Owning up on state ownership - privatisation is no easy answer Print this article

If privatisation of state-owned enterprises (SOEs) is to benefit infrastructure and services and improve the performance of firms over the long term, it needs to be complemented by promotion of competition and effective regulation, according to a recent Forfás report

It is essential that infrastructure users’ interests are protected.

Published in the wake of the establishment of a special group to advise the Minister for Finance on, among other things, selling off state assets, the report is entitled The Role of State Owned Enterprises.

In assessing an enterprise’s suitability for privatisation, the report emphasises the importance of developing clear criteria to select appropriate assets. It is essential that infrastructure users’ interests are protected, i.e. by not selling natural monopoly assets (e.g. electricity transmission lines, gas pipelines, broadband ducting, key airports, etc.) or assets to dominant competitors.  

It is also vital to ensure that regulatory capabilities are sufficiently advanced to achieve public policy goals in the absence of ownership rights. While there are statistical challenges in comparing the role of SOEs across countries, Ireland is one of the countries with the lowest levels of state ownership in the OECD across the entire economy. On the other hand, SOEs are responsible for delivering a significant part of Ireland’s National Development Plan (2007-2013) and are taking on significant liabilities to enable them deliver on this.

National policy

It is difficult to discern a definitive national policy on SOEs in Ireland - the practice to date has been to approach issues on a case-by-case basis rather than an overall strategic approach, the report observes.

Internationally, the OECD recommends: “Government(s) should develop and issue an ownership policy that defines the overall objectives of state ownership, the state’s role in the corporate governance of SOEs, and how it will implement its ownership policy.” (OECD 2008; Accountability and Transparency, A Guide for State Ownership)

Goals of SOEs

In the absence of regular reviews, the report warns, there are risks that SOEs can drift from their founding goals or that individual SOE goals may not reflect current national development needs. There is a need to evaluate:

• the rationale for state involvement in specific markets (founding rationales were generally centred on the existence of natural monopolies, capital and other market failures, and equity concerns); and,

• the roles of state-owned enterprises in terms of supporting wider economic growth through timely provision of high-quality and cost-competitive infrastructure. 

Clearer governance structures

State-owned enterprises are often required to implement multiple, and sometimes conflicting, objectives, i.e., to achieve loss-making public policy goals, while operating commercially. There is nothing inherently wrong with an SOE serving multiple goals, but this can affect performance negatively if the goals and the relative priority among them are left unclear, the report claims.

Internationally, evidence suggests there is potential to implement clearer governance structures by establishing a single, competently resourced centralised agency (or unit) – a model increasingly adopted across the OECD. 

Many of the governance challenges faced by large SOEs and large private sector companies are similar. Ownership does not necessarily equate with control. International experience suggests that there is potential to implement stronger corporate governance frameworks, such as putting in place transparent mechanisms to ensure that boards comprise members with relevant expertise - for example, competency databases, as are used in Nordic countries.

Develop contestability 

SOEs should not enjoy a competitive advantage simply because of their state ownership.

SOEs in formerly non-traded sectors of the economy such as telecommunications, air and inter-city bus transport and energy generation are subject to on-going market liberalisation initiatives. There may be potential to develop greater contestability in other markets currently dominated by SOEs – for example, in the provision of urban bus services, rail freight and water services.