What is Corporatization?

[Response by Anton Eberhard, May 2009]

Corporatization attempts to explicitly separate political considerations (support of favored groups who vote or provide campaign funds for candidates) from economic considerations (involving the financial sustainability of the SOE and performance improvements). Clearly, that separation will not be total, but long term objectives social and economic objectives are more likely to be met by instituting procedures that improve governance within the operating company and that strengthen accountability. Furthermore, corporatization serves as the basis for commercialization.

Steps for Corporatization:

1. Make the utility subject to private-sector company law
   • Utility has a legal identify separate from government (since one objective is to distinguish between an entity responsible for long-lived assets and a current government that holds power for shorter periods of time—and has a shorter time horizon)
   • Governed by a board that includes independent and non-executive directors (to avoid having a Board whose members whose jobs and compensation depend on political factors in the current government)
   • Directors have legal rights and duties (making opportunistic political interference more difficult).
2. Clearly define Government shareholding (Ministry of Finance or Sector Ministry)
3. Make the entity liable for taxes and dividends (although this requirement may be difficult to achieve at the start, given initial price levels and performance)
4. Establish a reporting relationship to a shareholder that reflects the shareholder agreement and the entity’s performance contract for the period in question. The focus of the reports should be on day to day operating decisions, but on the links between managerial strategies and organizational performance. This requires a number of steps:
   • Adoption of generally accepted accounting standards for reporting purposes.
   • Development of Information requirements that shift the burden of proof about performance from taxpayers and customers to the infrastructure firm. However, the process requires credible, understandable and responsive/timely information.
   • Collection and dissemination of reports on operating statistics (to facilitate benchmarking comparisons and to establish reasonable performance targets that are used to determine bonuses for managers and employees). This process involves the publication of
     • Comprehensive annual reports and financial statements
     • Business plans (sources and uses of funds, with underlying assumptions clearly identified)
     • Performance contract and results
     • Investment and coverage plans
     • Prices, costs and tariffs
     • Service standards and performance
     • Benchmarking studies
     • Customer surveys and complaint reports
   • Implementation of Performance-based compensation schemes. Salary structures in SOEs tend to be related to longevity or political connections rather than performance. Salary levels are often constrained by civil servant classifications—yet recruitment and retention of talented professionals requires salary systems that reflect market conditions.
   • Recognition that the political will is also necessary to improve performance. Implementation requires collective action—which means that information is necessary is necessary but not sufficient to improve performance.

Corporatization establishes the foundations for commercialization.