Communication from the Commission to the Council and the European Parliament - The Reform of State-Owned Enterprises in Developing Countries with focus on public utilities: the Need to Assess All the Options
Date: 2003-06-03
Institutions: European Commission
Subjects: developing countries, public sector, public service, structural adjustment, the EU's international role

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 03.06.2003
COM(2003) 326 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND
THE EUROPEAN PARLIAMENT

The Reform of State-Owned Enterprises in Developing Countries with focus on public
utilities:

The Need to Assess All the Options

1. 

SUMMARY

1. Poverty reduction is the over-arching objective of the EU’s development co-operation1 –
measured  in  the  medium-term  by  progress  towards  the  Millennium  Development  Goals.
Improving the performance of State-Owned Enterprises (SOEs), and SOE reform, can have a
major  impact  on  developing  countries’  prospects  of  achieving  those  goals.  The  EU
furthermore aims to foster the integration of developing countries into the world economy, for
which the development of the business/private sector plays a key role.

2.  For  some  years  there  has  been  heavy  pressure  on  developing  countries  to  reform  SOEs.
This  pressure  has  been  prompted  by  the  heavy  burden  of  SOE  losses  and  economic
inefficiency on macro-economic and fiscal balances and growth. Though the Commission has
often  linked  its  budget  support  programmes  to  adjustment  conditionality  of  the  Bretton
Woods  Institutions  (BWIs)2  and  has  been  engaged  in  close  and  constructive  talks  with  the
BWIs, it has not always been explicit on the specifics of SOE reform included in adjustment
programmes.

3.  The  objectives  of  SOEs  reform  have  not  always  been  made  sufficiently  clear.  Some
possible  goals  –  e.g.  reducing  fiscal  deficits  by  reducing  subsidies  to  SOEs  or  cashing
privatisation receipts – may  conflict with others –  e.g.  ensuring  low-cost access  to  services.
The  Communication  aims  at  clarifying  key  issues  in  this  respect  and  argues  for  the
importance of making the objectives of reform explicit and clear. Only thus can trade-offs be
made transparently, and the achievements of each reform assessed.

4.  There  will  usually  be  several  possible  ways  to  achieve  these  goals.  The  Communication
does  not  attempt  to  settle  the  debate  on  the  advantages  of  different  forms  of  ownership  of
enterprises – public, private or PPP. Rather it argues for the essential importance of looking
objectively at all the options and their sequencing and selecting the one that best meets the
needs of the particular country and  field. This needs  to pay  careful attention  to  the capacity
and resource constraints of the country.

5. Once objectives have been set and a reform option chosen, it will be essential to ensure that
progress is monitored. The lack of  adequate  monitoring  in  the  past  makes  it  impossible to
answer many questions about what has  and has not worked  in  general. But one  key  general
lesson that emerges from all the experience to date is that an adequate regulatory framework
is  essential  for  successful  reform.  Beyond  that,  solid  conclusions  on  growth,  employment,
service delivery, and fiscal impact of reform are elusive.

1

2

Joint  Declaration  of  Commission  and  Council  on  Development  Policy,  November  2000;  Resolution
of the UN General Assembly n. 55/2 'United Nations Millennium Declaration', September 2000.
The International Monetary Fund and the World Bank.

2

                                                
6. Public utilities3 are something of a special case, and of growing importance in the debate.
They  are  frequently  characterised  by  natural  monopolies,  and  each  field  has  specific
characteristics (and specialised language)  that  make  the  debate  complex.  The  importance  of
the regulatory framework is, however, particularly evident for all public utilities. In  general,
the key issues are about the access, affordability and quality of each service4 - with realistic
target levels varying greatly according to the characteristics of a country, particularly its level
of development - and quality and efficiency of management.

7. To sum up, the objective of this Communication is to propose a more active role for the
EC  in  the  debate  on  and  the  design  of  SOE  reform  in  developing  countries,  with  a  special
emphasis on public utilities, in order to ensure that all the possible options are assessed before
choosing  one  and  that  reform  is  implemented  in  a  transparent  manner,  with  adequate
sequencing and regulatory frameworks and monitoring mechanisms. This Communication is
complementary to the one on private sector development in third countries being developed in
parallel.

2. 

INTRODUCTION AND BACKGROUND TO THE COMMUNICATION

8. For the last two decades, the failures of SOEs and the resulting burden on fiscal balances,
economic  efficiency  as  well  as  on  access  to  basic  services,  have  been  at  the  centre  of
structural reform  programmes  all  over the  world.5 The  main  responses  to  these  problems  in
both  developed  and  developing  countries  have  been  market  liberalisation  and  changes  in
incentives  and  control  –  often  through  changed  ownership.  Though  the  impact  of  the
introduction  of  competition  and  a  change  in  ownership  cannot  in  practice  be  completely
separated, the Communication deals mainly with the latter.

9. For changes in incentives and control, the options ranged from commercialisation, through
alternative forms of management such as Public Private Partnerships (PPP), to partial or full
privatisation. Details are found in Sections 5-7 below. During the 1980s and 90s there was a
marked increase in the volume of divestiture of SOEs in virtually all the regions of the world.
Accurate figures are difficult to come by, but conservative estimates put the proceeds of these
sales  at  US$850  billion  between  1990  and  1999.  In  developing  countries,  US$250  billion
were raised during this period and there was a 15% decline in the relative share of the value
added of state-owned enterprises in GDP6 due to privatisation and the slow growth rate of the
public sector.

3

4

5

6

Used  here  in  the  restricted  sense  of  water,  electricity,  postal  and  telecommunications  services  and
transport infrastructure.
Using these words in their popular sense and not in the technical senses  which they have taken on in
(e.g.  COM(1996)281/03;
of 
specialised 
COM(2000)580
Privatisation in competitive sectors: the record to date by Sunita Kikeri and John Nellis.
Global Development Finance 2001 - The World Bank.

services 

interest 

general 

debate 

public 

on 

3

                                                
10. The growing number of studies on the reform of SOEs suggest that it is impossible to say
that one option or another is unconditionally “the best”7. The purpose of this Communication
is  therefore  not  to  suggest  a  “preferred”  form  of  SOE  reform  –  privatisation,  restructuring,
PPP, or other. An unconditional public or private prone approach may not be fully consistent
with the EU position expressed in Article 295 of the EC Treaty relating to its internal market,
which establishes the EU neutrality as regards the issue of the ownership of any enterprise.
In this context, the  importance of  the private sector  as  an “engine for  growth and  source  of
employment and revenue should not be undermined.” (COM(2000) 212 final : The European
Community Development Policy)

11. This Communication proposes a more active involvement of the EC on the issue. There
are  compelling  reasons  to  do  so.  First,  the  impact  of  SOE  reform  on  the  economies  of
developing  countries can affect  the  achievement  of the  Millennium  Development  Goals,  to
which  the  EU  is  firmly  committed.  This  effect  could  be  positive,  through  reduced  fiscal
deficits, increased economic growth, improved provision of essential services and building of
management  capacity,  if  reform  is  effective,  or  negative,  through  increased  unemployment,
reduced  access  to  basic  services,  loss  of  managerial  and  administrative  know-how  and
increased corruption if it is not successful .

