Previous Findings

Previous studies have found that SOEs in the ME&CA region tend to be more concentrated in the hydrocarbons, services, and industrial sectors (Amico 2017). The sectoral footprint of SOEs has, however, varied across time and countries, in part reflecting changes in development models pursued by countries. In some countries, SOEs initially focused on strategic sectors, for example the oil sector in the GCC countries (OECD 2013). More recently, the GCC countries have expanded the scope of SOEs beyond the oil sector and some have very large multinational SOEs (Hertog 2010; Amico 2017; IMF 2020a). In other countries, SOEs were initially established both in strategic and non-strategic sectors (for example, Egypt, Iraq, Kazakhstan, Uzbekistan), partly as a result of a more socialist-oriented development model pursued by these countries (OECD 2012a). However, SOEs continue to play a sizeable role. In particular SOEs in the MENA region have been estimated to account for between 20 to 50 percent of value added and 30 percent of employment (OECD 2012a).⁴

However, the existing literature suggests SOE performance in the ME&CA region has been weak and subject to limited scrutiny. State ownership is often associated with weak oversight, limited competition, political interference, and soft-budget constraints which can negatively affect performance (Hertog 2010, Ter-Minassian 2017, Arezki and others 2020). The lack of regular, comprehensive reporting on the financial performance of SOEs in the region is well documented (OECD 2019), which hinders effective supervision of SOEs. SOEs often operate as monopolies or are subject to limited competition. In Central Asia, for example, previous work has highlighted how SOEs often operate on an uneven playing field relative to the private sector which can stife competition and innovation (OECD 2018c). Studies in the ME&CA region which have analyzed financial performance, albeit with limited data, suggest that losses emanating from the SOE sector can be sizeable. For example, a study of four MENA countries (Egypt, Iraq, Morocco, and Tunisia) found that in the aggregate SOEs amassed sizeable annual losses, with the share of total losses ranging between 0.6 percent and 6 percent of GDP (World Bank 2015). While a more recent assessment of Tunisia found that operating losses in the 30 largest SOEs have been growing and capital has been eroded (IMF 2021a, Box 2).

SOE Prevalence

The footprint of SOEs is very heterogeneous across countries in the ME&CA region.⁵ The number of SOEs in each country varies from just one in West Bank and Gaza to more than 4,000 in Azerbaijan (Figure 4), which in most cases is larger than the OECD average (51 SOEs).⁶ However, this comparison is complicated as there is no commonly accepted definition of an SOE (Box 1). Countries in the CCA region tend to have a larger SOE footprint than in the MENAP region based on the number of SOEs. This regional difference is explained by a historically large role of public sector involvement in the economy during the Soviet period. And, although, after independence, the role of the state declined in most CCA countries during their transition toward a market-oriented economy (Kazakhstan, Kyrgyz Republic), it has been slower than in other former command economies.

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Number of SOEs

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: OECD (2015a); national country authorities; and IMF staff calculations. Note: Light-colored bars show data from alternative data sources (see Annex Table 2.1). Saudi Arabia reporting is limited to the portfolio of entities under the remit of the reporting institution and therefore cannot be considered wholly representative of the national SOE portfolio. Number of SOEs in Algeria is representative of SOEs with 90–100 percent government ownership.

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The total assets of SOEs provide further information on the scale of the SOE sector (Figure 5, panel 1).⁷ A number of countries have very large SOE sectors, with total assets exceeding 100 percent of GDP (Kazakhstan, Morocco, Uzbekistan). It is also often the case that total assets are concentrated in just a few very large SOEs (Figure 5, panel 2). For example, in several countries the assets of the largest three SOEs account for more than half of total SOE assets (Armenia, Georgia, Jordan).

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SOE Assets

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: Light-colored bars show data from alternative data sources (see Annex Table 2.1). Data for Yemen are 2010 and 2014, respectively. For panel 2, data for Egypt do not include Economic Authorities, and correspond to the coverage indicated in the definition (see Annex Table 1.1). Two companies are in the electricity sector, and one in the construction sector.

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SOE Footprint Across Sectors

Historically, SOEs have played a central role in sectors usually dominated by natural monopolies, such as the provision of gas and electricity, water supply, waste management, or transportation (network sectors). Global data suggest that SOEs are most represented in administrative and support service activities and utilities in all regions, including the CCA and MENAP regions (Figure 6). SOEs in the MENAP region are more prominent in the transportation and storage, and mining and quarrying sectors than other regions, while SOEs in the CCA have a larger presence in agriculture and forestry. Furthermore, for the countries which provided sectoral information in the survey, SOEs tend to play a particularly large role in natural monopoly sectors. For example, in Armenia, SOEs account for more than 30 percent of value added in the electricity sector, while in Algeria and Yemen SOEs account for 100 percent and almost 70 percent of value added in the water sector, respectively (Figure 7).

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Sectoral Distribution of SOEs

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: Orbis Bureau Van Dijk Database; and IMF staff calculations.Note: AE = advanced economies; CCA = Caucasus and Central Asia; EM = emerging market economies; LIC = low-income countries; MENAP = Middle East, North Africa, Afghanistan, and Pakistan.¹ SOEs refers to definition used in the paper (see Annex Table 1.1). Turkmenistan is excluded due to limited data availability. The data presented is reflective of the SOEs data available in the data source and not data provided in the country authorities survey.

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SOE Contribution to Economic Activity

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: Information and communication data for Algeria also include value added from the transportation sector.

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In many countries SOEs are prevalent in a wide range of sectors, including those normally run by the private sector. For example, there are more than 100 SOEs in Tunisia, of which 55 are in areas that would ideally be run by the private sector. They are present across the spectrum of the economy from manufacturing of tobacco to the production and distribution of electricity; in Algeria SOEs are involved in the leather and textiles industries; in Iraq they are involved in the production of furniture, carpets, textiles, shoes, dairy products, and soap; and in Lebanon SOEs operate in the communication sector (television station, telecom landlines, and mobile carriers). SOEs often have a monopoly position. In Turkmenistan, the SOE sector is also wide-reaching, as SOEs are responsible for executing most public sector investments. SOEs also play a large role in Djibouti’s economy (including utilities, transport, and logistics sectors) and in some cases, they operate as monopolies (for example in telecommunications where they are one of only six countries globally with this monopoly setup,⁸ water and sanitation, or electricity distribution sectors) (World Bank 2018). The biggest SOEs in the Kyrgyz Republic remain in strategic and economically important sectors, including energy, mining, and transport and have large capital needs and infrastructure requirements (World Bank 2020b).

Employment

While the number of SOEs and their assets are very large in some ME&CA countries, their share of employment appears to be relatively low and concentrated in the largest SOEs (Figure 8). Except in Yemen, where SOE employment is about 17 percent of total employment, SOEs in the region account for less than 4 percent of total employment. SOEs in Armenia, Jordan, and Pakistan account for a much lower share of total employment at under 1 percent. These results, based on survey responses, might be explained by a narrower definition of SOEs and limited data coverage or capital intensity of the industries, while other research in this area suggests a larger share of SOE employment (OECD 2012a).⁹ Moreover, at the individual SOE level, there can be significant over-employment (or problems of ghost workers) where employment is often granted based on political connections and not on qualifications.¹⁰

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SOE Employment vs. Number of SOEs

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: OECD (2015a); national country authorities; and IMF staff calculations. Note: Saudi Arabia reporting is limited to the portfolio of entities under the remit of the reporting institution and therefore cannot be considered wholly representative of the national SOE portfolio. Number of SOEs in Algeria is representative of SOEs with 90–100 percent government ownership.

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Similar to SOE assets, a few very large SOEs often account for a significant share of total SOE employment (Figure 9, panel 1). For example, while Georgia has more than 350 SOEs, the three largest SOEs (in terms of employment) account for more than 40 percent of total SOE employment. Similarly, the largest SOEs in Armenia, Mauritania, Morocco, Tajikistan, and Tunisia account for more than 35 percent of SOE employment. In part, this could reflect data availability constraints and limited reporting by small SOEs. In Pakistan, the majority of SOE employment is in gas and electricity sector (Figure 9, panel 2). SOE employment in mining and quarrying sector is significant in Tajikistan.

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SOE Employment

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: Light-colored bars show data from alternative data sources (see Annex Table 2.1). Saudi Arabia reporting is limited to the portfolio of entities under the remit of the reporting institution and therefore cannot be considered wholly representative of the national SOE portfolio. Number of SOEs in Algeria is representative of SOEs with 90–100 percent government ownership.

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Financial Performance

Research reveals that profitability is often lower in SOEs than in comparable private sector companies. This lower SOE profitability may reflect the cost of public mandates—for example, providing services at below-cost prices to underserved communities or universal service, promoting employment beyond what is efficient for the firm at significant wage premiums—or other factors (Richmond and others 2019; IMF 2020a). Our analysis suggests that SOEs in the ME&CA region have large revenue (as percent of GDP), but weak operating performance, with more than 30 percent of SOEs operating at a loss and reliant on government support in at least seven countries in the region (Figure 10). The fiscal impact and risks from loss-making SOEs are discussed in Chapter 3.

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SOEs Operating at a Loss

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.

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While Figure 11 suggests healthy profitability of the overall SOE sector in some countries, many individual SOEs are in a poor financial position.¹¹ For example, partial data covering Tunisia’s 30 largest SOEs in 2019 shows that their debt was in excess of 20 percent of GDP, two-thirds were loss-making with their capital rapidly declining, and half were insolvent (IMF 2021a; Box 2). Moreover, three of the largest SOEs in Tunisia (national fuel, electricity, and grain companies) had negative (equity) capital at almost 5 percent of GDP (IMF 2021a). Similarly, in Egypt, 107 out of the 278 SOEs considered in this study and for which data are reported incurred losses in FY 2018/19, and in Pakistan a large share of SOEs are loss-making (Box 3). SOE performance is also a concern in the Kyrgyz Republic due to low profitability and growing debt and expenses. Specifically, the energy sector is a burden on the budget as tariffs do not cover production costs (World Bank 2020b).

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Average Return on Assets

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.

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Detailed data on the financial performance of SOEs in the region are, however, limited, partly due to weak, often decentralized, oversight of SOEs, despite existing legal provisions in some countries. For example, the Direction du Portefeuille de l’Etat at the Ministry of Finance in Djibouti was created to monitor SOE performance, but it does not have direct access to SOEs’ financial statements and must request them from the Ministry of Budget. It also lacks human resources to consolidate SOEs’ information and monitor their financial performance (IMF 2019b). SOE surveillance in Tunisia is also scattered across various government entities. Whereas monitoring of SOE performance has improved recently in Egypt, with the publication of reports providing detailed financial information on SOEs and economic authorities.¹² IMF technical assistance has also helped some countries in the region to take stock of the SOE sector and improve data coverage (Box 4).

^{Box 1.}

Defning SOEs

There is no commonly accepted definition of what constitutes a SOE. While definitions vary, they tend to share some key features (see IMF 2020a). Definitions usually specify that (1) SOEs are individual entities; (2) they are controlled by a government unit to some extent; and (3) they are market producers, providing goods to the market at economically significant prices. Typically, however, they stop short of providing a precise threshold of government ownership. For example, the European Commission (2016) defines SOEs as “those nonfinancial companies where the state exercises control, regardless of the size of ownership”. Similarly, the IMF 2014 Government Finance Statistics Manual and OECD (2015b) do not provide a threshold that determines government ownership.

