Integrated State-Owned Enterprises Framework iSOEF Thematic Guidance Note: Restructuring State-Owned Enterprises i INTEGRATED STATE-OWNED ENTERPRISE FRAMEWORK (iSOEF) THEMATIC GUIDANCE NOTE RESTRUCTURING STATE-OWNED ENTERPRISES July 2021 © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. ABBREVIATIONS AND ACRONYMS AfDB African Development Bank CEO Chief Executive Officer DPF Development Policy Financing DSO Days-Sales Outstanding EBIT Earnings Before Interest and Tax EBITDA Earnings Before Interest and Tax, Depreciation and Amortization EBRD European Bank for Reconstruction and Development GDP Gross Domestic Product GMD Gambian Dalasi IFRS International Financial Reporting Standards IGAPE Institute for Asset Management and State Holdings (Angola) ISA International Standards on Auditing iSOEF World Bank Integrated SOE Framework KPI Key Performance Indicator kWh Kilowatt-hour MoF Ministry of Finance MW Megawatt NAOL National Airport Operator Ltd. NAWEC National Water and Electricity Company (Gambia) PKP Polskie Koleje Państwowe (Polish Railways) PPP Public Private Partnership PSO Public Service Obligation SEMRY Société d'Expansion et Modernisation de Riziculture de Yagoua SOE State-Owned Enterprise SWOT Strengths, Weaknesses, Opportunities and Threats WB/WBG World Bank / World Bank Group iv CONTENTS Abbreviations and Acronyms............................................................................................................. iv Preface ............................................................................................................................................. vi OVERVIEW ....................................................................................................................................... vii 1. Introduction ...............................................................................................................................1 1.1. Context .......................................................................................................................................... 1 1.2. What is SOE Restructuring?........................................................................................................... 2 2. Diagnosing the problems facing SOEs ..........................................................................................4 2.1. Country, Sector and market context ............................................................................................. 4 2.2. Legal and institutional framework ................................................................................................ 6 2.3. Appropriateness of SOE objectives and roleS ............................................................................... 8 2.4. Financial performance assessment ............................................................................................... 8 2.5. Operational performance and organizational effectiveness assessment ................................... 10 3. Formulating options and developing the restructuring plan ....................................................... 12 3.1. Policy and regulatory changes .................................................................................................... 13 3.2. Changes to the legal and institutional framework for restructuring .......................................... 13 3.3. Financial restructuring ................................................................................................................ 14 3.4. Operational and organizational restructuring ............................................................................ 15 3.5. Social impact mitigation .............................................................................................................. 17 4. Finalizing and implementing the restructuring plan ................................................................... 17 4.1. Reviewing options with stakeholders ......................................................................................... 17 4.2. Presenting the restructuring plan ............................................................................................... 18 4.3. Implementing, monitoring, and evaluating the plan .................................................................. 20 Annex 1. Case Study: THE GAMBIA’S NATIONAL WATER AND ELECTRICITY COMPANY ....................... 22 Annex 2. Case Study: SERBIA GAS COMPANY .................................................................................... 25 Annex 3. Case Study: SEMRY (CAMEROON)....................................................................................... 27 Annex 4. Case Study: NATIONAL AIRPORT OPERATOR Ltd. ................................................................ 29 Annex 5. Case Study: POLISH RAILWAYS (�PKP�) ............................................................................... 31 Annex 6. Checklist: Issues to Consider in Preparing an SOE Restructuring Plan ................................... 33 Annex 7. Template for an SOE Restructuring Plan ............................................................................. 35 References....................................................................................................................................... 37 v PREFACE This guidance note on state-owned enterprise (SOE) restructuring is part of the Integrated State-Owned Enterprise Framework (iSOEF), whose overall aim is to provide guidance on assessing the performance of state-owned enterprises (SOEs) in an economy—their rationale, their economic implications, factors enabling their operational efficiency, and options for reforming the sector. The iSOEF takes a modular approach, allowing for flexible application according to the specific country context and development needs. Modules 1–4 address the role of SOEs in the market, their fiscal and distributional implications, and corporate governance and accountability mechanisms. Module 5 takes a sectoral perspective, focusing on state-owned financial institutions. Finally, four thematic modules (including this one) address cross-cutting factors such as corruption risks, political economy considerations, communication strategies, and restructuring. Each module contains additional analytical tools, matrices, questionnaires, key indicators, and other analytical instruments to be used for diagnostics and assessment. This guidance note was prepared by Henri Fortin (Lead Financial Management Specialist and Global Lead, SOE Corporate Governance) and Bernard Drum (Consultant), with support from Zana Bacaj (Consultant). Aleksandar Crnomarkovic, Andrea Dall’Olio, Charles Schlumberger, Chris Trimble, Kjetil Hansen and Sergei Shatalov provided inputs during its preparation. The note further benefitted from guidance from Abdoulaye Seck, Manuel Vargas and peer reviewers Andrei Busuioc, Ira Lieberman, Immanuel Steinhilper and Pedro Antman first second round of review), as well as Alexander Pankov, Pedro L. Rodriguez and Sarah Cuttaree (second round of review). vi OVERVIEW In many countries, the SOE sector has been plagued by operational and financial problems and is a source of contingent liabilities for the State. Many SOEs have posted large losses, are heavily indebted and have built up significant trade, tax and other types of arrears. Many have also underperformed in terms of their public service delivery. To put these SOEs on a sustainable pathway, Governments are seeking solutions including (i) encouraging new market entrants by opening up SOE-dominated markets to competition, (ii) full or partial divestiture, (iii) SOE closure, (iv) transfer of non-commercial SOE activities to the central administration, and (v) restructuring SOEs. This thematic guidance note focuses on item (v), i.e., the restructuring of SOEs that will remain in State hands. SOE restructuring entail two main sets of measures: financial and operational. The restructuring of an SOE follows closely the principles, processes and methods widely applied in the restructuring of private enterprises. Financial restructuring – often referred to as a “balance sheet restructuring� – aims primarily at restoring the SOE to a solvent financial position. Operational restructuring seeks to improve the SOE’s productivity and effectiveness. The combination of the two sets of measures, if successfully executed, can lead to significant improvement in financial performance including profitability, and in the quality-of-service delivery. The methods for restructuring “purely commercial� SOEs and public utilities follow the same fundamental principles, but the way to implement them may differ due to the environment in which the SOEs operate. In the case of an SOE engaged in the “tradeable� products sector, the approach taken is normally opening up the sector to competition, and full or partial privatization. Increasingly, and in particular in the case of restructuring public utilities (e.g., electricity, water supply, and ports), the emphasis is often first on improving the structure of the sector to include market liberalization with strong and independent regulation, then on allowing the private sector to operate in segments of the market where competition is viable (e.g., electricity generation or distribution). The first step to develop a restructuring plan is to diagnose the problems facing the SOEs. Restructuring is fundamentally about tackling the issues that cause the SOE to underperform. To gain a thorough understanding of these issues is a critical initial step. Like any enterprise or organization, SOEs can face a myriad of problems, external – related to the markets and institutional framework they operate – or internal – involving their strategy, pricing, financial structure, costs, organization, etc. Some of these problems are structural others are related to recent events and other external factors. A “strengths, weaknesses, opportunities and threats� (SWOT) matrix is typically prepared to summarize the key findings from the diagnostic. Based on the rigorous diagnosis and prevailing government SOE ownership policies, the next step is to assess whether restructuring the SOE in state hands would be the best choice. If restructuring under state ownership is selected an assessment needs to be made of the range vii of actions the SOE or the authorities would need to undertake. These actions could entail policy and regulatory changes (including those affecting tariffs); changes to the legal and institutional framework for restructuring; debt “workout�; internal measures such as the change of business model, workforce reduction, reorganization and corporate governance improvements (e.g., professionalizing the board of directors); and other measures aimed at improving the operational efficiency of the SOE. If divestiture, rather than restructuring in State hands, is the preferred option, then some preliminary restructuring prior to divestment may still be necessary. However any pre- privatization restructuring should be defensive in nature and strictly limited to necessary measures such as unbundling or reduction of debt or labor costs. Major restructuring decisions in such cases in terms of new investments, new products or services or expansion into new markets should not be taken by the State but be left to the new private investors. Accompanying measures will need to be considered and included in the restructuring plan to mitigate any adverse social consequences of the restructuring actions, such as workforce optimization. These should be tailored to the situation in the country and combine financial support for retrenched employees in the short term with opportunities, assistance and incentives for finding new employment. The restructuring plan will typically include direct severance payments and other support such as extension of medical benefits for employees. The restructuring plan needs to be translated into a business plan. This includes financial projections (including revenues, net income, capital expenditure, free cash flow and debt servicing/repayment) and performance targets for the duration of the plan. A critical success factor in developing a restructuring plan is stakeholder consultation. Engaging with stakeholders can not only help improve the design of the plan but also increase its acceptance and likelihood of success. Mitigation measures to ease the impact of employee retrenchment will need to be discussed with labor unions and other employee representatives. As for any process involving the implementation of a plan in a changing and challenging context, a strong monitoring and evaluation (M&E) framework is critical. For the best chances of success, SOE restructuring needs should be anticipated through monitoring for early warning signs, and restructuring programs planned and launched before the SOE’s performance has deteriorated to crisis level. Also, while an SOE restructuring plan will benefit from having an initial focus on “quick wins�, then, beyond the short term, it should be reviewed regularly during implementation and updated as circumstances change and experience is gained. SOE restructuring, as with private enterprise restructuring, is a long-term process, sometimes taking up to a decade to complete and often ongoing as a continuous process, This Thematic Guidance Note includes six case studies covering five sectors (including from Cameroon, Gambia, Poland and Serbia). In five of these cases, the World Bank financed activities leading to the adoption of the restructuring plan. For four of them, significant results have been obtained. For SEMRY Cameroon, the restructuring is still at the early implementation stage. viii 1. INTRODUCTION 1.1. CONTEXT In many developing countries, the State is still a major owner of business entities, often known as state-owned enterprises (SOEs). This is particularly true in sectors such as electricity, mining, oil and gas, transport, telecommunications, water and sanitation, financial services, social housing, agriculture, and some commercial entities in manufacturing and trading. Most governments see SOEs as tools to meet social and other objectives (e.g., job creation and global expansion). Many of these SOEs face operational and financial challenges that hinder their performance, translating into poor service delivery, financial losses, increasing indebtedness, liquidity problems, and a growing burden on public finances. To tackle these challenges and mitigate the fiscal risks associated with SOEs, governments have embarked on a process of reforming their SOEs. A range of measures and modalities has been adopted to achieve the desired performance improvements. Some of these measures include the involvement of private actors through liberalizing markets, public-private partnerships, restructuring of ownership through privatization, and closing down of SOEs while in some cases transferring any essential non-commercial public service activities to the central administration, and restructuring SOEs, while keeping them in state hands, or a combination of these different types of measures. Table 1 below shows paths adopted in SOE reform initiatives. Table 1: Possible individual SOE reform paths SOE functions Reform path The SOE operates under a monopoly but, Liberalize the SOE’s market by opening it up to competition from the private sector could competition from new entrants and, if the result in better and more efficient public domestic regulatory environment and market service delivery conditions allow it, list the SOE on the local market The SOE operates in a fully commercial and Partially divest or privatize competitive sector and, there is no public policy reason for continued state ownership The SOE no longer fulfills a useful function Liquidate / close down the SOE The SOE has an important non-commercial After closing down or divesting from commercial public service function and no longer activities using the options above, transform the engages or plans to engage in commercial SOE into a parastatal entity or transfer its residual activities (non-commercial) activities to the central administration 1 The SOE has commercial activities for which Fully corporatize and restructure the SOE as government has determined state needed ownership remains the best option in the foreseeable future The focus of this thematic guidance note is limited to the last option above, i.e., to the processes used to restructure those SOEs that will remain in State hands. But in adopting this, the note takes account of lessons learned during recent decades of experience with SOE restructuring and fully acknowledges that, without accompanying safeguards, SOEs can distort markets, stifle competition and growth, and impose a heavy burden on public finances. The recommendations for SOE restructuring processes, and particularly for accompanying measures, include actions to minimize these risks. For many years, the design and implementation of restructuring plans has been a significant component of SOE reform programs in countries supported by the World Bank Group (WBG). Similarly, regional international financial institutions such as the African Development Bank (AfDB), Asian Development Bank, and European Bank for Reconstruction and Development (EBRD) have provided support to developing countries in preparing SOE turnaround strategies or restructuring plans.1 The purpose of this note is to provide Bank teams and partner-country Governments with an approach to restructuring SOEs based on international experience, mainly in developing countries.2 This proposed approach covers key dimensions of SOE restructuring. It draws on and provides appropriate references to existing material in the field of enterprise restructuring. It aims to be practical, with concrete case studies, and to be adaptable in low income and developing-countries with weak institutional capacities. 1.2. WHAT IS SOE RESTRUCTURING? Although SOE restructuring can have many meanings in various contexts and under different country circumstances, fundamentally it consists of a comprehensive set of actions taken by the management/shareholders that aims to rebuild the SOE’s operational and economic viability. Restructuring an SOE usually becomes necessary when the enterprise is having serious 1 For examples of such initiatives, see AfDB (2019, 35), available at: https://www.afdb.org/sites/default/files/2019/07/09/zimbabwe_infrastructure_report_2019_-_afdb_- _20052019.pdf, and EBRD (2020), available at: https://www.ebrd.com/cs/Satellite?c=Content&cid=1395271842258&d=Mobile&pagename=EBRD%2FContent%2F ContentLayout. 2 The principles in this note are applicable to SOEs across all sectors, although restructuring of financial institutions requires specific treatment that is covered elsewhere in World Bank (2019a). 2 financial challenges or shortcomings in the quality and quantity of its products or service delivery. In most cases it is a critical part of a broader economic reform program aiming to improve the SOE’s governance and effectiveness in essential service delivery while reducing the budgetary burden and fiscal risks posed by the SOE. Restructuring typically entails modifications across two main dimensions: i. Financial: Focuses on restoring the SOE’s solvency and liquidity. This is often motivated by the need to reduce the SOE’s explicit and implicit burden on public finances, including reducing its associated fiscal risks. Such restructuring often combines operational restructuring with financial measures such as debt workouts, arrears clearance, assets disposals, and capital injections. This exercise usually requires a precise stocktaking of existing liabilities by creditor category, type of instrument, and maturity profiles. ii. Operational: Aims to restore the SOE’s future performance and viability. This can be done, for example, by redefining the SOE’s business model, product mix, and organization; by splitting, combining, relocating, or divesting parts of its operations; by increasing the capital intensity and product quality by acquiring new technology, equipment, or other assets and changing the skills mix in the workforce; and by cutting costs across all aspects of operations. In many cases, SOE restructuring also includes reducing the size of the workforce. Successful SOE restructuring typically entails a sequence of three steps. The first step is to diagnose the problems facing the SOE. The second step is to formulate restructuring options and develop the plan, if the diagnosis concludes that the SOE could be viable and should remain in state hands. The third step is to finalize and implement the plan while monitoring and evaluating progress and adjusting as necessary, in consultation with stakeholders. The following sections review each of these steps in turn. While the methods for restructuring purely commercial SOEs have much in common with those for restructuring public utilities in terms of financial restructuring and efficiency improvements, there can be considerable differences in approaches particularly, related to changes to the SOE’s operating environment. For SOEs engaged in tradeable products, the approach taken is usually opening up the sector to trade competition and, concomitantly, fully or partially privatizing the SOEs concerned. For public utilities operating as monopolies and managing major infrastructure in sectors such as electricity, water supply, transport, the emphasis is often first on improving the structure of the sector, with strong and independent regulation, then allowing the private sector to operate in areas of the sector where competition is viable, for example, electricity distribution in the power sector. 3 2. DIAGNOSING THE PROBLEMS FACING SOES The essential first step before launching an SOE restructuring program is to complete a rigorous diagnosis of the situation and problems facing the enterprise. This could, for example, take the form of a “Strengths, Weaknesses, Opportunities, and Threats� (SWOT) analysis of the enterprise. Whichever form it takes, the diagnosis needs to review: (i) the sector context, government policies, and the market in which the SOE operates; (ii) the legal and institutional framework that governs SOE restructuring in the country; (iii) the SOE’s established objectives and role, and their appropriateness within the sector context; (iv) the SOE’s financial performance; and (v) the SOE’s operational performance and organizational effectiveness. Diagnostic analyses and reports of this type are typically carried out by consulting firms or outside advisors. 2.1. COUNTRY, SECTOR AND MARKET CONTEXT The ultimate success of any SOE restructuring process will depend not only on factors internal to the enterprise but, to a large extent, on the country, sectoral and policy environment in which the SOE operates. Conditions in the market for the SOE’s products—together with prevailing policies governing the macroeconomic environment, competition, trade, pricing, taxation, labor, sectoral regulation, budget support, and SOE ownership policy—can all have a major impact on the SOE’s performance and on the likelihood that the restructuring process will succeed or fail (Lieberman et al 1989). Policies and needs concerning climate change, adaptation and environmental impact are also important, particularly for those SOEs which are in the energy sector or large energy consumers. The diagnosis of problems facing SOEs, therefore, needs to review all of these factors and determine which of them have an impact on the SOE’s financial viability and operational performance, and on the costs that government may have to bear to keep the SOE in operation, even after restructuring. A critical question to be addressed is whether: (a) the SOE has a monopoly or a protected role in its sector, or (b) there is open competition among market participants. Is the SOE a public utility or natural monopoly with only limited competition or is it a fully commercial SOE producing and/or selling tradeable goods or services in an open market? Does the SOE operate on a level playing field with private competitors, or does it pay lower taxes, customs duties, and dividend rates compared to private companies? Does it benefit from preferential access to government contracts? If there is competition, how does it affect the SOE’s operations and financial performance? Is the SOE competitive? Is it subject to the same competition law requirements as private companies? In many countries—and in some competitive sectors such as telecommunications and industrial production or commercial services—policies to encourage competition for SOEs from new private entrants or to privatize SOEs have sometimes proven to be more successful in improving service quality and reducing the burden on public finances than 4 trying to restructure the entity in state hands. In such cases, closing down the SOE, selling its assets, and allowing new private market entrants can be a viable alternative to trying to restructure or even privatize the SOE. Even in monopoly or semi-monopoly situations, for example in sectors such as electricity generation or distribution and airline transport, privatization or public-private partnerships can be alternatives to state control over the entity managing these activities—provided that effective regulatory and institutional frameworks are in place. External reasons for SOE non-viability often include a policy of non-reimbursement or only partial reimbursement by the government of the public service obligations (PSOs) that it imposes on the SOE. PSOs can include either: (i) provision of services for social rather than commercial reasons, such as universal service obligations in unprofitable areas; or (ii) more general tariff policies that do not allow the SOE to recover its full operating and financing costs. A related problem is the failure of the state to enforce full payment of utility bills by government entities. Assessing the costs of PSOs can often require changes in the SOE’s cost accounting systems, which in many cases do not adequately apportion the costs of PSOs and those of fully commercial activities. Such problems are illustrated in the case of NAWEC, the power and water utility of The Gambia (Annex 1). The diagnostic review needs to assess to what extent the SOE can be well-managed and competitive under the existing policy environment and, if not, to what extent the policy environment can or should be changed. It needs to assess the implications of such changes for the SOE’s financial performance and for public finances. Assessments of SOE financial viability need to account for international market prices to understand whether the SOE is internationally competitive or whether the state