E N E R G Y A N D M I N I N G S E C T O R B O A R D D I S C U S S I O N P A P E R P A P E R N O . 1 1 F E B R U A R Y 2 0 0 4 Some Options for Improving the Governance of State-Owned Electricity Utilities Timothy Irwin and Chiaki Yamamoto THE WORLD BANK GROUP The Energy and Mining Sector Board AUTHORS DISCLAIMERS Timothy Irwin (tirwin@worldbank.org) and Chiaki Yamamoto The findings, interpretations, and conclusions expressed in (cyamamoto@worldbank.org) work for the Infrastructure this paper are entirely those of the authors and should not be Economics and Finance Department of the World Bank. attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. CONTACT INFORMATION To order additional copies of this discussion paper, please contact the Energy Help Desk: +1.202.473.0652 energyhelpdesk@worldbank.org The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permis- sion to photocopy or reprint, please send a request with complete information to the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 01923, USA, fax 978-750-4470. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street N.W., Washington DC, 20433, fax 202-522-2422, e-mail: pubrights@worldbank.org. E N E R G Y A N D M I N I N G S E C T O R B O A R D D I S C U S S I O N P A P E R P A P E R N O . 1 1 F E B R U A R Y 2 0 0 4 Some Options for Improving the Governance of State-Owned Electricity Utilities Timothy Irwin and Chiaki Yamamoto The World Bank, Washington, DC THE WORLD BANK GROUP The Energy and Mining Sector Board Copyright © 2004 The International Bank for Reconstruction and Development/The World Bank. All rights reserved CONTENTS FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 ABSTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 1. PROBLEMS AND APPROACHES TO THEIR SOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . .7 Symptoms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Fundamental problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Necessary characteristics of a solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Privatization as a solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Other approaches to the problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 2. FOUR COUNTRIES' APPROACHES TO CORPORATE GOVERNANCE OF STATE-OWNED ELECTRICITY UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 3. OPTIONS FOR IMPROVING CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . .11 Applying private-sector company law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Legislating and contracting for new public-sector governance . . . . . . . . . . . . . . . . . . . . . .13 Requiring additional public reporting of performance and policies . . . . . . . . . . . . . . . . . . .14 Instilling a commercial culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Subjecting the utility to new pressures from lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Listing a minority of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Strengthening more-efficient instruments of social policy . . . . . . . . . . . . . . . . . . . . . . . . . .17 Alleviating the government's conflict of interest as owner and policy-maker . . . . . . . . . . . .17 4. SOME EMPIRICAL EVIDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Studies of private versus public ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Studies of the effects of different types of governance in the private sector . . . . . . . . . . . . .18 Studies of the effects of corporatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 5. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 ANNEX 1. COMISIÓN FEDERAL DE ELECTRICIDAD, MEXICO . . . . . . . . . . . . . . . . . . . . . . . .20 ANNEX 2. STATE-OWNED ELECTRICITY COMPANIES IN NEW ZEALAND . . . . . . . . . . . . . . .23 ANNEX 3. THE NATIONAL POWER CORPORATION, PHILIPPINES . . . . . . . . . . . . . . . . . . . . .29 ANNEX 4. ESKOM, SOUTH AFRICA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 BOXES, FIGURE, AND TABLES BOX 1. THE OECD PRINCIPLES OF CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 BOX 2. CORPORATE-GOVERNANCE DISCLOSURE REQUIREMENTS OF THE ASX--EXCERPT . . . . . . . . . . .12 BOX 3. LEGISLATING FOR NEW GOVERNANCE ARRANGEMENTS FOR STATE-OWNED ENTERPRISES IN UGANDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 BOX 4. MINORITY OWNERSHIP IN STATE-OWNED GAS UTILITIES IN PAKISTAN . . . . . . . . . . . . . . . . . . .16 BOX 5. THE STATEMENT OF CORPORATE INTENT FOR NEW ZEALAND STATE-OWNED ENTERPRISES . . . . . .25 FIGURE 1. SEPARATING GOVERNMENT ROLES: ONE OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 TABLE 1. CORPORATE GOVERNANCE OF STATE-OWNED ELECTRICITY COMPANIES IN MEXICO, NEW ZEALAND, THE PHILIPPINES, AND SOUTH AFRICA . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 TABLE 2. CFE'S LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 TABLE 3. PERFORMANCE TARGETS FROM MIGHTY RIVER POWER'S STATEMENT OF CORPORATE INTENT . . . .26 TABLE 4. COMPOSITION OF BOARDS OF GENERATOR­RETAILERS IN NEW ZEALAND, FEBRUARY 2003 . . . . .27 TABLE 5. CREDIT RATINGS BY STANDARD AND POOR'S OF GENERATOR­RETAILERS AND OTHERS . . . . . . . .28 TABLE 6. RECENT ACCOUNTING PROFITABILITY OF NEW ZEALAND ELECTRICITY GENERATOR­RETAILERS . . .28 TABLE 7. NAPOCOR'S NET INCOME IN BILLION PESOS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 TABLE 8. ESKOM'S REAL RATE OF RETURN ON TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 ii FOREWORD Access to a reliable supply of electricity is vital for economic growth and poverty reduction, yet electricity companies in most developing countries fail to satisfy the reasonable demands of firms and citizens. Improving electricity supply is therefore a priority for most developing- country governments, as well as international development agencies such as the World Bank. Perhaps the most important part of a strategy for improving electricity supply is to improve the markets in which electricity companies operate, by strengthening competition where that is feasible and designing regulation that encourages improvements when competition is not feasible. Another part of the strategy is to ensure that the owners of electricity companies pressure the companies to improve 1 their performance--for example to seize opportunities to supply potential customers who remain unserved and to provide more reliable service to existing customers. Privatization is one option for achieving this goal; but privatization is sometimes very difficult. In the last couple of years, large energy companies in the United States and Western Europe, under pressure to reduce debts and take fewer risks, have shied away from making new investments in developing countries. And privatization remains a hotly contested political issue: many politicians are unwilling to risk the certain controversy and possible loss of support that privatization may entail, in the hope of future gains in performance, especially when investors express skepticism about becoming involved. This paper therefore looks at options governments have for improving the performance of state-owned utilities, short of privatizing them. It focuses, in particular, on improving the relationship between state-owned electricity companies and governments as their owners--or in other words on improving corporate governance. Penelope Brook Sector Manager South Asia Energy and Infrastructure Unit Jamal Saghir Director, Energy and Water Chairman, Energy and Mining Sector Board February 2004 2 ABSTRACT Most government-owned utilities in developing countries perform poorly when judged as providers of electricity, in part because politicians and officials use their power, not to encourage the utilities to increase sales, improve the collection of bills, and cut costs, but to transfer resources to politically influential groups and, sometimes, extract bribes. To improve the performance of government-owned electricity utilities as electricity utilities, rules and practices must be changed in a way that reduces politicians' willingness or ability to use the utilities for political purposes and subjects the utilities to new sources of pressure to perform well. This paper considers ways in which a government might seek to achieve this goal without privatizing. It focuses on changes in corporate governance--that is, changes in the rules that structure the relationship between the company and the government 3 as its owner. It concludes that governments should be cautious about the prospects for improvement without privatization--since, among other things, creating a truly arms-length relationship between the government and the utility will always be difficult as long as the government remains the utility's owner--but that improvements in corporate governance are still worth pursuing. ACKNOWLEDGEMENTS An earlier version of this paper was commissioned by the World Bank's South Asia Energy and Infrastructure Unit and benefited greatly from comments from Ian Alexander, the task manager for the work, and others in that Unit, including Bhavna Bhatia, Penelope Brook, Rohit Mittal, Pedro Sanchez Gamarra, and Joe Wright. It also benefited from comments and advice from Mierta Capaul, Gabliela Elizondo Azuela, Charles M. Feinstein, Eric Groom, Mohinder Gulati, Marie-Laurence Guy, Ron Hamilton, Bernie Tenenbaum and Salman Zaheer. 4 EXECUTIVE SUMMARY This paper considers ways in which a government can · requiring electricity companies to borrow from private improve the performance of an electricity company it lenders without the benefit of a government owns, short of privatizing it. It focuses on changes in guarantee, to bring to bear the benefits of scrutiny by corporate governance--that is, changes in the rules that lenders and credit-rating agencies, structure the relationship between the company and the · listing a minority of the companies' shares, to create government as its owner. market information on commercial performance, allow equity-linked compensation, and create Most government-owned utilities in developing countries monitoring by other shareholders. perform poorly when judged as providers of electricity, · strengthening more transparent and efficient means in large part because politicians and officials use their of redistributing resources, such as direct subsidies to power, not to encourage the utilities to increase sales, electricity customers, and improve the collection of bills, cut costs, and so on, but · reducing the conflict of interest it faces as to transfer resources to politically influential groups and, policymaker and owner, by separating responsibility sometimes, extract bribes. To improve the performance within government for policy and ownership--for of government-owned electricity utilities as electricity example, making the former the job of the minister of utilities, rules and practices must be changed in a way energy and the latter the job of the minister of finance. 