Across the ME&CA region, countries define SOEs differently. There is no standard definition of an SOE. To facilitate cross-country comparisons, the survey suggested the following definition of SOEs: “nonfinancial companies with at least 50 percent direct or indirect state ownership (central government), excluding health institutions and education institutions. A number of countries used this definition; however, respondents also had the option to provide their own definition (Box Figure 1.1, for details see Annex 1).

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Definition of SOEs used by Countries in the Survey

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF country teams.Note: The groups are not mutually exclusive. See Annex Table 1.1 for further details on SOEs defintions.

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Most responses used the common definition provided in the survey. More than 50 percent of the respondents used the survey definition. Within the alternative definitions provided by respondents, the state ownership share ranged from 25 to 100 percent. Some countries relied on legal rulings, not numerical ownership thresholds, for SOE classification. Georgia provided an alternative definition, which has a less stringent threshold for state ownership, capturing every SOE of the central government (as defined in the Registry of SOEs) and municipal enterprises that meet certain criteria, including state ownership of more than 25 percent. Kazakhstan, Kyrgyz Republic, Mauritania, Morocco, and Uzbekistan also used their own definitions (Annex Table 1.1). In addition, country reports that supplemented the analysis relied on various definitions, often much narrower than specifed above (details in Annex Table 2.1).

Various SOE definitions would present a very different footprint. The lack of a common definition of SOEs makes cross-country analyses challenging, as the SOE sector looks very different, should some parameters, such as the percentage of government ownership or the level of government, change. In particular, SOEs outside the central government could be very sizable and the inclusion of subnational government level increases the size of the sector significantly. While choosing the broadest definition might seem like a natural choice to have the most comprehensive picture of the SOE sector, the lack of data in most countries poses limitations.

^{Box 2.}

Financial Performance of SOEs in Tunisia

SOEs are prevalent across a broad range of sectors in Tunisia and play a significant role in the economy.¹ In 2019, there were 110 SOEs, half of which were considered commercial, operating in the energy, transport, media, and agricultural sectors, among others.² As of 2014 (the most recently available figure), SOEs accounted for 9.5 percent of GDP.³

The financial performance of the largest SOEs has deteriorated in recent years. Financial data for the largest 30 SOEs⁴ indicate declining profitability between 2017 and 2019 (Box Figure 2.1). More than two-thirds of these SOEs reported a loss in 2019 and in aggregate terms, they recorded an operating loss of over 2 percent of GDP.⁵ Total capital of these SOEs has declined from more than 8 percent of GDP in 2017 to only 0.7 percent of GDP in 2019.

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Financial Performance of 30 Largest Tunisian SOEs

(Percent of GDP)

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: Tunisian authorities (LdF 2021); and IMF staff calculations.

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SOEs are also heavily indebted, with large arrears and cross-arrears. The total debt of the largest SOEs has increased (Box Figure 2.1, panel 1), reaching in excess of 20 percent of GDP in 2019. Arrears to the state were 5.5 percent of GDP in mid-2020, while state arrears to SOEs were 7.9 percent of GDP.

Several factors could explain the weak performance of these SOEs. Profits may be constrained by an inability to freely set prices to cover costs. In addition, SOEs are used to hire for social-political purposes and average wages at the 30 largest SOEs are 50 percent higher than average wages in the civil service. High debt and large arrears and cross-arrears may distort the investment and management decisions.

¹ This box is based on IMF (2021a). ² Of these 110 SOEs, 13 SOEs are in the health, education, or financial or quasi-financial sectors. ³ République Tunisienne (2018). ⁴ Of these 30 SOEs, six are in the health, financial, or quasi-financial sectors. ⁵ The net loss was slightly lower than 2 percent of GDP.

^{Box 3.}

Footprint and Performance of SOEs in Pakistan

A comprehensive report published by the Ministry of Finance in 2021 provides a snapshot of the federal-level SOE landscape as of end-FY 2018/19. In total, there are 213 federal-level SOEs operating in various economic sectors, made up of 85 commercial SOEs, 44 noncommercial SOEs (trusts, universities, training institutions, and welfare funds), and 84 subsidiaries of commercial SOEs. This is a larger number than reported in this chapter, which focuses on nonfinancial companies excluding education and health institutions (per this definition, there are 120 federal-level SOEs in Pakistan). Out of the 213 SOEs total, 85 commercial SOEs (which includes 18 financial SOEs) are the focus of the government report.

The SOE footprint in the power and oil and gas sectors is particularly large. Out of 67 nonfinancial commercial SOEs, 28 are in the power or oil and gas sectors, while 15 are in the manufacturing sector (Box Figure 3.1).¹ Previous analysis also shows that the total assets of SOEs are significant, consistent with the survey results presented in this chapter, and are heavily concentrated in the energy and transportation sectors.² However, despite holding sizeable assets, SOEs share of employment is relatively low. Total SOE employment, including financial SOEs, accounted for only about 0.8 percent of the formal workforce in FY 2018/19.

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Portfolio of Non-Financial Commercial SOEs, FY 2018/19

(Number of SOEs)

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Source: Finance Division, Government of Pakistan (2021).

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The overall revenues of all commercial SOEs in FY 2018/19 were about PRs 4 trillion (10 percent of GDP), with total assets of about PRs 19 trillion (50 percent of GDP). Despite their important role in the economy, financial performance of many SOEs is weak, with one-third of them consistently generating losses (NHA, power sector distribution companies (DISCOs), Pakistan Railways, and Pakistan International Airlines that owns the Roosevelt Hotel in New York and the Scribe Hotel in Paris are among the major ones). Commercial SOEs recorded losses of PRs 118 billion in FY 2018/19. Box Figure 3.2 illustrates performance of the SOE sector over the past few years, suggesting large persistent losses since FY 2015/16.

Privatization has slowed down over the past decade, with only 5 transactions taking place versus 167 transactions completed during 1991–2010.³ The authorities have recently undertaken a comprehensive exercise to examine SOEs based on their functions and financial performance to identify those to be (1) retained under state ownership; (2) restructured; and (3) privatized. The reform process to improve performance of the SOE sector includes an active engagement with the IMF and World Bank. The authorities are planning to establish a Central Monitoring Unit with a central database and analysis of all the SOEs.

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SOEs Net Profit/Loss FY 2013/14–2018/19

(PRs. billions)

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Source: Finance Division, Government of Pakistan (2021).

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¹ 18 financial sector SOEs are explicitly excluded for the purposes of our analysis. ² See Ministry of Finance Implementation and Economic Reforms Unit “SOE Federal Footprint 2016–17.” ³ Government of Pakistan, Completed Transactions.

A Large Fiscal Impact Across the Region

Governments in the region provide significant fiscal support to SOEs through different means (Figure 12).¹ Direct fiscal support was about 2.2 percent of GDP on average, and reaching above 7 percent of GDP in 2019, in Tunisia, largely to compensate SOEs for below-market pricing. Given that ME&CA countries spend on average 3 percent of GDP on health and 3.5 percent of GDP on education, support to SOEs may reduce fiscal space for other priority spending. In several countries (Kazakhstan, Kuwait, Lebanon, Pakistan, and Tunisia) direct support takes the form of explicit subsidies or transfers.² Governments also inject equity to support or bailout SOEs for the purpose of restructuring or lowering debt ratios or to resolve arrears. For example, equity injections into Georgia’s SOEs were about 1.8 percent of GDP during 2017–18. Direct loans and on-lending are another major way governments lend support to SOEs, as in Georgia, Mauritania, and Uzbekistan.³

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Direct Fiscal Support to SOEs

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF country desks; and IMF staff calculations.

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Some SOEs, particularly in the energy sector, are also an important source of government revenue.⁴ In oil-exporting countries across the region, SOEs have contributed more than 20 percent of general government revenue in recent years (Figure 13, panel 1). In Algeria and Qatar, about half of the government revenue has been paid by the national oil companies over the past decade, and this share is even higher for Kuwait and Saudi Arabia (Figure 13, panel 2); in Iraq more than 80 percent of budget revenues are oil export proceeds transferred from the largest oil SOE, State Organization for Marketing of Oil, as well as transfers from other profitable SOEs in the oil sector. With a few exceptions (Armenia, Egypt, and Georgia) where SOEs contribute less than 1 percent of government revenue, non-oil SOEs also contribute significantly to the budget. A few examples include tobacco companies in Tunisia, the phosphate mining SOE in Morocco (Office Chérifen des Phosphates), and the public telecommunication operator in Lebanon.

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Revenue Impact of SOEs on the Government Budget

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: Government Finance Statistics; World Economic Outlook; Natural Resource Governance Institute; national country authorities; and IMF staff calculations. Note: In panel 3, the figure plots correlation between annual changes in oil price (simple average of Brent, WTI, and Dubai) and changes in real general government revenue (horizontal axis)/expenditure (vertical axis). Government revenue and expenditure are deflated by consumer price indices.¹ Includes only transfers by the national oil companies to the budget.² Excluding missing values.

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Governments collect revenues from SOEs mainly via direct taxes and dividends (Figure 14). More than half of budget revenues from SOEs are paid in the form of taxes in Mauritania, Pakistan, Saudi Arabia, Tunisia, and Uzbekistan. Pakistan, Qatar, and Saudi Arabia have also reported significant dividend payments in recent years, with dividends representing up to 80 percent of SOE payments to government in Qatar in 2018 (see Annex 3 for accounting treatment). SOEs also make payments to the budget in other forms, such as an oil export duty in Kazakhstan, or fees on sales of goods and services in Jordan.

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Composition of SOE Payments to Government

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; Natural Resource Governance Institute; and IMF staff calculations.¹ Includes royalties.² Includes export duties, and fees and other payments to government.³ Includes only transfers by the national oil companies to the budget.

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Revenues from SOEs could introduce significant volatility into public finances. This is most pronounced in oil-exporting countries, as total government revenue remains highly synchronized with the oil and gas price cycles, largely due to payments made by state-owned or private oil companies, and often results in government expenditure being highly correlated with oil prices (Figure 13 panel 3). Dividends paid by SOEs also display significant volatility, with several countries having experienced a large surge, such as Uzbekistan during 2011–12 and Qatar during 2013–15, which turned out to be temporary (Figure 15). This volatility also exists in oil importers, although less pronounced, given the relative size of SOE revenues. For instance, during the COVID-19 crisis, Pakistan reported government revenue shortfalls due to lower revenue from the SOE sector, while SOEs in Kazakhstan have temporarily increased dividends paid to the government to help finance emerging spending needs.

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Dividends Paid by SOEs to the Budget, 2010–19

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: Government Finance Statistics; World Economic Outlook; Natural Resource Governance Institute; national country authorities; and IMF staff calculations.

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Complex Fiscal Interactions

In principle, SOEs performing market activities should operate without government support and contribute to the government budget. Many oil companies in the region are highly profitable, not reliant on budget support, and contribute immensely significantly to government revenues each year. In addition, governments could increase revenues from SOEs by improving the return on their SOE assets (IMF 2018). However, across the region, there are also many unprofitable—and even lossmaking—SOEs (see Chapter 2) that require continuous fiscal support. Many SOEs have an unprofitable business model and end up being a permanent drag on the budget. Their underperformance and inefficient use of resources directly impact public finances because of forgone revenues and fiscal costs needed to support continued operations, crowding out much needed pro-growth and social spending.

