protecting the poor. Many economists would argue against the use of pricing to redistribute income and would consider progressive income taxation and welfare subsidies to be more effective means to redistribute income. Redistributive price distortions can, to some extent, damage the efficiency of the overall economic system.

Multiple objectives arise either because they are mandated by legislation or because a number of government ministries are in a position to exert influence on SOEs. The latter situation becomes especially problematic if the ministries have different aims for SOE sand do not reconcile their divergent views (see Vagliasindi, 2008a). For instance, when shares are held jointly by the treasury and line ministry, the treasury may be concerned principally with the impact of the SOEs on the government’s budget, while the line ministry may focus on increasing the quality of the service with less regard to costs. This can give rise to major conflicts between the SOEs and the government, as the case of Kosovo illustrates (see Box 7).

# **<mark>Box 7 The Case of Kosovo</mark>**

<mark>In Kosovo, the central importance of the infrastructure sectors – and particularly of the two largest SOEs, the electricity and telecom service providers, respectively KEK and PTK – to the health of the wider economy is widely acknowledged. The combined turnover of KEK and PTK in 2004, at approximately €240 million, was equivalent to about 10% of GDP, and 40% of KCB revenues; and the SOEs are major employers. The services provided by the SOEs are essential to broader economic development, so that ensuring their efficient operation has a macroeconomic, rather than a purely sectoral, impact. The performance of KEK in particular is also very important for political stability – electricity supply being a basic necessity. An asymmetry of treatment emerge strongly. Whereas KEK’s financial losses are absorbed by the KCB, no part of PTK’s profits were. PTK was only allowed to declare dividends for 2005 and 2006. Moreover, PTK will also provide a loan to KEK under a special trust fund administered by the Treasury.</mark> <mark>The current institutional framework of the public enterprise sector generates a complicated set of incentives which are generally not conducive to the efficient operation of the SOEs. On the one hand the Provisional Institutions of Self Government (PISG), which are responsible for fiscal outcomes, have little control over the SOEs. The fact that the both Boards and senior management of the SOEs have been delegated to foreign contractors and the Board also composed by independent foreign directors has only increased the conflictual relationship between the SOEs and the PISG which practically precludes the type of co-operation required to resolve the problem of the substantial fiscal burden represented by the public enterprise sector.</mark> _<mark>Source:</mark>_ <mark>Vagliasindi (2008b)</mark> What can be done to reduce such problems? First of all, governments may want to set clear objectives for SOEs. If improved financial performance is the goal, then state overseers must set specific targets. The performance measure doesn’t necessarily have to match what might be achievable in the private sector – where profit maximization tends to be the only objective. Nonetheless, performance targets must ensure that an SOE will – when the costs of non-commercial objectives are stripped out – recover its cost of capital. In Sweden, the government and an SOE’s Board agree annually on detailed financial targets, based on the performance of internationally successful competitors.

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