governance dimension is unlikely to improve SOE performance in a sustainable manner (Vagliasindi, 2007). In particular, SOE management does not face any credible threats for non-performance from the external environment in which it operates –there is no plausible threat of takeover or bankruptcy as an _ex ante_ performance and monitoring instrument, especially in cases where the SOE is a monopoly.<sup>20</sup> As a result, there is a role for additional techniques to increase transparency and efficiency.

# **<u>Box 7: Three Cases of SOE Reform</u>**

<mark>A reform project involving the Phnom Penh Water Supply Authority included putting in a management team with performance-based incentives, corporatization, water meters installation and automated billing and accounting, customer surveys and a new tariff structure based on cost-recovery models and accompanied by a public information campaign. Similarly, the Bangladesh Rural Electrification and Renewable Energy Project supported rural cooperatives with management operating under a performance contract, with market-based salary structures (World Bank, 2006b).</mark> <mark>In the Dominican Republic, a reform program has supported a considerable improvement in energy bill collection rates. In 2004, only 45 percent of power generated in the country was paid for by consumers. Theft and non-payment of bills by government, the private sector and households alike was rampant. Under the reform program, new legislation criminalized electricity theft, and provided for easier access to customer premises. Performance-based management contracts were introduced for distribution companies, metering was extended along with meter inspection, bill payment processes were simplified and illegal connections regularized. Energy was rationed on circuits with large losses to provide and incentive for regularization. Auditing and publication of accounts was combined with social surveys and the use of a ‘social contract’ between providers and stakeholders promising better quality in return for better payments, all complimented by an active communications program. By January 2007, the percentage of power</mark> <u><mark>generated that was paid for by consumers had risen to 56 percent</mark></u> In some countries, an SOE audit committee is chaired by an independent non-executive director and externally audited accounts meeting International Financial Reporting Standards (IFRS) are published. Additionally, SOEs that borrow from the private sector without the benefit of a government guarantee will face the scrutiny of lenders and creditrating agencies. Listing a minority of shares will create another level of monitoring by shareholders.

One of the key challenges in addressing public sector governance is that SOEs are frequently given broad developmental objectives, such as ensuring employment, or creating necessary infrastructure for economic development. If there are multiple goals and especially if they cannot be clearly quantified, then performance cannot be accurately measured –and SOE managers cannot be rewarded on the basis of performance. Where possible, it may be simpler to set a clear target of financial performance, utilizing regulatory oversight and transparent subsidy tools to achieve non-financial objectives.<sup>21</sup> Governments might consider quantifying costs and benefits of meeting equity objectives

> 20 Continued state-directed credit, equity injection and finance deficits have created perverse incentives for

> managers of SOEs and perpetuated soft-budget constraints (Kornai et al. 2003).

> 21 In this model, a regulatory body oversees (or publicly advises on) pricing (and, if necessary, quality) of provision.  The concerned sectoral ministry uses transparent subsidy mechanisms to support social goals related to pricing and rollout (World Bank 2006).

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