3/21/2016

LookatPolandandSouthKoreatheysavedthemselvesthroughpublicsectorreforms

OPINION

LookatPolandandSouthKorea
theysavedthemselvesthrough
publicsectorreforms
November18,2013
Thispagein:English

Hrvatski

TWEET

SHARE

SHARE

HongjooHahm,WorldBank
Publishedin:Jutarnjilist

Thepublicsector,especiallystateownedenterprises(SOEs),isomnipresentin
Croatia.Theydominatetheeconomiclandscapefromtransport(ports,rail,
ferries,air,roads)toenergy(electricity,districtheating)toeventourism(hotels
andprimerealestate)orfoodproduction.SomuchsothattheSOEsectorin
CroatiaisoneofthelargestamongEUmemberstates.Stateownedassets,
includingSOEassets,comprisesome31.4billionor68%ofCroatiasGDP,
whichputsCroatiabehindonlyfourcountriesinEuropeintermsofvalueof
stateownedassets.Thestateowns584enterprises,ofwhich54aremajority
owned.Sincethebeginningofthe2008crisis,theprivatesectorhaslostmore
than150,000jobs,whiletheCroatianpublicsectorhasactuallyincreased
employment.
Whiledominatingthelandscape,CroatianSOEshaveperformedpoorlywith
limitedearningsbutrequiringenormousfiscalsupport.AccumulatedSOEs
debt,largelytransferredtothestatethroughdebtrestructuring(especially
shipbuildingandtransport),havesignificantlycontributedtoanincreasein
governmentdebt(i.e.stateguaranteedSOEsloansamountingtoHRK39.6
billionor12%ofGDPoradirectdebtassumptionresultingfromtheSOE
restructuring).

"Croatiacanlearnfrominternationalexperienceand
http://www.worldbank.org/en/news/opinion/2013/11/18/croatiaandtheexampleofpolandandskorea

1/4

3/21/2016

LookatPolandandSouthKoreatheysavedthemselvesthroughpublicsectorreforms

improvetheperformanceandmanagementofitsSOEsto
fosterthesustainabledevelopmentoftheeconomy"
HongjooHahm
WorldBankCountryManager,CroatiaandSlovenia

ThesurgeingovernmentSOErelateddebtalsoaffectscurrentexpenditures,
asinterestpaymentsongovernmentdebtaloneaccountsfor3%ofGDP.
CroatianSOEsalsorequirelargestatesubsidies,amountingtoaround1.7%of
GDPannually(comparedtoEU27averageofonly0.75%).Evenwiththese
subsidies,themajorityofCroatianSOEshavepostedlossesin2012.State
subsidiesandstateguaranteedSOEdebtweighsheavilyonthecountrysfiscal
positionandhascontributedsignificantlytoitsentryintotheECsExcessive
DeficitProcedure.
CroatianSOEsfaceanuncertainfuturewiththeadventofCroatiasEU
accession,withstrictEUregulationsonstatesubsidiesandastrongpushfor
SOErestructuring.ButmorethantheEUdirectivesthemselves,theeconomic
landscapeischanging,andCroatianSOEswillfaceextremecompetition
withoutmonopolisticadvantages,andwillhavetoperformasmeasuredby
profitability.Tocompete,SOEmanagementwillhavetoundergoradical
transformation,notablythroughdramaticallyimprovedcorporategovernance.
Thereisacriticalneedtoappointindependentandqualifiedboardsand
managerstoSOEs,atarmslengthfromgovernmentinterventions,withclear
separationofownershipandregulatoryfunctionsofthestate.Asnotedevenby
tradeunionsconfederations,itisnecessarytodepoliticizeandselect
managementandsupervisoryboardsaccordingtoqualification,andnotpolitical
favoritismortosatisfycoalitionpartypersonnelmatters.
InternationalexperienceshaveshownthatSOEreformsthroughmarket
liberalization,changesinownership,betteralignedincentivesstructures,and
perhapsmostcruciallyadramaticallyimprovedcorporategovernanceculture
cansignificantlyimproveproductivityandcontributetoeconomicgrowth.In
1984,KoreaundertookmajorSOEreformsthroughincreasedmanagerial
autonomy,improvedperformanceevaluationsystems,andbetterincentive
structures.
Afterimplementingreforms,therewasanoticeablechangeinmanagerial
http://www.worldbank.org/en/news/opinion/2013/11/18/croatiaandtheexampleofpolandandskorea

