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counterparts because PEs tend to<sup>operate, by and large, in sheltered markets</sup> (which are either natural --<sup>decreasing cost industries-- or policy induced--</sup> protection and the like).<sup>They usually escape the disciplineof</sup> financial markets; p.rticularlv because they have access to government<sup>funds and credit</sup> from the banking svstem and<sup>abroad, often at preferential termi. Moreover,</sup> they operate behir.d barriers to exit; that is, they<sup>are seldom liquidated even</sup> when thev prove to be costly<sup>tosociety.</sup> 16. The implication of this literature<sup>is straightforward:</sup> ownership matters; it has consequences<sup>for enterprise efficiency. Public ownership and</sup> management of resources of<sup>enterprises producing tradable commodities and</sup> operating in relatively competitive<sup>or potentially competitive markets entail</sup> costs associated with bureaucratic<sup>failure that go largely uncompensated for</sup> by any gains from reductions<sup>in market imperfections.</sup> Therefore, private ownership of such activities<sup>shoull usually be prcferred. The same conclusion</sup> does not strictly apply, however,<sup>to non-competitive</sup> firms, i.e. firms which may be in a position to exercise<sup>some monopoly power. For this subset of PEs,</sup> the net benefits from and feasibility<sup>of regulating private monopolies have to</sup> be weighted against the net benefits<sup>from and feasibility of retaining them in</sup> the public domain and reforming<sup>thiem.</sup> Assuming that a decision is made<sup>in</sup> favor of retaining this subset<sup>of PEs in the public domain, this literature</sup> suggests, in order to reduce<sup>the room for managerial discretionary behavior</sup> and reduce political interference,<sup>that: PEs should pursue commercial</sup> objectives; their managers should<sup>be appropriately</sup> selected and induced to pursue these objectives; and<sup>they should have the autonomy to respond to</sup> market signals, in return for<sup>which they should be held accountable for</sup> outcomes and rewarded or penalized<sup>accordingly.</sup> PEs should, in addition, face greater competitive pressure and<sup>financial discipline. Non-viable PEs should</sup> be closed down.<sup>8</sup> /

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# C. Components of AoDroach

17. The Bank's sector-wide approach<sup>and best practice solutions to PE</sup> reform correspond to the above recommendations. In its endeavor to assist its borrower countries to improve the<sup>efficiency of their PEs, the Bank suppor-s</sup> reforms to: (1) rationalize the<sup>sector's size, (2) improve the PE market-</sup> related environment, (3) streamline<sup>the institutional set-up governing the</sup>

**8/** Theoretical assertions apart,<sup>similar conclusions are reached by a</sup> number of country studies and inter-country comparisons. One such study, which focuses on the determinants of performance<sup>of PEs in a sample of ..3 developed</sup> and developing countries, concluded<sup>that the most important determinants of the</sup> performance of PEs were: competition,<sup>managerial and financial autonomy, and</sup> accountability. The countries covered by the study<sup>are: Austria, Brazil, France,</sup> Ghana, India, Israel, Italy, Norway,<sup>Pakistan, Portugal, Sweden, Tunisia, and</sup> Zambia. For details, see: Ayub and<sup>Hegstad, 1986.</sup>

9/ For a detailed review of the<sup>Bank's approach to PE reform, reform</sup> components, best practice solutions,<sup>and examples, .ee Shirley, 1989a.</sup>