5 that reduces politicians' willingness or ability to use the utilities for political purposes and subjects the utilities to While the paper focuses on corporate governance and new sources of pressure to perform well. related policies, other policies matter too. Among the most important are policies affecting the environment Privatization is probably the most effective way of for businesses generally, such those affecting contract changing the relationship between politicians and enforcement, and, among electricity-specific policies, electricity utilities, because private owners will resist those affecting the opportunities for competition efforts by politicians to interfere in the businesses. But a between electricity providers. government can also try to change its relationship to utilities without privatizing by changing the rules The paper examines practice in four countries in determining, or influencing, the utilities' corporate which the government is a major owner of electricity governance under state ownership. Among its options companies--Mexico, New Zealand, the Philippines, and are the following: South Africa--and reviews some of the available empirical evidence on the success of reforms in various countries. · subjecting the utilities to company law and other laws that apply to private-sector companies--in order to It concludes that governments should be cautious about bring to bear new rules governing the relationship the prospects for improvement without privatization-- between the utilities and the government as their owner, since, among other things, creating a truly arms-length · legislating for additional constraints on the relationship between the government and the utility will relationship between the government, as owner, and always be difficult as long as the government remains utilities--to address the special problems afflicting the the utility's owner. Nonetheless, the reforms discussed governance of state-owned utilities (such as the weak above are likely to be better than nothing. influence of the utilities' ultimate beneficial owners, citizens, over the proximate owner, the government), · requiring additional public reporting by the utilities-- for example, of directions given to the utility by politicians and of the utility's policies toward theft and corruption by employees, · taking further steps to instill a commercial culture in the utilities, such as appointing independent directors from successful businesses, INTRODUCTION During the 1990s, most reforms designed to improve public-sector norms, while New Zealand and South the performance of electricity industries in developing Africa have modeled corporate government for state- countries included as one of their components some owned electricity companies on private-sector practices. form of privatization, either through divestitures or concessions. In many countries, however, privatization now The rest of the paper proceeds as follows. Section 1 looks more difficult than it previously did, because of analyzes the problems that state-owned electricity domestic political opposition as well as diminished interest companies tend to suffer from in developing countries, on the part of traditionally important investors in Europe the types of solution that might address those problem, and the United States (see Harris 2003, for example). and the potential role of reforms of corporate governance in those solutions. Section 2 describes the This paper considers some of the options that main features of corporate governance in the four case- governments have for improving the commercial focus study countries. Section 3 suggests a range of options and performance of government-owned electricity for improving the corporate governance of state-owned businesses, short of privatizing them. In doing so, the utilities. And Section 4 reviews empirical evidence paper is not intended to imply that privatization is relevant to an assessment of the effectiveness of the 6 inappropriate or that these options are likely to be as corporate-governance options under discussion. effective as privatization; the implication is, rather, that when privatization appears impracticable, less far- reaching reforms of corporate governance may be better than no reform. To provide examples of the approaches taken by governments in other countries, annexes to the paper describe the governance of state-owned electricity companies in four countries in which significant electricity reforms have occurred, but in which the state remains a dominant owner of electricity companies: · Mexico--where the dominant electricity company, the Comisión Federal de Electricidad (CFE), is owned by the federal government, · New Zealand--where the government owns three large generator­retailers, as well as the transmission company, · The Philippines--where the government owns the largest generation company, Napocor, and the transmission company, Transco, and · South Africa--where the dominant electricity company, Eskom, is owned by the government. The countries differ in several respects as well: the Philippines and New Zealand, for example, rely on competition more than do Mexico and South Africa. Their approaches to corporate governance also differ, Mexico and the Philippines following relatively traditional 1. PROBLEMS AND APPROACHES TO THEIR losses, and theft also contribute to their poor SOLUTION financial performance. Symptoms Fundamental problems Some government-owned electricity companies perform The precise causes of problems besetting electricity reasonably well, but in developing countries most