—as essential for financial stability, capital market development, and fiscal sustainability; however, it acknowledged ongoing government funding (e.g., capital injections into SOCBs) as a necessary short-term measure to address systemic risks like nonperforming loans, contingent on parallel reforms to strengthen governance, credit risk management, and NPL disposal mechanisms.

Advocates SOE reform — not automatic privatization — to enhance governance, fiscal sustainability, and service quality, integrated with sectoral reforms and conditioned on clear mandates and accountability.

The EBRD advocates reforming state-owned enterprises (SOEs) — not blanket privatization, but targeted, context-specific reforms to improve governance, operational efficiency, fiscal sustainability, and competitive neutrality — particularly in strategic sectors like energy and infrastructure. It supports SOEs where they deliver essential public services or contribute to stability (e.g., during crises in Ukraine), but insists reforms must clarify mandates via public service obligations, strengthen accountability through performance contracts and transparent dividend policies, and integrate SOE-level improvements with broader sectoral reforms (e.g., regulation, unbundling, tariff design). The Bank explicitly links SOE reform to reducing fiscal risk, curbing political misuse (e.g., clientelism or below-cost pricing), and enhancing the investment climate for private sector development — all while respecting the legitimate role of SOEs in achieving policy and social goals.