GovernmentSOE Relationships to Reduce the Curse

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Government-SOE Relationships to Reduce the Curse

• William Ascher
• Claremont McKenna College
• February 2004

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Premises

• Resource SOEs remain very important
• Privatization lags behind that in infrastructure
  telecommunications
• Even reduced EP joint ventures leave SOEs in
  the revenue stream
• SOE behavior shapes both efficiency use of
  proceeds this is the fundamental problem
• Structure of government-SOE fiscal/institutional
  arrangements shape SOE behavior

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Premises

• SOE control over resource rents is problematic
• Lack of society-wide perspective in allocation
• Lack of expertise to allocate optimally
• SOE interests in pace balance of consumption
  investment not the same as societys

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Premises

• SOE investment of resource rents risks
• Over-investment in non-renewable resource sector
• Wasteful exploitation
• Inadvisable downstream /or creeping
  diversification

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Philosophy

• Virtue of the central fiscal apparatus
• Long-run optimal is allocative decisions at the
  highest level
• Maximum potential for X-efficiency,
  accountability, transparency, macroeconomic
  balance
• Despite current politics that might compromise
  even highest-level decisions

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Difficult Situation for SOEs

• Fiscal regimes are mal-structured
• Resource rents not removed pre-tax
• Often used as off-budget slush fund for
  government officials
• Investment funds based on formulae unrelated
  optimal time path of resource extraction
• Taxation sometimes abused to capture borrowed
  capital
• ? indebted but under-capitalized SOEs

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Difficult Situation for SOEs

• Overly broad mandates
• Social functions
• Better addressed by government agencies with
  accountability transparency regarding these
  functions
• Resource exploitation conservation
• ? conflicting objectives
• ? difficult to assess performance

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Non-Perverse Reward Structures

• Reward true profitability
• Requires full pre-tax royalty payments
• Rewarding pre-royalty profit ? over-exploitation
• Treat SOEs like private firms
• Bonuses, based on true profits performance
  benchmarks
• Not profit retention

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Non-Perverse Reward Structures

• Appropriate rewards
• Higher thresholds requiring government approval
• Greater contracting freedom
• Guaranteed foreign exchange access
• All require contract with the right ministries

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Change the Nature of the SOE

• Where the demand for the SOE is too strong to
  eliminate
• Alternatives
• As a contractor rather than EP
• Become a multinational while allowing MNCs to
  operate domestically

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Sectoral Changes

• Partial private ownership
• Increases transparency
• Provides SOE management with defense against
  interference
• Competitor in sector rather than monopolist
• By introducing private competition
• By creating competing SOEs or affiliates
• PDVSA example

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Addressing the Government Interference Dilemma

• Problem How to reform when The Government
  wants slush funds does not want transparency
  etc.?
• The Government is not monolithic
• For the right price, government agencies would
  be willing to trade off allocative flexibility
  for other things
• Assurances of fair dealing
• Market access

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What Can Be Done Internationally?

• Fiscal structure conditionality
• Demands for transparency
• Alliance with government agencies in favor of
  reform
• Technical expertise

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Research Questions

• Partial privatization how much grater
  transparency, efficiency, etc.?
• Can the extracted resource rent be reasonably
  estimated?
• Can proposed reward structures induce efficiency,
  appropriate rates of extraction,
  central-treasury rent capture?
• Update on effectiveness of performance contracts