Cutting the risk of corruption out of privatisation

The privatisation of state-owned enterprises (SOEs) is complex and accompanied by multiple challenges. One of these challenges is how to manage the risk of corruption. On the occasion of the 2019 OECD Global Anti-Corruption and Integrity Forum, the OECD’s Mathilde Mesnard examines why privatisations of SOEs carry a risk of corruption and what the OECD is doing to help.

Privatisation trends

102 of the world’s largest 500 enterprises are now wholly or majority owned by sovereign governments.

Technology is transforming the global economy and the privatisation landscape is no exception. The rationale for state ownership is disappearing in a number of sectors as digitalisation lays them open to market competition. This has put a fresh emphasis on a long-standing problem: the transfer of assets from public ownership to private ownership enables incentives for self-profit among political decision makers, SOE corporate insiders and the ultimate buyers of assets. As privatisation becomes steadily more dependent on outside advisors, the risk of conflicts of interest also comes to the forefront.

The number of SOEs operating in the global economy has tripled in less than two decades – largely due to the growing importance of SOEs in emerging markets. Global privatisation activity is trending upwards in parallel. Privatisation revenues more than doubled from around USD 110 billion in 2008 to USD 266 billion in 2016. Most of these revenues came from divestments originating in emerging and post-transition economies. Capital market developments confirm this trend. OECD research shows that the public sector in 10 out of 30 selected markets holds more than 20% of the share capital of listed corporations (Figure 1). As emerging economies, many with large state sectors, expect to grow briskly, divestment activity will continue to rise, with partial privatisation through stock market listings being one of many possible exit options for the state.

The relationship between privatisation and corruption

The privatisation of SOEs is accompanied by multiple challenges and one of these challenges is the risk of corruption. The sheer magnitude of divestment proceeds, the nature of assets being privatised and the complex nature of privatisation transactions make them particularly prone to corruption. Some of the issues include:

The complex nature of privatisation transactions and the plethora of actors involved. The decision to privatise is a complex one clouded by evolving governmental priorities, political cycles, and changing paradigms about the merits/demerits of public ownership. It also involves a plethora of actors from the government to the company to its employees, and a large number of intermediaries and advisors, which risk instrumentalisation for personal or political gain.
The magnitude of divestment proceeds. The state owes it to taxpayers to obtain fair value for state assets, which are often large in size and in terms of revenue. Unclear clear sales rationales; irregularities in valuation methods; and a lack of transparent and accountable bid handling can represent substantial amounts in forgone revenue for the state.
Certain sectors are more at risk than others and the stakes are often high. Empirical research demonstrates that oil and gas, mining, postal, energy, transportation, and logistics sectors report are susceptible to corrupt and other irregular practices more often than average. These sectors are highly regulated, likely to have natural market monopolies and are engaged in high-value procurement projects. Not surprisingly many SOEs in these sectors are also privatisation candidates. Thus underlying the importance of ensuring an effective competition and regulatory framework in place before undergoing a privatisation transaction.
Poor governance. Policy makers and privatisation experts agree that it is important to “get privatisation right.” A failed privatisation, due to ill planned processes, poor governance, corruption or other irregular practices can have far-reaching consequences on future divestment activity by reducing investor confidence, inflicting reputational damage on the state, and losing support of key stakeholders and the public.

What can be done?

Getting privatisation right means means ensuring that privatisation decisions and processes are backed by sound rationales, and underpinned by strong institutional and regulatory arrangements, good governance and integrity.

The OECD’s Policy Maker’s Guide to Privatisation draws upon over 40 years of national experiences in both OECD and non-OECD countries. The Guide accompanies policy makers in the privatisation process. It sets down measures to be taken leading up to, during and after privatisation. A special section describes how to prevent corruption each step of the way. The Guide further supports implementation of the OECD Guidelines on Corporate Governance of State-Owned Enterprises – the so-called golden standard for professionalised state-ownership and governance practices. Policy makers and newcomers to the privatisation process will find this Guide particularly useful.

The OECD is close to completing the Guidelines on Anti-Corruption and Integrity for State-Owned Enterprises which will provide guidance on how the state as an enterprise owner can improve integrity and fight corruption in SOEs.

This guidance helps us to heighten awareness of the issues, engage in policy dialogue, build further consensus and work with partners and stakeholders to implement the high standards needed to mitigate corruption risks in the privatisation process.

Mathilde Mesnard is Deputy Director in the OECD Directorate for Financial and Enterprise Affairs and will be moderating the session “Risky Business: Corruption in Privatisation” at the OECD Global Anti-Corruption and Integrity Forum

The OECD Working Party on State Ownership and Privatisation Practices is a recognised forum where policy makers and practitioners can engage in dialogue, seek advice and share best practices.