would need to protect its SOE to keep it in business. If the latter, the diagnosis will need to determine whether the government would be justified in allowing the SOE to pass on its higher costs to consumers when lower-cost solutions are available from competitors. Political economy factors need to be carefully considered as well. Part of the reason why improving the governance and performance of SOEs is challenging is that a multitude of political economy factors come into play in the process at the moment of deciding which measures to undertake. These factors originate within the SOE itself, and in the interface between SOEs, on the one hand, and the ecosystem within which they operate including government, on the other. As further discussed in Section 4.1, a critical aspect of successful restructuring is stakeholder engagement at the design and implementation stages. To that end, mapping the SOE landscape and stakeholders (including owners, managers, workers, labor unions and other influencers) is an essential aspect of the work preparatory to the design of the restructuring plan. 5 2.2. LEGAL AND INSTITUTIONAL FRAMEWORK In addition to the external factors described above (Section 2.1), SOE restructuring processes will be affected by the broader legal and institutional considerations that govern SOEs and SOE restructuring in the country. Many countries that have experienced systemic financial distress— for example, some East Asian countries during the financial crisis of the late 1990s —have adopted formal corporate restructuring frameworks intended to facilitate needed restructuring of enterprises, particularly debt resolution. Other countries have specific SOE laws that may include provisions for restructuring. In the absence of such frameworks, however, SOE restructuring is normally subject to existing laws governing general enterprise restructuring, insolvency, and debt resolution. In some countries, these laws may be outdated and can thus impede efficient restructuring. In an environment where SOE restructuring, or even general private enterprise restructuring, is becoming necessary, governments will likely need to review the legal framework and identify any impediments. Laws and institutions that can have a major impact on the restructuring process are those affecting property rights, including land; collateral, including registries; courts that oversee insolvency, debt resolution and enforcement; and taxation that affects debt reductions or other financial actions that can form part of SOE restructuring. Also, in some countries, particularly formerly centrally planned economies, SOEs may not have a corporate form that would enable key restructuring actions such as debt/equity conversions, share sales or applying the same corporate governance requirements as private companies. In these cases, the “corporatization� of the SOE is often a necessary early step. SOE ownership arrangements are normally defined in the established SOE legal and institutional framework, but some governments have established SOE ownership policies. (World Bank 2014). Because SOE laws and ownership policies can often affect the types of SOE restructuring that are permitted or favored, they need to be assessed and taken into account as part of the planning of a restructuring program. Typically, the ownership policy will define the following: (i) the purpose of state ownership; (ii) the types of enterprises that will be owned by the State and are covered by the policy (commercial, non-commercial, or both); (iii) the criteria under which SOEs are required to operate (commercial versus non-commercial); (iv) the roles and responsibilities of specific oversight and regulatory institutions; (v) the requirements for transparency and disclosure in reporting; (vi) the separation of roles among the state, boards of directors, and SOE management; (vii) the degree of operational autonomy the SOE has; (viii) the fiduciary duties of boards and SOE management; and (ix) guidance on how to handle conflicts between commercial and non-commercial objectives. 6 Decentralized SOE ownership structures, where SOEs report to line ministries, are steadily being replaced around the world by more centralized and specialized structures, which can play a key role in the restructuring of SOEs. The main objectives of this centralization, which is the recommended practice in the OECD’s Guidelines on Corporate Governance of SOEs, are to (i) separate ownership functions from policy-making and regulatory functions; (ii) minimize the scope for political interference; and (iii) promote greater coherence and consistency in exercising the state’s ownership role across all SOEs. Such entities may be government ministries or departments (e.g., the Ministry of State Enterprises of Indonesia, the Office of Public Sector Governance of Mauritius, the Department of Public Enterprises in South Africa), government agencies (e.g., China’s State-Owned Assets Supervision and Administration Commission and France’s Agence des Participations de l’Etat), or holding or investment companies (e.g., Malaysia’s Khazanah Nasional and Singapore’s Temasek Holdings). Such agencies or companies often report to the Ministry of Finance. The centralized ownership function may also be exercised directly by the Ministry of Finance, as is the case in the Netherlands and New Zealand. In the centralized model, the ownership entity typically plays a central oversight role, consolidating roles formerly played by line ministries. It (i) monitors, analyses, and reports SOE performance and prospects for the future, helping to develop annual plans and KPIs, (ii) guides and oversees reforms, including the restructuring of SOEs, and optimizes the use of available restructuring capacity by prioritizing those SOEs in greatest need of action (iii) manages the appointment of Board members and drafts rules and regulations on corporate governance of SOEs, and (iv) decides or advises the government on equity investments, mergers, sales of assets, and other forms of privatization of SOEs. In countries with a centralized model the central SOE ownership entity will typically take the lead role in SOE restructuring. An assessment of banking system capacity is also likely to be needed since the financial restructuring of SOEs often requires debt reductions, including write-offs and increased provisioning for restructured loans. A full assessment of the debt profile of the SOEs is first required to determine the banking system’s exposure to SOE loans. This will produce a breakdown of SOE debt, for example into long v. short term, foreign exchange v. local currency, bonds v. loans v. advances from the State. Also, many countries faced with the need to restructure their SOEs have banks with high levels of non-performing loans, which, in addition, are often under provisioned, resulting in high vulnerability. In such cases, SOE restructuring will likely require increased capital in the banks. Given these factors, combined with the possibility that the tax regime may treat forgiven debts as taxable income, these banks may be unwilling or unable to participate in debt restructuring. Moreover, in some countries, there are many state- owned banks and issues of cross-ownership between those banks and the SOEs, which can expose banks or borrowers to possible liability to other stakeholders in a restructuring context (Johnson, 2019). 7 2.3. APPROPRIATENESS OF SOE OBJECTIVES AND ROLES An assessment should be made as to whether the SOE’s objectives, roles, and activities are appropriate to the environment in which it operates. Many SOEs were created to serve purposes that are no longer relevant. For example, some SOEs that provide goods or services were created originally to serve markets where there was no national private provider. Is the SOE’s role still appropriate after new national private providers have entered the market? In other cases, an SOE may have been created as a means of assuring price competition in markets that were deemed to be monopolistic or oligopolistic. However, liberalization of markets and application of effective regulation and competition laws and institutions may provide more benefits to consumers than trying to restructure an increasingly non-viable SOE. In some cases, it may be appropriate to keep the SOE in operation but to downsize it and reduce the scope of its activities The issue of whether and how to restructure SOEs has become particularly acute in the context of COVID-19 in sectors, such as air transportation, that have borne the brunt of the pandemic’s negative economic impacts. Although it is too early to draw definitive conclusions, some governments have decided not to support financially distressed airlines and have rolled back significantly strategies that promote a national carrier. South African Airways is an example. 2.4. FINANCIAL PERFORMANCE ASSESSMENT Mounting losses, expanding debts and arrears, growing insolvency, and an increasing demand for government financial support are indicators that often suggest a need for SOE restructuring. The case studies from Cameroon, Gambia, Poland and Serbia (plus an undisclosed country) shown in Annexes 1-5 illustrate these problems. An important diagnostic step in this regard is a comprehensive review of the enterprise’s financial performance. This review should draw on the SOE’s audited financial statements and management reports, other internal SOE financial reports, performance monitoring reports from SOE oversight agencies, and reports from the finance ministry and the tax and customs authorities on the history of the SOE’s financial relations with the government. It is important that this assessment gather information for at least five years in order to have sufficient data to evaluate performance trends over time. Also, to assess the SOE’s performance in context the SOE’s financial performance should be benchmarked against indicators for SOEs in other countries where such comparative information is available and also, where the SOE is in a competitive sector, for private enterprises in the country. Finally, the financial performance needs to be compared with the targets previously agreed between the SOE and the ownership and oversight entities. 8 The assessment of SOE financial performance needs to analyze a range of indicators from the SOE’s income statements, balance sheets, and cash flow statements. First, the quality and timeliness of the accounts need to be assessed—that is, whether they are up to date, prepared according to International Financial Reporting Standards (IFRS), and audited by reputable firms according to International Standards on Auditing (ISA). Next, many indicators can be derived from the SOE’s financial statements. Indicators frequently used to assess financial viability include earnings before interest, tax, depreciation and amortization (EBITDA), earnings before interest and tax (EBIT), net profit margin, return on equity and return on capital employed. Other financial performance ratios used include the vulnerability of stocks (stocks/working capital) and days sales outstanding (DSO, or trade debtors/average daily sales). Finally, financial soundness indicators include the debt-to-equity ratio, the current ratio (current assets/current liabilities), and the liquidity ratio (liquid assets/current liabilities).3 The government will also need to assess the impact, direct and indirect, of the SOE on public finances. Direct transfers from the Government to SOEs include operating and capital subsidies and disbursement of loans to SOEs. Direct revenues received from SOEs include payments of dividends, taxes, import duties and royalties, and loan repayments. Indirect revenues from SOEs include non-payment by the Government of public service obligations and in many cases non- payment or arrears in payment for services received from the SOE. But SOEs are often granted full or partial tax, duty and royalty concessions, are not required to pay dividends, or are in arrears or in default in making these payments. These concessions, arrears and defaults are indirect subsidies from Government to the SOEs. Moreover, SOE loans from sovereign and commercial lenders are frequently guaranteed by the government, representing an explicit contingent liability on the government. When SOEs in distress default on these loans, the guarantees are called, and they become a direct liability for the government. Even in cases where loans are not guaranteed or where SOEs default in their payment of trade debts to suppliers, or are required to make large unforeseen financial outlays, particularly SOEs that are providing essential services (see for example the case of NAWEC in the Gambia in Annex 1), the Government is often called on to provide the necessary funding. All subsidies, both direct and indirect, along with contingent liabilities, explicit and implicit, need to be taken into account by the government in assessing the fiscal risk they are sustaining from SOEs. An analysis of absolute and relative (that is, as a percentage of gross domestic product, or GDP) impacts can be complemented by ratios indicating the SOE’s dependence on government 3 There is a large body of literature on financial analysis. One overview of financial analysis techniques can be found at: https://www.cfainstitute.org/-/media/documents/support/programs/cfa/2019-L1V3R26-footnotes.pdf (accessed June 1, 2020). 