perform utilities differ from country to country and case to case, poorly. Some of the problems are common to government- but a common core of fundamentally political problems owned businesses in all sectors--including excessive appears to underlie most cases. staffing, low profitability, and limited innovation (see, for example, Megginson and Netter 2001 and World Bank First, politicians and officials do not act as ordinary, 1995). Other problems tend to be specific to industries largely profit-motivated shareholders. Instead of pressuring providing basic services under conditions of monopoly the company to increase sales and reduce costs, they or strong market power, including electricity as well as pressure it to pursue noncommercial goals and in some other utilities. Prices in these industries typically reflect cases obtain bribes. The result is that politicians, officials, neither costs nor demand. Average prices are often lower and certain other stakeholders extract benefits from the than average costs, eventually causing utilities to experience utility at the expense of others: some customers get financial distress and to cut back on maintenance and charged very low prices, and some employees collect 7 investment. Customers often suffer losses of supply, and bribes, pilfer stocks, or receive salaries for little work. many potential customers remain completely unserved. The outcome is generally undesirable not because--or In addition, the relative prices paid by different customers not only because--of the transfer of resources from the frequently fail to reflect differences in costs or demand: ultimate owners (citizens at large) to certain stakeholders some politically powerful customers tend to pay very low per se, but because of the nature of the transfers. In prices relative to the cost of supplying them, while others particular, the transfers are generally opaque when pay high prices. Technical losses tend to be high, and compared with budgetary subsidies; neither the billing and collection tend to be poor. beneficiaries nor the benefits they receive are transparent. And the transfers are also typically inefficient--direct The problems of government-owed electricity businesses budgetary subsidies would generally provide a larger in India illustrate the problems (Dubash and Rajan 2001 benefit to the recipients at a lower cost to the benefactors. and Rao 2002). Average electricity prices are lower than average costs, and the state-owned electricity boards Second, the government faces a conflict of interest that that dominate the industry are making increasingly large undermines the quality of policy. In setting rules relating losses. Farmers pay particularly low prices, and to competition, for example, the government has an sometimes have a right to free power. As the interest in protecting the firms it owns, so is more likely government notes, the electricity companies' ability to than otherwise to restrict competition. Moreover, serve their customers is impaired: because it owns the industry, government can get away with regulating the sector in a somewhat arbitrary From the viewpoint of households and firms in manner. Rules about tariffs, for example, can be the country, the power sector has been delivering changed at will, even if they effectively bankrupt firms. unsatisfactory performance in terms of reliable access to electricity. The energy and peak shortages of power Necessary characteristics of a solution have been around 7.5 percent and 12.1 percent, respectively, leading to brownouts and blackouts If this diagnosis is right, any solution to the problems across the country. Scheduled power cuts, unscheduled afflicting government-owned electricity utilities needs outages and incorrect voltages are common in most to achieve one or more of the following objectives: states, leading to enormous disruptions in all aspects of economic life (Government of India, 2003). · reducing the net benefits to politicians and officials of using the utilities to achieve political goals in non- Much of the state electricity boards' financial problems transparent or inefficient ways--either by raising the stems from low prices. Yet overstaffing, technical cost or by reducing the benefit, · subjecting the utilities to commercial pressures from What, then, are the options for changing the higher- sources other than the government, and level rules about the relationship between politicians · removing or alleviating the conflict of interest the and officials, on the one hand, and a utility, on the other? government faces as owner and policy-maker. Privatization as a solution But if the problems arise because officials and politicians face incentives to put the wrong sort of pressure on utilities, One approach is to privatize the utility. Because the can we expect those same politicians and officials to adopt privatized utility is legally and functionally independent of reforms that help solve those problems? Won't their the government, the government cannot so easily pressure incentives necessarily prevent them from undertaking it to pursue noncommercial goals in nontransparent ways. the reforms that would limit their powers? Moreover, the utility's new owners will pressure it to increase profits, partly by lobbying for price increases-- We assume that politicians will often but not always which is not always helpful, but is helpful when prices are oppose such reforms. First, we assume that politicians' too low--and partly by increasing