12.  Second,  Member  States  have  broad  expertise  in  SOE  reform.  The  EU  has  unique
experience of  combining economic  liberalisation  with  common  “rules  of  the  game”,  and  an
unequalled record of reconciling competitive markets with the provision of services of general
interest8. By  recommending to  developing  countries  examples  based  on  its  own  experience,
the EU shows that it is not applying double standards.

13. Third, the EC already supports many SOE reform programmes – whether privatisation or
other  forms  of  change  –  directly  or,  more  often,  indirectly  within  the  framework  of
adjustment programmes led by the Bretton Woods Institutions (BWIs).

14. There has been a growing dialogue with the BWIs during the last years on a large number
of issues. However, if the EC wants to enhance the discussion with the BWIs on the design of
SOEs reforms, there is the need first to strengthen its own analysis and define guidelines. The
Communication therefore reviews the reasons behind the build-up of a large public sector in
developing  countries.  It  notes  the  political  nature  of  some  of  the  key  choices  involved.  It
highlights the reasons for reforming SOEs, discusses the risks and benefits of different types
of reform, and suggests lessons for best practice for both recipient governments and donors.
Finally, it makes some practical recommendations for enhanced involvement by the EC in the
reform  process,  notably  the  need  to  define  and  monitor  the  objectives  of  reform  and  to
examine all the options (including privatisation).

7

8

Public versus Private Ownership: the current state of the debate by Mary Shirley and Patrick Walsh
e.g.  in  rail,  road,  and  air  transport,  telecommunications,  postal  services,  public  broadcasting,  water
distribution, sanitation, gas and electricity supply etc.

4

                                                
15.  For  the  sake  of  clarity,  the  analysis  will  put  special  emphasis  on  the  case  of  public
utilities, but given the range of sectors concerned, will come up with broader conclusions that
can  be  applied  more  generally  (notably  to  the  financial  and  competitive  sectors).  .  The
liberalisation of agriculture and the reform of crop marketing boards have been excluded from
the  analysis  –  not  because  they  are  unimportant  but  because  they  have  too  many  specific
characteristics.  In  contrast,  public  utilities  deserve  special  attention  both  because  of  market
structure  (most  are  natural  monopolies)  and  because  of  the  substantial  impact  that  the
provision of basic services such as transport, electricity and water has on the competitiveness
of the economy and on public health, and thus on poverty reduction. Within its own internal
market, the EU recognises the notion of general interest attached to the universal provision of
such  services,  and  in  a  number  of  areas  provides  for  specific  obligations  to  be  met  by  any
public  or  private  provider.  While  the  minimum  standards  might  be  very  different  in
developing countries, many of the principles can be valuable in providing policy insights.

3. 

THE BUILD-UP OF LARGE PUBLIC SECTORS

16.  In  many  developing  countries  the  build-up  of  a  strong  public  sector  dates  back  to  the
colonial period and the first initial  years of  subsequent  independence. With the  surge  in de-
colonisation, political leaders sought greater national control of the economy, especially the
activities on which their countries depended most for foreign exchange earnings. This led to
the nationalisation of many foreign companies during the 1960s and 70s and to the acquisition
of companies in strategic sectors such as petroleum and mining in order to influence corporate
policies  on  production,  pricing  and  investment.  Import  substitution  and  accelerated
industrialisation  were  often  the  justification  for  the  creation  of  SOEs  in  manufacturing.
Similarly,  banks  were  nationalised  or  state-owned  banks  established  to  contribute  to  rapid,
state-led development or to meet challenges that the private sector was seen as ignoring, e.g.
providing rural credit.

17.  In  developed  economies,  in  particular  in  Europe,  state  ownership  also  experienced  a
period of popularity just after the second world war and later in the 60s and 70s when it was
seen as a way of protecting employment levels (especially in Europe). As recently as in  the
1980s there was a wave of nationalisation in France, and a number of calls elsewhere for the
state  to  bail  out  ailing  industries.  State  ownership  was  also  considered  a  solution  to  market
failures  in  sectors  of  natural  monopoly.  By  entrusting  SOEs  in  these  sectors  with  general
interest objectives rather than profits, they were expected to be able to adjust prices, quality
and output towards more socially efficient levels.

18.  In  the  1970s  the  criticisms  of  this  model  of  state  economic  management  gained
momentum,  particularly  in  developed  countries.  In  developing  countries,  while  some  SOEs
operated  well,  many  experienced  severe  problems,  creating  heavy  fiscal  burdens.  The  low
productivity  of  investments  in  SOEs  was  a  burden  on  the  economy  as  a  whole.  Others
suffered  from  a  lack  of  resources  for  essential  investments.  Insufficient  provision  of  basic
services hindered competitiveness and particularly harmed the poorest. . Essentially political
choices about the level of subsidy for basic services became entangled with technical debates
about the quality of SOE management.

5

4. 

THE NEED FOR SOE REFORM

19.  In  financial  terms,  SOEs  in  developing  countries  often  performed  very  poorly.  Many
firms  operated  at  a  loss,  entailing  heavy  opportunity  costs  to  the  national  economy  and  a
heavy  fiscal  burden  for  the  State  through  explicit  subsidies,  the  assumption  of  operating
losses,  or  re-capitalisation  costs  made  necessary  by  the  continued  erosion  of  the  capital
structure of enterprises.

20. In non-financial terms, the results of SOEs in developing  countries were also frequently
disappointing.  Their  provision  of  goods  and  services  has  often  been  deficient.  Water  and
electricity  supplies,  in  particular,  are  often  limited  and  unreliable,  hindering  the  country’s
competitiveness and harming public health, while very few SOEs in manufacturing are able to
compete internationally9.

21.  The  main  factors  determining  the  performance  of  enterprises,  whether  private  or  public
sector,  can  be  summarised  as  incentives  and  capacity.  Among  the  key  influences  on  the
performance  of  SOEs  have  been  two  important  aspects  of  incentives,  political  interference
and  unclear  objectives  (often  reflected  in  the  absence  of  a  genuine  budget  constraint).
Similarly  there  have  been  two  important  capacity  constraints,  skills  (including  technology)
and  funds  (whether  for  investment  or  for  working  capital),  which  have  also  limited  their
ability to deliver.

22.  Politics  played  an  important  role  in  the  expansion  of  the  public  sector  in  developing
countries and is at the root of these management problems. The level of political interference
in  SOE  management  has  been  high  in  areas  such  as  investment,  tendering,  pricing,
employment  levels  and  appointments.  There  are  many  examples  of  public  utilities  being
prevented – chiefly by political considerations – from raising charges to cover marginal costs,
without an explicit political decision on the level and incidence of such implicit subsidies. A
further  widespread  problem  has  been  extensive  overstaffing,  often  linked  to  political
patronage.

23.  Capacity  and  financial  constraints  also  contributed  significantly  to  management
weakness and played a decisive role in the poor performance of many SOEs. The impact of
all  these  problems  is  further  aggravated  by  the  lack  of  competition,  especially  in  less
developed  countries  where  regulation  and  the  rule  of  law  are  weaker.  The  lack  of  an
appropriate  legal  framework  made  it  harder  for  these  countries  to  mobilise  the  foreign  and
local  financial  resources  that  might  have  allowed  them  to  maintain  an  appropriate  level  of
investment.

