22 its ability to operate efficiently; if SEEG should subsequently argue that an investment was poorly planned and cannot be operated efficiently, SONEG niay lose some leverage in negotiating the lease-contractor rate.

5.37 SONEG's Vulnerabilitv. A recent study of contract plans (CPs, also known as enterprise contracts) reported that, while CPs have been useful for establishing management processes and creating channels for dialog between state enterprises and the state, they "have not proven to be legally enforceable contracts." Governments cannot be sued or othelwise forced to comply with their obligations as stated in such contracts. In fact, "persistent noncompliance with terms of the CPs has discouraged and demotivated enterprise managers."1<sup>8</sup> A major source of problems has been the unreliability of government subsidies or transfers to support the operations of state enterprises.

5.38 A review of SONEG's enterprise contract reveals that SONEG may not be as vulnerable as many state enterprises in this regard. The company is not directly dependent on the government for operating transfers or subsidies. On the contrary, the sector is expectcd to become self-sufficient. SONEG is authorized to propose and, after approval of the State Secretariat for Energy, set tariffs that will cover: SEEG's local operating costs; an incrcasing percentage of SEEG's foreign exchange costs; all of SONEG's own operating costs, including depreciation; an increasing percentage of the sector's debt service; and an acceptable return on SONEG's assets (that would be used as SONEG's contribution to future sector investments). The state agrees to pay all of the sector debt for two years, and a gradually decreasing portion of the debt for four additional years. There is no provision for the government to contribute to SONEG's operating costs or investmen. funds, should tariff revenues fall short.

5.39 These arrangements could leave SONEG somewhat vulnerable to operating shortfalls. Even though the government appears to be committed to gradually increasing tariffs to a level that would cover all sector operating expenses and vield an acceptable rate of return on SONEG's assets, there is no guarantee that it or its oversight agent, the State Secretariat for energy, will approve the tariff increases that SONEG proposes to mcet this objective.<sup>19</sup> In the event that tariffs are not increased to a level that covers the lease-contractor rate and SONEG's operating costs as well as a return on assets, the lease contract guarantees that payment of the LCR to SEEG would have first priority. As a result, SONEG's revenues would be reduced or even eliminated before SEEG's would be affected. Inadequate resources for SONEG could compromise its ability to supervise the lease contract and to carry out sector planning and investment activities.

_5.40_ The study of enterprise contracts concluded: "They should be kept short and simple. Emphasis should be placed on goal clarification, an increase in managerial autonomy, 18. John Nellis, _Contract Plans and Public Enterprise Performnance,_ World Bank, Policy, Planning, and Research Working Paper 118, October 1988, p. ix.

19. The IDA credit agreement with the government requires that measures be taken, including tariff adjustments, so that SONEG's revenues will generate a 1.5 percent rate of return on annually revalued net assets in service from 1991 to 1993, and a 2.5 percent rate of return from 1994 onward. A schedule of tariff increases is included in SONEG's enterprise contract.