IEG Findings and Conclusions Enhancing selectivity: corruption and competition The World Bank Group has a higher rate of successful outcomes in countries with better control of corruption and competitive conditions at the sector and enterprise level. State-owned enterprises (SOEs) perform better in both focal sectors if competitive conditions prevail at the sector and enterprise level. Both can be incorporated into approaches to selectivity and mitigation of risks when planning SOE reforms.
A substantial minority of interventions (26 percent) are in countries with weak control of corruption. In conditions of low control of corruption, all five major types of SOE reforms are less likely to succeed. There is an opportunity for greater Bank Group traction on SOE reform through a more selective approach. Certain internal and external factors can at least mitigate the risk of weak governance to project success.
Competition and competitive neutrality at the sector and enterprise level of SOEs can strongly influence performance. Improving competition can enhance the success of other reforms. However, analytics on competition, especially at the project level, are insufficient. International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) policies demand verification that a level playing field for competition exists before engaging with an SOE, but attention to competitive neutrality in project documentation is uneven and often missing.
Realizing SOE reform through a more coordinated and consistent application of Maximizing Finance for Development (MFD) and its embedded Cascade approach
This evaluation generally finds positive experiences when the Bank Group collaborates internally on SOE reform. Institutional collaboration to mobilize private financing and capabilities is a key expectation of the Cascade approach. Recent Independent Evaluation Group work suggests that such collaboration works best when the roles, division of labor, and responsibilities among the different Bank Group institutions and respective project teams are clear. Realistically, internal coordination can require additional resources that require balancing of benefits and costs. At the corporate level, there is room to spell out the implications of MFD and the Cascade approach for SOE reform.
There is a gap between the high incidence of recommendations on privatization and ownership reform in diagnostic work and the low incidence of privatization in the portfolio. Despite priority given to private solutions in the MFD, the Equitable Growth, Finance, and Institutions’ Integrated SOE Framework does not treat privatization (or public-private partnerships) as part of the Bank Group’s approach. However, interviews suggest that after a period of client disinterest and political sensitivity, demand for privatization support has been growing.
IEG Recommendations Recommendation 1. The World Bank Group should apply a selectivity framework for SOE reform support that considers country governance conditions, control of corruption, and sector and enterprise-level competition. First, findings suggest that the Bank Group could ramp up engagement with clients where success is more likely. In conditions of weak control of corruption, one option would be to engage first in addressing overall governance quality before attempting SOE reform. Where disengagement on SOE reform is not possible or desirable, close attention is needed to the factors that may mitigate corruption’s negative influence on SOE reform success. Next, the Bank Group should gear up capacity to conduct competition analysis, especially at the project level. The importance of competitive neutrality (the idea that SOEs should be on a level playing field with potential private competitors), especially considering IFC and, to a lesser extent, MIGA policies, indicates a need to ramp up project-level analysis by carrying out competition assessment more systematically and by applying substantial up-front analytic capability to project-specific work on competitive neutrality. This would allow for greater selectivity toward competitive conditions that would enhance SOE performance and for establishing up-front mitigating measures if competitive conditions were not conducive to success.
Recommendation 2. The World Bank Group should apply the MFD and its embedded Cascade approach for SOE reform. This would enhance consistent internal coordination and mobilize private financing and capacity, especially for ownership reforms. First, the Bank Group should further develop and harmonize its diagnostic frameworks applied to SOE reform. This requires developing shared framing tools such as an Integrated SOE Framework and Country Private Sector Diagnostic modules treating private sector options, including privatization and public-private partnerships, for addressing SOE performance challenges. Second, the Bank Group could apply the Cascade approach in offering clients options for SOE reform that mobilize private financing and capacity through privatization and ownership reform. Along with recommendation 1, given appropriate country and sector conditions, there is greater room to apply the MFD and its Cascade approach through a greater degree of and more routine World Bank, IFC, and MIGA coordination that builds on their comparative advantages. This can be piloted as a sequential process, with upstream interventions focusing on any needed policy and regulatory reforms to create a level playing field for private entry and investment, combined with downstream use of Bank Group instruments to catalyze and mobilize private financing. With careful monitoring and evaluation, such a pilot could inform future efforts to realize the Cascade more fully as a systematic approach to SOE reform.