DOES GOVERNANCE LEAD TO PERFORMANCE · Czech Republic, Italy and Romania Otilia Nuţu, Sorin ......
Transcript of DOES GOVERNANCE LEAD TO PERFORMANCE · Czech Republic, Italy and Romania Otilia Nuţu, Sorin ......
DOES GOVERNANCE LEAD TOPERFORMANCE?
What we learned about SOEs from Bulgaria, Czech Republic, Italy and Romania
Otilia Nuţu, Sorin IoniţăBerlin, May 2018
www.expertforum.ro
www.statecapture.euOverall report, 4 country cases
“All happy families are alike; each unhappy family is unhappy in its own way.” Lev Tolstoy, Anna Karenina
SOEs are a very diverse and unhappy family
1. Defining & measuring “performance” for SOEs
Are SOEs really comparable to private companies?
Fiscal Council Report EC report
Are SOEs really comparable to private companies?
What are SOEs and why do they exist?1. Natural monopolies (ex infrastructure): roads, water-
sewage, energy mains, etc2. Imperfect contracts: high externalities, unpredictable
trends, effective regulation would be too complex / costly (forests, other nat assets, airports, hydro)
3. Incumbent operators (ex post): burdensome social service obligation, costly regulation
4. Industrial policy (the most fuzzy): Various social goals like employment, regional cohesion, “strategic sector” (?): promote R & D; “infant industry”; in ECE, legacies of inherited socialist industry (Oltchim), other reasons (Italy)
What are SOEs and why do they exist?
SGEIs SOEs
• Different from purely commercial companies• Not exactly entities providing only public goods and services
- SGEI• Continuum between SGEI provision and purely commercial
Several ways around this, but limitations• Sectorial comparisons (IMF, EC) – each sector same SGEIs
Financial Output
• Benchmark before/after privatization
What we found: options• Define SGEI/PSOs clearly in the legislation, finance it
separately from public budgets, avoid cross-subsidies between commercial activities vs for-profit You can then simply benchmark profitability of commercial part with private & commercial companies and monitor cost to budget/output for SGEI part
• Define a set of indicators that are relevant for “benchmarking” considering the SGEI vs commercial activity limitation for each company / sector
Our research approach
1. Researching SOEs: performance (vs governance)
What we did: 1. Sample SOEs – difficulties RO IT BG CZ
CENTRAL / REGIONALRoads CNADNR ANAS MRDPW RSDRailways CFR Calatori Trenitalia BDZ (passenger) CD (passenger)Electricity HE, CEO, ELCEN IREN NEK CEZGas Romgaz IREN BulgargazPorts Constanta VarnaAirports OTP Sofia APForestry Romsilva SW SOE - Blagoevgrad Lesy CeskePost Posta Romana BG Post Ceska Posta
LOCALUrban transport RATB Metro Milanese Sofia Metropolitan DPPDH RADET IREN TOPLOWater Apa Vital AMIU Genova, AQUE Torino Russe waterWaste AMIU Genova
What we did: 2. Define clientelism in SOEs
In theory, corruption / clientelism / capture in SOEs have three main avenues:i. Buy goods and products for own use at above market
prices (fraudulent procurement & equivalents)ii. Offer goods, services or assets preferentially, at below
true market prices, to various individuals/entities (reverse of A)
iii. Nepotism / politicization in hiring, firing, management
What we did: 3. “Grade” the governance
RO IT BG CZCENTRAL / REGIONALRoads CNADNR ANAS MRDPW RSDRailways CFR Calatori Trenitalia BDZ (passenger) CD (passenger)Electricity HE, CEO, ELCEN IREN NEK CEZGas Romgaz IREN BulgargazPorts Constanta VarnaAirports OTP Sofia APForestry Romsilva SW SOE - Blagoevgrad Lesy CeskePost Posta Romana BG Post Ceska Posta
LOCALUrban transport RATB Metro Milanese Sofia Metropolitan DPPDH RADET IREN TOPLOWater Apa Vital AMIU Genova, AQUE Torino Russe waterWaste AMIU Genova
What we did: 4. Place SOEs on SGEI/commercial continuum
Two broad categories:A. SOEs purely profit based, with 100% commercial activity
but which happen to be state owned (for various reasons, but mainly in category 4): freight railways, coal mines, airlines, industrial plants
B. SOEs which operate more like the public administration, get budget money, have taxes assigned, legal monopoly: roads companies, state TV/radio, “research institutes”• They are not paid by clients, but mostly by taxpayers
What we did: 4. Place SOEs on SGEI/commercial continuum
Budget pays (general taxation)Public agency
Performance: delivery @ reasonable cost Clear separation public goods / profit
CNADNR, ANAS RAI Uno Posta Romana Hidroelectrica HPPMRDPW, RSD TVR public television TOPLO Ceska Posta Romsilva forest management
CFR Infrastructure RADET DH BG Post SW SOE - Blagoevgrad Romgaz, Bulgargaz supIREN DH Lesy Ceske
