## 1. OECD Guidelines on Corporate Governance of SOEs (wp17221)

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### Introduction and objectives
- SOEs play an important role in the economies of Emerging Europe.
- Poorly exercised state ownership can carry substantive macroeconomic risks on fiscal policy, financial stability and, via productivity spillovers, on economic growth.
- Emerging European economies are particularly susceptible due to legacy issues from inconsistent privatization and varying degrees of institutional quality.
- Objective of the paper:
  - Review the SOE landscape in Emerging Europe and assess SOE performance across countries and vis-à-vis private firms using a new firm-level dataset.
  - Gauge underlying SOE governance frameworks by identifying shortcomings, evaluating recent reform experiences, and drawing policy lessons.

### Dataset and coverage
- Dataset and scope:
  - Constructed from the Orbis database (Bureau Van Dijk), covering the years 2012-2014; annual averages used to smooth data.
  - After cleaning, total number of SOEs = 6,282.
  - State ownership defined as a minimum stake of 50.1 percent.
  - Countries covered: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, and Sweden (benchmark).
- Country SOE counts in the dataset:
  - Poland: 2097
  - Sweden: 1699
  - Bulgaria: around 798
  - Romania: around 799
  - Other listed countries have far smaller numbers.
- Sectors: eight sectors in line with NACE-2 sections (Mining; Other industries & agriculture; Energy; Water utilities; Transport; Postal services; Healthcare; Other services).
- Note: healthcare sector and postal services excluded from remainder of analysis due to atypical SOE roles.

### SOE presence and economic shares
- Aggregate contribution (across sectors):
  - SOEs contribute between around 1 and 12 percent to total economic output.
  - SOEs contribute between around 0.5 and 8 percent of total employment.
- Countries with largest SOE shares:
  - Output shares: Slovenia, Poland, Sweden.
  - Employment shares: Sweden, Bulgaria, Slovenia.
- Sectoral dominance:
  - Energy: in Slovenia, Hungary, Poland, and Bulgaria, more than 60 percent of energy-sector output is generated by SOEs.
  - Mining: Sweden and Estonia have SOE output shares exceeding 50 percent.
  - Water utilities: SOEs responsible for around 30 percent of output in Poland, Bulgaria, and Slovenia.
  - Transport: Hungary (output and employment shares above 20 percent); Bulgaria (employment share around 26 percent).
  - Other services: only Sweden and Slovenia exhibit SOE output shares above 5 percent.
  - Other industries: SOE influence remains below 5 percent in all countries.

### Financial performance — profits/losses and liabilities
- Measurement: aggregated profits/losses before tax, averaged over 2012-2014 and expressed in percent of GDP.
- Selected profit/loss observations:
  - Bulgaria: large losses in the energy sector (mainly due to the National Electricity Company and a structural tariff deficit).
  - Croatia: significant losses in the transport sector.
  - Slovenia: losses in other industries driven by the state-owned automotive company.
  - Latvia: losses in other services caused by the bad bank established during resolution of the financial crisis.
  - Profitable examples: energy sectors in CEE countries, Croatia, and Estonia; Estonia’s and Slovakia’s transport sectors.
  - Sweden: large profits in the services sector mainly due to the gaming industry and public real estate companies.
- Accumulated liabilities (percent of GDP) — notable examples:
  - Energy sectors in Bulgaria, Croatia, Estonia, and Slovenia: SOE debt ranging between 5 and 7 percent of GDP.
  - Transport sector (public railways): debt around 9 percent of GDP in Slovenia and around 6 percent in Slovakia.
  - Croatia: large liabilities in other industries due to the public motorway company.
  - Other services liabilities stand out in Latvia (bad bank) and Sweden (telecom company and real estate sector).
- Contingent liabilities reporting: Eurostat totals of government-controlled entities outside general government reported for 2013–2015 in source materials.

