Since many SOEs in developing countries are inefficient and thrive on patronage, in what ways might commercialization of SOEs improve financial (and operating) performance?

[Response by Sanford Berg and Anton Eberhard, October 2008]

Commercialization of SOEs can improve access to external funds (crucial for network expansion)if the borrowing limits are not exceeded and the reputation of the company is better than that of the state. In addition, commercialization can strengthen incentives for cost-containment in operations. Regulatory authorities (if they already exist at this stage of the reform process) should provide input into the corporatization and commercialization process, since the internal governance system adopted by the operator establishes the foundation for incentives and information provision. The public policy decision to commercialize an infrastructure SOE goes beyond initial corporatization (which basically separates the activities of the operator from those of the controlling Ministry). The fundamental goal is to reduce the role of non-transparent political considerations in the provision of infrastructure services. The process separates the government’s role as policy-maker from the role of managing operations. Another part of the reform process involves the establishment of an autonomous regulatory agency charged with implementing public policy—reducing the role of politics in the oversight of infrastructure firms. The result of corporatization and the creation of a regulatory authority is improved incentives for improving short and long term performance of the SOE. The following draws heavily on Eberhard¹ who examines the implications of coporatization and commercialization on performance.


Is it possible to regulate state-owned utilities effectively?
Presentation at the PURC/World Bank International Training Program on Utility Regulation and Strategy
Eberhard, Anton