profitable sales and preferences may change over time. One possibility is cutting costs. that new politicians come to power with, at least initially, more idealistic preferences, which cause them to prefer In addition, after privatization, the government no longer 8 welfare-enhancing reforms to, say, collecting bribes. faces a conflict of interest between its role as owner of the Another is that a crisis may occur during which the costs utility and its role as policy-maker. And the costs and of not introducing reforms increases relative to the benefits of arbitrary use of the policy-making power also benefits of maintaining the status quo. change: the government now has more to gain than before from a set of rules that encourage investment and change Second, politicians' preferences may differ according only after reasonably careful consideration of the effects to the level at which decisions are made. Higher-level of the changes. decisions, as we use the term, are those that create rules about making lower-level decisions. For example, Privatization can therefore address the problems discussed decisions about constitutions create rules governing the here. Yet it is not easy. First, it requires the government making of laws, which in turn create rules governing to make a credible commitment to cost-covering tariffs lower-level administrative decisions. Even if politicians (or to a cost-covering combination of tariffs and subsidies); and officials currently prefer to make low-level decisions otherwise, private investors will not buy the utilities. Second, that reduce social well-being (for example, causing the it creates new political problems. Some are corollaries of utility to hire more people than it needs), they may the economic benefits of privatization--namely the utility's sometimes prefer to change higher-level rules in ways demand for cost-covering tariffs and its desire to reduce that make it easier for them to make better lower-level costs by ending excessive staffing, preventing theft, and decisions (just as governments may prefer to create so forth. Others result from concerns about privatization independent central banks that reduce their ability to per se and, in particular, about private, possibly foreign, change monetary policy and independent regulatory companies profiting from the supply of basic services. agencies that reduce their ability to set tariffs). For example, they may be prepared sometimes to privatize utilities even Other approaches to the problem though that makes it harder for them to continue to use the utilities to transfer resources to politically powerful At times, these concerns appear insuperable. When they groups whom they previously helped. When making these do, must the government accept the status quo while it decisions, politicians are unlikely to be motivated only by waits for the environment to change? Or can it do more concerns to improve public policy; they may, for example, to improve the performance of the utilities while waiting want to use privatization receipts to redistribute even more for the climate for privatization to improve? resources to politically powerful groups. But we assume that improving public policy may be one of their concerns There are many things it can do outside the domain of and, specifically, that they may agree to new rules about corporate governance (the relationship between the utilities their relationship to the utilities that make it harder for and their owners). It can facilitate competition in the them to direct the utility on a day-to-day basis. electricity industry and improve regulation of functions that cannot be competitive. It can also work on improving 2. FOUR COUNTRIES' APPROACHES TO the business environment for all firms--for example, CORPORATE GOVERNANCE OF STATE- improving mechanisms for enforcing contracts, improving OWNED ELECTRICITY UTILITIES employment law, and simplifying tax administration-- which will help electricity companies among others. And, Before discussing options for improving performance, at the highest level, it can work on improving mechanisms it is useful to describe some aspects of governance of of political governance: for example, on improving the state-owned electricity companies. We discuss four accountability of governments to citizens. cases--Mexico, New Zealand, the Philippines, and South Africa. Table 1 provides a summary of some In this paper, however, we concentrate on what the important aspects of policy and corporate governance. government can do to improve corporate governance, The Annexes provide details. that is, the structure of its relationship with utilities as their owner. Few if any of the ideas considered here are new; In each country, government-owned electricity companies for other presentations of the same or similar ideas, see, are important. Each country has also reduced significant for example, Muir and Saba 1995 and World Bank 1994. reforms, of different types. All have independent utility regulators, although their roles with respect to the Taken individually, the options listed below seem likely government-owned utilities differ. Competition is very to have at best quite small benefits; it is easy, in particular, limited in Mexico and South Africa, but important in the 9 to see how politicians and officials, facing pressures to Philippines and New Zealand. Corporate governance in interfere, could overcome the intended effects of these Mexico and the Philippines follows traditional public- options. Yet, even