### Profitability and efficiency
- Profitability (ROE = profits and losses before tax as a percentage of shareholders’ equity):
  - In the vast majority of cases, SOEs are less profitable than private firms.
  - Exceptions where SOEs outperform private firms: Swedish and Estonian mining sectors; Slovak services and industries.
  - Countries with lower SOE profitability and larger SOE–private gaps: Bulgaria, Romania, Poland.
  - Caveats: regulated prices, inadequate compensation for public service obligations, and averaging across large numbers of private firms affect comparisons.
- Capital efficiency (ROCE = operating profit or loss before tax as a share of capital employed):
  - Transport sectors and other services display the largest ROCE gaps between SOEs and private firms in most countries, indicating inefficient capital allocation.
  - Energy, mining, and other industries show a more nuanced picture; some countries have more capital-efficient SOEs than private firms (examples: Czech Republic; Bulgaria in mining; Slovakia in other industries).
- Labor efficiency:
  - SOEs generally exhibit higher average cost of labor per capita than private firms in most countries and sectors.
  - Cases of roughly equal labor cost between SOEs and private firms include: energy and transport sectors in Sweden; other services in Hungary and Poland; other industries in Lithuania and Poland.
  - Some extreme values driven by small samples and outliers (example: transport sector in Latvia driven by the national airline).

### Output quality
- No SOE-specific output quality data; World Economic Forum’s Global Competitiveness Indicators used as proxy for infrastructure-related sectors.
- Findings:
  - Bulgaria and Romania exhibit particularly poor output quality in overall infrastructure and electricity supply; also weak in port infrastructure when compared with the sample excluding the land-locked Czech Republic, Hungary, and Slovakia.
  - Better performance indicated for the Baltic countries, the Czech Republic, Slovakia, Slovenia, and Sweden.

### Macroeconomic and financial risks from poor SOE performance
- Three main channels of risk:
  - (i) Risks to public finances via contingent liabilities from excessive SOE indebtedness:
    - Aggregate debt of SOEs classified outside general government accounts represents contingent liabilities.
    - Risk degree may stem from size (examples: Slovenia, Sweden, Poland) or from likelihood of realization even for modest liabilities (example: where SOEs are largely exempt from insolvency regulations, such as in Bulgaria).
  - (ii) Risks to financial sector stability via state-owned banks:
    - Slovenia example: the state owned the three largest domestic banks and holds around 63 percent of the total banking sector’s equity; corporate governance failures and excessive state control amplified crises in 2012-13.
  - (iii) Risks to productivity and growth via spillovers from SOEs to other firms:
    - World Bank analysis (Bulgarian firm-level data) indicates performance in SOE-dominated network service sectors affects downstream firm productivity in manufacturing and services.
    - Improvements in network service sector performance enhance downstream firm productivity particularly in the electricity sector, and likely in transport.
    - Opening sectors to foreign investors, increasing competition, and promoting export activity among network sector firms lead to improved downstream firm total factor productivity.

### SOE governance — OECD Guidelines and diagnostics
- OECD Guidelines — core principles:
  - State should evaluate and disclose objectives that justify state ownership and subject these to recurrent review.
  - State should act as an informed and active owner with transparency, accountability, professionalism and effectiveness.
  - Legal and regulatory framework should ensure a level playing field and fair competition when SOEs undertake economic activities.
  - Equitable treatment of shareholders where non-state investors exist.
  - State ownership policy should recognize SOEs’ responsibilities towards stakeholders and request reporting on stakeholder relations.
  - SOEs should observe high standards of transparency and be subject to the same accounting, disclosure, compliance and auditing standards as listed companies.
  - Boards of SOEs should have authority, competencies and objectivity for strategic guidance and monitoring; boards should act with integrity and be held accountable.
- Diagnostics in Emerging Europe:
  - Qualitative indicators show considerable variation across countries.
  - OECD state control indicators: Bulgaria and Lithuania display the worst-possible ratings.
  - EBRD Transition Indicator: Bulgaria scores worst among available countries, followed by Romania.
  - Country-specific challenges cluster in three areas:
    - Ownership policy: rationale rarely specified; objectives not unequivocally defined; legal provisions unclear; responsibilities fragmented.
    - Financial oversight: dedicated oversight teams often absent or understaffed; performance targets absent or vague; dividend policies erratic.
    - Board appointments: political appointments common; frequent replacements; lack of private-sector expertise; remuneration not transparent nor performance-based.