24. This does not mean that SOEs are necessarily mismanaged. Nor are they unique in their
problems: the private sector in most developing countries has not always been immune from
political  interference  (although  the  channels  of  influence  were  more  direct  with  SOEs).
Private  sector  enterprises  also  suffered  from  a  number  of  governance  problems  and
management  deficiencies  that  led  to  progressive  and  generalised  losses  of  competitiveness.
However,  the  management  problems  of  the  public  sector  in  developing  countries  have
monopolised the debate. The reform of SOEs became a priority issue after the debt crisis of
the 80s. But plus attention tended to focus on the means – usually ownership changes – rather
than the ends – reduced fiscal deficits, higher quality or lower cost  of outputs,  employment
generation, even economic growth – and hence the key political issues, such as the level and

9

The politics of patronage in Africa, parastatals, privatization & private enterprise, by Roger Tangri

6

                                                
distribution  of  subsidies,  were  all  too  often  lost  from  view  in  “technical”  debates  on  the
ownership structure of enterprises10.

5. 

SOE REFORM OPTIONS WITHIN THE PUBLIC SECTOR

25. Answers to these problems in both developed and developing countries have usually been
sought in  market  liberalisation  and  ownership  changes.  It  can  be  difficult  to  separate  the
effects  of  the  two,  since  price  liberalisation  or  removal  of  barriers  to  the  entry  of  private
competitors  often  accompany  ownership  changes.  On  the  other  hand,  in  several  cases,
privatisation  without  liberalisation  has  shown  mixed  results  for  societies.  However,  this
Communication will focus mainly on the question of SOE reform, considering the objectives
of reform and the options available to Governments to attain them.

26.  The  preferred  choice  of  many  governments  was  commercialisation,  i.e.  subjecting  the
operation  of  public  firms  to  market-related  management  disciplines  through  a  range  of
different contractual forms, hard budget constraints and where possible competition, with the
state  retaining  ownership.  This  was  intended  to  capture  the  benefits  of  private  ownership
without the loss of public assets.

Reform of the Water Sector in Burkina Faso: a successful tale of commercialisation.

During the 90s the national water provider ONEA underwent extensive technical and management
restructuring,  including  the  separation  of  rural and  urban  water  supply.  This  aimed  to  make  the
public utility commercially viable and extending both water and sanitation access to low-income
areas for an affordable price. The government identified its objectives clearly through a series of
policy  documents  setting  time-bound  targets  for  reform.  At  the  end  of  the  process,  in  1999,
ONEA had achieved 95% cost recovery and 80-85% of the population served with clean water,
regardless of their income – better than most of Africa.

Sustainability  of  service  provision  and  affordability  were  secured  through  higher  tariffs  for
large consumers in order to cross-subsidise social tariffs for lifeline consumption, allowing tariff
revenue  to  cover  operational  and  capital  costs.  Improvement  in  access  to  water  was  mainly
obtained  by  connecting  existing  small-scale  systems  to  the  network  and  placing  commercially-
operated kiosks in informal settlements. This allowed for a minimum service affordable to all, and
tackled the problem of unregulated mobile vendors. Quality was improved through government
investment programs and subsidies for installing sanitation.

There was heavy pressure for privatisation, but the strong political commitment of the Burkina
Faso Government and the support of some EU Member States, and the provision of technical and
financial  assistance  by  the  whole  donor  community,  made  reform  within  the  public  sector  a
success.

10

Exploration of the Impact of Privatisation: Overview and Case Studies by Oxford Analytica

7

                                                
27.  The  range  of  management  reform  options  within  the  public  sector  also  includes  price
liberalisation, the removal of barriers to the entry of private competitors, the introduction of
performance  contracts,  and  greater  autonomy  given  to  the  managers  of  state-owned
enterprises  to  determine  prices,  hire  and  fire  employees  and  make  investment  decisions.
Market testing of particular functions, to secure value for money by comparison with private
sector options, has also been used to improve internal efficiency, though government capacity
to manage these mechanisms is a constraint in many cases.

28.  On  the  other  hand,  it  is  often  argued  that  SOEs  still  remain  vulnerable  to  political
interference  in  decision  making  and  subject  to  weak  financial  discipline  (partly  because  of
state-owned  or  politically  influenced  bank  lending)11.  This  interference  also  applied  to  staff
matters.  Many  appointments  to  senior  management  positions  were  made  on  the  basis  of
political connections. SOE reform within the public sector sometimes did little to lessen the
burden on public finances, in a context of declining international assistance. In such cases, the
privatisation  of  public  firms  would  depoliticise  economic  decisions,  put  an  end  to  the
mismanagement  and  corruption  seen  as  endemic  in  SOEs,  and  lead  to  improvements  in
productivity,  fiscal  performance,  service  delivery  and  profitability.  In  fact,  bilateral  and
multilateral  donors  encouraged  governments  in  developing  economies  to  embark  on
privatisation for many reasons, with insufficient assessment of the objectives involved.

29.  More  recently,  the  peculiar  market  structure  of  public  utilities  (e.g.  natural  monopoly,
large  sunk  costs)  lent  itself  to  another  variant  of  reform:  Public  Private  Partnership  –  a
transfer of operational control to private providers while maintaining (majority) ownership in
public hands. Contracts can greatly vary in terms of duration and obligations for both actors
and usually seek to introduce competition not within the market but for the market. A more
detailed description of PPPs is found in Section 7, with a subsequent discussion of the range
of issues raised by the peculiarities of public utilities (Section 8). Nevertheless it is too soon
to evaluate the efficiency of these new instruments that are in most cases still evolving.

30.  Finally,  the  recent  poor  financial,  operating  and  safety  performance  of  some  privatised
firms (particularly in public utilities) in developed countries has led to experiments with other
forms of ownership, such as mutualisation. In this case the assets are vested in a non-profit
company  funded  by  bond  issues  rather  than  shares,  and  any  profit  is  then  reinvested  in  the
company.  The  company  is  usually  controlled  by  relevant  stakeholders  –  service  users,  the
local community, national government, workers in the enterprise, and the commercial private
sector are often represented. The advantages are firstly that the firm is run commercially but
not owned by private shareholders, and secondly that it can pursue public interest concerns. It
is not yet clear whether such an approach can be applied in developing economies, given its
reliance on suitable legal, administrative and financial infrastructures, as well as on customers
with the ability to pay and on sufficient incentives for effective management and safeguards
against capture.  In view of its limited track record,  it  is not  covered  in further detail in  this
Communication. However, it seems to merit more exploration than it has so far received.

6. 

PRIVATISATION , SUCCESSES AND FAILURES

31. Though exact figures are not available, the empirical evidence shows a growing number
of  privatisations  in  developing  countries.  Proceeds  increased  particularly  in  the  90s  and  in
1999 they were four times the level of 1990, following a peak of six times in 1997.

11

Roger Tangri op cit

8

                                                
Figure 1. Developing Countries Privatisation Proceeds 1990-2001

32. In recent years there have been many studies and reports on the outcome of privatisation.
From the abundant literature available there emerges a mixed message.

