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The reform of state-owned enterprises in developing countries

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The reform of state-owned enterprises in developing countries

The European Union wishes to play a more active role in helping partner governments in developing countries to devise and implement reform of their state-owned enterprises, especially their public utilities. This new commitment by the EU will contribute to poverty reduction.


Communication from the Commission to the Council and the European Parliament: "The reform of state-owned enterprises in developing countries with focus on public utilities: the need to assess all the options" [COM(2003) 326 final - Not published in the Official Journal].


In this communication the term "public utilities" is used in the restricted sense of water, electricity, postal and telecommunications services and transport infrastructure.

Risks and benefits of reform of state-owned enterprises (SOE)

In the communication, the Commission examines objectively the different types of SOE reform (public ownership, private ownership, public-private partnership) and suggests lessons as regards best practice for both recipient governments and donors. It underscores the importance of choosing the situation that best meets the needs of the particular country and field. This means paying careful attention to the capacity and resource constraints of the country.

Note that the EU, as laid down in the EC Treaty, adopts a neutral stance on the issue of the ownership of public utilities.

Guidelines and enhanced role of the EU

The Commission defines a set of guidelines to steer developing countries" governments in the implementation of SOE reform and proposes more active involvement on the part of the EU.

Before any reform of SOEs, the Commission must first establish a dialogue with the local authorities and the Bretton Woods Institutions (World Bank, International Monetary Fund, with a view to contributing to the following results:

  • clear definition of the objectives of SOE reform;
  • in-depth examination of all the options for reform;
  • complete transparency of the process;
  • introduction of a suitable regulatory framework and monitoring systems to back up proper implementation of the reform.

The Commission also encourages developing countries to:

  • create a conducive climate based on peace, democracy and stability as SOE reform requires a marked increase in the level of foreign direct investment flows;
  • include reform of their financial sector, given the impact that unreformed banking institutions can have on the incentives confronting enterprises during the reform process;
  • set up an appropriate social protection strategy.

The Commission undertakes to enhance its capacity to provide high quality and timely technical assistance to governments for the key stages of SOE reform.

As one of the main development aid providers, the EU has long been involved in funding and reforming SOEs in developing and transition countries. It has, for example, supported SOE reform directly in some Mediterranean countries and Tacis countries. It has also supported them indirectly, as in the African, Caribbean and Pacific states (ACP), through macroeconomic support programmes.

The need for SOE reform

The communication notes that in most cases low-income households in developing countries have not been adequately served by state-run public utilities. It is therefore important to tackle problems such as access, affordability and quality of basic services in developing countries.

Because of the importance of the sector, SOE reform in developing countries can have a considerable impact - positive or negative - on these countries public deficits, economic growth, the quality of basic services supplied and hence on their capacity to contribute to achieving the Millennium Development Goals.

Last updated: 05.06.2007