### Lessons and policy recommendations (three main lessons)
- Lesson #1: Flesh out a consistent ownership policy
  - Establish clear institutional basis: dedicated SOE framework law or high-level political document specifying rationale, objectives, and ownership strategy.
  - Regularly review state ownership and make the case for divestment if assets no longer align with objectives (examples: Estonia and Sweden review annually).
  - Specify and ring-fence roles and responsibilities of government bodies; choose centralized vs. decentralized/hybrid ownership models on solid grounds.
  - OECD recommends exercising SOE ownership rights in one dedicated, accountable entity within government rather than primarily at line ministries.
  - Separate ownership and policy functions to avoid conflicts of interest and political patronage.
  - Strengthen competition authority mandate and abolish insolvency exemptions that create fiscal risks (example: Sweden’s competition authority can take municipalities to court).
- Lesson #2: Give teeth to financial oversight
  - Establish or upgrade a well-powered SOE oversight unit:
    - Collect and synthesize SOE financial information regularly and build a publicly-accessible database including sub-national SOEs.
    - Analyze risks to fiscal, financial, and macro stability and develop mitigation strategies.
    - Publish findings in regular reports to ensure public accountability.
    - Oversight units often placed in the Ministry of Finance but can reside elsewhere (examples: Estonia — MoF coordination unit; Sweden — unit within Ministry for Enterprise and Innovation; Lithuania — coordination unit in the State Property Fund).
  - Define clear performance targets and monitor compliance:
    - Prefer targets based on rates of return or capital structures (examples: Sweden, Latvia, Lithuania, Slovenia).
    - Avoid targets tied to sales volumes or employment that may serve industrial or labor policy rather than value maximization (example: Bulgaria).
    - Apply sanctions for non-compliance ranging from additional reporting to administrative measures on SOE boards.
    - Benchmark performance with private and foreign companies; Korea’s monitoring system highlighted for rigorous monitoring including customer satisfaction surveys and index-based evaluations.
  - Make dividend policies predictable and balanced:
    - Facilitate stable long-term investment planning while ensuring adequate capital return for the state.
    - Country practices and explicit ratios:
      - Bulgaria, Czech Republic, Estonia, Hungary: dividend requirements often ad-hoc and sometimes guided by government budget needs.
      - Poland: guidelines consider recovery of prior losses, long-term investment strategies, privatization, and firm indebtedness; dividend levels determined in relation to rate-of-return indicators and liquidity ratios.
      - Lithuania: explicit dividend ratios — at least 7 percent of equity and at most 80 percent of company profits for limited liability firms; statutory corporations expected to pay out 50 percent of annual profits.
      - Slovenia: general dividend policy foresees an annual pay-out of at least one third of net profits.
      - Australia and the Netherlands: dividend payments linked to achieving a desired capital structure and target credit rating (noted as potentially excessive sophistication for Emerging Europe).
- Lesson #3: Make SOE boards more professional
  - Legislate clear board mandates enabling independent exercise of operational functions without undue state intervention.
  - Ensure transparency measures such as reporting requirements and annual board performance evaluations (examples: Czech Republic and Sweden).
  - Nomination process should be transparent, competitive and skill-based; include independent board members; improve qualification requirements and involve external contractors where appropriate (examples: Croatia and Romania efforts).
  - Estonia requires board members to come equally from private and public sectors to secure private-sector expertise.
  - Avoid excessively frequent board changes (reported in Bulgaria).
  - Remuneration policies should be clear, balanced, and preferably linked to performance; Sweden applies guidelines for reasonable and competitive remuneration; Hungary applies remuneration limits in relation to the minimum wage.