9 financing. One such ratio is that of subsidies to total revenue. Other relevant indicators include the cost of the SOE’s public service obligations paid by the government and the extent to which these payments fully cover the actual costs incurred by the SOEs. The portion of PSO costs that exceed the remuneration received by the SOE from the state represents a “quasi-fiscal activity,� which, in essence, implies hidden budgetary costs and distorts the presentation of the SOE’s performance. 2.5. OPERATIONAL PERFORMANCE AND ORGANIZATIONAL EFFECTIVENESS ASSESSMENT An analysis of the SOE’s operational performance and organizational effectiveness is of critical importance in determining whether and how restructuring may be appropriate. The SOE’s financial statements can give some indication of its operational performance—for example, cost breakdown ratios, which show contributions to total costs, of maintenance, payroll, and administrative costs; capital intensity (total assets/revenue and capital expenditure/labor costs); value-added per employee; turnover of stocks (sales/stocks); and revenue per customer. In addition, a host of non-financial performance indicators can be used to explain problems that may already have been identified in the financial performance assessment and to identify underlying structural, organizational, and operational performance problems. As with financial performance assessment, the SOE’s operational performance should be benchmarked where possible against that of similar SOEs in other countries and any private sector competitors; it also needs to be compared with previously agreed targets. The operational and organizational assessment should cover all key issues involving the management and operation of the enterprise. These issues include internal aspects of corporate governance; organization structure; the quality of general management; the quality of management of finance and accounts, production, marketing and distribution, research and development, and human resources; and the extent to which the existing capital investment, technology, and human resources meet the needs of the enterprise. Factors to be taken into account also include the processes for setting and agreeing on performance targets, the extent to which agreed targets have been met, capacity utilization, quality of customer service as 10 measured by customer satisfaction surveys, extent and timeliness of service delivery, employee satisfaction, turnover and training, and bill collection timelines. Box - Assessing SOE Corporate Governance Many key aspects of an SOE’s corporate governance will be determined not within the enterprise itself but by the legal and institutional environment in which the enterprise operates. Good laws set clear relationships between the government and SOE boards and management. They describe the various SOE legal forms and define and ensure effective oversight of SOEs and SOE accountability. To be effective, SOE ownership entities need to monitor, evaluate and report adequately on SOE performance while at the same time engaging in strategic decision making and holding SOEs accountable for their performance. Ownership entities need to implement effective performance management systems using performance agreements and monitor SOE performance against key financial and non-financial performance indicators (KPIs). The ownership entity needs to establish and implement a well-structured, merit-based and transparent board nomination process. This should result in a balanced composition of the board of directors, including the necessary competencies through a mix of insiders and independent directors. The board needs to be given the autonomy to make strategic decisions while at the same time being held fully accountable for ethical behavior and results. Board membership should be rotated, and board committees should be set up for important oversight functions such as audit. Good corporate governance requires adequate and timely financial reporting . The external reporting requirements should be set out in the legal framework and enforced by the supervisory agencies. But good financial reporting will depend also to a large extent on the adequacy of the internal accounting systems and capabilities within the SOEs and within the independent entities responsible for auditing their accounts. The SOE needs to have an effective management information system (MIS). Key performance information should be disclosed publicly and provided to all key stakeholders, and the use of government subsidies should be fully documented and disclosed. Particular attention needs to be given to assessing SOE procurement practices, which may or may not be required to follow government procurement rules. [For a fuller discussion on the assessment of corporate governance of SOEs see the World Bank’s Toolkit o n SOE Corporate Governance (2014), the Integrated SOE Framework Module 4 Annex 2 (2019) and the IFC’s Corporate Governance Progression Matrix (2019)]. Sector-specific operational performance indicators need to be reviewed as well. An operational assessment of an electricity utility, for example, requires indicators of generation capacity/demand, energy efficiency, system losses (percent of supply), number of outages or transformer failures per year, and illegal connection rates. Similarly, an operational assessment of a water and sanitation utility would require indicators of storage capacity, levels of non- revenue water, water quality, length of the distribution network, interruptions in water supply and time to restore supply, and bacterial content in treated wastewater. For transport SOEs, such 11 as airlines and railways, the assessment would need to include passenger and freight load factors, passenger miles, on-time departures, cancellations, delays, misconnections, and so on. For telecom companies, sector-specific indicators might include call success and drop rates, traffic congestion, user turnover, and price indicators. Together, the results of all of the analyses discussed in Sections 2.1–2.5 will form the basis of a diagnostic report. This report should layout the problems that the restructuring plan will address, including the SOE’s key features (business lines, legal and governance framework and main relations with the State); a strengths, weaknesses, opportunities and threats (SWOT) analysis; the SOE’s business plan before restructuring and the key issues to be tackled. This diagnostic report is often prepared by a consulting/professional services firm. 3. FORMULATING OPTIONS AND DEVELOPING THE RESTRUCTURING PLAN Based on the rigorous diagnosis outlined above, the next step is to assess whether—given the problems it faces—the SOE can be made viable through restructuring in State hands. The fiscal costs of maintaining the status quo versus the costs of restructuring need to be compared. Moreover, the upfront costs normally required in SOE restructuring, such as new capital investment, labor retrenchment, and social mitigation measures, need to be balanced against the long-term potential fiscal gains. Alternative measures to restructuring in state hands, or complementary ones, such as liquidation and closure, privatization, public-private partnerships, and management contracts, should also be considered. Criteria for deciding between alternatives can vary widely from country to country. In countries where the State has an explicit or implicit SOE ownership policy, the criteria for deciding on divestment or retention of SOEs in State hands will normally be included as part of this policy. Many countries have adopted as a policy to partially divest or privatize SOEs that operate in competitive sector, maintaining controlling stakes when they have determined it is in the public interest. Such cases have included natural monopolies, essential infrastructure operators, SOEs playing a strategic role in the economy, and cases where the market is judged to be unable to provide necessary public goods or services (often referred to “market failures�). If restructuring in State hands is considered the best solution, the diagnosis should point to the areas that need to be addressed through the restructuring process and the types of actions it would entail. Actions may include tariff increases, headcount reduction, adjustments in the organizational structure, debt restructuring, and so on. The restructuring plan will need to be presented in the form of a full business plan, including financial and operational projections and performance targets for the duration of the plan. 12 3.1. POLICY AND REGULATORY CHANGES Tariff policies may need to be adjusted to provide for market-based pricing and adequate cost recovery. This applies in particular to public monopolies such as those that often exist in power supply, water supply, and wastewater treatment sectors. Tariffs should be set and adjusted through an independent sector regulator. Important reforms often include increasing the flexibility to adjust tariffs to rapidly changing costs, for example with regard to the cost of fuel needed for power generation. Where an independent regulator does not yet exist, there will be a need to create one. Related policy changes will include the need to ensure adequate costing of any public-service obligations (PSOs) imposed on the SOE and adequate compensation to the SOE based on those costs. Specifically, the costs of these PSOs will need to be included as line items, or specific programs, in the national budget. Care needs to be taken, however, to ensure that any tariff adjustments and cost reimbursements do not automatically pass SOE operational inefficiencies on to consumers. Price increase formulas—such as the consumer price index minus a percentage factor, to allow for and encourage cost efficiency improvements—can build in incentives for SOEs to maintain and improve their operational efficiency. Similarly, the benefits of reductions in input cost prices need to be passed on to consumers through the tariff-setting formulas. 3.2. CHANGES TO THE LEGAL AND INSTITUTIONAL FRAMEWORK FOR RESTRUCTURING In the interest of competitive neutrality, SOEs operating in competitive sectors need to be given equal treatment as compared with private companies. They should be subjected to hard budget constraints by Government and not receive preferential tax, customs, or royalty concessions, nor benefit from preferential access to finance, land, buildings, or inputs or preferential access to markets through, for example, government procurement or pricing policies. Any barriers to entry for enterprises in the sector need to be eliminated, along with barriers to exit. Competition laws should be applied equally to SOEs and private competitors. SOEs should not receive any subsidies from the government, other than for the reimbursement of PSOs. Any government investments in the SOE or government guarantees on the SOE’s loans should require prior justification based on a commercial rate of return. Commercial dividend policies should be applied to SOEs. Finally, SOEs should be subjected to the same corporate governance requirements and reporting requirements for financial and operating performance as private enterprises, preferably through commercial law or, if not, then through specialist SOE laws. The diagnostic phase described in Section 2 above will have identified any legal, regulatory, and institutional impediments that may affect the success of the SOE restructuring process. To 13 address these issues, the government may need to revise laws and regulations to simplify, streamline, and speed up the restructuring process. These revisions may include changes to laws and institutions governing property rights, land, collateral (including registries), insolvency courts, debt resolution and enforcement, and tax treatment of debt reductions or other necessary financial adjustments. They could also include strengthening institutions such as collateral registries, creating specialized commercial courts where there are none, strengthening the commercial courts that do exist and promoting the use of out-of-court alternative dispute resolution mechanisms. Design of the financial restructuring components of any SOE restructuring program will also need to take into account limitations in banking system capacity. In some cases, accompanying measures to strengthen the banks may be necessary. Policymakers are increasingly emphasizing the need to create, within SOE oversight agencies, monitoring systems that identify and focus attention on SOEs in financial distress. The European Union’s recent Directive 2019/1023 requires member states to develop early warning tools to notify enterprises in financial difficulty of the need to take prompt action (EBRD 2020). The objective should be to create institutional mechanisms to identify problems, particularly concerning SOE liabilities and liquidity, and to focus early attention on taking remedial measures. Early action, taken before the SOE’s situation reaches crisis proportions, will improve the chances of success of the restructuring and other remedial measures. 