Fiscal interactions with SOEs are difficult to capture, given the middleman role they play when undertaking activities on behalf of the government. Figure 16 shows the stylized fiscal interactions and identifies the main financial flows linking the government, SOEs, and end users.⁵ Most countries in the region depend on SOEs to provide essential goods and services, infrastructure development and employment opportunities (see Chapter 4). To ensure universal access, public services are often provided by SOEs at regulated prices set below cost recovery, requiring the government to compensate SOEs for the resulted losses. For example, in the energy sector, SOEs incur losses if governments do not ensure the full pass-through of international oil prices to consumers or if tariffs are maintained significantly below cost recovery levels. Other subsidized goods and services in the region include food items, water, heating, and public transport (railways, buses).

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Illustrative Fiscal Relations

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Source: IMF staff.

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In many cases, SOEs are required to generate employment and facilitate income redistribution. Some governments have depended on SOEs to reduce unemployment through hiring, for instance, in Algeria, Azerbaijan, Iran, Iraq, Kazakhstan, Mauritania, Pakistan, Sudan, Tunisia, and the United Arab Emirates.⁶ In addition, SOEs are entrusted with a role to support sectors that are considered critical by the government from an economic, political, or social standpoint. For example, in Morocco, the state-owned group Office Chérifen des Phosphates has access to 70 percent of the world’s phosphate reserves. It holds a large share of the world phosphate market and is one of the leading fertilizer manufacturers, thereby contributing about 20 percent of

Morocco’s exports. In Egypt, 53 economic authorities⁷ operate in many strategic sectors, including transportation (Suez Canal Authority) and housing (New Urban Communities Authorities).

Finally, SOEs implement investment projects outside their core business. Governments may use SOEs to undertake noncommercial investment on their behalf, delegating to SOEs the responsibility of providing public investment, often without adequate compensation.⁸ Governments facing capacity constraints can also leverage the know-how of large SOEs for strategic and socially important projects. For instance, Saudi Aramco has engaged in building social infrastructure (a university and a stadium), supporting small-and medium-sized enterprises, undertaking non-oil related research, as well as contributing to the development of an industrial city.⁹ Similar arrangements have been reported by other national oil companies,¹⁰ as well as SOEs in oil-importing countries. For instance, SOEs provided 30 percent of total public investment in Jordan in 2017 and 55 percent in Morocco 2008–15, both of which are oil importers.¹¹ This engagement in non-core activities risks distracting SOEs from their main businesses and may undermine their efficiency.

Governments use various means to compensate SOEs for lossmaking activities. Subsidies are the main form of compensation for quasi-fiscal activities involving the provision of public services at below market prices.¹² They amounted to more than 3 percent of GDP in Lebanon and 1.5 percent of GDP in Morocco and Armenia in 2019. Support to SOEs could also be provided through the banking system (often via state-owned banks) using government guarantees or preferential credit, with governments ultimately responsible for the difference between the market interest rate and the subsidized interest rate (for example, Iraq). Furthermore, SOEs may benefit from inputs provided by other SOEs at below market prices as a means to reduce losses due to below cost recovery tariffs. In Uzbekistan, the public electricity company (Uzbekenergo) benefited from such an implicit subsidy of close to 2 percent of GDP as the electricity is generated from underpriced gas provided by the oil and gas SOE (Uzbekneftegaz).¹³

In the absence of commensurate compensation, the aforementioned activities can create complex cross-subsidies and arrears that ultimately hinder fiscal management. SOEs that are not fully compensated often face difficulties meeting their payment obligations to the government, social security funds, and other SOEs or private companies providing production inputs. Writing of SOEs’ accumulated payables to improve their financial situation thus may have potentially large fiscal impacts and spillovers to the rest of the economy. In Tunisia, for example, SOEs owed more than 5.5 percent of GDP in arrears to the government in 2020, while the government owed about 7.9 percent of GDP to SOEs; and cross arrears between SOEs are estimated at about 2.5 percent of GDP.¹⁴

Fiscal Transparency

Effectively managing fiscal interactions requires transparency. For example, identifying all financial flows between the government, SOEs, and end users can significantly improve fiscal planning while ensuring that SOEs’ compensation is adequately costed.¹⁵ It also helps governments make the case for tariff reform, by making explicit the actual costs of subsidized services.

Survey responses by the authorities indicate the ME&CA region faces several transparency shortcomings (Figure 17).¹⁶

• Less than half of the survey respondents indicate that their legislation requires an explicit definition of noncommercial mandate for individual SOEs (Figure 17, column 1).

• Very few countries have a legal requirement to compensate SOEs for any losses associated with quasi-fiscal activities (Figure 17, column 2).

• Only seven countries inform Parliament of government support to SOEs and publish this information (green cells); five countries only inform Parliament (yellow cells); and four countries do neither (red cells) (Figure 17, column 3). Furthermore, the 2019 Open Budget Survey shows that 14 countries in the region do not present information on quasi-fiscal activities in budgetary documents and four countries present only partial information. In this aspect, Morocco’s annual report on SOEs and budget annex on subsidies provide an example of the best practice in the ME&CA region and could be emulated in many other countries where transparency is limited (see Box 5). As recommended by the IMF’s Fiscal Transparency Code governments should regularly publish comprehensive information on the financial performance of public corporations, including any quasi-fiscal activity undertaken by them.¹⁷

• Only four countries (Egypt, Mauritania, Morocco, Oman) include SOEs in public sector financial statements (Figure 17, column 4).

• The majority of countries does not consolidate SOEs into fiscal reports or fiscal indicators (Figure 17, column 5). Doing so could reduce incentives to bypass the government budget constraint and improve fiscal planning. Jordan already includes the Water Authority of Jordan and National Electric Power Company (NEPCO) in the government fiscal deficit and public debt statistics since 2018, while Georgia and Oman incorporate SOEs debt into public debt.

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Survey Responses on Fiscal Transparency

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: The figure shows survey responses by the authorities. See Appendix 6 for the survey questions. The countries are ordered alphabetically and by region, in Figures 17 and 19. Positive answers are represented in green, negative answers in red, and the answer in between in orange (that is, in column 3, orange would correspond to the following answer: “Yes, support to SOEs is reported to parliament, but the information is not public”). White or blank denotes missing response. Medians are used for regional groupings, with a score of 1 for green, 0.5 for orange, and 0 for red. Egypt survey responses cover only a subset of SOEs.

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Fiscal Risk Management Framework

In addition to their direct fiscal impact, SOEs create risks for public finances.¹⁸ This is because SOEs’ finances can, and often do, have adverse repercussions on government finances. When they materialize, these risks can entail substantial fiscal costs, weakening public finances and complicating fiscal management. Governments can face risks from SOEs recurring losses, under investment, and/or excessive borrowing. Ultimately, the government bails out SOEs through transfers, equity injections and, in the more extreme cases, by assuming or restructuring their debt.

Fiscal risks can arise from governments’ explicit commitment to support SOEs (Table 1). This gives rise to balance sheet and operational risks. First, governments may provide loans to SOEs that create an explicit fiscal risk in the case where SOEs cannot meet their debt payments. In the Kyrgyz

^{Table 1.}

Fiscal Risks from SOEs

Source: IMF staff.

^{Table 1.}

Fiscal Risks from SOEs

Explicit Fiscal Risks	Implicit Fiscal Risks
Lower dividends or tax receipts from SOEs	SOEs’ arrears, debt assumptions
Higher budget transfers	Political risks
Debt guarantees	Commodity prices’ shock
On-lending and loan subsidies	Insolvency (bail out)
Equity injections (undercapitalized SOE)	Exchange rate risk from SOEs’ external debt
Infrastructure projects (PPAs and PPPs)	Legal dispute

Source: IMF staff.

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^{Table 1.}

Fiscal Risks from SOEs

Explicit Fiscal Risks	Implicit Fiscal Risks
Lower dividends or tax receipts from SOEs	SOEs’ arrears, debt assumptions
Higher budget transfers	Political risks
Debt guarantees	Commodity prices’ shock
On-lending and loan subsidies	Insolvency (bail out)
Equity injections (undercapitalized SOE)	Exchange rate risk from SOEs’ external debt
Infrastructure projects (PPAs and PPPs)	Legal dispute

Source: IMF staff.

Republic, for example, the stock of budget loans to SOEs amounted to almost 20 percent of GDP in 2018, and the government restructured SOE debt worth 1.4 percent of GDP during 2015–18.¹⁹ Second, many governments across the region guarantee SOEs’ debt, including external debt, with five countries reporting guarantees above 10 percent of GDP (Figure 18). Governments may have to service this debt in case SOEs fail to do so. Third, on-lending operations generate explicit fiscal risks, as the government directly borrows on behalf of SOEs and is responsible for servicing this debt, which SOEs should finance. Government on-lending to SOEs could be sizable, such as in Uzbekistan where it reached 13 percent of GDP in 2017.²⁰ In Tajikistan, on-lending to the energy company Barki Tojik (equivalent to 17 percent of GDP) is mostly serviced by the government.²¹ In Afghanistan, government on-lending of almost 2 percent of GDP to the electricity SOE (Da Afghanistan Breshna Sherkat) creates a large fiscal risk given that the company has experienced operational losses for several consecutive years.²² Fourth, subsidized loans often provided by state-owned banks to SOEs might also constitute significant fiscal risks due to government debt assumptions in case of default. In Algeria, IMF staff estimates that government guarantees mostly benefiting SOEs’ rose from 3 percent of GDP in 2005 to 19 percent of GDP in 2020 amid a decline in oil revenue and continued spending pressures for social transfers and investment.²³

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SOEs’ Debt and Government Debt Guarantees to SOEs (2019)

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: The total amount of Egypt’s guaranteed debt is around 14.8 percent of GDP at end-FY2019/20, including Economic Authorities, which are not included in the SOE coverage for Egypt in this paper.¹ The breakdown between external and domestic debt is not available.² The breakdown between foreign currency and local currency denomination is not available.

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Governments may substitute fiscal costs with fiscal risks from SOEs, often generating implicit fiscal risks (Table 1). To lower the deficit or debt, governments may transfer large costs to SOEs as they are generally not consolidated in these fiscal accounts, thereby replacing fiscal costs with fiscal risks. For instance, in Tunisia, the government recruitment policy following the Jasmine Revolution was partly assumed by SOEs to reduce fiscal costs. Another example are public-private partnerships signed by SOEs, where the government provides a minimum revenue guarantee or a payment guarantee to the private partner. In Georgia, the total value of the payment guarantees provided through power purchase agreements is estimated at 19 percent of GDP, which the government would have to service in case the electricity SOE defaults on its payment.²⁴ The government may also have to provide compensation in case of early termination or a force majeure event.

Other implicit fiscal risks may arise from the perception that the government will bail out financially distressed SOEs. Government ownership often generates fiscal risks as governments may be required to inject capital to cover losses incurred by SOEs or face valuation risk when divesting SOEs at prices lower than expected. More broadly, there is often a general perception that the government will bail out distressed SOEs as the economic, political, and social impact of liquidation would be too large. In Jordan, the electricity SOE NEPCO had accumulated losses of 16 percent of GDP as of end-2019, exceeding the limit of 75 percent of the paid-in capital that would require the liquidation of the concerned company according to the Jordanian company law, absent of capital increase.²⁵ For NEPCO to continue operating, the government provided extensive support through loan guarantees (7.6 percent of GDP) and Treasury advances (8 percent of GDP).²⁶ Governments may also be exposed to risks when SOEs with large external debt incur difficulties in making repayments. In 2015, the National Fund of the Republic of Kazakhstan (part of the general government) transferred 1.8 percent of GDP to cover the external debt payment of the national oil company KazMunaiGas due to the SOE’s shortages of foreign currency. Legal disputes can also generate fiscal risks to the government if an SOE required to compensate a plain-tiff is unable to honor the litigation settlement without government support.

