State-owned enterprises (SOEs) are involved in almost every facet of life across developing countries – from electricity, water, transport to ports, airlines, and banking. Some operate commercially in competitive markets, while others deliver essential public services, often at below-cost tariffs. SOEs are often among the largest formal employers and play an even more important indirect role for enabling – or hampering – private sector job creation through the services they provide.
Yet many continue to underperform financially and operationally. As a result, they remain dependent on government support, absorb scarce public resources, and create significant fiscal risks without delivering commensurate improvements in performance or service delivery.
Why do SOE reforms often look promising on paper but fail to deliver results in practice? In some cases, the issue starts earlier where the reform design itself may be incomplete or overly ambitious, failing to adequately reflect country-specific institutional constraints and implementation realities on the ground. A useful analogy is a gym membership. Subscribing to one feels like progress. But unless you actually show up and change your habits, nothing really happens.
Many SOE reforms work the same way. Governments pass new company laws, issue governance codes, or establish oversight units. These actions are real. But without changes in incentives, data, and decision‑making authority, day‑to‑day behavior inside SOEs often stays exactly the same. Such dynamics are often highly context-specific.
In Bangladesh, for example, SOEs play a central role in sectors such as energy, financial services, and transport. Despite multiple waves of reform, many continue to face persistent operational inefficiencies and financial pressures. In practice, the binding constraints tend to lie less in formal reform design and more in institutional bottlenecks—such as fragmented oversight, limited board autonomy, and political economy considerations around pricing, subsidies, and employment.
Researchers describe this phenomenon as isomorphic mimicry—the adoption of the form of good governance without its underlying function. Institutions replicate the appearance of reform without developing the capability needed to make reforms work. The result is a capability trap: reforms continue to be announced, but performance remains unchanged.
Eight Reasons SOE Reforms Stall
Based on experience across countries, several patterns show up repeatedly:
1. Copying form, not substance.
Changing rules is easier than changing incentives and behavior.
2. Hidden financial risks remain invisible.
Weak reporting obscures debt, arrears, guarantees, and other fiscal risks until they become crises.
3. SOE ownership functions remain fragmented and weak.
Overlapping mandates and dispersed oversight weaken accountability.
4. A clear rationale for state ownership and a strategic reform vision are missing.
Without a clear ownership policy, governments struggle to define objectives and measure performance.
5. Boards exist, but lack independence.
Political interference often limits boards’ ability to hold management accountable.
6. Mixed mandates are not made explicit.
When public service obligations are not clearly costed and funded, losses accumulate and accountability suffers.7. Reforms demand too much, too fast.
Advanced reporting and performance systems cannot succeed without basic financial management foundations.
8. Announcements are rewarded more than results.
Passing a law or launching a unit is visible and easy to celebrate. Whether debts shrink or service improves is harder to track—and therefore often ignored. This pattern is often reinforced by political economy dynamics, where visible actions are prioritized over more difficult reforms that may entail short-term fiscal or social trade-offs.
What Actually Works
Effective SOE reform does not require perfection. It requires focus, sequencing, and persistence. While the exact path will vary by country and the composition of the SOE portfolio, successful reforms tend to follow a common progression:
1. Get visible. Develop a clear reform vision and disclose SOE finances, debt, guarantees, and fiscal risks. Countries are increasingly adopting state ownership policies that clarify why the state owns SOEs and what it expects them to achieve. Risks that are visible can be managed.
2. Get viable. Address loss-making mandates and hidden subsidies. If an SOE is expected to deliver public services below cost, that choice should be funded transparently through the budget rather than absorbed as hidden losses.
3. Get voice. Strengthen governance and accountability. Countries with strong, often centralized, SOE ownership functions have generally achieved more consistent oversight and reform momentum. Boards should be selected for skills, not connections, and empowered to hold management accountable.
4. Get value. Focus on outcomes, not compliance. Before introducing sophisticated performance systems, ensure SOEs can produce reliable accounts, track assets, and generate credible financial statements. Then link performance targets to measurable financial and service delivery results.
Skipping early steps often explains why later reforms fail.
SOEs are central to delivering on the World Bank Group’s development mission and jobs agenda. Strengthening their efficiency, governance, and innovation capacity can transform them into competitive, commercially viable actors, boosting productivity in key sectors, crowding in private investment, and generating more and better jobs at scale. However, this won’t be possible without reforming SOEs by changing how decisions are made, risks are managed, and results are measured.
The real test of reform success is not “did we adopt a new framework?” but rather, are losses shrinking; are services improving; are opportunities increasing;.
That shift—from compliance to capability—is what separates reforms that look good from reforms that do good.
How has SOE reform played out in your country? What has worked—and what hasn’t? Share your experience.
Source : World Bank