3.3. FINANCIAL RESTRUCTURING Many SOEs faced with restructuring are heavily indebted. These debts will often need to be restructured if the enterprise is to regain financial viability and autonomy, including the capacity to borrow from commercial banks or to issue bonds. In some cases, these debts may have resulted in part from the conversion of foreign-denominated debts to local currency. In many cases, SOE debts may have been incurred over several years to finance accumulated losses, in which case it is likely that they are not represented by any assets on the balance sheet. Transfer of some of these debts to the government is often the first step. Pressure from the SOE’s creditors, particularly in the case of guaranteed loans, can be a factor leading Governments to restructure the SOE. The costs of such financial restructuring are often borne entirely by Government but Government may receive assistance from financial institutions to help finance the costs. In some cases debt write-offs may be financed by bonds issued by the SOE itself, as in the case of The Gambia’s National Water and Electricity Company (NAWEC) – see Annex 1. However, even in this case, Government later had to assume the full costs of servicing the bond when NAWEC defaulted on its payments to bondholders. Depending on the projected financial capacity of the restructured SOE, however, some of these debts may be amenable to restructuring through negotiations with creditors. Options for 14 restructuring the SOE’s debt may include (i) negotiating a reduction in the principal amount with creditors (i.e., partial write-offs or “haircuts� or “bail-in�); (ii) interest rate reductions, as was done in Uruguay in 2003; (iii) loan tenor4 extensions (or “reprofiling� of maturities); (iv) other forms of debt exchange (as was the case in Jamaica in 2010), which included the exchange of variable-rate debt for fixed-rate debt; (v) sale of assets, particularly non-productive assets or in cases where downsizing or elimination of non-core activities will be part of the proposed restructuring process, and (vi) debt to equity conversions, particularly in SOEs with high debt/equity ratios and good chances of successful restructuring (as in the case of Serbia’s Srbijagas described in Annex 2). Injection of new equity in this way can be an important contributor to the SOE’s future viability, not only because it puts the SOE on a more financially stable footing but also because it can bring in commercial know-how, better accountability, and access to additional financing. 3.4. OPERATIONAL AND ORGANIZATIONAL RESTRUCTURING Internal SOE operational restructuring can take many forms and include a wide range of components. The forms may include a redefinition of the business model, the unbundling of large conglomerates, break-ups, partial divestiture or mergers of discrete operations, changes to the organization structure, general across-the-board cost reductions, improvements in operational efficiency and environmental impact. Labor retrenchment is often an essential part of the restructuring process. A good diagnostic report should give clear indications as to which operational and organizational solutions are most likely to be successful in the given country and market context. The case of SEMRY from Cameroon (Annex 3) is an example of planned major restructuring including many of these components. While approaches for restructuring purely commercial SOEs have much in common with those for restructuring public utilities in terms of financial restructuring and efficiency improvements, there can however be significant differences. In the case of commercial companies engaged in, for example, steel, oil, gas, petrochemicals or cement, the approach taken is normally opening up the sector to trade competition or fully or partially privatizing the SOEs concerned. In the case of public monopolies and major infrastructures such as electricity, water supply, roads, and ports the approach is primarily concerned with organizing the structure of the sector, ensuring strong and appropriate regulation, while allowing the private sector to operate in areas where competition is viable, for example, electricity distribution. A change of business model could involve changing the product mix or the targeted market segments in terms of customers, geographical locations, or even export markets. Examples of 4 Refers to the length of time until the loan is due. 15 such changes are shown in the case of Srbijagas presented in Annex 2. It could also include the adoption of new technologies. Unbundling is often applied to vertically and horizontally integrated SOEs such as those involved in electricity generation, transmission, and distribution. Divestiture of non-core activities such as vehicle fleets, maintenance, office management, catering, and security—is frequently a component of SOE restructuring as in the case of SEMRY in Cameroon, described in Annex 3. Many SOEs in formerly centrally planned economies operated social assets such as health clinics, kindergartens, transport and utilities; divestiture of these assets or transfer of these activities can be an important step in an SOE restructuring. Even in cases where an SOE is not physically or legally split up, the creation of separate cost and profit centers can be an effective restructuring component. A key component of many restructuring processes is improving the SOE’s corporate governance, including strengthening autonomy and accountability and professionalizing the composition and operations of the board of directors (World Bank 2014 and Box above). Other restructuring measures include improving internal and external information flows and accountability; streamlining organization structures; recruiting and training better-qualified managers and technical personnel; improving planning processes; strengthening internal financial management, controls, and audit; and adopting performance incentives for managers and other personnel. SOE restructuring often entails a reduction in surplus labor, which in turn requires measures to mitigate the social impact of the retrenchment. A well-prepared diagnostic report will have included an assessment of the SOE’s existing human resources. See Section 3.5 below for more details on the subject of social impact mitigation. This note focuses only on processes for restructuring SOEs under state ownership and management, even though other approaches exist—especially private participation in ownership and management. These alternative approaches include outright privatization, employee buy-outs and partial share sales, joint ventures, public-private partnerships, leasing of assets, and management contracts, all of which are important SOE restructuring modalities which can improve SOE financial and operational performance and reduce the burden of SOEs on public finances. In some cases, partial SOE restructuring by the state, particularly through “defensive� measures such as unbundling, debt resolution, and shedding of excess labor, is a necessary first step to be carried out by the State before proceeding to divestiture or other forms of private participation. However, if majority private ownership is planned, “positive� restructuring such as a change in product mix, conversion to new technologies and expansion into new markets is best carried out by the new owners. 16 3.5. SOCIAL IMPACT MITIGATION Historically, many SOEs have employed a significantly larger workforce than that required for efficient operations. This has resulted in low labor productivity and excessive wage costs, which have in turn exerted a negative impact on SOE operations and financial performance. In addition, restructuring to improve efficiency often includes investments in automated processes, with a consequent increase in capital intensity and shedding of labor. For these reasons, the restructuring of SOEs, more often than not, involves a significant reduction in the size of the workforce. The labor retrenchment resulting from these processes can have substantial social and political implications. As a result, restructuring plans need to include measures to mitigate the social impact of these changes. The case of SEMRY in Cameroon, described in Annex 3 is a good example of the need for such measures. Mitigation measures should be tailored to the situation in the country and in the SOE concerned and will often need to be multifaceted.5 The programs will need to be targeted carefully and their impact monitored closely. The objectives will be to include elements of compensation and financial support in the short term—and sometimes over the longer term— for employees who will lose their jobs, while at the same time offering them incentives to leave, along with opportunities and assistance in finding new employment. Labor unions will need to be closely consulted in that respect. Programs typically include direct severance payments. They may also include extensions of medical and other benefits, retraining for new work opportunities, and counseling and other assistance in searching for and obtaining new jobs. For major labor restructuring programs, governments may start new job creation schemes—in infrastructure development, for example—and may offer employment subsidies to new employers. Support for new business startups through business incubators and other means, along with entrepreneurship training, can also be important components of social mitigation measures and may contribute more broadly to the promotion of economic growth in the region or country where the SOE is located. 4. FINALIZING AND IMPLEMENTING THE RESTRUCTURING PLAN 4.1. REVIEWING OPTIONS WITH STAKEHOLDERS The restructuring planning process should have resulted in the formulation of restructuring options for consideration by stakeholders and decision-makers. Alternatives need to be developed and considered where possible since there is often more than one way to solve a restructuring challenge, each with its pros and cons. In drawing up and evaluating restructuring 5 World Bank/PPIAF 2004; Fretwell 2004. 17 options, it is useful to consider the results of past experiences with restructuring similar SOEs, both in the country concerned and elsewhere. Several factors need to be taken into account in determining which option is the most suitable. These include the changes in operational performance and quality of output that can be expected to result from the proposed changes, the financial costs and benefits, the level of risk, the impact on the environment and appropriate mitigation measures, potential difficulties and disruptions that may be faced, the possibility of employee resistance to change, the optimal timing for launching the process, and the speed of implementation. The evaluation process should adopt a clear set of criteria against which the various restructuring options can be scored using a transparent process of decision analysis. As mentioned earlier, the restructuring plan should be prepared in the form of a full business plan with financial and operational projections. Stakeholder consultations are an essential feature of a successful SOE restructuring process. All key players need to be consulted to evaluate the identified options and arrive, to the extent possible, at a consensus on the restructuring plan to be adopted. Labor unions in particular have to be consulted and involved, particularly when employee retrenchment is a component of the restructuring plan. The consultation process often leads to improvements in the design of the restructuring options under consideration and of the chosen option. The extent to which this consultation process results in stakeholder buy-in can be a critical factor in determining the success of implementation. Another critical lesson learned is that, as with other major reforms, successful SOE restructuring requires strong and enduring political commitment to the process and its intended result. One option for promoting political acceptance and support is the preparation by the government and tabling to the parliament of a white paper outlining the proposed reforms, why they are necessary, and the expected benefits for the country. Another mechanism, widely used during the market reforms in Central and Eastern Europe and the former Soviet Union, is the employment of an external communications firm to develop and implement a public information program aimed at promoting public understanding and support (World Bank 2019b). 4.2. PRESENTING THE RESTRUCTURING PLAN The way the restructuring plan is presented will vary according to the context – e.g., cabinet deliberations v. public consultation – and specific audience. The audience typically includes government officials, SOE management and directors, trade unions and employees representatives, the private sector and civil society. However, when presenting the restructuring plan, a key element to include will be the SOE’s financial projections (or “business plan�) including projected revenues, net income, cash flows, and net debt, and corresponding key financial ratios. 