33. In commercial sectors, empirical evidence confirms large efficiency gains from the joint
implementation  of  privatisation  and  market  liberalisation12.  There  is  consensus  that  the
profitability, productivity and output of firms improve substantially after reforms. New capital
investments are sometimes made to upgrade equipment13. Such gains are particularly evident
for  high  and  middle-income  countries,  while  low-income  economies  indicate  more  mixed
results. Privatisation and liberalisation in sub-Saharan Africa and transition economies of the
former Soviet Union, for instance, have not always achieved the results expected in terms of
efficiency.  In  these  cases,  ineffective  public  administrations,  fragile  legal  systems,  weak
regulatory  capacities  and  poorly-developed  financial  markets  seem  to  be  at  the  root  of  the
limited success.

Examples of privatisation with a positive impact14

Privatisation  can  have  a  positive  impact  on  firms  financial  performance.  In  Kenya,  profits  of  the
Housing  Finance  Company,  privatised  in  1992,  rose  by  more  than  100%  between  1992  and  1993.
Privatisation has also enabled firms to diversify product lines and upgrade and rehabilitate facilities. In
Uganda,  Shell  International  reported  that  privatisation  allowed  the  firm  to  concentrate  on  core
activities and to contract out noncore activities such as canteen services and gardening. Investment far
exceeded the requirement under the privatisation  deal to  invest  $10  million  over  three  years:  in just
two years $13 million was invested in new and rehabilitated filling stations.

Management  changes  and  new  investments  associated  with  privatisation  have  resulted 
in
improvements in performance. In Ghana, the acquisition of a majority stake by Lever International in
Unilever  Ghana  Limited,  which  increased  its  shareholding  from  45%  to  70%,  brought  about
significant changes in the company. It gave the investor the necessary flexibility on matters relating to
strategic  direction,  capital  investment,  mergers  and  acquisitions.  The  capital  investment  made  has
enabled  the  company  to  reduce  unit  costs  and  to  report  a  50  %  increase  in  production  without
increasing energy consumption.

12

13

14

Birdsall  N.  and  Nellis  J.  (2002).  Winners  and  Losers:  Assessing  the  distributional  impact  of
privatisation. WP n.6 Center for Global Development; Kikeri S. and Nellis J. (2002) op cit.
The divestiture of the Polish cement plants in the mid-90s with the contractual obligation for the new
owners to invest in their development is a case in point.
From Privatisation in Africa by Oliver Campbell White and Anita Bhatia.

9

                                                
34. Financial sector reform deserves further attention, since the creation of a competitive and
commercially-oriented  banking  system  is  not  only  important  per  se,  but  can  enhance  the
success  of  SOE  reform  in  all  sectors.  Bank  divestitures  have  produced  substantial  savings
(e.g. Argentina) and, in transition economies like Estonia, Hungary and Poland, privatisation
has led to better outcomes because of bank restructuring early in the transition. State-owned
banks  tend  to  hinder  stock  exchange  activity,  have  often  high  ratios  of  administrative
costs:revenue and, above all, concentrate their lending on other SOEs,  allowing them “soft”
budget  constraints.  However,  banking  privatisation  in  Chile  (70s),  Mexico  (90s)  and  South
East Asia (late  90s)  was accompanied  by severe financial  crisis because of  weak regulatory
frameworks and lack of monitoring and enforcement procedures.

35. The outcome of privatisation has varied widely  between countries and sectors, and  as a
function of the sale process, but there is evidence that it enhanced efficiency more than equity.
Many  SOEs  were  overstaffed  and  retrenchments  had  a  significant  impact  on  income
distribution. Where applied, severance schemes were expensive, but without them job losses
pushed many ex-employees towards poverty. Evidence for gains in overall economic growth
is  not  certain  and  recent  studies  indicate  that  poor  regulation  and  the  absence  of  broad
institutional reforms may be the reasons undermining the positive impact of privatisation on
growth15.  Fiscal  proceeds  and  the  end  of  subsidies  to  large  loss-makers  substantially
contributed to the reduction of public deficits in developing countries. However, there is still
room  for  improvement  since  proceeds  have  often  fallen  well  short  of  those  expected,  for
reasons including delayed payments, lack of transparency, and limited government capacity to
monitor and enforce contracts.

Zambia Consolidated Copper Mines (ZCCM) : the sad saga of a flawed reform process

ZCCM, with its own farms, schools and hospitals, was more than a company, accounting for more
than  10%  of  Zambia’s  GDP  and  at  one  stage  90%  of  total  exports  and  70%  of  foreign  currency
earnings.  After  nationalisation  in  1972,  lack  of  maintenance  and  capital  re-investment,  and  wide-
spread mismanagement, reduced ZCCM’s copper output from a peak of 720,000 t in 1969 to just over
286,000 t in 1999. At the time of its privatisation it was losing US$1-1.5 million a day (9% of GDP in
2000) and had a total indebtedness of US$1 billion.

The  Privatisation  Act  entrusted  the  Zambia  Privatisation  Agency  with  the  responsibility  for  all
divestiture,  a  task  it  had  been  performing  in  recognised  transparency  and  honesty.  Instead,  the
privatisation  of  ZCCM  was  carried  out  in  an  opaque  manner  by  a  special  negotiating  committee
appointed by the President, amid wide-spread allegations of corruption and asset stripping. Attractive
bids were declined and the process stalled for several years, while the Asian financial crisis led to a
sharp fall in copper prices. Potential buyers either lost interest or sought to renegotiate their deals.

Finally  in  2000,  after  the  World  Bank  withheld  a  $530  million  credit  until  ZCCM  was  sold,  the
divestiture  process  was  completed.  Many  analysts  contended  that  the  deal  compared  very
unfavourably with the June 1997 bid by the Kafue consortium – especially when incentives to Anglo,
such as a cut in corporation tax, a 20- year exemption from profit tax and a reduced power tariff, are
taken into account. This rather generous treatment did not however, prevent Anglo from deciding to
halt its operations in Zambia in 2002 after it had spent over $350 million, leaving the government with
the daunting task of finding another operator.

36.  The  most  frequent  criticism  of  privatisation  processes  is  their  lack  of  transparency.
Public assets are transferred to private hands by non-competitive methods, fuelling the system

15

Sachs  J.  (2000). The  gains  of  privatisation  in  transition  economies:  is  change  of  ownership  enough?.
CAER Discussion Paper 63, Harvard.

10

                                                
of  political  patronage.  This  makes  for  suspicions  of  corruption.  Lack  of  transparency,  and
consequent  corruption,  also  often  reduce  privatisation  proceeds.  A  good  example  is  the
Russian  “loans  for  shares”  privatisation  scheme16  between  1995  and  1997.  Privatisation  of
copper mining in Zambia is a further example of how lack of transparency and adverse market
trends can lead to serious shortfalls in divestiture proceeds (see box above).