Establishing a strong risk management framework within SOEs is the first line of defense against fiscal risks. As in private companies, SOEs should put in place an internal risk management system, which empowers the Board to address risks (see Chapter 4). This would greatly help limit the exposure to and occurrence of risks that may require the government to intervene. Some countries such as Azerbaijan and Kazakhstan have created holding companies to manage their SOEs’ portfolios, which bring both opportunities and challenges for limiting fiscal risks (see Box 6).²⁷

Improving fiscal risks management requires strengthening the legal and institutional framework, as well as building capacity within the Ministry of Finance to assess and monitor SOEs. This requires regularly collecting timely and reliable reporting from SOEs and identifying fiscal risks from SOEs, while gradually improving the fiscal risk management framework. Some countries have started to put in place some of the building blocks for better management of fiscal risks from SOEs, supported by IMF technical assistance (see Box 7).

An effective legal framework empowers the government to assess, measure, and monitor fiscal risks from SOEs. This allows the Ministry of Finance to enforce its fiscal and financial oversight powers over SOEs. In this area, most survey respondent countries in the region have already adopted a legal framework for fiscal risks, and SOEs are generally integrated into the overall risk management framework (Figure 19, columns 1 and 2).

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Survey Responses on Fiscal Risk Management Framework

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: The figure shows survey responses by the authorities. See Appendix 6 for the survey questions. Egypt survey responses cover only a subset of SOEs.

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Typically, a centralized fiscal risk assessment function would be located in the Ministry of Finance. This is because the Ministry of Finance has a consolidated view of public finances across sectors and can integrate risks from SOEs into fiscal policy planning. However, to be effective, adequate resources need to be allocated and capacity building will be required over time. Armenia created a Fiscal Risk Assessment Division in 2016,²⁸ and Tajikistan instituted a Fiscal Risks Coordination Council for the management of SOE fiscal risks in 2019.

Identifying the main fiscal risks—both explicit and implicit—is critical for assessing government exposure to SOEs’ operations. The survey results indicate that most countries in the region have already estimated some fiscal risks from SOEs (Figure 19, column 3) but so far, the focus has primarily been on explicit risks. To support this analysis, the IMF has developed a framework for assessing the financial soundness of SOEs, through key indicators reflecting SOEs’ profitability, solvency, and liquidity.²⁹ It recommends that initially the largest fiscal risks generated by SOEs should be analyzed and then quantified, starting with SOEs that are macro-critical or benefiting from significant government guarantees. In the medium term, scenario analysis and sensitivity analysis could be developed to determine how government payments and receipts vary with changes in the assumptions.

There is scope to improve transparency on fiscal risks from SOEs. The majority of ME&CA countries neither prepare nor publish a fiscal risk statement incorporating SOEs (Figure 19, column 7). CCA countries are more advanced in this area, for instance Armenia, where budget documents present an assessment of fiscal risks related to 20 major corporations (both public and private) in the energy, transport, and water sectors³⁰ and Georgia, where the government publishes a fiscal risk report (see Box 8 for the Georgian experience). Publishing information and data would help raise awareness, both for policymakers and the general public, and build investor confidence. Countries should take a gradual approach that could span over several years and aim at aligning with principles defined in the IMF Fiscal Transparency Code, that is, publishing regular summary reports on risks to their fiscal prospects, including risks related to SOEs. Governments could start by publishing qualitative information on key risks in the budget document, before moving to a comprehensive fiscal risks statement.

In addition to assessing and reporting fiscal risks from SOEs, measures to mitigate and provision these risks are needed. Governments in the ME&CA region have used various risk mitigation strategies. Algeria, Morocco, Oman, and Saudi Arabia report setting guidelines on SOEs’ financing and investment plans, such as borrowing limits or ceilings on foreign exchange exposure (Figure 19, columns 4 and 5). Additionally, most countries report using a more stringent approach where the government can veto SOEs’ borrowing and sale of assets (Figure 19, column 6). Some countries impose ceilings on aggregate lending or guarantees to the SOE sector, which would be approved by parliament in the context of the budget process. For instance, the budget law in Tunisia puts a cap on annual issuance of debt guarantees to SOEs (6.3 percent of GDP in 2020)³¹ and SOEs are required to pay fees for guarantees provided; however, this has not been implemented in practice. At the same time, SOEs still require the government to bear residual risks, regardless of the government’s risk management framework. As a result, building budget buffers and contingencies in anticipation of fiscal risk realization is prudent. Armenia and Tunisia have budget contingencies, but such funds are often used to finance other outlays. Morocco plans to establish a special budget fund that would be used to manage the government’s transaction in financial assets with SOEs, for example, the capital injection expected to generate a realistic rate of return.

Lastly, if circumstances demanded, a framework for determining when to provide support to distressed SOEs would help countries manage fiscal risks.

This framework should not be a one size fits all and should be implemented flexibly, considering each country’s and each SOE’s specific circumstances. Such a framework could guide policymakers and lead to decisions that minimize taxpayer cost and social impact as well as improve economic outcomes (Figure 20).³² To begin with, it would be important to determine if the SOE needing support is solvent. If so, then the authorities and SOE should agree on a business plan which, if implemented, should lead to the end of extraordinary financial support. If the SOE is not viable, but is systemic or strategic, the authorities should seek to refocus on core activities (this may require restructuring and/or additional capital) and find private buyers for non-core parts of the company. If the SOE is not systemic, the government should seek to privatize the SOE and if unsuccessful, liquidate the company. In applying this framework, governments should set clear targets on SOEs to ensure their accountability. For example, as part of Egypt’s reform and development of its SOEs the authorities have placed the companies into three groups: (i) those suffering increasing losses, debt accumulation, and declining productivity; (ii) companies with adequate profitability; and (iii) companies with profitability below expectations. As a next step the authorities will formulate company-specific strategies to improve performance.

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Government Decision to Provide Support to SOEs

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Source: IMF staff.

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What Are Countries’ Objectives for SOE Ownership?

According to the OECD, the ultimate purpose of state ownership of enterprises should be to maximize value for society, through an efficient allocation of resources (OECD 2015b). In the ME&CA region (Figure 21), the rationales for establishing or maintaining state enterprise ownership include one or more of the following for most countries: (1) supporting national economic and strategic interests—cited by nearly all countries; (2) supplying of specific public goods and services; and (3) supporting social objectives. While the specific roles for SOEs and the rationales that underpin their ownership may differ across countries and regions, best practices usually require that governments consider and communicate the ways in which a given SOE adds public value.

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Objectives for SOE Ownership

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.

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De Jure SOE Corporate Governance

Ownership Policy

Best practices require that the state provide SOEs, the market, and the general public with predictability and a clear understanding of the state’s overall objectives as an owner. This is because multiple and contradictory rationales for state ownership can lead to either a very passive conduct of ownership functions, or conversely result in the state’s excessive intervention in matters or decisions which should be left to the enterprise and its governance organs. To do this, governments need to first know what they own, by establishing comprehensive SOE lists. Second, they should decide the rationales for state ownership and clearly communicate them to the public, and to all parts of the government that exercise ownership rights or are otherwise involved in the implementation of the state’s ownership policy. Lastly, governments need to establish well-structured, merit-based and transparent board nomination processes, independent from political interference. These pillars are covered under the broad umbrella of ownership policy (Figure 22).

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Ownership Policy and Governance Framework

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: The figure shows survey responses by the authorities. See Appendix 8 for the survey questions. Countries are ordered alphabetically, by region in Figures 22–24. In green are the responses that are most aligned with the associated guidelines, while in red are those that are misaligned. Orange is used to represent measures that are partly in alignment with the guidelines. Hues of these three colors are used to convey the intensity of the alignment with corporate governance guidelines. White corresponds to missing responses. Egypt survey responses cover only a subset of SOEs.

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Financial Oversight Framework

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: The figure shows survey responses by the authorities. See Appendix 8 for the survey questions. Egypt survey responses cover only a subset of SOEs. IFRS =

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Fiscal and Policy Interactions with Government

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: The figure shows survey responses by the authorities. See Appendix 8 for the survey questions. Egypt survey responses cover only a subset of SOEs.

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The coverage of SOE lists is relatively strong in the sample. Most countries report having SOE lists at the national level and also include subnational SOEs in their registers. Nonetheless, some fully lack a consolidated SOE list (Algeria, West Bank and Gaza), and others are missing subnational SOEs (Jordan, Morocco, Pakistan). The latter creates a gap in coverage that complicates a comprehensive assessment of economic importance, financial performance, and fiscal risks that arise from these companies.

An effective ownership policy document is not found in most ME&CA countries. The policy is often considered a pillar of a strong rationale and strategy for owning SOEs. It should, among others, define the overall rationales for state ownership, the state’s role in the governance of SOEs, how the state will implement its ownership policy, and the respective roles and responsibilities of those government offices involved in its implementation. It should also be reviewed periodically with broad public participation. The lack of ownership policy documents is a significant gap in the exercise of ownership policy; only eight countries in our sample report having ownership policy documents in place, with only four making such document publicly available (Armenia, Egypt, Kyrgyz Republic, Morocco).²

The region also lags behind best practices on the issue of centralizing ownership. Government ownership, by definition, tends to produce diffuse oversight, given the large size of the state, including the number of SOEs and diverse sectors they are involved in. Because of this, SOE management often has to report and negotiate with many parties—including regulators, sectoral ministries, treasury, presidency or ruler’s court and, where applicable, parliament or ruling party. This myriad of interests creates risks to accountability, incentive structures, and agenda setting (Vernon 1984, Lawson 1994). As a result, managers and public officials sometimes use their pivotal positions to maximize their own power, budgets, and hiring discretion. In addition, in the cases where the regulator and the owner of SOEs is the same government agency, this could lead to “regulatory capture” and endanger the principles of competitive neutrality³ (Lafont and Tirole 1991; see Section 4.5 for an in-depth discussion). Accordingly, best practice is to separate policy and ownership functions, with the ownership function centralized in a single government agency (OECD 2015b). Within the country sample, some have established both centralized operational and fiscal oversight units (Afghanistan, Algeria, Egypt, Morocco, West Bank and Gaza), while others only have one of them (Armenia, Kyrgyz Republic, Mauritania, Uzbekistan), but progress in this area remains spotty for most countries.

Many countries have gaps in their SOE board composition requirements. Good ownership functions should also include an active participation in a transparent selection of SOE boards that are both independent and qualified.⁴ However, independence and competency requirements for SOE boards in the ME&CA sample are lacking.⁵ About three-quarters of the countries in the sample have in place explicit competency, experience, and skill requirements for SOE board membership, but in some cases (Algeria, Armenia, Jordan, Kazakhstan, Pakistan, Uzbekistan, West Bank and Gaza) only for a subset of SOEs. In about one-third of the sample there are no legislative requirements for a minimum number (or share) of independent board members in some SOEs. In Egypt, the roles of the boards are stipulated in a law, but the selection criteria of board members are not clear.