CFR Calatori Port Constanta, Burgas TAROM airlinesTrenitalia Aeroport Otopeni, Sofia Airport IREN gasBDZ Passenger Russe Water IREN electricityCD Passenger AMIU Genova NEK CEZRATB, Metro M CFR Marfa Apa Vital, IREN water CE Oltenia electricitySofia Metro, DPP AQUE Torino
Transelectrica (regulated), Bulgargaz pipes ELCEN
Public services / goods Commercial services / goods
Consumers pay (price)For-profit company
SOEs
Performance: profit maximization
What we did: 5. Define indicators comparable across companies placed on same spot
Identified areas of risk (procurement – of core vs non-core activity items; sales; output)Energy sector / mining: • Percentage of overheads: Overhead/revenues; overhead/installed capacity; overhead/distribution assets (both in $ and in km
of wires and number of transforming stations); overhead/number of consumers; overhead/sales to consumers (as opposed to wholesale market)
• Cost of coal / oil / gas per MWh (procurement)• Price of electricity EUR/MWh in direct contracts vs similar contract on power exchange (underestimated sales)• output (GWh) or turnover (EUR) per employee; arrears as share of turnover, correlation of arrears with electoral cycles• overdue receivables / turnoverTransportation – railways:• Percentage of overheads: Overhead/revenues; overhead/number of clients; overhead/sales to clients• output (person-km, tons) / employee; revenue (EUR) / output (traffic, tons); profitability compared to private counterparts.• procurement: cost per car /locomotive, SOE vs private.• miscellaneous (non-core activity related) procurement / total procurement (highlights if company procures useless supplies)• Freight transport - sales: price per ton of major commodity (e.g. coal), SOE vs private freight transporters• Overdue receivables / turnover, SOE vs private transporter (e.g., SOE allows clients to default on payments)• turnover / employees
What we did: 5. Define indicators comparable across companies placed on the same spotWater-sewage operator• Price / km of newly build sewer main, Price / km of newly build water main• Price per unit of service (usually m3)• overhead/number of consumers; overhead/sales to consumers • miscellaneous (non-core activity related) procurement / total procurement• turnover / employeesLocal public transportation• Price for client served• Number of employees (other than direct operators) / number of clients• Price of insurance per vehicle• overhead/number of clients; overhead/sales to clients• turnover / employee• OPEX / turnover• revenue (tickets + subsidies) / clients• procurement: cost per vehicle (bus; tram; trolleybus)• miscellaneous (non-core activity related) procurement / total procurement
What we did: 5. Define indicators comparable across companies placed on the same spotConstruction contracts / infrastructure (for public authority-like SOEs)• Cost per km of newly built motorway / standard national road• Cost per km of yearly maintenance of motorway / standard national road• Profitability of commercial partners (contractors), national vs foreign; national vs EU funds• miscellaneous (non-core activity related) procurement / total procurement• turnover / employeePostal services:• arrears / turnover; correlation of arrears with electoral cycles• turnover / employee• miscellaneous (non-core activity related) procurement / total procurement• profitability benchmarked with private postal services?Forestry:• arrears / turnover; correlation of arrears with electoral cycles• turnover / employee• miscellaneous (non-core activity related) procurement / total procurement• area of forest managed by SOE/ total country surface (evolution in time)
What we did: 6. Limit – 10 key indicators• Criteria: available data, comparability, relevance• Purpose: measure variations of performance
• Across time (e.g. 2010-2015) vs across countries (Ro-Bg-It-Cz) • Variations: search deeper for explanations (illustrated on Romania)• Correlate with national governance quality in SOEs• List of indicators:
• Roads: Total investment cost / network km• Railways - passenger: cost/passenger*km (total operational costs/passenger*km)• Energy, gas: profitability benchmarked with similarly structured companies and
GWh/employee• Forestry: profitability vs preservation of forest• Ports: traffic per employee (airports – passengers; ports – cargo)• Postal services: benchmarking of profitability (considering all similar SIEG)• Urban transport: cost/passenger-km; water: cost/m3• DH: arrears or subsidies/GCal
Roads: Total road investment cost / network km
OECD data, own calculations. Total investment includes upgrades, new constructions. RO: partly backlog of investments, partly over-expensive procurement. Note: Competition Council highlights motorway costs in Ro = 3x BG
