Lessons from Contractual Arrangements for Infrastructure SOEs in Developing Countries

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1 Lessons from Contractual Arrangements for Infrastructure SOEs in Developing Countries Nilgün Gökgür Boston Institute for Developing Economies June 20, 2007

2 Outline History of State-Owned Enterprise Reforms Internal reforms Public to Public -- Performance contracts Public to Private -- Management and shareholding contracts TANESCO, ELECTROGAZ and SENELEC External reforms Macro economic evaluation of SOE performance Monitoring fiscal impact in Uganda and Turkey Exercising government s ownership function in Europe and Asia Which reforms are most promising in today s environment? 2

3 History of State-Owned Enterprise Reforms : Internal and external reforms in competitive and non-competitive sectors : Private participation in infrastructure (divestiture in telecom, management contracts in electric power, lease contracts in water, concession contracts in railways and container terminals) 2005-Present: Back to public management; investment needs remain unfilled; and what next? 3

4 State-Owned Enterprise Reforms External to Enterprise Macroeconomic evaluation of SOE performance (evaluating economic aggregates, fiscal and monetary impact of the SOE sector) Competition and regulation Introduction of hard budget constraints Clearance of arrears and inter-arrears Elimination of the habit of non-payment Introduction of financial sector reforms 4

5 State-Owned Enterprise Reforms Internal to Enterprise Corporatization; Commercialization and providing subsidies only for non-commercial activities; Designing, implementing, monitoring performance contracts; How to identify KPIs? How to evaluate performance? Who will evaluate performance? Privatization: Divestiture, management contracts, lease or concessions contracts. 5

6 Two Types of Performance Contracts French-style performance contracts, contrat plan -- France, Senegal, Côte d Ivoire, Benin, Morocco and Tunisia Usually for five years in the absence of a well defined performance evaluation system or third-party monitoring Korean-style performance contracts, signaling system - - Korea, Pakistan, Philippines, India Memorandum of Understanding, Bolivia and the Gambia Usually for one year with well designed performance evaluation system, and with end-of the year evaluation 6

7 Signaling System for Performance Improvement Performance evaluation system (national goals are translated into explicit and quantifiable targets captured in performance criteria) Performance information system (monitors and measures the actual performance of an enterprise using the accurate information needed to evaluate management performance) Performance incentive system (links the well-being of managers and employees to national welfare through a system of bonuses and penalties) 7

8 Performance Evaluation System STEP 1. Beginning of the year: Criteria selection, criteria weight selection and criteria value selection (excellent to poor) STEP 2. End of the year: Calculation of the composite score as a rigorous link between the evaluation and distribution of pecuniary and non-pecuniary rewards/penalties and setting of new targets 8

9 Calculating the Composite Score (CS) in PCs IND Unit Weight 1-4 (4-0 month bonus) Actual Met Gross Results Net Results Gross Profits Pesos millions 385 millions Exports Pesos millions 75 Millions Project Imp. Months TOTAL CS Source: Gökgür (1994), Performance contracts: a Tool for Reforming and Evaluating the Performance of Public Enterprise, First Evaluation Seminar for Central America, Panama & Dom. Rep. IADB 9

10 Why did PCs not improve performance? Design problems with French-style PCs Performance evaluation not well specified; no performance information system and not linked to an incentive system Absence of base-line data and data gaps, Implementation problems; absence of third-party monitoring Not enough resources allocated by development partners compared to those for privatization 10

11 Comparing Management to Performance Contracts Features TANESCO Electrogaz Performance MC MC Contracts I. Fixed Fee Fixed Declining None Financial responsibility SIDA WB None II. Success Fee Financial responsibility Performance targets Utility revenues Performance targets Utility revenues Composite score Utility revenues Investments Loans, grants Loans, grants Loans, grants 11

12 TANESCO Management Contract with Net Group (May December 2006) Phase I (27 months) Financial Turnaround Revenue & Costs; Power Losses; Quality of Supply Relief projects implemented Strong worker support US$10.7 million Phase II (29 months) Technical Turnaround Utility Profits; System Reliability; Electrification Turnaround projects never disbursed Weak worker support US$ 7-8 million Source: Ghanadan and Eberhard (2007) Electricity Management Contracts in Africa 12

13 Not Extending Net Group s Management Contract Poor hydrological conditions, Load shedding and power outages, Underestimating of IPP costs, Delaying debt restructuring, Falling short of performance targets, Yet private operator improved information on key performance indicators. 13

