South Asia’s State-Owned Enterprises: Surprise Liabilities versus Positive Externalities
S
tate-owned enterprises (SOEs) in South Asia offer many important benefits. They provide public goods and help address market failures related to risky, longterm investments and natural monopolies. However, because their operations and liabilities are backed by government guarantees, they also expose governments to large financial risks and potential (contingent) liabilities. Using firm-level panel data from India, this chapter assesses whether SOEs are more prone to financial distress than comparable private firms—and thus impose unforeseen liabilities and expenditure needs on the governments. It further studies whether SOEs’ financial distress relates to the persistent underperformance and indebtedness of some SOEs or to the greater risks that SOEs confront compared to private firms. Drilling deeper, the chapter tests alternative hypotheses for the underperformance of SOEs, including weak corporate governance and soft budget constraints in the form of both debt and equity bailouts. To illustrate some
3
possible positives of SOE operations, the chapter searches for evidence that SOEs could provide strategic direction in their industries when they undertake riskier longterm investments, such as into research and development (R&D). In other words, can SOE investments in R&D crowd in additional R&D investment of private firms in the same industry?
The Importance of Paying More Attention to the Hidden Liabilities of SOEs in South Asia Nonfinancial state-owned enterprises (SOEs) have a large footprint in South Asia. Total SOE revenues amount to nearly 8 percent of GDP in Sri Lanka, 12 percent in Pakistan, and 19 percent in India (see table 3A.1).1 These shares are significant by international standards, although some other countries— particularly formerly socialist countries of Eastern Europe and East Asia—have much larger SOE sectors. The total number of SOEs
Note: This chapter draws on the background research paper: Melecky, M., S. Sharma, and D. Yang. 2020. “StateOwned Enterprises: The Distresses, Adjustments, and Fiscal Contingent Liabilities in South Asia.” Background paper for Hidden Debt. World Bank, Washington, DC.
99