RO: hike in spending in 2009 – crisis year and 2011 (Transalpinacase). Reduction of costs: reduced investment spending, procurement on EU rules
In-depth Roads analysis: CNADNR Romania2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
General frameworkCNADNR governance
ProcurementProfitability partners
Foreign cosRomanian vs foreign less profitablee.g. 2011 (tenders)
In-depth Roads analysis: CNADNR Romania2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
General frameworkCNADNR governance
Romstrade One-off spike:Transalpinasince 2015insolvent
Strabag EU-fundedprojectstake off in 2012
Romstrade Strabag normalvs Strabag rates ofprofitability profitability
-250-200-150-100-50050100150200
0
500
1000
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2008 2009 2010 2011 2012 2013 2014
Millio
ns
Millio
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Turnover (left axis) Profit (right axis)
-50
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2009 2010 2011 2012 2013 2014 2015 2016
Millio
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Turnover (left axis) Profit (right axis)
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2009 2010 2011 2012 2013 2014
Romstrade Strabag
Energy: GWh/employee; profitability
To compare exactly the same figures, we used electricity generation vs employment for electricity generation, as some companies – NEK, CEZ, IREN are integrated companies / groups comprising many activities. This is why we cannot benchmark profitability between them directly. Cogeneration is considered jointly (electricity + heat total production in GWh)Note: the better governed, the better the performance. IREN and CEZ are stock-listed; NEK and CEO are notoriously inefficient; Hidroelectrica is a case detailed below.
In-depth Analysis: Hidroelectrica Romania2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
General frameworkHidroE governance
Below market price sales No transactionsoutside competitive market
Foregone profits No foregone profits
Profitability of traders Regular traders fare better than "smart guys"
Smart guys contracts - e.g. 2011, mn RON
Smart guys vs regular traders - e.g. 2011, RON Ex- smart guys vs regular traders, e.g. 2015, RON
No smart guys, e.g. 2016 (except attempt 2013)
2304
1452
852
0%
20%
40%
60%
80%
100%
Value Foregone profits
0
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Turnover/employee
Mill
ions
Alpiq RI Repower
-
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Profit / employee
Thou
sand
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Alpiq RI Repower
16
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Turnover/employeeM
illio
ns
Alpiq RI Repower
(60)
(40)
(20)
-
20
Profit / employee
Thou
sand
s
Alpiq RI Repower
In-depth Analysis: Hidroelectrica Romania2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
General frameworkHidroE governance
Overvalued inputsGWh/employee Slightly better performance
Still large gapDifficulties to fire excessstaff
Third-party maintenanceand works (EUR/MWh)
High improvementoverachievementpossible underfinancing
Overall profits
HidroE becameprofitable
0
10
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Hidroelectrica AES Tiete CESP Verbund0
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Hidroelectrica AES Tiete CESP Verbund
0
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Hidroelectrica Verbund0
200400600800
1000120014001600
Hidroelectrica Verbund
ConclusionsThe balance between the two sets of goals (profit and social obligations) must be:● Clearly defined in policy and measurable● Written into the contracts● SOEs must be compensated by the state
(central/local) for the public service obligations performed
In general (at least ECE) none of these is true – which creates big problems for defining clientelism
Conclusions• Very few “benchmarkable” indicators, as companies are
very different. However, general indicators highlight general issues, research can be refined to explain variations (“case studies”)
• Needed: DATA TRANSPARENCY+ full implementation of state aid, proper SGEI definition and financing• Note: bad governance, bad performance do not
necessarily mean corruption; but acting on governance and performance limits corruption
ConclusionsBroader definition of clientelism = bad governance in general, perpetuated through mechanisms (i)+(ii)+(iii)
Practical dilemma: In the case of “legacy SOEs” and when there is no economic viability (ex Oltchim) is the very existence of the entity an act of clientelism?
What is the difference between legitimate “industrial policy” (subsidization / support) and outright rent-seeking by particular groups / enterprises? (ex. cheap gas in RO?)