### Conclusion — summary findings and reform priorities
- Summary findings:
  - SOEs play an important role, notably in network sectors.
  - Profitability and efficiency of resource allocation in SOEs largely lag behind private firms, evidenced by sizeable gaps in return on equity and return on capital employed, and unfavorable relative cost of employees.
  - Large cross-country variation: some countries exhibit much worse SOE performance than others.
- Risks:
  - Poor SOE performance creates risks to fiscal, financial, and macro stability.
  - Contingent liabilities and insolvency exemptions can pressure public finances.
  - Financial instability can be accelerated by large-scale state ownership of banks with opaque cross-ownership and regulatory failures.
  - Weak SOE productivity can spill over to downstream firms, generating wider macro risk.
- Reform priorities:
  - (i) Clearly define high-level ownership policy, specify and regularly review state ownership case-by-case, assign distinct responsibilities to government entities, and exercise ownership centrally when institutional quality is weak.
  - (ii) Strengthen financial oversight teams to implement and monitor financial performance targets effectively.
  - (iii) Professionalize SOE boards via competitive, skill- and experience-based selection procedures and transparent, merit-based remuneration.
  - Emphasis: implementation is critical — strong de jure frameworks can fail in practice; achieving a sustainable SOE landscape requires perseverance over time.

*Source: wp17221 - 1. OECD Guidelines on Corporate Governance of SOEs (PDF chapter/section).*

### 1. OECD Guidelines on Corporate Governance of SOEs........................................................17

### 1. OECD Guidelines on Corporate Governance of SOEs........................................................17

### Introduction and objectives
- State-owned enterprises (SOEs) play an important role in the economies of Emerging Europe.
- Poorly exercised state ownership can carry substantive macroeconomic risks on fiscal policy, financial stability and, via productivity spillovers, on economic growth.
- Emerging European economies are particularly susceptible to these risks as, in some cases, legacy issues with SOEs prevail as a result of inconsistent privatization during the transition process.
- Varying degrees of institutional quality aggravate the risks of suboptimal SOE governance.
- The objective of this paper is twofold:
  - Review the SOE landscape in Emerging Europe and assess SOE performance across countries and vis-à-vis private firms. A new firm-level dataset is constructed, covering 11 Emerging European countries and Sweden as a benchmark country.
  - Gauge the underlying SOE governance frameworks in these countries by identifying shortcomings, evaluating recent reform experiences, and drawing overall lessons for policy implications.

### Key findings on SOE presence and performance
- SOEs make up significant shares of employment and output in several countries.
- SOEs are especially important in network sectors, such as energy, transportation, and water management.
- In some countries and sectors, SOEs are heavily loss-making.
- Large amounts of debt have been piled up in the energy and transport sectors, but partly also in telecoms, financial services and real estate.
- SOE profitability and the efficiency of resource allocation in SOEs largely lags those in private firms.
- The gaps in profitability and efficiency are particularly large in some of the Southeast European and Baltic countries.
- Risks arise where:
  - contingent liabilities are sizeable,
  - poorly regulated state ownership of banks amplify financial instability,
  - negative productivity spillovers affect the larger economy.
- Underlying SOE governance reforms have advanced in Slovenia, Lithuania and Latvia but have remained rudimentary so far in Bulgaria.
- Overall assessment across countries shows large variation in SOE performance and governance reforms — described as “good, bad, and ugly”.

### Policy implications and reform lessons
- A well-defined ownership policy is needed at the highest level:
  - Clarify the rationale for state ownership.
  - Review state ownership case-by-case every year.
- Centralize the ownership function rather than leaving it with line ministries, particularly advisable if the overall institutional quality is weak.
- Financial oversight teams need to have teeth to implement and monitor financial performance targets.
- Dividend policies should be balanced and predictable.
- Firm-level governance needs to ensure professionalized SOE boards:
  - Appointments should be determined by skill and experience, not political affiliation.
  - Remuneration needs to strike a healthy balance of remaining competitive while being transparent and merit-based.