if the options, taken one by one, sector norms, while in New Zealand and South Africa seem unlikely to be able to offer much resistance to it is largely modeled on private-sector practices. a determined politician, the hope is that the collection of them will make a difference. Table 1. Corporate governance of state-owned electricity companies in Mexico, New Zealand, the Philippines, and South Africa M E X I C O N E W Z E A L A N D P H I L I P P I N E S S O U T H A F R I C A Extent of competition Minor (some independent power Significant in both generation Significant in generation Minor from private sector producers--IPPs--sell to CFE) and retailing Who regulates Ministry of treasury and public The independent Commerce The independent Electricity The independent National credit for CFE, the independent Commission, though generation Regulation Commission Electricity Regulator Comisión Reguladora de Energía and retail are largely (CRE) for IPPs unregulated Public and private Yes. See above. Not in principle Not in principle Not in principle, but all providers providers regulated are currently public differently Legal identity of Separate from the government Separate from the government Separate from the government Separate from the government state-owned enterprises Objectives, The law sets out the main Law sets out objective to be Shareholder compact sets out key performance targets, objectives. profitable. Statements of corporate performance objectives including and incentives intent set out specific targets. financial indicators and social targets. continued Table 1. Corporate governance of state-owned electricity companies in Mexico, New Zealand, the Philippines, and South Africa - continued M E X I C O N E W Z E A L A N D P H I L I P P I N E S S O U T H A F R I C A Shareholding ministry Ministry of Energy Minister of State Owned Enterprises Department of Energy Department of Public Enterprises and Minister of Finance Responsibility for By law, the board consists of The ministers of state-owned By law, the board consists of Minister of public enterprises hiring and firing board specific government officials, enterprises and finance jointly specific government officials, ex members ex officio. appoint the directors and choose the officio. chairman. Responsibility for The ministers of state-owned determining enterprises and finance determine remuneration of the total remuneration of the board and board members the board determines the allocation. Number of non- 9 out of 9 All directors are at present non- 8 out of 9 13 out of 15 executive directors executive 10 Criteria for appointing Law specifies that board be made Skill (with some attention to Law specifies that board be made directors up of specific government officials. demographic diversity) up of specific government officials. Professional By law, five are cabinet secretaries, Typically, business background. None All 8 are cabinet secretaries Most have business background. experiences of non- one is director of state owned are from the government One works at Department of Public executive directors petroleum company, and three are departments. Enterprises, one is an academic, and from the labor union. one is from union organization. Tenure of the directors Directors are appointed for Three years three-year terms, with the expectation of one renewal. Legal duties of the Managing the company and Managing the company and board of directors appointing chief executives, among appointing general manager, other duties. among other duties. Audit Committee and Not mentioned in annual report Boards have both committees. Not mentioned in annual report. Board has both committees. Remuneration committee Financial reporting Annual reports, complying with Annual and semi-annual reports Annual reports complying with Annual reports complying with requirements or Mexican GAAP complying with New Zealand GAAP Philippines GAAP international standards and South practice African GAAP Auditor Private auditing firm The government audit office, which The government's Commission on Private auditing firm delegates execution to private Audit accounting firms Profitability of CFE's recent accounting profits All state-owned generator-retailers Losses recorded since 1998. Real rate of return on total assets companies are low. made moderate profits in 2002. has recently been low Source: Annexes. 3. OPTIONS FOR IMPROVING CORPORATE Further, some rules governing the relationship between GOVERNANCE private companies and their shareholders may be useful for government-owned utilities even though their The challenge facing governments is in some respects purpose in the private sector may not be relevant in the similar to the challenge facing any owner. Like other public sector. For example, many of the rules of private- owners, governments want a set of rules and practices sector corporate governance aim to protect minority that allow them to shareholders by giving them access to detailed information on the performance of the firm. There is no need to protect · monitor the utility effectively, minority shareholders when the government is the sole · make strategic decisions about the utility's direction, and shareholder, of course, but imposing private-sector reporting · hold the utility's managers accountable for its standards nevertheless ensures that the government has performance. access to detailed information on the financial performance of the utilities that it might otherwise lack. If the law requires