37.  Sales  revenue  can  be  also  be  reduced  because  of  the  absence  of  real  competition  in
bidding, or a lack of bargaining power on the part of the government. For important sectors
like network industries, the level of investment and technical expertise required of the private
provider limit the number of companies able to bid. Cartel arrangements are highly possible.
Local  businesses  play  very  little  part  in  such  SOE  reforms.  In  addition,  limited  capacity
prevents  governments  from  carrying  out  complex  price  evaluations  of  SOEs  and  properly
managing  the  selection  and  negotiation  stages.  This  often  leads  to  inadequate  prices  and
unfavourable conditions attached to the sale.

SENELEC – two unsuccessful attempts at privatisation

The  privatisation  of  the  Senegalese  electricity  company,  SENELEC,  has  been  attempted  on  two
occasions without success.

On  the  first  occasion  in  March  1999  a  consortium  bought  34%  of  the  shares  of  SENELEC  under
contractual  obligations  including  service  and  investments  levels.  However,  18  months  after  handing
over the operations, the Senegalese government decided to end the contract, leading to an agreement
in January 2001 by which the government repurchased all the shares held by the consortium. It wanted
a  larger  investment  programme  and  accused  the  consortium  of  not  honouring  its  investment
obligations,  while  the  consortium  felt  that  SENELEC  had  been  in  a  worse  condition  than  they  had
been told.

A  second  attempt  at  privatisation  was  initiated  in  July  2001.  It  was  decided  that  51%  of  the  shares
would  be  allocated  to  a  “strategic  partner”  on  the  basis  of  the  purchase  of  existing  shares  and  an
increase in capital, thereby making available funds for investment as well as increasing the capacity of
the company to seek further debt finance. In addition the obligation to carry our out investments would
be more clearly defined. This process too was unsuccessful: two bids were received but neither bidder
completed a deal. The government is now re-examining the options for privatisation.

16

Sachs  J.  (2000). The  gains  of  privatisation  in  transition  economies:  is  change  of  ownership  enough?.
CAER Discussion Paper 63, Harvard.

11

                                                
38.  Privatisation  may  also  be  unsuccessful  in  the  absence  of  an  appropriate  regulatory
framework.  This  is  particularly  important  for  sectors  where  it  is  practically  impossible  to
introduce competition, creating a risk of going from a public monopoly to a private one, with
serious  consequences  for  social  welfare.  In  developing  countries,  the  absence  of  proper
regulation is often linked with the pressure to sell off SOEs as quickly as possible in order to
free resources to reduce the fiscal deficit or to meet donor conditions, as well as to lack of the
technical  and  financial  resources  it  requires.  It  can  also  be  connected  with  the  fact  that  the
divestiture  of  an  unregulated  monopoly  is  much  more  profitable.  As  a  result,  enforcing  ex-
post  regulations,  to  ensure  competition  or  to  control  monopolistic  situations,  becomes  very
difficult.

39.  Finally  many  privatisation  processes  have  suffered  from  inadequate  monitoring
mechanisms  during  and  after  the  transfer  of  public  companies  to  private  ownership.  Clear
contracts,  followed  by  transparent  monitoring  and  enforcement,  are  crucial  to  devising
solutions, overseeing and reporting on the smooth working of the enterprises themselves, and
ensuring that the new private owners honour their  commitments and  that the state fulfils its
obligation vis-à-vis local communities and any workers made redundant.

7. 

PUBLIC-PRIVATE  PARTNERSHIPS:  AN  ALTERNATIVE  TO  THE  OUTRIGHT  SALE  OF
PUBLIC ASSETS

40. The difficulties encountered by privatisation operations in developing countries have often
reduced the pace of entire programmes and led the donor community to consider alternative
options to outright divestiture in their support to public sector reforms. One of these options
has been the  creation of PPPs, enabling the  injection of private  resources  and  expertise  into
state-owned enterprises.

Type of
contract

Duration

What the contractor
usually receives

Nature of
contractor
performance

Examples

Service
contract

Short-term
(1–3 years)

A fee from the
government for
performing the service

A definitive, often
technical type of
service

Bill collection;
facility repairs and
maintenance

Management
contract

Medium-term
(3–8 years)

A fee from the
government for the service
and a performance-based
incentive

Manage the
operation of a
government service

Regional water
supply
management

Lease

Long-term
(8–15 years)

All revenues, fees or
charges from consumers
for the provision of the
service; the service
provider pays the
government rent for the
facility

Manage, operate,
repair and maintain
(and maybe invest
in) a municipal
service to specified
standards and
outputs

Existing water or
power facilities

Build-
operate-
transfer

Long-term
(15–25 years)

The government mostly
pays the service provider
on a unit basis

Construct and
operate, to specified
standards and
outputs, the
facilities necessary

Building,
construction and
maintenance of
regional schools,
prisons or hospitals

12

to provide the
service

Concession

Long-term
(15–30 years)

All revenues from
consumers for the
provision of the service;
the service provider pays a
concession fee to the
government and may
assume existing debt

Manage, operate,
repair, maintain and
invest in public
service
infrastructure to
specified standards
and outputs

New airport or
seaport facilities,
toll road or bridge

41.  Public-Private  Partnerships  are  basically  a  contract  between  a  private  investor  and  the
state for the provision of a service. There are different types of contracts, of which the table
above17 gives a few examples. In exchange for the provision of a service, the private promoter
receives fees, rights or receipts depending on the type of agreement.

42. It is worth noting that any of these forms can be focused on a range of objectives. Their
choice  is  a  political  one,  of  course  within  a  range  given  by  e.g.  availability  of  resources  as
well  as  other  demands.  Thus  the  emphasis  can  be  on  access,  affordability  and  quality  of
service,  or  on  maximum  fiscal  gain,  or  on  employment  protection,  or  any  other  policy
priority.  What  is  important  is  that  objectives  be  specified  clearly  in  the  contract,  and  then
compliance  be  monitored.  Ideally  the  level  of  subsidy  should  be  transparent,  so  that  the
political choices associated with different subsidies – the crucial questions of who  gets how
much subsidy – can be explicitly addressed.

43. Investment in private infrastructure projects began from a relatively low base in the early
1990s,  reached  a  peak  of  $123.3  billion  in  1997,  declined  in  1998  and  1999  in  response  to
crises in emerging markets, and resumed their upward trajectory in 2000 (see Figure 2).

F ig u re  2 :  In v e s tm e n t in  In fra s tru c tu re  P ro je c ts  w ith  P riv a te  
P a rtic ip a tio n  in  D e v e lo p in g  C o u n trie s , 1 9 9 0 -2 0 0 0

(2 0 00  U S $  b illio n s )

1 4 0

1 2 0

1 0 0

8 0

6 0

4 0

2 0

0

1 9 90

1 9 91

1 99 2

19 9 3

19 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

S o u rc e : W o rld  B a nk  P P I D a ta b a s e

44. By 2000 some 154 developing countries had concluded this kind of deal to develop their
infrastructure.  Between  1990  and  1998,  PPPs  were  estimated  to  have  had  a  total  value  of
some US$496 billion: $14 billion representing Africa’s share, $237 billion for Latin America
and the Caribbean, $147 billion for Eastern Asia and the Pacific and $38 billion for Southern
Asia.

17

Source: African Development Bank 2002.