Many countries have—to varying extents—a centralized board selection process. In countries where the state enterprise ownership function is centralized for example through a dedicated unit—such as in China, Korea, Sweden, and Thailand—this ownership unit has the direct responsibility for nominating members to SOE boards, whereby the decision often benefits from advisory functions (OECD 2018b). In decentralized models, line ministries select supervisory and management board members, adding to risks of non-transparency, political influence, conflicts of interest, and different procedures across the government (Richmond and others 2019). Most countries in the sample report a centralized board selection process by either a centralized unit tasked with SOE oversight or a separate administrative entity (for example, a state asset or holding company). Countries such as Algeria, Georgia, Kazakhstan, Morocco,⁶ and Tunisia, where a political entity (cabinet, ministries, or parliament) selects the SOE board could benefit from centralizing the process in an independent unit to avoid risks of prioritizing sectoral objectives of SOEs over broader countrywide objectives and/or financial value maximization.⁷

SOE Governance Index

A composite index of SOE governance practices is constructed for cross-country com parison (Figure 25). The index covers authorities’ reported policies on ownership policy, financial oversight, and fiscal and policy interactions, but does not reflect the implementation of the policies. This snapshot of stated policies in place in 2020 can be helpful to provide an approximate relative comparison of policies vis-à-vis OECD guidelines (see Annex 7). The results are also compared against those of European countries documented in prior literature (Richmond and others 2019) as this chapter uses the same survey and methodology (see Annex 8 for details).

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SOE Governance Index

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.Note: Score is out of a maximum of 16.5. Higher values denote closer adherence to the OECD guidelines and greater fiscal transparency. See Annex 8 for full description.

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Differences across countries are mostly driven by heterogeneous corporate governance standards in ownership policy and policy interactions, and less so in oversight policy. Based on the sample, CCA countries tend to score less across the three dimensions of corporate governance when compared to the MENAP countries¹⁰ (see Figure 25). While we cannot rule out sample bias, this trend could be explained by different interpretations of questions by the authorities in the survey. In addition, fragile and conflict affected states also face their own challenges (for example Sudan in Box 9).

When compared with Central, Eastern, and Southeastern Europe (CESEE) (Richmond and others 2019), our sample shows that CCA has a lower SOE governance index while MENAP scores higher. While the CESEE region scores a median of 9.1, the CCA region scores 8.3, whereas MENAP scores 9.5. As another comparison, a frontier country, Sweden, scores 16.5, the maximum. Nevertheless, the median country’s index—in both CCA and MENAP—reffects more favorable ownership policy standards than the CESEE region. One caveat is that the index for CCA and MENAP reflects the “stated” corporate governance measures by end 2020, while the CESEE index is associated with the stated measures in early 2019. In the span of two years, ME&CA countries may have made efforts to strengthen SOE corporate governance and overall governance more generally as illustrated in the second section of this chapter.

In conclusion, most countries in the ME&CA region have scope to better align their stated SOE corporate governance measures to best practices and international guidelines. In particular, ME&CA authorities could further strengthen the ownership policy and governance framework, and better manage the fiscal and policy links with SOEs. This includes broadening the scope of SOE monitoring through the inclusion of subnational enterprises, producing and publishing ownership policy documents and SOE aggregate reports, strengthening SOE board requirements and appointment procedures, and establishing a centralized SOE oversight unit and fiscal risk assessment units.

SOE Corporate Governance and Performance

Claessens and Yurtoglu (2012) show that improved corporate governance is associated with a number of positive outcomes for both private and state-owned companies. These include better access to external finance by firms, lower costs of capital and higher firm valuation, improved strategic decision making and operational performance, reduced risk of corporate crises and scandals, and better relationships with stakeholders. Moreover, public corporate governance standards—notably the OECD guidelines on corporate governance of SOEs (OECD 2015b)—have been associated with improved management and oversight of SOEs and helped in enhancing the transparency and accountability (OECD 2020a). The World Bank toolkit on corporate governance of SOEs (World Bank 2014) provides anecdotal evidence suggesting that financial performance of many SOEs has improved as a result of improved governance practices as well as other factors such as budgetary reforms, restructuring measures, and capital market discipline. Boxes 10, 11, and 12 highlight three cases in Jordan, Pakistan, and Uzbekistan where reforms are being undertaken to improve corporate governance in an effort to improve the performance of individual SOEs or the broader SOE sector.

That said, the empirical literature on corporate governance of SOEs remains scarce. The scarcity of such research is further fragmented under different disciplines (for example, management, public policy, and economics, among others) (Grossi, Papenfuß, and Tremblay 2015). Daiser, Ysa and Schmitt (2017) provide a systematic analysis of empirical literature on the subject, and they find that such research is a growing field with diverse opportunities for investigation and that the existing research is focused primarily on regression analyses and lacks qualitative empirical research. They also note that about half of the studies tackle Chinese SOEs, pointing to a lack of diverse research across regions.

Hertog (2010) illustrates how many countries in the GCC were successful in creating highly profitable and well-managed SOEs, against the preconceived expectation from rentier-seeking public sectors. He argues that political insulation provided for SOEs played a major role in their success. Below, we explore some correlations between corporate governance measures and SOE performance in the region.

Corporate Governance Measures and Performance in ME&CA

To explore the relationship between SOE performance and governance measures in the ME&CA region, we combine governance indices with measures of SOE performance using our sample of countries from the region. We find that a higher composite SOE governance index score is associated with higher return on assets (ROA) of SOEs. In particular, a higher financial oversight index is associated with a higher share of SOEs operating at a profit in a given country (see Figure 26). Although we do not find robust relationships across all measures of SOE performance—in part due to limited data availability and a small sample size—the illustrated results suggest, as most literature does, that better governance is associated with better SOE performance.

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SOE Performance vs Governance Index Scores

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; and IMF staff calculations.

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A potential link between governance and performance could be that weak SOE corporate governance measures leave large scope for clientelism, political capture, conflict of interests, and other types of activity, which are proven to impact negatively the performance of SOEs (Baum and others 2019). The unclear relationship between measured corporate governance and actual performance can be due differences between legislated governance (de jure) versus those actually implemented (de facto), as will be discussed below.

De Jure Versus De Facto Corporate Governance¹¹

Implementation of corporate governance policies can often differ from what is established by law, driving a wedge between de jure and de facto corporate governance measures. This gap can be noticeable in a few areas: (1) many countries may report the existence of an ownership policy document, but this does not imply that it is used for operational purposes; (2) board members may not be properly qualified and instead political appointees, while independent board members may not be truly independent (aligned to the requirements of publicly listed companies) and can often be part of a pre-selected “independent” roster; (3) financial disclosure will require independent audits to be conducted, but these may or may not be done by external auditors (instead relying on the country’s auditor general), or making use of an external auditor that is also providing non-audit services to the same company.

To illustrate the potential deviation of the practice from the stated standards, we compare an adjusted aggregate SOE corporate index based on authorities’ stated response with one based on the responses of IMF country teams (see Annex 8, Table 8.5 for details). We use the former as a proxy of de jure standards, and the latter as a proxy of de facto practices. With some exceptions, countries’ self-reported scores are better than those assessed by IMF teams. As can be seen in Figure 27, MENAP countries fare better than CCA countries in the authorities’ reported scores, while CCA fares better than MENAP in the IMF desk assessment. This finding should be interpreted with care as this could reflect many factors beyond the implementation of governance standards, including extent of country teams’ knowledge of specific SOE issues or different interpretation of the questions.

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Adjusted SOE Governance Index

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations. Note: Score is out of a maximum of 10.

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Focusing on the subcategories (Figure 28), results are broadly similar in two key areas: List of SOEs and policy interactions between the government and SOEs. The largest divergences between IMF country teams and authorities’ responses are in annual financial statements and SOE management, for both MENAP and CCA regions. In addition, responses also diverge in the areas of dividend policy and financial performance target setting for MENAP countries, and in operational performance evaluation in the CCA region. Interestingly, CCA authorities’ responses were more negative than IMF country team assessments in the area of central fiscal oversight. This may point to an underestimation of fiscal risks by IMF country teams.

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SOE Governance: De Jure Versus De Facto

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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Ensuring a Level Playing Field: Competitive Neutrality¹²

Leveling the playing field for all economic agents and fair competition can also help reduce SOE inefficiencies and has the potential to increase private and foreign investments. Corporate governance reforms can bring about significant improvements to the operation of SOEs, strengthen their public accountability and, if present, reduce macroeconomic risks that stem from the potentially inefficient operation of SOEs. At the same time, SOEs do not exist in a vacuum and a wider positive impact of corporate governance reforms in SOEs may be highly conditional on the existence of well-functioning markets, fair competition, adequate regulation, and efficient competition policy enforcement. Thus, mitigating the negative economic impact of inefficient SOEs and increasing their competitiveness involves not only strengthening their corporate governance practices but also addressing a number of other distortions that are sometimes associated with SOE inefficiencies. In this respect, several countries around the world have introduced policies and mechanisms that, along with better governance of SOEs, aim to achieve the so-called “competitive neutrality” between SOEs and private sector players.

Competitive neutrality policies can best be described as measures aimed at preventing the introduction of new, or eliminating existing, policies that give an unfair competitive advantage to SOEs. OECD (2012b) provides a useful taxonomy of these distortions. These may include, among others, structural constraints in sectors preventing new firm entry (for example, the existence of an incumbent vertically integrated SOE with restricted third-party access to critical infrastructure), exemptions of SOEs from various policies and regulations, uneven regulatory treatment between SOEs and private firms, administrative discrimination, cross-subsidization of commercial activities using the government support provided for carrying out noncommercial activities, different tax treatment as well as easier access to financing (likely at preferential terms).

Due to legacy reasons, political lobbying, bureaucratic impediments, or governments’ strategic considerations, such challenges abound in the ME&CA region. In particular, many SOEs in the region do not operate in a competitive environment and, in many instances, enjoy a range of protections and benefits that put them in a stronger competitive position vis-à-vis private sector players and foreign entrants. Overall, available evidence suggests that achieving competitive neutrality in many countries of the region will require achieving neutrality in the areas of regulation, taxation, public procurement, access to resources, and separation of non-commercial and commercial activities of SOEs.

According to recent assessments, no country in the ME&CA region effectively separates noncommercial from commercial activities of SOEs.¹³ This means there is potential cross-subsidization of commercial activities and undercutting of private sector players (Arezki and others 2020). While separation of activities may be mentioned in the competition law or related legislation in some countries, effective implementation is lacking. In a number of countries in the region, some SOEs that hold a dominant and monopolistic position in selected sectors are exempt from the competition law or may be excluded from the competition law altogether (for example, Algeria, Egypt, Kuwait, Qatar, Saudi Arabia, Tunisia, and United Arab Emirates). There are also cases whereby SOEs are exempt or are treated differently in some specific legislation (for example, bankruptcy law) or receive special status or privileges in sector-specific regulations. This protection appears to implicitly extend also to the court system in some countries where firms reported difficulties enforcing court decisions against SOEs and public authorities (for example, Azerbaijan; see OECD and others 2020).