### Structure of the paper
- Section II presents the dataset and sets the scene by reviewing the broader SOE landscape in Emerging Europe.
- Section III assesses SOE performance including indebtedness, profitability, efficiency and output quality, and discusses risks of poor SOE performance on fiscal, financial, and macroeconomic stability.

*Source: wp17221 - 1. OECD Guidelines on Corporate Governance of SOEs (PDF chapter/section).*

### Section IV addresses SOE governance by setting out the ideal framework, identifying major

### wp17221 - Section IV addresses SOE governance by setting out the ideal framework, identifying major

### A. The Dataset and Coverage
- Dataset constructed for this study based on the Orbis database (Bureau Van Dijk), covering the years 2012-2014; annual averages used to smooth data.
- After cleaning for inactive companies, outliers and double entries, the total number of SOEs amounts 6,282.
- State ownership is defined as a minimum stake of 50.1 percent.
- The dataset comprises eleven new European Union member states (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia) as well as Sweden (included as a benchmark).
- Country SOE counts in the dataset:
  - Poland: 2097
  - Sweden: 1699
  - Bulgaria: around 798
  - Romania: around 799
  - Other listed countries have far smaller numbers.
- Sectors defined in line with NACE-2 sections; eight sectors considered (Mining; Other industries & agriculture; Energy; Water utilities; Transport; Postal services; Healthcare; Other services).
- The healthcare sector and postal services are excluded from the remainder of the paper due to atypical roles for SOE analysis.

### B. SOE Presence and Economic Shares
- Aggregate SOE contribution (across sectors):
  - SOEs contribute between around 1 and 12 percent to total economic output.
  - SOEs contribute between around 0.5 and 8 percent of total employment.
- Countries with largest SOE output shares: Slovenia, Poland, Sweden.
- Countries with largest SOE employment shares: Sweden, Bulgaria, Slovenia.
- Sectoral dominance:
  - Energy sector: strongest SOE domination — in Slovenia, Hungary, Poland, and Bulgaria, more than 60 percent of energy-sector output is generated by SOEs.
  - Mining: Sweden and Estonia have SOE output shares exceeding 50 percent.
  - Water utilities: SOEs responsible for around 30 percent of output in Poland, Bulgaria, and Slovenia.
  - Transport: notable SOE influence in Hungary (output and employment shares above 20 percent) and Bulgaria (employment share around 26 percent).
  - Other services: only Sweden and Slovenia exhibit SOE output shares above 5 percent.
  - Other industries: SOE influence remains below 5 percent in all countries.

### C. Financial Performance: Profits/Losses and Liabilities
- Profits and losses measured as aggregated profits/losses before tax, averaged over 2012-2014 and expressed in percent of GDP.
- Selected loss/profit observations:
  - Bulgaria: large losses in the energy sector (mainly due to the National Electricity Company and a structural tariff deficit).
  - Croatia: significant losses in the transport sector.
  - Slovenia: losses in other industries driven by the state-owned automotive company.
  - Latvia: losses in other services caused by the bad bank established during resolution of the financial crisis.
  - Profitable sectors: energy sectors in CEE countries, Croatia, and Estonia; Estonia’s and Slovakia’s transport sectors.
  - Sweden: large profits in the services sector mainly due to the gaming industry and public real estate companies.
- Accumulated liabilities of SOEs (percent of GDP) — notable examples:
  - Energy sectors in Bulgaria, Croatia, Estonia, and Slovenia: SOE debt ranging between 5 and 7 percent of GDP.
  - Transport sector (public railways): debt around 9 percent of GDP in Slovenia and around 6 percent in Slovakia.
  - Croatia: large liabilities in other industries due to the public motorway company.
  - Other services liabilities stand out in Latvia (bad bank) and Sweden (telecom company and real estate sector).