13

                                                
45. By sector, telecommunications has dominated investment, with some $292 billion during
1990-2000. Electricity accounted for $197 billion, transport $125 billion, water and sewerage
$37 billion, and natural gas transmission and distribution $33 billion.

46. PPPs have come in for increasing political criticism, partly because of the loss of national
control  implied  by  foreign  multi-national  companies  operating  essential  services  and  partly
because of the loss of jobs often associated with reform. The process of contracting has also
been open to the same criticisms as that of privatisation, with concerns over transparency and
the risk of corruption.

47.  Developing  the  local  private/business  sector  is  an  important  goal  of  co-operation,
particularly  for  economic  growth.  The  private  sector  may  also  have  an  important  role,
depending on particular national arrangements and at the behest of the state, in the provision
of  public  services.  However,  market  failures  mean  that  there  remains  an  important  role  for
public  action  in  these  areas.  Public  utilities  are,  as  noted  above,  perhaps  the  most  common
form of PPP. They have a number of special characteristics18, whatever the form of ownership
under which they operate, and hence merit more in-depth analysis.

8. 

PUBLIC UTILITIES

48.  Public  utilities  are  a  sub-set  of  the  broader  category  of  services  of  general  economic
interest. This Communication focuses on the subset of greatest significance for development,
which  always  includes  water  supply  and  sanitation,  basic  transport  infrastructure  and
generally electricity and postal services. Telecommunications also fall within this category in
almost  all  developing  countries,  and  in  most  cases  some  public  transport  services  are  also
included. However, the aspirations to universal provision which would  apply  within the  EU
are often unattainable in the short to medium term in many developing countries.

49.  The  European  Union  takes  a  neutral  stance  on  the  ownership  of  public  utilities,  and
recognises  that  an  issue  of  general  interest  could  be  attached  to  the  universal  provision  of
basic services  by  these  utilities.  The  concept  of  universal  service  “refers  to  a  set  of  general
interest requirements that guarantee  that everyone has  access  to  certain  essential services of
high quality at prices they can afford, in industries where these services are provided through
a  network”19.  In  developing  countries,  tackling  issues  such  as  access,  affordability  and
quality is particularly important, given the extremely narrow reach of existing networks, the
low  potential  and  immaturity  of  markets  in  specific  areas  (e.g.  rural)  and  sectors  (e.g.
sanitation) and the poor quality of service, particularly in low-income neighbourhoods. Thus,
the impact of reform on poverty is expected to be far-reaching.

50.  “Basic  needs”  has  been  variously  interpreted  in  development  literature  and  in  further
different ways in the debate on services of general interest within the EU. Similarly, “access”
has  been  used  in  the  development  literature  to  cover  a  range  of  issues  differentiated  in  the
public services debate (access, coverage etc.),  while “quality”  also  encompasses issues such
as  absence  or  interruption  of  service  as  well  as  the  technical  usage  of  the  term  in  public
service debate.

18

19

Notably the scale of their fiscal impact, their  market structure – frequently a natural  monopoly  –  and
their direct impact on poverty. They also form a large part of the SOEs remaining after previous rounds
of reform.
The  Services  of  General  Interest  in  Europe.  Communication  of  the  European  Commission,  OJ  C
 281, 26.9.1996, p. 3.

14

                                                
Services of general economic interest in the EU

Services of general economic interest (SGEI) are a key element in the European model of society and
the new Article 16 of the EC Treaty confirms their place among the shared values of the Union. Public
authorities consider the provision of such services (e.g. water and electricity supply, postal service) to
the population as necessary.

States  are  free  to  choose  whether  to  provide  them  directly  or  entrust  a  private  operator  with  their
supply.

When market forces alone cannot ensure a satisfactory provision of these services, public authorities
can lay down a number of specific service obligations, dealing mainly with access, affordability and
quality issues. The fulfilment of such obligations may trigger the granting of exclusive rights to private
or  public  providers  and  compensatory  payments  for  the  deficits  incurred  in  the  provision  of  those
services (within a limited amount in order not to distort trade and competition).

At  the heart of this  policy,  lies  the  interest  of  the  European  citizens  who  have  come  to  expect  high
quality services at affordable prices.

51.  Concerns  have  been  raised  that  reforms  in  state-run  public  utilities  may  increase  tariffs
and  connection  fees,  worsening  the  conditions  of  low-income  households.  Whatever  the
validity  of  such  concerns,  it  is  important  to  recognise  that  in  most  cases  low-income
households  in  developing  countries  have  not  been  adequately  served  by  state-run  public
utilities. In many cases, the great majority of poor people does not have access to the existing
subsidised or price-controlled services at all, but have to pay much higher prices (often well
above  even  unsubsidised  prices  to  existing  customers)  for  “informal”  supplies  of  dubious
quality.  Prices  below  cost  recovery  and  lenient  attitudes  towards  non-payers  have  also
frequently  undermined  the  ability  of  utilities  to  expand  their  networks  and  maintain  an
acceptable quality of service. In the water and sewage sector the impact of such situations on
the spread of water-related diseases has been widely documented20 while electrical fires due
to illegal connections are common among low-income households in developing countries.

52. PPPs in public utilities have contributed so far to the lessening of the financial burden of
loss-making SOEs and have  generated resources  for the  state.  Between 1990  and 1998 PPP
investments are estimated to have totalled nearly US$500 billion.

53. Access to water or electricity services has a mixed record in privatised SOEs. Among the
positive examples are electricity privatisation in Chile and Guatemala, and water privatisation
in  Ivory  Coast,  Bolivia  (La  Paz)  and  Philippines  (Manila).  On  the  other  hand,  water
privatisation  in  Guinea,  Argentina  (Buenos  Aires)  and  Bolivia  (Cochabamba)  failed  to
achieve significant  increases in  connections, mainly  because of excessively  high  connection
fees.  Improvement  in  access  is  particularly  evident  in  telecommunications.  High  rates  of
service  expansion  have  been  experienced,  for  instance,  in  African  and  Latin  American
countries. In this case the introduction of competition, made possible by mobile technology,
seems to be a decisive factor. In general, significant differences in access between urban and
rural or sub-urban areas remain across all sectors.

20

e.g. Ghana, see Vaz L. and Jha P. (2001). Note on the Health Impact of Water and Sanitation Services.
CMH Working Paper Series n. WG5:23. World Health Organisation.

15

                                                
Bolivia water PPPs : a tale of two cities

In  1997  the  Bolivian  Government  issued  a  30-year  concession  for  the  private  provision  of
water and sanitation  to  La  Paz  and  El  Alto.  Competing  bids  were  judged  on  the  number  of
new connections offered for a pre-determined tariff: the winner  contracted for  almost 100%
coverage for water and 90% for sewerage. Complementary support through micro-finance and
community work helped to achieve these levels, together with substantial cross-subsidisation
– domestic fees were set at about half the cost of provision.

In Cochabamba, in contrast, the water company was privatised without competition. The new
owners  decided  to  source  water  differently  from  the  plans  made  by  the  public  utility.  They
trebled tariffs, but did nothing to improve quality or extend access to low-income households.
Following  public  protests,  the  company  was  re-nationalised  and  the  assets  given  to  the
municipality to run.