Moreover, the overall regulatory environment in some sectors creates a dis-advantaged position for private sector players. In particular, in a number of countries, effective separation of the regulatory, policy and operational functions of government bodies may not exist, leading to the conflict of interest in sector structures (for example, telecom sectors in Egypt and Tajikistan where sector regulators or policy bodies are also responsible for overseeing the operation of state-owned telecom companies; Gyulumyan 2018, IFC 2020). Moreover, in some countries SOEs enjoy regulatory protection in various sectors (for example, electricity and gas, information and communication technology) that designates them as legal monopolies preventing the entry of new players (a number of sectors in Kuwait and, more specifically, access to international data networks in Tajikistan and Uzbekistan, which is limited only the main telecom sector incumbent; Arezki and others 2020; Gyulumyan 2018; IFC 2018).

SOEs often have favorable tax treatments that facilitate securing/winning public procurement contacts over potential private sector (domestic or foreign) suppliers, thereby hampering fair competition across companies. In some countries, public procurement laws do not cover SOEs (Egypt) or give flexibility to SOEs to develop their own rules (Algeria, Jordan; Arezki and others 2020). In several countries, some SOEs including nonincorporated public entities also benefit from certain tax exemptions (for example, Egypt, Lebanon, Libya, Kuwait; Arezki and others 2020). In Uzbekistan, SOEs have regularly received company-specific tax and customs duty exemptions to carry out specific investment projects (World Bank 2020a).

The practice of providing extensive support measures, guarantees, and subsidies is present in many countries too, allowing SOEs to continuously operate under soft budget constraints. Moreover, a common lack of effective monitoring and evaluation of such support measures leads to a limited understanding of the effectiveness of public funds provided to SOEs and reduces SOE accountability. This is further exacerbated by the common absence of the requirement on SOEs to demonstrate a positive rate of return on their capital and investments, allowing some enterprises to report consistent losses on their operations (Arezki and others 2020). Similarly, many SOEs in the region have benefited from access to debt financing on preferential terms with sometimes negative effects on the health of the banking sector and macroeconomic stability more widely (for example, in Tajikistan). Systematic assessment and review of the impact of state aid to SOEs on competition are uncommon. Some countries have just recently considered introducing the term of “state aid” and related provisions to the legislation (Uzbekistan).

Ensuring competitive neutrality requires a comprehensive government approach spanning central government, ministries, and sector-specific agencies and regulators. This is because a single authority will likely not have sufficient mechanisms for addressing the range of concerns related to a lack of competitive neutrality. Basic tenets of the approach are clearly identified in the OECD recommendations, though specific implementation across countries will depend on local circumstances including, among others, on the degree of involvement of the state in the markets and the importance of state-driven industrial policies (OECD 2012b, UNCTAD 2014). These measures aim to (1) identify and clearly separate commercial and noncommercial activities of SOEs; (2) achieve proper cost allocation by identifying the costs of commercial and noncommercial activities; (3) ensure that SOEs demonstrate a commercial rate of return in their operations and do not undercut private sector players; (4) achieve transparent compensation for noncommercial activities and public sector obligations of SOEs; (v) achieve tax and regulatory neutrality to ensure the same tax and regulatory burden is applied to private firms and SOEs, while special exemptions and exclusions are minimized and limited to achieving priority strategic and policy objectives; (6) achieve equal financing terms for both SOEs and the private sector; and (7) ensure equal and non-discriminatory treatment of private (domestic and foreign) firms and SOEs in public procurement rules (OECD 2012b). If effectively implemented, such measures should reduce barriers to entry for potential competitors, ensure that SOEs and private sector players operate under the same conditions, and minimize inefficient public sector support to SOEs.

The Impact of COVID-19 on SOE Operations

The COVID-19 pandemic had a sizeable and protracted impact on SOE revenue, but less than private firms.¹ In MENAP countries, SOE revenue (sales) declined throughout 2020 although the rate of decrease was less in the second half of the year. Revenue growth hit its trough in Q2 2020, with an average drop of 6 percent year over year compared to almost 19 percent for private firms (Figure 31, panel 1). Beginning in Q3 2020, revenue growth began to improve, but SOEs did not benefit from a rapid rebound similar to the private sector. In Q4 2020, SOE revenues registered a decrease of 2.3 percent year over year, compared to an increase of 3.8 percent year over year for private firms.

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Impact of COVID-19 on SOEs and Private Firms

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: S&P Global Market Intelligence; Compustat; and IMF staff calculations. Note: Figures show median values for each time period.

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In contrast, SOE profitability suffered more than that of private firms after the onset of the pandemic but recovered much faster in H2 2020 (Figure 31, panel 2). The ROA of SOEs declined during Q2 to 0.5 percent from 1.2 percent prior to the crisis. By end-2020 the ROA for SOEs rose to 2.1 percent, exceeding precrisis levels. In contrast, the ROA for private firms declined modestly early in 2020 and did not improve sharply in H2 2020.

The evolution of SOE profitability (Figure 31, panel 3) may be linked to wages (in addition to revenue). SOE wages continued to increase in the first half of 2020 despite the COVID-19 shock, suggesting that SOEs may have been used to shield workers from the impact of the first pandemic wave. But after growing by 7.4 percent year over year in Q2 2020, they declined sharply in Q4 2020. In contrast, private sector wages adjusted to the shock much faster. They declined by 2.7 percent year over year in Q2 and recovered thereafter, registering an increase of 0.7 percent year over year by end-2020. SOE profitability in 2020 may have also been supported by generous government support (direct or through guarantees) or influenced by the dominant position the SOEs have in the sectors they operate in.

The COVID-19 pandemic does not appear to have worsened SOE indebtedness (Figure 31, panel 4). At end 2020, SOEs’ ratio of debt to total assets was broadly unchanged relative to in the pre-COVID period (46.5 percent compared to 46.7 percent). In contrast, the indebtedness of private firms increased modestly to 54.7 percent compared to 53.2 percent prior to COVID-19.

The authorities survey indicates that SOEs have been used in some countries to directly aid the COVID-19 pandemic health response (Figure 32).² For example, in Egypt the government instructed the Holding Company for Medicines, Chemicals, and Medical Supplies to increase its subsidiaries’ production of disinfectants and sanitizer. In the Kyrgyz Republic, Mauritania, Qatar, and Tunisia, SOEs were used to provide medical equipment and distribute supplies. Additionally, state-owned airlines, like Etihad in the United Arab Emirates, have been used to transport supplies and repatriate nationals. In general, SOEs in the MENAP region have been more engaged in managing the overall pandemic response than SOEs in the CCA region.

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Mandates of SOEs During the COVID-19 Pandemic

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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SOEs have shielded their employees from the economic fallout of the COVID-19 pandemic (Figure 33). In most countries, SOEs did not report laying of or furloughing employees, except for Kazakhstan and the Kyrgyz Republic.³ The muted impact on employment may suggest that governments have used SOEs as automatic stabilizers (providing more stable forms of employment) to cushion some of the impact of the COVID-19 shock on the economy.⁴

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Impact of COVID-19 on SOE Employment

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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Despite the loss of revenue, SOE operations have largely continued during the COVID-19 pandemic (Figure 34). In most countries, SOEs reported continuing to honor most of their financial commitments to suppliers and creditors and execute their investment plans. In Egypt, despite recording losses, SOEs operations continued, including fulfilling most of their financial obligations towards suppliers and creditors and implementing their investment plans. However, SOEs in Algeria, Jordan, Kyrgyz Republic, Tunisia, and Uzbekistan reported accumulating arrears to creditors, the government, and private sector suppliers. Moreover, the pandemic did not appear to delay SOEs’ investment plans except in Afghanistan, Algeria, Kyrgyz Republic, Mauritania, Tunisia, and Uzbekistan. These results highlight the different experiences of the CCA and MENAP regions.

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Consequences of COVID-19 on SOE Investment

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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In general, governments have refrained from seeking financial support from SOEs to ease fiscal pressures, so that they can continue their operations without major disruptions (Figure 35). The survey responses suggest that only SOEs in Djibouti, Kazakhstan, Morocco, Oman, and Turkmenistan were asked to contribute to public finances, mainly through dividends and ad hoc payments.

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Potential Impact of COVID-19 on SOEs

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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Government Support to SOEs

In response to the deteriorating economic conditions, most governments have provided some support to SOEs (Figure 36).⁵ The most common reason for government support appears to be to protect employment and avoid layoffs (Algeria, Azerbaijan, Bahrain, Egypt, Iran, Jordan, Mauritania, Morocco, Oman, Pakistan, Saudi Arabia, Tunisia, and Turkmenistan). However, most countries offered multiple motives. For example, Egypt, Jordan, Mauritania, Morocco, Saudi Arabia, Tunisia, and Turkmenistan listed maintaining public service delivery, supporting economic activity, and protecting strategic assets in addition to protecting employment. A few countries provided one motive: in the United Arab Emirates, it was protecting strategic assets; in Lebanon, Georgia, and West Bank and Gaza, ensuring public service delivery; and in Djibouti supporting economic growth.

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Government COVID-19 Support to SOEs

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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The main SOE beneficiaries of government support were in the transport and energy sectors, which were among the sectors most affected by the COVID-19 shock and possibly reflecting their large contribution to employment and economic activity (Figure 36, panel 2). The services sector also received government support possibly because of linkages to small- and medium-sized firms. Most countries, however, targeted support to a few sectors. Lebanon mostly supported the energy sector, while Djibouti and Qatar both supported their transport sectors. Azerbaijan supported the transport and services sectors, Bahrain the transport and aluminum manufacturing sectors, Egypt the transport and tourist sectors, Georgia the water utilities and waste management sectors, and Pakistan the transport and energy sectors. In a few countries, the government provided broad-based, multisectoral support (Jordan, Kyrgyz Republic, Mauritania, Morocco, Saudi Arabia, and Uzbekistan).

Tax deferrals were the main vehicle of support to SOEs (Figure 37, panel 1). In general, governments have used many instruments, most commonly tax/ fee deferrals, followed by guarantees and subsidized loans.⁶ Tax/fee deferrals were used in Algeria, Azerbaijan, Egypt, Iran, Jordan, Kazakhstan, Kyrgyz Republic, Lebanon, Mauritania, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, Uzbekistan, and West Bank and Gaza. While tax incentives were used in Azerbaijan, Djibouti, Jordan, Mauritania, and Saudi Arabia, it is not clear if these incentives were given to private firms as well. Capital injections were used in Egypt, Morocco, Oman, Tunisia, and the United Arab Emirates. Of these countries, only Morocco conditioned a capital injection on SOE restructuring. Most countries relied on a single instrument—tax/fee deferrals in most cases—to deliver support (Algeria, Bahrain, Georgia, Kyrgyz Republic, Qatar, Tajikistan, Turkmenistan, Yemen, and West Bank and Gaza). However, some countries used multiple instruments (Egypt, Mauritania, Morocco, Saudi Arabia, Tunisia). In general, MENAP countries used a more diversified instrument mix than CCA countries.

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SOE Financial Support: Instruments and Conditionality

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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Government support was unconditional in many cases (Algeria, Djibouti, Egypt, Georgia, Iran, Kazakhstan, Mauritania, Tajikistan, United Arab Emirates, and Uzbekistan) (Figure 37, panel 2). Among the countries that provided unconditional support, the most common instrument was tax/fee deferrals (Algeria, Iran, Kazakhstan, and Uzbekistan). Some countries provided conditional financial support, the most common reason being to ensure delivery of services at low prices (Azerbaijan, Mauritania, Pakistan, Saudi Arabia, Tunisia, and Turkmenistan). In Jordan, Morocco, Pakistan, and Saudi Arabia conditioned government support on SOE restructuring.