### D. Profitability and Efficiency
- Profitability (ROE = profits and losses before tax as a percentage of shareholders’ equity):
  - In the vast majority of cases, SOEs are less profitable than private firms.
  - Notable exceptions where SOEs outperform private firms: Swedish and Estonian mining sectors; Slovak services and industries.
  - Countries tending to rank lower in SOE profitability and with larger SOE–private gaps: Bulgaria, Romania, Poland.
  - Caveats: regulated prices, inadequate compensation for public service obligations, and averaging across large numbers of private firms affect comparisons.
- Capital efficiency (ROCE = operating profit or loss before tax as a share of capital employed):
  - Transport sectors and other services display the largest gaps between ROCE of SOEs and private firms in most countries, indicating inefficient capital allocation in SOEs of those sectors.
  - Energy, mining, and other industries show a more nuanced picture; some countries have more capital-efficient SOEs than private firms (e.g., Czech Republic; Bulgaria in mining; Slovakia in other industries).
- Labor efficiency:
  - SOEs generally exhibit higher average cost of labor per capita than private firms in most countries and sectors.
  - Cases of roughly equal labor cost between SOEs and private firms include the energy and transport sectors in Sweden; other services in Hungary and Poland; other industries in Lithuania and Poland.
  - Some extreme values driven by small samples and outliers (e.g., transport sector in Latvia driven by the national airline).

### E. Output Quality
- No SOE-specific output quality data; World Economic Forum’s Global Competitiveness Indicators used as proxy for infrastructure-related sectors.
- Output quality indicators:
  - Bulgaria and Romania exhibit particularly poor output quality in overall infrastructure and electricity supply; also weak in port infrastructure when compared with the sample excluding land-locked Czech Republic, Hungary, and Slovakia.
  - Better performance indicated for the Baltic countries, the Czech Republic, Slovakia, Slovenia, and Sweden.

### F. Macroeconomic and Financial Risks from Poor SOE Performance
- Three main channels of risk:
  - (i) Risks to public finances via contingent liabilities from excessive SOE indebtedness.
    - Aggregate debt of SOEs classified outside general government accounts represents contingent liabilities.
    - Risk degree may stem from size (e.g., Slovenia, Sweden, Poland) or from likelihood of realization even for modest liabilities (e.g., where SOEs are largely exempt from insolvency regulations, such as in Bulgaria).
  - (ii) Risks to financial sector stability via state-owned banks.
    - Slovenia example: the state owned the three largest domestic banks and holds around 63 percent of the total banking sector’s equity; corporate governance failures and excessive state control amplified crises in 2012-13.
  - (iii) Risks to productivity and growth via spillovers from SOEs to other firms.
    - World Bank analysis (Bulgarian firm-level data) indicates performance in SOE-dominated network service sectors affects downstream firm productivity in manufacturing and services.
    - Improvements in network service sector performance enhance downstream firm productivity particularly in the electricity sector, and likely in transport.
    - Opening sectors to foreign investors, increasing competition, and promoting export activity among network sector firms lead to improved downstream firm total factor productivity.
- Contingent liabilities (Eurostat totals of government-controlled entities outside general government) are reported for 2013–2015 by country in the source materials.

### G. SOE Governance: Best Practice and Relevance
- Good corporate governance is central to effective SOEs, important because SOEs often have dual goals (market activity and public policy obligations) and face risks of politically motivated ownership interference.
- OECD guidelines on SOE governance provide an international benchmark of best practices:
  - Agreed in 2005 and developed further in 2015.
  - Aim to professionalize the state as an owner, make SOEs operate with similar good practices as private enterprises, and ensure competition between public and private firms on a level playing field.
  - These guidelines constitute useful yardsticks for Emerging European countries, including those not OECD members.