54. Affordability of services is ultimately a political decision, since a government can decide
what level of subsidy it wishes to provide, given other commitments in relation to resources.
It has usually been true that tariffs rise after reform, since prices were previously held below
cost  recovery  levels.  This  happened  for  example  in  Peru,  Argentina,  Bolivia  and  Guinea.
However,  cost  reductions  due  to  increased  efficiency  can  also  lead  to  lower  tariffs  for
consumers,  as  happened  in  the  water  sector  in  the  Ivory  Coast,  in  electricity  in  Chile  or
telecommunications in the United Kingdom. Sectors where it has been possible to introduce
some limited competition, such as electricity generating and telecommunications, are the ones
to show the best results in terms of affordability.

55.  Quality  of  service  generally  improves  after  reform,  as  witnessed  by  a  cross-section  of
utilities  and  countries.  Moving  from  the  extremely  low  levels  of  quality  provided  by  many
SOEs represents an  important  benefit, especially  for sectors  where public  health  is  at  stake.
However,  the  issue  of  raising  quality  still  remains  after  reform.  In  perfectly  competitive
markets  there  may  be  no  need  to  regulate  service  quality,  but  in  sectors  characterised  by  a
natural  monopoly  it  has  been  shown  that  providers  tend  to  set  low  standards  in  relation  to
price (especially in sectors with low price elasticity like water and electricity).

Morocco Telecommunications: a lucrative PPP in the form of a concession

In  1999,  for  instance,  Morocco  awarded  a  US$1.1  billion  mobile  phone  concession  for  15
years to Medi Telecom, a consortium of Spain Telefonica, Portugal Telecom and Moroccan
investors.  The  government  used  the  proceeds,  which  represented  half  of  its  total  annual
capital inflows, to repay some 6% of the country’s debts as well as make fresh investments in
the public  sector. (source: African  Development  Bank)  This  example  illustrates  the  positive
impact  that  Foreign  Direct  Investment  can  have  in  improving  the  quality  of  services  and
economic performance of developing countries and in mobilising local and regional financial
resources.

56. The magnitude and incidence of these effects depend on three main factors: competition,
the regulatory framework, and monitoring and enforcement mechanisms.

57. The introduction of competition has positive results in terms of prices, service expansion
and quality (as shown by reform  of the  telecommunication sector in a number of countries)
which  benefit  the  consumer.  However,  it  has  to  be  borne  in  mind  that  technological
constraints  represent  a  barrier  to  competition  in  the  majority  of  infrastructure  sectors,
particularly electricity distribution, water supply and sewerage.

16

58. A sound regulatory framework is essential. When competition is not a feasible option,
regulation acts as a substitute for the market, taking on some of the functions of a competitor
and addressing the monopoly power of the provider. Obviously there is no single approach to
the  regulation  of  public  utilities,  and  the  outcome  of  regulation  depends  on  the  framework
chosen.

59. For the water and electricity sectors, there is evidence that poor people are often the losers
unless reform  agreements are  carefully constructed.  However,  if  poverty-focused  conditions
are built into an agreement it can have a positive impact on service provision. In the case of
water supply in Bolivia (La Paz), service expansion was obtained through connection targets
specified  in  the  agreement  with  a  private  investor.  In  both  Guatemala  and  Bolivia  the  net
proceeds of the sales of electricity companies were invested in network expansion. Targeted
subsidy  schemes  in  Chile  allowed  the  government  to  mitigate  the  impact  of  tariff  increases
and  improved  the  attractiveness  of  low-income  customers  to  the  provider.  Where  such
conditions  were  set the  fiscal  benefits of reform often  decreased  because of  implementation
costs or lower prices offered by new managers. Thus the trade-off between revenue raising for
the public sector and consumer protection is difficult to escape. The choice remains ultimately
a political one.

60.  Monitoring  and  enforcement  mechanisms  after  reform  are  also  vital.  There  is  little
evidence  of  the  extent  to  which  the  commitments  made  by  the  new  managers  in  terms  of
investment, labour conditions, or service delivery, have been met. There also seems to be little
sign of monitoring of the impact of privatisation or PPPs by governments: most reports are of
academic,  donor,  or  civil  society  origin.  The  main  reasons  for  this  lack  of  monitoring  stem
from  weak  legislative  frameworks  and  a  lack  of  resources  for  regulatory  authorities.  The
result  is  that  the  design  of  contracts  is  biased  towards  the  provider,  for  lack  of  government
bargaining power and enforcement is weak, allowing opportunistic behaviour such as delays
in payment and maintenance and low quality standards.

9. 

GUIDELINES AND KEY ISSUES FOR SUCCESSFUL SOE REFORM

61.  Governments  need  to  define  their  objectives  clearly,  in  ways  that  can  be  monitored
transparently.  They  must  decide  what  is  the  most  important  issue  for  their  citizens:  service
quality  or  accessibility,  fiscal  gains  or  employment  generation,  taking  account  of  benefits,
costs, resources and alternative uses. Trade-offs may occur, for example between productive
efficiency  and  employment  levels,  revenue  raising  and  consumer  protection  or  quality  and
prices, as well as between needs and resources. It is therefore crucial for governments to set
priorities. Decisions like these, and those on subsidy level and incidence, are fundamentally
political decisions and need to be made explicit and transparent if governments are to be held
properly accountable.

including  restructuring  within 

62.  Before  deciding  on  a  formula  for  reform,  governments  would  need  to  examine  all  the
options, 
the  public  sector,  PPP,  privatisation,  and
mutualisation,  analysing  the  impact  they  are  likely  to  have  on  access,  affordability,  and
quality  of  services  and  goods,  on  public  finances  and  on  the  country’s  economy.  This
assessment  should  also  take  into  account  the  employment  and  social  consequences.  The
reforms  should  be  dealt  with  in  an  open  and  transparent  process  involving  all  relevant
stakeholders, especially since employment issues are often central to their acceptability.

17

63.Transparency  in  both  design  and  implementation  is  critical  to  the  outcome  of  reform.
There  are  two  main  reasons  for  this:  first,  a  lack  of  transparency  implies  higher  risk  of
corruption; and second, poor information during the process can undermine the confidence of
public  opinion  and  oblige  the  government  to  reverse  the  reform.  Donor  support  to  improve
transparency can be crucial and it is important that their intervention be clearly separated from
the  commercial  interests  of  bidders  from  donor  countries.  Detailed  and  regular  information
campaigns targeted to the whole population should be an integral part of this, which  should
help to secure acceptability of the type of reform envisaged and of its consequences.

64.  The  design  of  the  regulatory  framework  and  monitoring  of  post-reform  performance
are key issues,  which  have  an influence on all the  impacts  analysed  so far.  There  is  no  one
regulatory  approach  that  fits  all  utilities,  but  rights  to  access,  affordability  and  minimum
quality  of  the  service  should  be  guaranteed  as  a  public  interest,  taking  account  of  the
availability  of  resources.  The  benefits  of  a  proper  regulation  and  control  range  from  direct
reduction of poverty to consumer protection, from better quality of service to less corruption.
Since developing countries may lack  the  capacity  to  tackle  such  issues  successfully,  donors
should  pay  careful  attention  to  ensuring  that  they  are  addressed.  Technical  assistance  may
need to be provided for the design of the legal framework, and selection and negotiation with
new managers. Financial assistance may also be needed, at least during the phase immediately
following reform.

