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Study Case 4 – Pendulum Swings on Privatization in Bank Group State-Owned Enterprise Reform

– This article is provided for Educational Purposes only –

World Bank Group state-owned enterprise (SOE) engagements in the 1980s stressed improving operational and financial performance by rationalizing the policy framework, improving governments’ management of their portfolios, reducing SOE fiscal expenditures and improving their revenues, and assisting SOEs to improve their financial and operational performance.

By the early 1990s, many donors were pushing hard for the privatization of SOEs given the disappointing results of past SOE reforms, the altered popular understanding of the government’s role regarding productive enterprises, and assumptions about the ease of transferring Western systems to dramatically different settings. Between 1988 and 2005, global privatization proceeds were an estimated $2.6 trillion. Aligned with this global trend and guided by concern about government failure, World Bank support for privatization grew rapidly, from 14 percent of World Bank SOE-related loans in the 1980s to 52 percent of operations in the 1990s. Between 1990 and 2003, the Bank Group assisted 120 countries to carry out 7,860 transactions generating nearly $410 billion in proceeds.

However, the wave of privatization gave rise to critiques. Questions about attribution arose because factors other than ownership may have accounted for performance improvements, such as the introduction of hard budget constraints and increased competition. Performance comparisons were questioned on the grounds that better-performing SOEs were “cherry-picked” for privatization. Additionally, governments faced difficulties in carrying out privatization, for example in creating, monitoring, and enforcing contracts in infrastructure, along with some failures that led to renationalization. Then there were the failures in the regulation of privatized industries, the rise of powerful oligarchs in the former Soviet Union, the cases of asset stripping, and the popular opposition to privatization from citizens and workers. Furthermore, in the 2000s, China was seen to offer an alternative model involving substantial state ownership and control of enterprises, despite large-scale privatizations of its own.

Thus, in the 2000s, there was a step back from privatization. Instead, the emphasis was on corporate governance reform to improve SOE performance through supervision, transparency, and accountability (along with a focus on other aspects of SOE business and operations) to improve quality, cost recovery, and controls. Tools such as public-private partnerships and risk guarantees aimed to bring some degree of private investment and private operation to SOE service delivery.

Source: Independent Evaluation Group privatization deep dive.

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