*Source: wp17221 - Section IV addresses SOE governance by setting out the ideal framework, identifying major*

### Box 1. OECD Guidelines on Corporate Governance of SOEs

### Box 1. OECD Guidelines on Corporate Governance of SOEs

### OECD Guidelines — core principles
- Rationales for state ownership:
  - The state exercises the ownership of SOEs in the interest of the general public.
  - The state should carefully evaluate and disclose the objectives that justify state ownership and subject these to a recurrent review.
- The state’s role as an owner:
  - The state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness.
- SOEs in the marketplace:
  - The legal and regulatory framework for SOEs should ensure a level playing field and fair competition in the marketplace when SOEs undertake economic activities.
- Equitable treatment of shareholders:
  - Where SOEs are listed or otherwise include non-state investors among their owners, the state and the enterprises should recognize the rights of all shareholders and ensure shareholders’ equitable treatment and equal access to corporate information.
- Stakeholder relations and responsible business:
  - The state ownership policy should fully recognize SOEs’ responsibilities towards stakeholders and request that SOEs report on their relations with stakeholders.
  - The state should make clear any expectations it has in respect of responsible business conduct by SOEs.
- Disclosure and transparency:
  - SOEs should observe high standards of transparency and be subject to the same high quality accounting, disclosure, compliance and auditing standards as listed companies.
- The responsibilities of boards:
  - Boards of SOEs should have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance and monitoring of management.
  - Boards should act with integrity and be held accountable for their actions.

### SOE governance performance in Emerging Europe — diagnostics
- Qualitative indicators show considerable variation across countries:
  - OECD state control indicators gauge insulation of SOEs from market discipline and political interference; Bulgaria and Lithuania display the worst-possible ratings.
  - EBRD Transition Indicator on governance and enterprise restructuring measures hard budget constraints, enforcement of bankruptcy legislation, competition and corporate governance; Bulgaria scores worst among available countries, followed by Romania.
  - Indicators reflect only selected dimensions of SOE governance and the latest vintages are slightly dated.
- Country-specific challenges cluster in three main areas:
  - Ownership policy:
    - Rationale for state ownership rarely specified clearly.
    - Objectives of SOEs often not unequivocally defined.
    - Legal provisions concerning SOEs tend to be unclear and opaque.
    - Responsibilities are typically fragmented with unclear reporting lines among government ministries and agencies.
  - Financial oversight:
    - Dedicated oversight teams often absent or understaffed with weak mandates.
    - SOE performance targets are absent or vague; compliance not adequately monitored or sanctioned.
    - Dividend policies are erratic and lack predictability.
  - Board appointments:
    - Political board appointments without transparent and competitive selection procedures are common.
    - Frequent replacements hamper efficient board functioning.
    - Private-sector expertise, international experience, and independent board members are often absent.
    - Remuneration often not fully transparent nor performance-based.

### Lessons and policy recommendations (three main lessons)
- Lesson #1: Flesh out a consistent ownership policy
  - Establish a clear institutional basis: dedicated SOE framework law or high-level political document specifying rationale for state ownership, well-defined policy objectives, and coherent ownership strategy.
  - Regularly review state ownership and make the case for divestment if assets no longer align with ownership objectives (examples: Estonia and Sweden review annually).
  - Specify and ring-fence roles and responsibilities of government bodies; choose centralized vs. decentralized/hybrid ownership models on solid grounds.
  - OECD recommends exercising SOE ownership rights in one dedicated, accountable entity within government rather than primarily at line ministries to ensure consistency and concentrate expertise.
  - Separate ownership and policy functions to avoid conflicts of interest and political patronage; centralized models generally facilitate this separation.
  - Strengthen competition authority mandate to ensure a level playing field and to abolish insolvency exemptions that create fiscal risks (example: Sweden’s competition authority can take municipalities to court).