65.  SOE  reform  in  developing  countries  requires  a  marked  increase  in  the  level  of  foreign
direct  investment  flows.  For  this  to  happen  governments  must  create  a  conducive  climate
based on peace, democracy and stability, a stable macroeconomic environment, a transparent
and predictable fiscal system, enforcement of the rule of law by an independent judiciary, and
respect for human rights. Indeed, Foreign Direct Investment goes primarily to countries that
have a good business climate, and developing countries must strive to improve theirs, with the
help of the donors. Similar conditions are needed to promote domestic private investment as
well.  This  is  true  for  any  form  of  change  of  ownership,  whether  privatisation,  PPP,  or
mutualisation;  and  indeed  remains  substantially  true  for  successful  commercialisation  and
reform within the public sector as well.

66. As noted with regard to regulation, sequencing is crucial. An important sequencing issue
is the  inclusion  of  the financial sector  reform,  given the  impact,  which  unreformed  banking
institutions,  can  have  on  the  incentives  confronting  enterprises  during  the  reform  process.
Furthermore, financial sector  reform  has  other benefits in its own right, notably in reducing
the scope for corruption and abuse of office and for increasing economic efficiency overall.

67.  Gains  in  access,  affordability,  quality,  greater  efficiency,  and  improvement  in  the  fiscal
position  are  the  expected  outcome  of  well-designed  reforms  in  the  medium  and  long  run.
However,  negative  consequences  at  least  in  the  short-term  must  not  be  underestimated,  for
example in terms of job losses, reduced access to services, or increases in poverty levels with
negative  consequences  for  stability  and  growth.  Therefore  any  reform  should  include  an
appropriate  social  protection  strategy,  not  only  in  order  to  mitigate  such  negative
consequences, but more importantly to ensure its overall success. Any isolated reform effort
is  unlikely  to  achieve  its  objective  if  it  not  embedded  in  a  consistent  package  of  mutually
reinforcing economic employment and social policies.

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10. 

THE  ROLE  OF  THE  EC  IN  THE  REFORM  OF  SOES  IN  DEVELOPING  COUNTRIES:
RECOMMENDATIONS AND IMPLICATIONS

68. As one of the main development aid providers, the EC has long been involved in funding
and  reforming  SOEs  in  developing  and  transition  countries  of  the  former  Soviet  Union  and
CEECs. It has done so in several ways. It has, through the EIB and ERBD, provided loans to
this sector and, sometimes, refunded severance costs in the course of industrial restructuring.
In a number of cases, it has financed the import of spare parts to allow an ailing industry to
resume production, and provided technical assistance to establish restructuring programmes.

69.  The  EC  has  also  supported  SOE  reform  directly  in  some  Mediterranean  and  Tacis
countries.  It  has  also  supported  them  indirectly,  as  in  the  ACP  region,  through  macro-
economic support programmes. In the latter case, it linked the budgetary  aid it provided for
structural adjustment programmes supported by BWIs to the implementation of SOE reform
processes.  Though  the  EC  collaborates  constructively  with  BWIs  in  many  areas,  it  has  not
generally  been  involved  in  the  details  of  these  reforms.  However,  given  the  importance  of
successful  SOE  reforms  for  the  attainment  of  the  Millennium  Development  Goals,  the  EC
should now pursue a closer dialogue with the governments and the BWIs on the matter.
The policy conclusions above form the basis of this stance

70.  It  must  where  appropriate  voice  its  concerns  about  the  shortcomings  of  current
approaches, to the countries concerned and enhance its dialogue with the BWIs in this respect.
By  using  the  broad  range  of  expertise  existing  within  its  Member  States  the  EC  should
become  a  more  active  partner  in  trying  to  design  such  reforms  to  take  more  fully  into
account  its  objectives  of  poverty  reduction  and  enforcement  of  sound  macroeconomic
frameworks in developing countries.

Discussions  with  the  developing  countries  concerned,  and  with  the  BWI,  should  take  place
prior to any SOE reform which directly or indirectly involves the EC . European Commission
Delegations  entrusted  with  increased  decentralised  responsibilities  would  need  to  play  an
active  role  in  the  discussions  to  be  held  at  country  level  during  PRSP  processes  or  during
BWI  missions,  concentrating  on  the  objectives  of  reform,  identification  and  assessment
of  reform  options,  including  sequencing  issues,  the  requirements  of  post-reform
regulation and monitoring and the need to address employment and social implications
in a consistent and integrated way. Member States should also be involved in these talks.

71.  When  a  decision  is  taken  on  this  basis,  the  EC  should  mobilise  the  appropriate
development  policy  instruments  to  back  its  implementation.  Where  a  role  for  the
private/business  sector  (e.g.  in  privatisation  or  PPP)  has  been  chosen  as  the  best  option,  it
should include its instruments for private sector development in third countries. It may also be
able to help through its macroeconomic support programmes. The former can make financing
and  investment  guarantees  available,  particularly  through  the  European  Investment  Bank.
Both can help to promote a favourable  business  climate,  essential  for  attracting  foreign  and
domestic private investment, and assist in building the capacity to implement social protection
strategies.

72.  On  the  other  hand,  this  approach  should  avoid  direct  EC  involvement  in  the
implementation of a SOE reform programme if there has been no assessment of the needs and
conditions  for  its  success.  Special  arrangements  should  be  made  to  review  programmes  of
support for SOE reform that have already been approved and are being implemented.

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73.  Where  SOE  reform  is  already  in  hand,  the  EC  should,  when  ever  possible,  make  an
assessment of the conditions for its successful contribution to the overall objective of poverty
reduction  and  its  specific  concerns  over  access,  affordability,  quality,  economic  growth,
employment  and  fiscal  impact.  This,  obviously,  may  take  time  to  attain.  Meanwhile,  if  a
country  falls  off  track  with  the  BWIs  for  failing  to  successfully  carry  out  a  SOE  reform
programme, the Commission should aim to make its own assessment of the specific case and
the implications for its continued support – albeit initially relatively informally until a more
structured methodology can be developed and resourced.

74.  The  Commission  should  enhance  its  capacity  to  provide  high-quality  and  timely
technical assistance to governments for the key stages of SOE reform. This should cover
the  dialogue  outlined  above  on  the  objectives  of  reform,  identification  and  assessment  of
reform options, including sequencing issues, and the requirements of post-reform  regulatory
framework and monitoring, as well as the processes of contract design and the identification
of and negotiation with new managers (whether within the public sector or through ownership
change).

75.  Some  additional  assistance  might  be  provided  in  international  promotion,  to  attract
investors interested in enterprise take-overs or in building partnerships with the state, where
those options are identified as optimal. If governments wish to divest after restructuring, they
might benefit from the expertise of high-level civil servants in the Member States who have
played a similar role in their own countries.

76. This new commitment should play a part in ensuring that SOE reform helps to deliver the
reduction in poverty that is the central goal of development policy.

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