Stepping Up the Financial Oversight of Public Corporations


Posted by Richard Allen and Miguel Alves[1]

Why should policy makers worry about the performance of public corporations (PCs)?  One reason is that, despite the large-scale privatizations that began in the 1980s, companies owned or controlled by the government continue to account for a large share of economic activity, and of public assets and liabilities (see charts below). Many PCs are pressured or mandated into fulfill political objectives and engage in public service obligations and other quasi-fiscal activities (QFAs) for which they are not compensated. PCs may also be used as a mechanism for circumventing traditional fiscal controls and as a conduit for financial corruption. (click to enhance images)

Chart 1. Market Capitalization of Listed PCs (in percent of GNI)

Chart 2. PCs as a Percentage of Global 500

  Chart 1  Chart 2

Second, many studies have highlighted how failures of PCs can result in huge economic and fiscal costs. One recent study[2], for example, analyzed a series of episodes in which contingent liabilities materialized over the period 1990-2014. It concluded that the maximum cost of those episodes involving PCs was 15.1 percent of GDP, and the average cost was 3 percent of GDP. PCs were the second largest category of fiscal risk after the financial sector (which includes many state-controlled companies). Moreover, the number of episodes involving PCs, as well as their average fiscal, cost doubled between the 1990s and the 2000s.

Third, around the world, the structure and characteristics of PCs have been changing, as the companies take on a more strategically important role. Traditionally, many PCs were natural monopolies. However, as a result of technological changes and competitive forces, natural monopolies in sectors such as electricity distribution and telecommunications have disappeared. Many of the largest PCs now operate in the oil, gas, copper and other mineral sectors, and some are only legal monopolies rather than natural monopolies.

To address these concerns, a new paper published by the IMF’s Fiscal Affairs Department[3] sets out a framework for the better financial oversight of PCs Key points are as follows:

Finally, advanced countries have spent many years building and refining the oversight systems described in the paper. It may not be practical to implement such ambitious reforms in low-capacity countries. In such cases, a risk-based approach to building an oversight regime for PCs is strongly recommended. The note provides a checklist of the main elements of such a regime and how they might be sequenced.

[1] Richard Allen is a Visiting Scholar to the IMF, and co-editor of the PFM Blog; Miguel Alves is a Senior Economist with the Fiscal Affairs Department of the IMF.

[2] Bova, E., M. Ruiz-Arranz, F. Toscana, and H. Elif Ture, 2016, “The Fiscal Costs of Contingent Liabilities: A New Dataset,” IMF Working Paper, WP/16/14.

[3] Richard Allen and Miguel Alves ”How to Improve the Financial Oversight of Public Corporations”, IMF, Fiscal Affairs Department, How To Notes No. 5, November 2016.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.