18 The business plan is the translation of the restructuring actions and key assumptions into the SOE’s projected revenues, costs and cash flows. Providing a different set of medium-term scenarios for at least the next five years will show the extent to which the restructuring measures would improve the SOE’s performance and financial outlook. In many cases, a slide presentation – including graphs and charts showing the SOE’s financial history and business plan of the restructured SOE – will be the best-suited format (Annex 7). The content of the restructuring plan will also vary depending on the types of issues the SOE faces, the country environment and the scenarios envisaged to turn the SOE around. The following elements are particularly important: The presentation would typically include a summary of business performance before and after restructuring to show the future aggregate effect of the restructuring measures (see Figures 2 and 3). A sample template for an SOE restructuring plan and a case study for a restructured national airport is provided in Annexes 4 and 6). Figures 1-2 – Example of Presentation of the Effects of Restructuring on an SOE’s Profits (mock data) 1,500 Projected EBITDA ($mn) Effect of restructuring measures on the Bef. Restruct. Scenario 1 Scenario 2 1,200 SOE's EBITDA in 2023 ($mn) 1,000 800 1,000 600 400 200 - 500 - 2021 2022 2023 2024 2025 19 4.3. IMPLEMENTING, MONITORING, AND EVALUATING THE PLAN As with private enterprise restructuring, SOE restructuring aims to achieve some quick successes, but typically represents a medium- to long-term process, possibly taking up to ten years to complete. In many cases, it can be a permanent continuing process. It requires careful and detailed planning, continuous monitoring and evaluation, and fine-tuning as necessary during implementation. It makes sense to appoint a restructuring implementation team to oversee the process and to continue the process of consulting stakeholders as changes take place. Difficulties will inevitably arise, and it will take thorough analysis, regular consultation, and good judgment to decide when it is best to persist with the original plans and when to make adjustments to planned actions or their timing. Continuous evaluation of results is also necessary to assess the extent to which the desired benefits are being achieved and whether the unfolding costs are in line with the original projections. Responsibility for the preparation, implementation, monitoring and evaluation of the restructuring plan can be assigned to a specialized agency, which might also be in charge of privatization. Establishing a dedicated restructuring agency, where one does not already exist, can be particularly useful when large-scale, systemic restructuring within the SOE portfolio is planned, requiring the development of a prioritized SOE restructuring program linked to a broader SOE reform agenda. The benefits of a dedicated structure are similar to those of creating a central entity for SOE ownership and include • Enabling the development of in-country capacity, for designing and implementing consistent and fit-for-purpose SOE restructuring plans; • Less dependency on outside advisors, and an increased ability to make effective use of their work; and • Improved coordination among government players and stakeholders, on all key aspects associated with restructuring (e.g., managing labor and social impacts; managing potential implications for the banking sector; and clearance of cross-arrears among SOEs). In fulfilling its role, the agency needs to work in partnership with the SOEs and the corresponding line ministries. In some cases, the SOE ownership agency itself may be given responsibility for SOE restructuring. SOE restructuring plans are living documents and, while achieving quick wins in the short term is important, restructuring requires sustained political commitment and effort over time. The restructuring plan needs to be reviewed during implementation and updated as circumstances change, and experience is gained. Adjustments can include accelerating or reducing the speed of 20 implementation, dropping components that are proving to be less effective than others, increasing focus and emphasis on those that are proving to be more successful, and adding new components or adopting alternative options to address factors that have become apparent only since the start of implementation. The case studies presented in Annexes 1–5 illustrate both the long-term nature of restructuring and the need for a continued effort Finally, in any SOE restructuring exercise, it is wise to acknowledge the inherent risks. An ambitious plan may produce mixed or partial results, or even fail. At such times, it may be necessary to consider alternatives to restructuring or to develop a new restructuring plan from the ground up. Given that SOEs worldwide have doubled their importance over the last decade, with assets now accounting for an estimated US$45 trillion, or around 20 percent of the assets of the world’s largest corporations (IMF 2020), state ownership of enterprises is likely to prevail in many partner countries for the foreseeable future. The need for SOE restructuring capacity and know-how is likely to grow, rather than decline. 21 ANNEX 1. CASE STUDY: THE GAMBIA’S NATIONAL WATER AND ELECTRICITY COMPANY The National Water and Electricity Company (NAWEC) is a vertically integrated SOE responsible for The Gambia's power, water supply and sewerage services, and therefore plays a critical role in the country’s economy. NAWEC is also by far The Gambia’s largest SOE, with revenues equivalent to 5% of GDP – almost a half of the entire SOE sector’s revenues – and assets totaling more than a quarter of all SOEs. NAWEC has historically represented a significant fiscal burden, but recent financial and operational results have the potential to put the utility on a positive reform path . The turnaround of NAWEC into an efficient, credit-worthy and financially viable utility is a key component of The Gambia’s vision of universal access to affordable clean energy. The Energy Sector Roadmap, approved by the Cabinet in October 2017, casts a vision to modernize the energy sector and transition to full-time (“24/7�) electricity access for all Gambians. The roadmap anticipates shifting the energy mix from 100% Heavy Fuel Oil to lower cost and cleaner energy, through imports from the West Africa Power Pool and private sector investments in the form of domestic independent power producers in renewable energy such as solar. In the years preceding the designation of the new government in 2017, NAWEC registered losses in the range of $10 to 20 million per year. This was primarily driven by tariff levels which did not allow NAWEC to cover its costs, but also by operational inefficiencies within NAWEC. In 2014, the Government was forced to assume the servicing of NAWEC’s debts, adding over 3 % of GDP to the budget. In 2015 and 2016, government fuel purchases on behalf of NAWEC cost $20 million per year, while the government serviced about one-third of the company’s debt. NAWEC reported a negative equity (deficit in net assets) of close to 5 billion Gambian Dalasi (GMD) – equivalent to approximately $100 million – at the end of 2018 (see Table A1 below). Since 2017, NAWEC leadership and the Ministry of Petroleum and Energy have embarked on an aggressive reform journey and achieved important milestones in operational and financial performance, as well as important changes to the governance of NAWEC. The key measures and associated results are highlighted below. Operational reform highlights: • Transmission and distribution losses were significantly reduced, from 28 percent in 2015 to 20 percent in 2020. • Generation capacity was expanded. Available generation in the Gambia increased from 27 MW in September 2017 to 80 MW in early 2021, sufficient to meet peak demand of 70 MW. 22 • System wide blackouts reduced, from 45 per month in 2018 to 11 per month in 2021. • Electricity sales grew on average 13% per year over the period 2017-2020, increasing from 230 GWH in 2017 to 335 GWh in 2020. • Bill collection rates have improved steadily, from 89% in 2018 to 96% in 2020, primarily achieved by replacing old uncalibrated credit meters for new prepayment meters. Financial reform highlights: • NAWEC debt was reduced by 75%, through (i) converting debt to equity; and (ii) government assumption of debts. • A cross-arrears clearance memorandum of understanding was signed with the government. It helped NAWEC collect what public sector customers owed it. • Public sector customers were switched to prepayment meters. The clearance of arrears has been followed by measures to prevent the buildup of future arrears. The majority of NAWEC’s public sector customers are now being supplied through prepayment meters. For critical customers such as hospitals, the military, and the Office of the President, a cash allocation earmarking system now ensures that their bills are paid. Bills for street lighting have been centralized and are now paid directly by the Ministry of Finance. • A new electricity tariff methodology was developed in 2020. It incorporates several changes to ensure tariffs fully reflect costs, including a transition to a multi-year tariff model, correct treatment of long-term debt, and an automatic pass-through mechanism for fuel costs. A tariff assessment is underway following the new methodology. Governance reform highlights: To complement and solidify these reform efforts, several key governance changes have been made, which will help NAWEC to achieve the financial projections presented in the table below. These include: • Organizational restructuring to ensure the right skills are in the right positions. With support of is Service Contractor, NAWEC kicked off a reorganization process in 2019. As of mid-2021, NAWEC has an entirely new management team, half of which are female, and it has started the process of recruiting the next level of management. Within the utility, two separate business units (SBUs) were created, one for water and another electricity, • A new information management system (IMS) will drive significant change in the day-to-day operations of NAWEC and will enable the separation of financial and commercial accounts for each SBU. The new IMS is expected to go-live in the second half of 2021. • Strategic development plan for the period 2019-25, including a set of 12 key performance indicators (KPIs) on which regular progress reports are submitted 23 • A new performance contract for the period 2021-23, which includes financial incentives and penalties associated with the KPIs. This builds on lessons from the pilot in 2020. For example, a robust monitoring framework has been established to ensure that KPIs are tracked by an independent party on a regular basis and discussed with high level decision makers to allow for mid-year course correction. • The first ever charter for NAWEC’s board of directors (2019), outlining more stringent corporate governance practices. • NAWEC’s first ever gender policy and gender action plan (2020): NAWEC elaborated a comprehensive gender policy, which was complemented by a Gender Action Plan to narrow the gap of female representation in the NAWEC workforce, with a special focus on technical- and leadership positions Taken together, these measures have already borne fruit, helping NAWEC achieve greater financial discipline. The SOE continuous improvement is evidenced by regular debt service payments enabling credit facility balances to be cleared ahead of schedule. Additionally, despite the negative impacts of COVID-19, NAWEC did not require direct State subsidies in 2019 or 2020. Table A1: Actual and projected (after restructuring) key financial indicators for NAWEC’s 2017-2023 (GMD million) 2017 2018 2019 (f) 2020 (f) 2021 (f) 2022 (f) 2023 (f) Revenues 2,820 3,225 4,801 5,995 6,450 6,978 7,548 Net income 18 (266) (828) 768 1,523 1,933 2,568 NPM% 1% -8% -17% 13% 24% 28% 34% Total assets 6,996 7,938 7,937 6,581 11,107 13,138 15,178 Equity (4,182) (4,757) (4,589) (4,921) (3,398) (1,465) 1,013 Source: NAWEC financial statements and financial model – 1 USD = 51.5 GMB at the end of 2020. 24 ANNEX 2. CASE STUDY: SERBIA GAS COMPANY6 Serbia’s national natural gas trading, transportation, distribution, and storage company, “Srbijagas�, was established in 2005 as a spin-off from a state-owned petroleum conglomerate. As of 2016, it supplied 600 businesses and 90,000 households in 57 municipalities and employed about 1,100 people. The company had stakes in several subsidiaries and associate companies, of which about half were non-core or non-operating businesses. The company had the largest transmission network in Serbia (about 95% ). The company’s distribution infrastructure was also the largest in the country (about 46%), comprising low- and medium-pressure gas pipelines with accompanying distribution stations. By 2014, Srbijagas was the most unprofitable SOE in Serbia, with losses of more than €440 million in 2013 and a further loss of €372 million in 2014. In 2015, losses were reduced to around €3 million, and in 2016, a small net profit of around €14 million was generated . The improvements in 2015 and 2016 were due mainly to reductions at that time in the prices paid for gas by Srbijagas. Accumulated losses led to negative equity of €564 million in 2015. There were significant liquidity pressures, driven by high levels of maturing debt and poor collection rates due to the difficulties experienced by the company’s major customers, most of whom were state- owned and in financial difficulty themselves. The company’s debts were all guaranteed by the state and therefore represented a substantial contingent liability on public finances. Srbijagas faced several threats from its external environment, mainly increased competition and a currency mismatch between revenues and costs. Competition from alternative energy sources, particularly electricity, was increasing in a context of low customer switching costs and the impending liberalization of the energy market. More than 90% of the company’s revenues were in local currency, whereas more than 85% of operating costs – mainly for gas purchases – were in US Dollars, and the cost of the company’s unhedged debt was in hard currencies (74% in Euros and 26% in USD). Srbijagas’s poor financial performance stemmed from two main factors: (i) low regulated prices for gas and (ii) many socially driven investments with low economic returns. Many of investment projects were motivated by political and social objectives and were not viable. These issues were laid out in a diagnostic report prepared with support from the World Bank in 2016. The assessment also showed that the company had engaged in several debt-to-equity 6 Information taken from a report on financial restructuring options prepared for the World Bank by Ernst & Young, July 2016. The reforms undertaking by Srbijagas were supported by the WB’s Public Expenditure and Utilities Development Policy Loan (see https://documents1.worldbank.org/curated/en/862611603807809443/pdf/Serbia- First-and-Second-Public-Expenditure-and-Public-Utilities-Development-Policy-Loans.pdf). 