Sectoral Impact

Although the analysis above assesses the impact of COVID-19 on SOEs at the aggregate level, the experience of SOEs in different sectors may be distinct. This section looks more closely at the experience of SOEs in three industries: airlines, oil and gas, and electricity, which were among the most hard-hit industries during the pandemic.

All three industries suffered considerable losses but did not benefit from similar levels of government support. The airline industry experienced significant losses over an extended time and received considerable financial support (including equity injections), often without conditions. The impact on the oil/gas and electricity industries was experienced during a narrower window of time. Unlike the airline and oil and gas industries, the electricity industry suffered not only a direct hit (reduced demand) but also an indirect hit (inability of consumers to pay bills), compensated partly by lower oil prices. The oil and gas industry for the most part did not receive support, whereas in the electricity sector it was conditioned on safeguarding service delivery.

Airline Industry

The pandemic has taken a heavy toll on the airline industry. Air traffic declined precipitously beginning in March 2020, with the number of fight arrivals and departures in the region falling to less than 10 percent of their 2019 level (Figure 38). The number of fights steadily increased over the second half of 2020 but remained at less than half of their 2019 level.

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Flights in ME&CA Countries

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: FlightRadar24; and IMF staff calculations.Note: Flights which have an origin or destination within the ME&CA region are selected and flights without a reported operator are dropped. The ratio of flights relative to a year ago is calculated by taking a 7-day average of flights (to abstract from within week volatility) and comparing this to the 7-day average of flights 365 days previously.

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Many ME&CA countries have national airline companies, which are at least partially state owned. They fared similarly to private airlines, even though they were used by governments to repatriate citizens stranded abroad (for example, Egypt Air, Kuwait Airways)⁷ and distribute medical supplies and vaccines. In Jordan, all incoming and outgoing commercial passenger fights were suspended for five months,⁸ leading to a drop in Royal Jordanian’s revenues by 84 percent year over year by end-Q3 2020.⁹ Airlines in the Gulf region cut employment and wages to cope with the shock. For example, Qatar Airways Group is estimated to have laid of some 20 percent of its 40,000 workforce and cut salaries of non-Qatari pilots by up to 25 percent.¹⁰ T o help mitigate the sharp decline in passengers, many airlines have expanded to other lines of business within the transportation sector, in particular their cargo services.

Governments across the region have stepped in to support state-owned airlines. Survey evidence suggests that state-owned airlines received government support in almost half of ME&CA countries (Figure 39) through subsidies, loan guarantees, cash transfers, equity injections, tax deferrals, and debt relief totaling at least US$6 billion:

• Azerbaijan. US$142 million in subsidies and US$21 million in guarantees to Azerbaijan Airlines.¹¹

• Egypt. EGP5 billion (US$318 million) in direct assistance and government-backed loans to EgyptAir.¹² The government also agreed to finance EgyptAir’s loan of EGP2 billion (US$127 million) until the company returned to 80 percent of its pre-COVID capacity.¹³

• Jordan. A comfort letter to allow Royal Jordanian to borrow up to JD50 million (US$70 million) from a commercial bank.¹⁴

• Qatar. Equity injection of QR7 billion (US$1.7 billion) to Qatar Airways from the Sovereign Wealth Fund.¹⁵

• Tajikistan. Tax deferrals and write-offs to Tajik Air.¹⁶

• Saudi Arabia. SAR6.4 billion (US$1.7 billion) to Saudia in H1 2020 for payments for services and other receivables.¹⁷

• United Arab Emirates. The Dubai government provided an AED7.3 billion (US$2 billion) cash injection into Emirates.¹⁸

• Uzbekistan. The government requested a state-owned bank to temporarily suspend payments on a US$111 million to the national airline.¹⁹

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Government Support to State-Owned Airlines

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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Oil and Gas Industry

The oil and gas industry has faced unprecedented difficulties due to the COVID-19 pandemic. Oil prices plummeted to 18-year lows, driven by the collapse in oil demand (especially jet fuel) in March 2020, and the ensuing price war between some oil exporters. Several OPEC+ agreements have subsequently limited overall oil market supply. Oil prices began to stabilize in H2 2020 and by early February 2021, they had returned to pre-COVID levels (Figure 40).

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Global Oil Demand and Prices

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: US Energy Information Administration (EIA) Short-Term Energy Outlook; and IMF World Economic Outlook (WEO).

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In response to a sharp fall in oil demand, state oil companies undertook cost-cutting measures to contain losses. Qatar Petroleum, for example, the world’s largest producer of liquefied gas, announced a 30 percent reduction in operating and capital expenses in 2020,²⁰ including the elimination of at least 800 jobs.²¹ Nevertheless, the company committed to pursuing its domestic and foreign expansion, including a 40 percent increase in annual LNG production by 2024.²² Similarly, Kuwait Petroleum Corporation (KPC) instructed its subsidiaries to cut both capital and operating expenditures. In April 2020, KPC agreed with the Kuwaiti Ministry of Finance to reduce its 2020/21 budget by about 20 percent in line with efforts to tackle the fiscal deficit, and to cancel several upstream and downstream projects.²³ Kuwait also approved plans to restructure KPC’s eight operating subsidiaries into the four main existing upstream and downstream subsidiaries over a two-year period, which will likely entail job losses. Saudi Aramco, one of the world’s largest companies by revenue, also implemented cost-cutting measures, but still registered a decline in net income (Box 14).

Electricity Companies

The pandemic has also negatively impacted power companies. Electricity demand declined sharply in the short term and many customers (both households and businesses) faced payment difficulties. Compensating for some of these losses, many electricity companies, which rely on fuel to produce electricity, benefited from reduced input prices.

The negative impact of COVID-19 on electricity companies was stronger in the wake of the pandemic but dissipated as the year progressed. In Tunisia, Société Tunisienne de l’Electricité et du Gaz (STEG) saw demand for electricity decline by 20 percent year over year in April 2020, driven by firms which represented 60–65 percent of electricity demand (industry, services, and agriculture).²⁴ As a consequence, STEG delayed some of its renewable energy projects, also because of supply chain closures and workforce mobility restrictions. In Jordan, NEPCO couldn’t fully benefit from lower oil prices given the nature of its supply contracts.²⁵ To cope with the shock, NEPCO delayed various investment projects, including the development of new plants. In Kazakhstan, Kazakhstan’s Electricity Grid Operating Company dropped its production by about 15 percent in April 2020 relative to March 2020, in response to reduced demand due to COVID-19, which only began to recover in September 2020.²⁶

Several electricity distribution companies voluntarily suspended shutoffs as part of their COVID-19 response to ease the burden on consumers. For example, STEG guaranteed access to electricity and gas for all consumers, announced that service would continue for households that did not pay their bills during the lockdown and deferred payments by one month. Morocco’s National Office of Electricity and Drinking Water (ONEE) also announced that during the COVID-19 crisis low-income households would benefit from a temporary billing suspension, continued electricity supply (with a prepayment meter), and special remote payment facilities.²⁷ To support ONEE, the government committed emergency aid of MAD1 billion (US$104.1 million).²⁸

Going forward, the sector will face challenges on its road to recovery, with the loss of revenue posing continued financial risks for some power companies. The ability to recoup losses incurred during COVID-19 by charging higher tariffs, could require regulatory approval that may prove difficult if demand remains subdued. In addition, the accumulation of large unpaid bills could pose challenges if regulators push power companies to forgive client debts.

Long-Term Consequences of COVID-19

While the worst of the pandemic may soon be over, its effects may linger in some countries, requiring governments to address two main risks. First, withdrawing exceptional support may prove challenging as only a few countries indicated that financial support was provided for a timebound period (Kazakhstan, Mauritania, Oman, Pakistan, Saudi Arabia, and Uzbekistan). This situation is compounded by the lack of clear exit strategies, as about two-thirds of survey respondents indicated that there was no clear strategy for withdrawing financial support (Figure 41). A second risk is that support provided during COVID-19 may set a precedent for future support. However, some countries are moving to mitigate this risk. In Morocco, the authorities are seeking to restructure SOEs and refocus on core businesses (Box 15). In Oman, the authorities are seeking to merge entities, review SOE financial performance and subsidy/support requirements, and align their objectives with Vision 2040.

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Risks Associated with COVID-19 Financial Support

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National country authorities; IMF staff; and IMF staff calculations.

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^{Box 14.}

The Impact of COVID-19 on Saudi Aramco’s Operations

In June 2020, Aramco laid of less than 1 percent of its more than 70,000 employees, while global energy firms resorted to extensive layoffs (10–15 percent of their workforce) during the COVID-19 pandemic.¹ Saudi Aramco’s domestic workers were protected. At the same time, the company activated its business continuity plan for the entire organization and cut capital spending by 6.2 percent in 2020 H1.² As of end-2020, the company had also cut operating costs by 14.8 percent.³

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Saudi Aramco Financial Performance

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: Company financial reports; and IMF staff calculations.

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Aramco saw a 50 percent year over year drop in net income during H1 2020, as demand for oil and prices continued to decline. In Q3 2020, results improved somewhat amid efforts around the world to ease mobility restrictions and cut oil production, helping the company post a profit of US$11.79 billion, compared to US$6.57 billion in Q2 (and US$21.3 billion in Q3 2019). Still, Aramco’s profits during January– September 2020 were down by about 45 percent relative to one year ago. Saudi Aramco finished 2020 with an overall drop in net income of 44 percent (US$49 billion compared to US$88.2 million in 2019), compared to 66 percent in the case of Total⁴ and about 260 percent for Exxon Mobile.⁵ The acquisition of 70 percent of the Saudi Basic Industries Corporation (SABIC), a chemical manufacturing company, contributed to a large increase in Aramco’s debt ratio. Finally, to strengthen its cash position, Aramco issued US$8 billion in multi-tranche US$-denominated bonds in November 2020.

The consecutive declines in Aramco’s quarterly profits put pressure on Saudi Arabia’s public finances as lower oil prices weighed on government revenues. Nevertheless, Aramco adhered to its commitment to pay a large dividend (US$75 billion) to its shareholders (mainly the Saudi Government), a pledge it made after it floated part of its shares in 2019 in the world’s biggest IPO. It also paid out US$18.75 billion in dividends related to Q3 2020.⁶

¹ Reuters (June 18, 2020). ² CNBC (August 9, 2020). ³ Saudi Aramco (2020). ⁴ Meredith (2021). ⁵ BBC (February 2, 2021). ⁶ Saudi Aramco, Investors Dividends (accessed April 12, 2021).

^{Box 15.}

SOEs in Morocco: Government Support During COVID-19

The Moroccan government provided about US$1.7 billion in financial support to SOEs in 2020 to tackle the COVID-19 crisis.¹ About US$500 million was direct support in the form of subsidies, loans, debt assumption, capital injection, and called guarantees. The rest, about US$1.2 billion, was in the form of domestic guarantees to enable SOEs to borrow from local banks and repay their suppliers as a way to support the private sector. The government also issued an additional EUR250 million in guarantees to allow SOEs to borrow externally.

SOEs have also played an important role in channeling COVID-related support to those in need. They transferred about MAD9 billion (about US$1 billion or 0.8-percent of GDP) to a special COVID-19 fund that was created by the authorities to channel voluntary contributions from private and public firms and high-wealth Moroccan citizens. The COVID-19 fund (Box Figure 15.1) has been used by the government to increase discretionary spending and has had a significant redistribution effect. In particular, it covered the costs of upgrading medical facilities and supported businesses and households impacted by the pandemic.

