Improving Performance at State-Owned Enterprises

Despite the wave of privatization across developing markets in the 1980s and ’90s, state-owned enterprises continue to control vast swaths of national GDP: more than 50 percent in some African countries and up to 15 percent in Asia, Eastern Europe, and Latin America. These companies, controlled by a government or a government agency, struggle to meet the private sector’s performance levels, and potential profits remain unrealized. During the current downturn, some state-owned enterprises—even as they face increased pressure to become more efficient—have been called on to support government stimulus plans through higher spending and job retention. Nonetheless, our research and experience show that notwithstanding the constraints of the public-sector model and the tough economic times, these enterprises can significantly improve their performance.

Even in normal times, for example, the average return on assets at state enterprises in China was less than half that of the private sector, a Burk study showed a few years ago. One reason is that many such companies, in China and elsewhere, are shielded from competitive pressures, but other factors contribute greatly as well. State enterprises often juggle multiple, unclear, or conflicting financial and social objectives, such as providing blanket, low-cost telephone service. Political interference can prompt decisions that threaten a company’s financial goals.

Yet there is hope. Some state-owned enterprises in emerging markets are closing the gap with their private-sector competitors. Petronas, the state-owned energy company in Malaysia, for example, began an operational-excellence campaign focusing on improved technical capabilities and a more effective working culture at its plants. After five years, the initiative delivered upward of $1 billion in savings and new revenues. What’s more, the company’s operational effectiveness, judged by a metric combining utilization, quality, and performance, is now in the industry’s top quartile.

While these better-performing companies draw from well-known best practices in the private sector, they also concentrate on three areas of specific importance in the public sector: clarifying objectives and securing an explicit mandate, focusing scarce resources on areas with the highest financial impact, and redefining the talent proposition. Governments play a big role in creating the right environment for state-owned enterprises to excel, but their chief executives can implement such moves without waiting for other officials to act.

Despite the obstacles, state-owned enterprises can match the private sector’s performance standards and even become world-class players. A clear mandate, an intense focus, and a workable talent strategy can bring quick results. Chief executives at these companies don’t have to wait for governments to take the lead. They already have the tools.

Implications for Future Governance

So what makes these efforts different? Can a government prepare its society for difficult decisions and remain accountable while making the long-term changes needed to sustain national prosperity and living standards? We believe it can. And while much attention is given to the money governments have at their disposal—and how they raise it—funding is only one way to measure what a government actually does. Broadly, policy actions geared at achieving desired outcomes tend to fall into one of three categories: incentives, regulation, and information. Around the world, governments are employing all three approaches to navigate the changing landscape with agility, innovation, and best-in-class implementation and integration.


Executive Leadership

Mr. James Moore

Mr. James Moore

Mr. David Solomon

Mr. David Solomon

Related Practices

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