- Lesson #2: Give teeth to financial oversight
  - Establish or upgrade a well-powered SOE oversight unit:
    - Collect and synthesize SOE financial information regularly and build a publicly-accessible database including sub-national SOEs.
    - Analyze risks to fiscal, financial, and macro stability from SOE underperformance and develop mitigation strategies.
    - Publish findings in regular reports to ensure public accountability and inform the political process.
    - Oversight units are often placed in the Ministry of Finance but can reside elsewhere depending on institutional structure (examples: Estonia — MoF coordination unit; Sweden — unit within Ministry for Enterprise and Innovation; Lithuania — coordination unit in the State Property Fund).
  - Define clear performance targets and monitor compliance:
    - Prefer targets based on rates of return or capital structures (examples: Sweden, Latvia, Lithuania, Slovenia).
    - Avoid targets tied to sales volumes or employment that may serve industrial or labor policy rather than value maximization (example: Bulgaria).
    - Apply sanctions for non-compliance ranging from additional reporting requirements to administrative measures on SOE boards.
    - Benchmark performance with private and foreign companies; Korea’s monitoring system is highlighted for rigorous monitoring including customer satisfaction surveys and index-based evaluations.
  - Make dividend policies predictable and balanced:
    - Facilitate stable long-term investment planning while ensuring adequate capital return for the state.
    - Country practices:
      - Bulgaria, Czech Republic, Estonia, Hungary: dividend requirements often ad-hoc and sometimes guided by government budget needs.
      - Poland: guidelines consider recovery of prior losses, long-term investment strategies, privatization, and firm indebtedness; dividend levels determined in relation to rate-of-return indicators and liquidity ratios.
      - Lithuania: explicit dividend ratios — at least 7 percent of equity and at most 80 percent of company profits for limited liability firms; statutory corporations expected to pay out 50 percent of annual profits.
      - Slovenia: general dividend policy foresees an annual pay-out of at least one third of net profits.
      - Australia and the Netherlands: dividend payments linked to achieving a desired capital structure and target credit rating (noted as potentially excessive sophistication for Emerging Europe).

- Lesson #3: Make SOE boards more professional
  - Legislate clear board mandates enabling independent exercise of operational functions without undue state intervention.
  - Ensure transparency measures such as reporting requirements and annual board performance evaluations (examples: Czech Republic and Sweden).
  - Nomination process:
    - Should be transparent, competitive and skill-based; include independent board members.
    - Improve qualification requirements and involve external contractors where appropriate (examples: Croatia and Romania efforts).
    - Estonia requires board members to come equally from private and public sectors to secure private-sector expertise.
    - Avoid excessively frequent board changes (reported in Bulgaria).
  - Remuneration policies:
    - Should be clear, balanced, and preferably linked to performance.
    - Address trade-off between attracting qualified professionals and ensuring long-term company interests.
    - Sweden applies guidelines for reasonable and competitive remuneration; Hungary applies remuneration limits in relation to the minimum wage.

### Conclusion — summary findings and reform priorities
- SOE performance in Emerging Europe shows a mixed picture:
  - SOEs play an important role, notably in network sectors.
  - Profitability and efficiency of resource allocation in SOEs largely lag behind private firms, evidenced by sizeable gaps in return on equity and return on capital employed, and unfavorable relative cost of employees.
  - Large cross-country variation: some countries exhibit much worse SOE performance than others.
- Risks:
  - Poor SOE performance creates risks to fiscal, financial, and macro stability.
  - Contingent liabilities and insolvency exemptions can pressure public finances.
  - Financial instability can be accelerated by large-scale state ownership of banks with opaque cross-ownership and regulatory failures.
  - Weak SOE productivity can spill over to downstream firms, generating wider macro risk.
- Reform priorities:
  - (i) Clearly define high-level ownership policy, specify and regularly review state ownership case-by-case, assign distinct responsibilities to government entities, and exercise ownership centrally when institutional quality is weak.
  - (ii) Strengthen financial oversight teams to implement and monitor financial performance targets effectively.
  - (iii) Professionalize SOE boards via competitive, skill- and experience-based selection procedures and transparent, merit-based remuneration.
  - Implementation is critical: strong de jure frameworks can fail in practice; achieving a sustainable SOE landscape requires perseverance over time.

*Source: Box 1. OECD Guidelines on Corporate Governance of SOEs, wp17221.*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17221.pdf_