25 conversions which had resulted in Srbijagas acquiring majority stakes in poorly performing SOEs whose activities did not relate closely to the core activities of Srbijagas. On top of these losses, the SOE’s financial position was made worse by recurring receivable collection problems, leading to unsustainable levels of debt. Governmental entities and other SOEs failed to settle their liabilities to Srbijagas, resulting in growing receivables and a liquidity shortage. To finance cash flow shortfalls, Srbijagas resorted to increased borrowing, using loans that were covered in most cases by state guarantees. In several instances, it faced difficulties repaying some of these loans, resulting in many guarantees being called and the loans having to be serviced from the state budget. The 2016 diagnostic report concluded that maintaining the status quo, with its overleveraged capital structure, liquidity pressures, and competitive and revenue pressures, was not a sustainable option. The report included recommendations intended to transform the company into a commercially viable entity, maintaining the existing business model but increasing gas market sales with a focus on large industrial consumers. It proposed tax and other incentives to promote gas consumption, more stringent environmental laws that would favor gas as a clean energy source, and improvements in corporate governance and organizational and operational efficiency within the company. To reduce the financial burden of the debt, the report recommended to renegotiate the debt to reduce cash interest rates, extend loan repayment periods, and capitalize some of the debt to the State. It was also recommended to subordinate the government’s own claims with respect to other senior debts, thereby reducing the senior debt leverage. Seeking “haircuts� from the creditors was not recommended as it would likely lead to creditor hold-outs due to the government guarantees. In 2016, the Serbian government accepted the recommendations and adopted and promptly implemented a financial consolidation and restructuring plan. This plan included first a new investment policy with investment criteria based on economic and financial viability. Over the following years, economic performance improved Figure A2: Srbijagas Economic (Figure A2). The receivables collection rate increased 900 Performance - 2013-2019 from 80 percent in 2015 to 93.3 percent, on average, 700 over the period 2016–18. Outstanding long-term bank 500 loan repayments fell from €657 million in December 300 2015 to €154 million in December 2018. Divestiture from 100 non-core businesses was not completed, however. The (100) Revenue company retained its ownership in seven SOEs that had (300) Net result been its debtors, and the decision on what to do with (500) 2013 2014 2015 2016 2017 2018 2019 these investments has yet to be resolved. 26 ANNEX 3. CASE STUDY: SEMRY (CAMEROON) The Yagoua Rice Development and Modernization Company (Société d’Expansion et de Modernisation de la Riziculture de Yagoua or SEMRY) was created in 1971 to build and manage major irrigation infrastructure for rice production in the North of Cameroon. In the early years, this fully state-owned SOE operated irrigation schemes on the Logone River in Yagoua and Maga. Initial results were impressive, with rice produced in SEMRY areas accounting for two-thirds of national consumption. With 1,500 employees, SEMRY supported around 25,000 households and built schools, water supply points, and health centers. Since the late 1980s, however, despite repeated attempts at rehabilitation, SEMRY's operational and financial performance has deteriorated steadily and the area under irrigation has fallen. The original objectives were for SEMRY to provide services enabling the production of around 150,000 metric tons of rice per year, but production has stagnated at 60,000 metric tons per year. As of early 2020, SEMRY had 450 employees and focused on providing rice farmers with a wide range of services. These include distribution of seeds and other inputs, irrigation and plowing services, operation of a rice mill, bagging, and transport. However, the costs of the services it provides are about twice as high as the revenues it receives. Several recent diagnostic reports identify weaknesses in SEMRY's internal governance, including a bureaucratic organization structure, poor financial controls, and a multitude of outdated operational roles that are legacies of the organization's complex history. Financially, SEMRY depends increasingly on support from the government. SEMRY’s greatest financial challenge is its inability to recover the costs of the services it provides. Annual investment subsidies increased from FCFA 6 billion in 2014 to FCFA 12 billion in 2017, while operating subsidies varied between FCFA 0.4 billion to FCFA 1.8 billion over the same period. As a result, SEMRY’s liabilities grew steadily from FCFA 0.4 billion in 2013 to FCFA 4.3 billion in 2017, consisting mainly of tax arrears and trade payables. Ambitious restructuring plans have been underway since 2020 to transform SEMRY into a modern water management entity, along the same lines as successful initiatives in other countries. These plans are receiving international support, including from the World Bank’s Valorization of Investments in the Valley of the Logone (“VIVA Logone�) Project under preparation. A management consulting firm has been recruited to create a detailed implementation plan for SEMRY’s transformation. It will include rehabilitation and transfer of the irrigation schemes and restructuring of SEMRY’s organization and functions, through a mix of public and private ownership. Producer organizations and commercial companies will take over most of SEMRY’s commercial activities, and privately run farm service centers will be set up throughout the producing region. Improvements to the legal and governance framework for land ownership and irrigation management will be implemented. The restructuring will be accompanied by a program to mitigate the social impact of employee retrenchment. A twinning 27 arrangement will also be set up with the Senegalese irrigation agency in the Senegal River Valley (SAED), which has successfully undergone a transformation similar to that planned for SEMRY. At the end of the transformation, following the divestiture of its commercial activities, SEMRY’s residual role will be limited to the provision of essential services, consistent with well- established international practice. Its organization structure will have been downsized and refocused on the maintenance of major infrastructures such as dams and dykes; access roads and major drainage outlets, on support to the newly created water user associations that will manage the irrigation schemes within the irrigation perimeters; on the monitoring of water resources in the Logone River basin, in coordination with national and international authorities; and on training and support to farmers, including the establishment of a new Technology Innovation Center. Other services will be divested or carried out in partnership with management groups, cooperatives, and private entrepreneurs. These services will include the management of water within the irrigation perimeters, management of the Technology Innovation Center, provision of finance by commercial banks and microfinance institutions, land preparation services, agricultural input supply, management of the rice mill, and rice storage and marketing functions. 28 ANNEX 4. CASE STUDY: NATIONAL AIRPORT OPERATOR Ltd.7 NAOL is a public company with 100 percent of the shares owned by the State government which is responsible for air traffic control. NAOL Figure A4.1 NAOL's Debt and Interest is also responsible for the maintenance and 20,000 Coverage operation of international and local airports. 15,000 Passenger and navigation fares and commercial contracts are the primary sources of revenue for 10,000 NAOL. Additionally, NAOL operates the 5,000 commercial areas of its airports through rental - agreements, vehicle parking fees and advertising 2014 2015 2016 2017 fees, among others. Debt Debt/EBITDA Due to a range of operational challenges and large investments, NAOL’s financial situation had become very fragile. The main airport accounts for almost 60% of NAOL’s revenues, including domestic and regional flights that account for the largest share of revenues. In a view of extensive investment (about $300 million) in the second largest airport and high levels of indebtedness, the main airport still generated annual losses that included the costs associated with maintaining its status as an international airport. The national carrier’s accounts receivable was the biggest obstacle to NAOL’s liquidity. Its negative operating liquidity gave a clear indication that NAOL was in a distressed position, with its high debt, negative equity and arrears to creditors. For the restructuring of NAOL, three possible scenarios were envisaged, combining different variables, including EBITDA, cash flow from operations and debt and financial leverage. The three scenarios included: (a) comprehensive reform - all restructuring options are implemented bringing significant operational improvements and capital increase; (b) partial reform (“in- between� scenario); and (c) status quo – i.e., no restructuring. The following measures were considered key to reform the NAOL. Under scenario A the market- based payment practices for billings to the national carrier; capital increase in 2017 (to eliminate the current backlog and leverage); closure of the second airport; 20% cut in personnel costs and contracting services to third parties; and an increase in domestic traffic of 20% in 5 years, and over the same period, non-aeronautical revenue increase of 30%, driven by new players. While under scenario B, no capital increase was considered, and instead of 20 percent, there was a 10 percent cut in personnel costs and contracting services to third parties. 7 Note: this case study is fictious but based on an actual case. The name of the SOE and relevant facts and numbers have been altered to preserve confidentiality. 29 Due to the NAOL's situation, which was alarming and risky, the Status Quo scenario could have led to an excessive cost to the government or failure to pay the debt. The inability to meet its short-term debt, combined with the growing financial obstacle arising from operations, was a piece of solid evidence that, without substantial changes, bankruptcy was imminent. Therefore, a capital increase and operational changes could improve NAOL's position and allow NAOL to make a positive contribution to the country's fiscal account. NAOL must increase profitability because higher profits translate into greater liquidity generation. Taking into account all of the key measures under scenarios A & B, Scenario A showed a slight improvement and significantly increases the conversion of EBITDA into liquidity due to the following: the closure of the second airport; cuts in personnel costs and services to the third parties; and as well as the increase of domestic traffic in the next five years along with the increase of non-aeronautical revenues. Even with a sturdy operational improvement, the generation of liquidity was not sufficient for NAOL's short-term debt service. Therefore, a capital increase was a viable option. Under Scenario A, NAOL's cash flow from operations showed a very significant improvement despite remaining slightly negative (due to interest costs). However, this indicated that measures to strengthen NAOL's balance sheet (including a capital injection) were needed to generate positive cash flows. Under Scenario C (the status quo), the company would continue to generate negative cash flows at a pace that is not sustainable. Figure A4.2 – Projected Debt and EBITDA under three scenarios (in million local currency) 40 Debt/EBITDA 4000 Debt 30 3000 20 2000 10 1000 0 0 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020 Scenario A Scenario B Scenario C Scenario A Scenario B Scenario C NAOL was unable to pay its debts. Therefore, if no reforms were implemented, debt was expected to increase (Scenario C). The measures implemented under the Scenario A would result in a sharp decrease in debt after one year and would continue at a more sustainable level. 