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Study Case 1 – State-Owned Enterprises in the Response to the Coronavirus Pandemic

– This article is provided For Educational Purposes only –

State-owned enterprises (SOEs) are an inviting channel for government responses to economic crises and natural disasters, given the degree of direct government control. The Independent Evaluation Group found such responses in the portfolio—for example, responding to the 2008 global financial crisis in part by using state-owned banks (such as the Sri Lanka Small and Medium Enterprise Development Facility, 2011) and responding to floods by restoring power distribution (Serbia Floods Emergency Recovery Project, 2015). The International Finance Corporation helped Russian Federation banks (public and private) deal with small and medium enterprises’ nonperforming loans after the financial crisis (the Russian Federation Financial Management Crisis Management Project), and the World Bank helped Nigeria create an asset management company to restore financial health to the banking sector.

SOEs can provide convenient vehicles to channel resources to adversely affected firms and households (for example, through bank loans or power utility payment abeyance). Although some crisis response efforts also aimed to reform SOEs, many aimed to use them to reach targeted beneficiaries. Several of the World Bank’s initial private sector support projects in response to the crisis are channeled through state development banks. The literature provides some explicit precautions:

  • Temporary subsidies and benefits after crises may be “policy traps” that are politically difficult to reverse. This is true for both utilities and banks.
  • The use of state-owned banks to respond to crises may be costly and inefficient. The World Bank Group’s Global Financial Development Report 2013: Rethinking the Role of the State in Finance finds that although SOE lending may be “less procyclical” than private lending, it “did not always target the most constrained borrowers” and is associated with a “deterioration of the quality of financial intermediation.” Special attention must be paid to governance, including assuring “adequate risk management processes are in place.”

Sources: Bril-Mascarenhas and Post 2012; World Bank 2012a; Independent Evaluation Group state-owned financial institutions deep dive; Independent Evaluation Group portfolio review and analysis.

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