14 ELECTROGAZ Management Contract with Lahmayer (August March 2006) Long preparation time from 1999 to 2003, 5-year MC as interim solution to divestiture, GOR responsible for investment finance, Private operator responsible for: preparing and executing the investment plan, Meeting financial, technical, operational and commercial objectives, GOR requested a performance bond of US$ 0.5 billion. 14

15 Terminating Lahmayer s Management Contract Lahmayer failed meeting the performance targets, Lahmayer asked to renegotiate the targets after a year claiming inaccurate base-line data, Business plan submitted was declared incomprehensible by the regulator, Investment plan never submitted, GOR decided to terminate the MC. 15

16 SENELEC s Short Experiment with Divestiture (January September 2000) First privatization in 1999: Phase I: 34% of equity divested to a consortium between Hydro-Quebec International (Canada) and Elyo (France) each with 17% Phase II: 10% for workers and 15% for local investors but never materialized Private Partner and Full Operator: Minority consortium partners had full management control for 5 years; SENELEC signed a license contract for 25 years Re-nationalization in 2000: Difficulties regarding equity increase; investment finance and tariff increase Second privatization attempt in 2001: Decision to sell off majority shares with no luck. 16

17 Failure to Evaluate Macro Economic Performance of SOEs Despite efforts to privatize: Most competitive SOEs are partially divested; state remains direct or indirect minority owner; Infra enterprises remain fully state-owned and controlled. Privatization agencies and the Treasuries fail to: Evaluate macro economic performance of SOEs; Monitor government ownership in partially stateowned competitive and fully state-owned infra enterprises. 17

18 Criteria for Macro-Economic Evaluation of SOEs SOE sector s share in GDP, investments, savings and employment Fiscal impact: Flows from State to SOE sector Flows from SOE sector to State Flows within SOE sector Monetary impact: Money supply Level of price inflation Structure of interest rates Balance of payments 18

19 Uganda: Macro-Economic Evaluation of SOEs Flows from State to SOEs: Direct subsidies (cash equity injections, donors grants, investments subsidies) Equity support (loans/grants/debt conversions, unloading of bad loans, unloading of SOE guarantees, de-linking SOE subsidies) Financing terms (loans arrears, low/unpaid dividends, low borrowing interest and foreign exchange coverage, guarantee fees) Fiscal terms (corporate tax exemptions, duty exemptions, late payment of PAYE, late payment of corporate taxes, late payment of NSSF, NSSF evasion or underpayment) Other (State s preferred SOE, monopoly pricing) 19

20 Uganda: Macro Economic Evaluation of SOEs Flows from SOEs to State: Financing terms (foreign exchange loss) Sale terms (advantageous pricing, government arrears) Unprofitable activities Other (under-capitalization) From/To Other SOEs: Financing terms (low SOE collections, late and/or unpaid dividends) Sale terms (arrears to SOEs, arrears from SOEs) NET/TOTAL:% of turnover, net profit and GDP 20

21 Turkey: Macro Economic Evaluation of SOEs Income and P&L statements, and balance sheets, Borrowing requirements and financing, Debt stock, Value-added, Financing obligations (accrual and payments), Non-tax revenues from SOEs and state-banks, Number of employees and total employment costs, Duty losses, Financing requirements of SOEs, Net deferred and advance payments & as % of GNP. 21

22 Learning from Government Ownership Agencies England: Shareholder Executive (ShE) since 2003 France: Government Shareholding Agency (APE) since 2003 Finland: Ownership Steering Department since 2007 Singapore: Temasek Holding South Korea: Ministry of Planning and Budget India: Standing Conference on Public Enterprises (SCOPE) China: State-Owned Supervision and Administration Commission (SASAC) Vietnam: State Capital Investment Corporation (SCIC) International Network of Government Ownership Agencies (INGOA) established 18 months ago with 26 members 22

23 Questions for Discussion How to establish parastatal monitoring and a government shareholding agency to analyze and monitor the performance of SOE sector? How to formulate a state-owned enterprise policy for clearing all arrears and inter-arrears as well as introducing the habit of timely payment for infra services? Are performance contracts relevant in today s environment? Who will design, implement and monitor them? What are the training needs? Can the WB and other donors support these reforms? What are the other alternatives to improve the performance of infra enterprises? 23