30 ANNEX 5. CASE STUDY: POLISH RAILWAYS (�PKP�)8 The Polish State Railways (Polskie Koleje Państwowe or PKP) found itself in a difficult financial and operational situation in the early years of transition after the collapse of the Soviet economic system. PKP experienced a sharp decline Figure A5. PKP's Revenues: 1990- in revenues (Figure A5), market performance and 6000 1999 (US$ million) asset condition. The company had been founded by Freight Revenue splitting the legacy rail SOE to align with European 4000 Passenger Revenue Union (EU) standards. A mixed operational productivity and gradual reduction in government 2000 subsidies compounded the situation, leading to mounting losses and financial difficulties. Bold 0 reforms of the railways sector were deemed necessary. A first wave of restructuring was carried out in the mid-1990s. Poland passed the first law to reform the railway system in 1995, and a Railway Transport law in 1997 opened the way for sector liberalization. This included allowing private-sector provision of some railway services and opening the track network to third-party domestic operators. Another measure aimed at preparing PKP for joint-stock company (“S.A.�) formation and creating separate lines of business. These measures were complemented by a significant reduction in employment. Total employment fell from more than 245,000 in 1994 to about 200,000 in 1999, thanks to tighter controls on recruitment and early retirement schemes through agreements with the trade unions. Despite the restructuring measures, the financial performance of the company remained weak, calling for further reform. The PKP group had accumulated significant financial debt, including short-term liabilities to social security and other state duties. The next wave of reforms started with the approval of the PKP Restructuring, Commercialization and Privatization Law in September 2000. The organizational restructuring component of the program led to the establishment in January 2001 of PKP S.A., a holding company with 24 subsidiaries. Employment reorganization continued, leading to the reduction of staff by a further 50,000 employees within 8 This case study is based on the following papers respectively by the Public-Private Infrastructure Advisory Facility (PPIAF) and the IMF: https://ppiaf.org/sites/ppiaf.org/files/documents/toolkits/railways_toolkit/PDFs/RR%20Toolkit%20EN%20New%2 02017%2012%2027%20CASE11%20POLAND.pdf and https://www.imf.org/- /media/Files/Publications/DP/2019/English/RRSOECESEEEA.ashx. 31 two years. These measures were financed through PKP’s own funds and borrowing from the EBRD, the World Bank and commercial banks. Debt write-offs were carried out as well. Changing the organizational structure and improving the governance and management of PKP Group companies was also key to the success of the reform effort. Starting in 2012, PKP undertook several initiatives to improve its corporate governance. Better management at the operational level was achieved by reducing the number of board members at the Group companies. To enhance the effectiveness of corporate governance, audit committees were instituted by the supervisory boards of the subsidiary companies. The overall improvement in management effectiveness increased paid dividends paid by subsidiary companies to PKP S.A. This allowed for a stronger negotiating position in bulk purchase and yielded over US$40 million in savings. Revenues have recovered after the 2009 financial crisis, and asset sales have help reduce PKP’s debt significantly. Both freight and passenger rail market competition has increased, with private operators moving 43% of rail freight and 54% of rail passengers in 2014. New market- oriented management has been appointed, and the workforce has been continuously reduced in response to market conditions. PKP made significant progress in repaying its legacy debt, which decreased from US$1 billion in 2012 to 130 million in 2015. Overall, Polish railways restructuring is considered a success. The four stated primary objectives – financial and debt restructuring; organizational restructuring; employment restructuring to right-size the workforce; and asset restructuring – were largely met. 32 ANNEX 6. CHECKLIST: ISSUES TO CONSIDER IN PREPARING AN SOE RESTRUCTURING PLAN Sector and market • Prevailing macroeconomic policies and the economic environment context • Budget support policies, reimbursement for PSOs • Competition policy, competitive neutrality, and the presence or otherwise of competitors • Trade and pricing policies • Taxation policies • Labor laws • Sectoral regulation Legal and institutional • Laws and institutions governing the restructuring process framework • SOE legal form and structure • Property rights, including land • Collateral, including registries • Courts that oversee insolvency, debt resolution, and enforcement • Legal framework for out of court restructuring • Taxation affecting debt reductions • SOE ownership policy • Early warning systems for SOEs in financial distress • Capacity of the banking system to handle financial restructuring Appropriateness of SOE • Ownership policy and rationale for state ownership objectives • Any changed circumstances requiring changed objectives • Potential new or expanded role for the private sector Financial performance • Need to review: appraisal o the SOE’s audited financial statements o internal SOE financial reports o performance monitoring reports from SOE oversight agencies (if any) o reports from the finance ministry and the tax and customs authorities on the history of the SOE’s financial relations with government o data should cover the last five years o budget for the year and business plan prepared by management • Calculate a range of financial performance indicators • Assess the explicit and implicit impact of SOE operations on public finances Operational • Assess the adequacy of operational capacity, performance, and performance appraisal management: o Review SOE operational reports o key non-financial performance indicators o general management o management of finance and accounts o production management 33 o marketing and distribution management o research and development o human resources management o corporate governance and the role of the board Reviewing restructuring • Based on the above diagnosis, decide whether restructuring is the options and consulting best option or whether alternatives such as closure, divestiture, or with stakeholders other avenues might produce better results • If restructuring offers the best chances of success, prepare options for restructuring • Consult on the options with all stakeholders • Review and select the best option(s) based on an assessment of: o expected improvements in operational performance and quality of output o financial costs and benefits o levels of risk o potential difficulties and disruptions, including employee resistance to change o the best time to launch the process and the speed of implementation • Maximize political commitment: o white paper for discussion in parliament o communication/public information program Social impact mitigation • Carefully target and monitor implementation of mitigation programs • Consider multifaceted programs, for example: o extension of medical and other benefits for retrenched employees o retraining for new work opportunities o assistance in searching for and placement in new jobs o new job creation schemes, including through infrastructure development o employment subsidies to new employers o support for new business startups o support for business incubators o entrepreneurship training Implementing, • Create an implementation team monitoring, and • Continuously monitor and evaluate results against plans evaluating • Continue stakeholder consultations throughout implementation • Adjust plans as necessary, for example by changing the speed of implementation or dropping/adding components 34 ANNEX 7. TEMPLATE FOR AN SOE RESTRUCTURING PLAN The structure and content of restructuring plans will vary greatly depending on the country context, sector context, and issues facing the SOE. Below is a broad template of components that might be incorporated. 1. Executive Summary 2. Introduction • Background, context, objectives, and processes followed in preparing plan • Plan structure 3. Situation analysis • Operating environment o Market prospects, competition, government policies, legal and regulatory requirements • Company profile o Finances o Markets and customers served o Products and/or services o Physical assets, production facilities o Human resources o Business model • Historical performance o Financial o Operational • SWOT analysis and summary of issues hampering performance 4. Objectives of Restructuring • Improve financial viability, reduce burden on public finances • Improve quality of product or service delivery • Extend or re-target customer base 5. Options considered for restructuring the SOE • Processes followed in reviewing options • Brief summary of each option considered 6. Selected Option • Reasons for selection • Planned measures o Change of business model or processes – Markets – Product range – Technology base 35 o Financial restructuring – Increase revenue – Reduce costs – Restructure debt – Recapitalize o Operational restructuring - Improve operational efficiency - Capital investment o Organizational restructuring – Mergers, acquisitions, divestments – Changes to the management structure – Changes in performance management – Changes in the management of finances, marketing, production, human resources • Risk factors and accompanying actions o Uncertainties in markets, revenues, costs, or government policies o Potential resistance to change o Planned social mitigation measures o Measures to gain public and political support • Business plan with outcomes under key scenarios o Expected results o Implementation schedule • Institutional arrangements o Creation of an implementation team o Monitoring and evaluation mechanisms o Continued stakeholder consultations 36 REFERENCES African Development Bank (AfDB). 2019. Zimbabwe Infrastructure Report 2019. Abidjan, Côte d’Ivoire: AfDB. Available at: https://www.afdb.org/sites/default/files/2019/07/09/zimbabwe_infrastructure_report_2019_-_afdb_- _20052019.pdf (accessed June 1, 2020). Ernst & Young. 2016. [Confidential] Financial restructuring options report prepared for the WB (July). European Bank for Reconstruction and Development (EBRD). 2018. “State-Owned Enterprise Restructuring in Croatia,� Invitation for Expressions of Interest. Available at: https://www.ebrd.com/cs/Satellite?c=Content&cid=1395271842258&d=Mobile&pagename=EBRD%2FContent%2F ContentLayout. European Bank for Reconstruction and Development (EBRD). 2020. “Turning Around State-Owned Enterprises in Croatia,� Law in Transition Journal 2020. Available at: https://2020.lit- ebrd.com/articles/#125-10 (accessed June 1, 2020). Fretwell, David H. 2004. “Mitigating the Social Impact of Privatization and Enterprise Restructuring.� Social Protection Discussion Paper Series No. 0405 (March). Washington, DC: World Bank. Available at: http://documents.worldbank.org/curated/en/207211468781818946/Mitigating-the-social-impact-of-privatization- and-enterprise-restructuring (accessed June 1, 2020). Henry, Elaine, Thomas R. Robinson, and Jan Hendrick van Greuning. 2011. “Financial Analysis Techniques.� Reading 26. Charlottesville, VA: CFA Institute. Available at: https://www.cfainstitute.org/- /media/documents/support/programs/cfa/2019-L1V3R26-footnotes.pdf (accessed June 1, 2020). International Monetary Fund (IMF). 2020. Fiscal Monitor: Policies to Support People During the COVID- 19 Pandemic. Washington, DC: IMF (April). Available at: https://www.imf.org/en/Publications/FM/Issues/2020/04/06/fiscal-monitor-april-2020 (accessed June 1, 2020). Lieberman, Ira et al. 1989. “Industrial Restructuring – Policy and Practice.� Industry and Energy Department. Washington, DC: World Bank. Available at: http://documents.worldbank.org/curated/en/245451468913751684/Industrial-restructuring-policy-and-practice (accessed June 1, 2020). World Bank. 2014. Corporate Governance of State-Owned Enterprises: A Toolkit. Washington, D.C.: World Bank. Available at: https://openknowledge.worldbank.org/handle/10986/20390 (accessed June 1, 2020). World Bank. 2018. Corporate Governance and Financial Performance of State-Owned Enterprises in Cameroon (October). World Bank and Public-Private Infrastructure Advisory Facility (PPIAF). 2004. Labor Issues in Infrastructure Reform: A Toolkit. Washington, DC: World Bank. Available at: https://openknowledge.worldbank.org/handle/10986/15020 (accessed June 1, 2020) World Bank and The Public-Private Infrastructure Advisory Facility (PPIAF). 2017. Railway Reform: Toolkit for Improving Rail Sector Performance. Case Study: Polish Railways. Washington, DC: World Bank. Available at: https://ppiaf.org/ppiaf/sites/ppiaf.org/files/documents/toolkits/railways_toolkit/index.html 37