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Distribution of COVID-19 Fund

(Percent of GDP)

Citation: Departmental Papers 2021, 019; 10.5089/9781513594088.087.A001

Sources: National authorities; and IMF staff calculations.

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¹ This box is based on IMF (2021b).

Lessons

This paper set out to document the footprint and performance of the non-financial SOE sector, analyze fiscal risks stemming from SOEs and corporate governance standards, understand how COVID-19 has impacted SOEs, and extract lessons from the ME&CA region.

SOEs play an important role in ME&CA’s economic activity, development, and employment. They range from multinationals with a global presence to network industries to activities that are served by private firms in other regions and span all sectors of the economy. Conservative estimates of the footprint in ME&CA (in terms of numbers, assets, and employment) suggest it is larger than in OECD countries in most instances, although with significant heterogeneity across countries. However, in most countries only a handful of large SOEs account for a large proportion of overall SOE assets and employment. SOEs in ME&CA frequently have weak operating performance, with many operating at a loss and reliant on direct or indirect government support, in line with previous findings from other regions. This large presence, coupled with large fiscal costs, significant corporate governance gaps, and preferential treatment for SOEs have implications for the competitiveness and dynamism of the private sector, overall growth, and ensuring the resilience of economies to future large shocks.

This paper distills a number of lessons from countries in the region:

• An appropriate SOE definition needs to take into account the national context. For example, while Georgia has no formal definition of an SOE, it has taken a comprehensive approach to include all entities in which the government holds more than 25 per share (including local governments), which is feasible in a small country.

• Improved transparency and analysis of fiscal risks help to strengthen governance, SOEs’ management, and fiscal planning. Morocco stands out for its annual SOE report that has been published online since 2008 and comprehensive reporting of its SOE sector in its annual budget law. This information will be used as the authorities seek to restructure SOEs. In Georgia, its Fiscal Risks Statement identifies sources of risks and estimates the magnitude of fiscal risks materializing using scenario analysis, supporting the authorities’ efforts to manage and mitigate them.

• Improving SOE efficiency and performance can be supported with corporate governance reforms but may require a cultural change. The experience of Jordan’s NEPCO suggests that corporate governance reforms can help focus a company on its commercial, financial, and operational performance. This focus has required building (1) leadership to transform the SOE into one “thinking” like a commercial company and (2) ownership of a corporate strategy, that fits with the government’s broader sectoral strategy, but makes commercial and financial sense to NEPCO. These changes need to be embedded in the SOE so that new practices take hold and allow the enterprise to control itself rather than having the government control the business.

• Anti-corruption governance reforms require a multipronged approach. Strong and stable support for the reform by top management will be critical for success. At the same time, boards and senior management need to gain an awareness of how to structure internal control functions, which are seen as key to tackling corruption. Success also hinges on dedicating sufficient resources to the work (both physical and human).

• SOE sector reform is a multiyear, multistep process, involving numerous stakeholders. The experience of Pakistan shows that while some work can be advanced in parallel, proper sequencing is necessary. This is even more evident in fragile states facing significant capacity constraints such as Sudan, where the initial focus is on clarifying the definition of an SOE and compiling an inventory of SOEs.

• Lastly, technical assistance can facilitate the design and implementation of reforms. The IMF has, for example, provided TA including from a regional center based in the Middle East (METAC), related to statistical classification of SOEs, identification and management of fiscal risks, and modernization of legal frameworks. With METAC support Egypt has improved its fiscal risk disclosure, started publishing reports on SOE financial performance, and compiled sector accounts.

Recommendations

The recommendations offer broad guidance, which should be tailored to meet the country context, including the institutional strengths and weaknesses as well as technical capacities.

Countries need to know what they own as this is a prerequisite to (1) assess the level of public ownership in the economy; (2) allow an honest appraisal of the appropriateness of public ownership in the economy; and (3) permit a reallocation of resources to boost productivity and profitability and reduce the reliance on government subsidies.

• Countries should review the national definition of SOEs, making use of the guiding principles provided in GFSM 2014, to ensure it is relevant and takes into account country specifics. Sectorization exercises should be completed to identify which SOEs should be classified as part of the general government sector and which as public corporations.

• A list of all SOEs should be published (and prepared if not already done) to build a comprehensive picture of the SOE sector (across economic activity, employment, and budget).

• An aggregate SOE report should be published to reflect the status of government ownership in the economy.

• Consolidated accounts of SOEs should be prepared to help to determine their impact on the government and the economy.

• SOE performance should be assessed on an annual (or quarterly) basis, with an evaluation against public policy and individual SOE objectives as well as private sector comparators.

Fiscal management frameworks for SOEs need to be strengthened to effectively monitor and reduce government exposure to SOEs.

• As a first step the Ministry of Finance or Ministry of Economy should be empowered to assess and monitor fiscal risks from SOEs. Such a framework could be developed gradually and be subsequently integrated into the overall public financial management framework to ensure consistency.

• Improving fiscal risks management will require strengthening the legal and institutional framework, as well as building capacity within the Ministry of Finance to assess and monitor SOEs.

• Priority should be given to regularly collecting timely data and reliable reporting from SOEs and identifying fiscal risks from SOEs, if necessary, through legal means. This will require identifying key financial indicators at both aggregate and individual SOE levels for effective monitoring (for example, profit and loss statements, cash flow statements, balance sheets.

• Greater transparency and disclosure of SOE debt and SOE guaranteed debt are warranted to adequately monitor and reduce fiscal risks.

• In countries where the SOE footprint is very large or governments face capacity constraints, the initial focus could be on a subset of SOEs that generate the greatest fiscal risk or have the largest impact on economic activity. Further, a specific SOE monitoring unit could be established in countries were SOEs are very large and an important part of the public sector.

• To mitigate fiscal costs and risks, SOE mandates and ownership rationale should be clarified to limit quasi-fiscal activities while ensuring there is adequate compensation of SOEs for the remaining quasi-fiscal activities.

More transparency would go a long way toward effectively managing fiscal interactions and ultimately improving the financial standing of SOEs.

• The full range of fiscal interactions should be reported to Parliament and published on a regular basis. To start with, countries should at least provide information on the main operational and financial results achieved by SOEs as well as on the fiscal support received by SOEs and their contribution to the budget. In addition, governments should transparently report the cost of quasi-fiscal activities.

• For SOEs that distribute dividends, the dividend payments need to be governed by a proper dividend policy and transparent reporting. Countries should apply best fiscal reporting practices that distinguish dividends paid out of different sources, which would enhance the transparency and sustainability of fiscal policy.

• Governments should consider incorporating into their balance sheet information such as the state holdings in SOEs, as well as government’s receivables from SOEs and payables to SOEs which are not captured in cash-based reports to track government exposure to SOEs.

Policymakers need to develop clear policies and conditions for when to provide extraordinary, as well as regular, support to SOEs, including by asking whether the SOE is viable and requiring a restructuring plan to be implemented.

• As a condition for financial support, there should be a commitment by the SOE to improve its corporate governance practices and audit procedures as well as enhance reporting, disclosure and, transparency by developing and including measurable targets and indicators that could be monitored by the state as part of the performance evaluation.

• For SOEs that face prolonged financial difficulties and large losses are expected, governments should consider conducting a triage—SOEs that are not viable and do not have a critical policy mandate should be divested, and SOEs deemed strategic or systemically important need to be reformed and restructured to restore their viability.

• SOE restructuring could be made easier if SOEs are incorporated and operating under corporate law.

• At the same time, serious consideration should be given to privatization in sectors that would be better suited to private sector involvement.

Governance shortcomings should be addressed.

• Most countries need to strengthen strategic thinking around SOEs (and their mission) and ask whether the objectives of state ownership are being met.

• More centralized oversight of SOEs should be adopted to address risks to accountability, incentive structures, and agenda setting.

• SOE board composition requirements should be improved to support objective and independent judgement, while avoiding potential conflicts of interest.

• Centralization of the board selection process can help in professionalizing SOE boards as it lowers risks of non-transparency, political influence, conflicts of interest, and different procedures across the government.

• Regular audits should be conducted by both the auditor general and an independent external auditor that is not providing non-audit services. They should be timely and publicly disclosed.

• As a first best, SOEs should be as transparent as publicly traded corporations.

• At the same time, all the best governance standards on paper are not worth much if they are not implemented in practice. Therefore, attention should be paid equally to de jure and de facto governance practices.

Beyond the implementation of corporate governance standards, the regulatory environment and preferential fiscal support should be examined to ensure a level playing field between SOEs and private enterprises.

• Clearly separate commercial and noncommercial SOE activities.

• Impose transparent compensation for noncommercial activities and public sector obligations of SOEs.

• Ensure the same tax and regulatory burden is applied to private firms and SOEs and reduce barriers to entry.

• The terminology “state aid” should be introduced. There should be an assessment of the impact of state aid on the banking sector, macroeconomic stability, and budget with the ultimate goal to be reduced state aid.

Governments should consider alternative ownership structures for a given enterprise and whether these would achieve the same objectives in a more efficient manner.

• A helpful exercise that governments can make in this direction is the triage of all SOEs on the basis of (1) financial viability; (2) public policy priorities (for example, strategic interests); and (3) market failures (for example, natural monopoly), to identify the SOEs that should be either maintained under state ownership, or subject to privatization, or rather liquidated.

• Of the SOEs that should be maintained, such an exercise should also take stock of SOE incorporating forms. For instance, when SOEs have their own constituting laws, which define parameters such as board size and composition, these laws may need to be reviewed and updated as their narrow definitions often pose barriers to good corporate governance.

• Where the state intends to retain ownership, professional management should be hired (or privatizing management).

• A partial stock exchange listing (minority position) could also be considered as it automatically requires higher transparency and disclosure standards.

The experience from COVID-19 thus far, and in particular the extraordinary financial support provided to SOEs, reinforces the need for SOE reforms in both governance and fiscal risk management areas given their strong linkages, with an immediate focus on improving oversight, reporting, and assessment of fiscal risks.

• Financial support during the current pandemic or during any other extraordinary shock should be timebound and the same for all companies, except when it is to support government objectives.

• Explicit exit strategies for the withdrawal of exceptional financial support need to be developed.

• Areas for quick wins include improving disclosures (ownership lists, budget costs, government guarantees, economic contribution, etc.).

Finally, governments and policymakers need to be aware that improved governance and fiscal risk management will not solve all SOE problems, such as economies of scale or technological gaps. This means that there needs to be an objective reexamination of the rationale and need to participate in many economic activities that could be better served by private enterprises. Even after an objective determination of the need for SOEs, they should play a constructive role in generating strong, diversified, and sustainable growth in a post-COVID world.

• At the individual SOE level, there is a need to improve efficiency and reduce their reliance on government financial support (possibly achieved through restructuring or partial privatization). This would allow the government to redeploy freed-up resources toward projects with higher growth multipliers. An improved financial position of SOEs could also free up non-government domestic credit, which could be reallocated towards the private sector.

• At the government level, there needs to be a commitment to leveling the playing field with the private sector, including by taking measures to separate the commercial and noncommercial activities of SOEs, minimizing financial and nonfinancial support or preferential treatment to SOEs, and reducing barriers to entry for potential competitors. In some cases, this could require changes in legislation to ensure that SOEs are bound by the same conditions as private sector firms, while in other cases it will require enforcing the laws.