2/4

3/21/2016

LookatPolandandSouthKoreatheysavedthemselvesthroughpublicsectorreforms

behavior,theadoptionoflongtermcorporateplans,whereoperatingprofitgrew
50%in1984and20%in1985,withconcomitantimprovementsinthequalityof
goodsproducedandservicesprovided.SwedenwasthefirstinEuropeto
systematicallyaddresstheissueofSOEownershipandmanagement.Political
insulation,clearobjectiveandtransparencywerethreemainpillarsofSOE
reformprogrambetween1998and2001.Numberofrestructurings,divestitures
andacquisitionsbyportfoliocompanieswasconductedduringthethreeyear
reformprogram(includingtransformationofSJintooneofthemostprofitablerail
operatorsinEuropeandsubsequentsaleofCelsius,oneoftheEuropeslargest
defensegroups).Thisreformprocesssawmorethan20%oftheportfoliosold
offtoexternalinvestors.
Asaresult,thevalueoflistedSOEsgrewmorethan28%from1999to2001.
Swedensinnovativeapproachyieldedsignificantreturnsandbenefits,anditis
nowbeingreplicatedinmanyothercountries.Theremarkablegrowthofthe
PolisheconomybeganwiththesingularobjectiveofincreasingPolands
competitiveness,partiallyachievedthroughprivatizationandrestructuringof
SOEs.Thisprocessisstillongoing,andthePolishgovernmentcontinueswith
privatizationofSOEsandeffortstoincreasetheirprofitabilityandproductivity.
PolandisinamorefavorablepositionintheprocessofSOEsector
restructuring,duetocomprehensive,structuralreformsundertakenduringthe
pasttwodecades,aimedatstrengtheningthePolisheconomythrougha
competitiveprivatesector.
InCroatia,thesizeofthepublicsector,andthecorrespondinglySOEfootprint,
iscrowdingouttheprivatesector.Limitedbudgetaryresourcesarebeingspent
onSOEswithpoorperformanceandinadequatecorporategovernance.
ReducingthenumberofsomelessessentialSOEsandreducingsubsidiesto
SOEscouldreleasebudgetfundsfornecessaryinvestmentsinareasthat
promotecompetitiveness,employment,efficiencyandexportgrowth.
OverallinvestmentintoR&Dandinnovation,forexample,accountforonly
0.75%ofGDPcomparedtoanEUaverageofmorethan2%.Theprivate
sector,especiallyinnovativesmallandmediumenterprises,isthekeydriverof
growthandjobcreation.TheCroatianauthoritiesarewellawareofthesefacts
andbeginningtoinitiatereforms.Butthescopeandbreadthofreformscouldbe
widened,similartoPolandwithmorefocusoncorporategovernance,like
Koreawithabroadenedrolefortheprivatesectortoleadinthereformsitself,a
laSweden.Inallthesecountries,themaingoalofSOEreformswastoenable
http://www.worldbank.org/en/news/opinion/2013/11/18/croatiaandtheexampleofpolandandskorea

3/4

3/21/2016

LookatPolandandSouthKoreatheysavedthemselvesthroughpublicsectorreforms

fasterrestructuringaimedatdevelopingcompetitive,incomegenerating
enterprises,regardlessofownership.
Croatiacanlearnfrominternationalexperienceandimprovetheperformance
andmanagementofitsSOEstofosterthesustainabledevelopmentofthe
economy.

http://www.worldbank.org/en/news/opinion/2013/11/18/croatiaandtheexampleofpolandandskorea

4/4