Private-sector corporate governance aims to address the financial reports to be made public, ordinary citizens these problems. Accordingly, ideas and lessons from the also have access to detailed information. field of private-sector corporate governance can help governments wishing to transform the governance of Yet governments are inherently different from private- state-owned businesses. sector owners, because they care less about profits 11 and more about the achievement of other, political Boxes 1 and 2 set out some views about good goals. Corporate governance in the private sector corporate governance in the private sector. Box 1 lists attempts to solve the principal­agent problem between the principles formulated by the Organization for shareholders (the principals) and management (their Economic Cooperation and Development (OECD); agents). As Takahashi (2000: 2) notes, "the major these principles can be thought of as the common core principal-agent problem in the governance of state- of the continental European, Japanese, and Anglo- owned enterprises exists between taxpayers and the American systems of corporate governance. Box 2 gives government rather than between the owner, which is an example of a more constraining set of recommendations actually the government, and the state-owned enterprises." from one OECD country, Australia. Shleifer and Vishny Thus the adoption of practices of governance from the 1997 and Megginson 2000 provide more-detailed policy- private sector cannot be expected by itself to solve the oriented surveys of private-sector corporate governance. problems of government ownership. BOX 1. The OECD principles of corporate governance In 1999, the OECD published a set of principles of corporate governance that might command widespread agreement, despite important differences between approaches to corporate governance among members of the OECD. The principles are that the corporate governance framework should · Protect shareholders' rights. · Ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. · Recognize the rights of stakeholders as established by law and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. · Ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. · Ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders. See OECD 1999 for elaboration of these principles. Source: OECD 1999. BOX 2. Corporate-governance disclosure requirements of the ASX--excerpt The Australian stock exchange, ASX, requires listed companies to disclose whether they abide by the following "best practice recommendations" for corporate governance and, if they do not abide by them, explain why not. For brevity, we have excluded some recommendations about providing information. Original numbering has been retained. 1.1 Formalize and disclose the functions reserved to the board and those delegated to management. 2.1 A majority of the board should be independent directors. 2.2 The chairperson should be an independent director. 2.3 The roles of chairperson and chief executive officer should not be exercised by the same individual. 2.4 The board should establish a nomination committee. 3.1 Establish a code of conduct to guide the directors, the chief executive officer (or equivalent), the chief financial officer (or equivalent) and any other key executives as to: 3.1.1 the practices necessary to maintain confidence in the company's integrity and 3.1.2 the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. 3.2 Disclose the policy concerning trading in company securities by directors, officers and employees. 4.1 12 Require the chief executive officer (or equivalent) and the chief financial officer (or equivalent) to state in writing to the board that the company's financial reports present a true and fair view, in all material respects, of the company's financial condition and operational results and are in accordance with relevant accounting standards. 4.2 The board should establish an audit committee. 4.3 Structure the audit committee so that it consists of: only non-executive directors; a majority of independent directors; an independent chairperson, who is not chairperson of the board; at least three members. 4.4 The audit committee should have a formal charter. 5.1 Establish written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. 6.1 Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings. 6.2 Request the external auditor to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor's report. 7.1 The board or appropriate board committee should establish policies on risk oversight and management. 7.2 The chief executive officer (or equivalent) and the chief financial officer (or equivalent) should state to the board in writing that: 7.2.1 the statement given in accordance with best practice recommendation 4.1 (the integrity of financial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board; and 7.2.2 the company's risk management and internal compliance and control system is operating efficiently and effectively in all material respects. 8.1 Disclose the process for performance evaluation of the board, its committees and individual directors, and key executives. 9.1 Provide disclosure in relation to the company's remuneration policies to enable investors to understand (i) the costs and benefits of those policies and (ii) the link between remuneration paid to directors and key executives and corporate performance. 9.2 The board should establish a remuneration committee. 9.3 Clearly distinguish the structure of non-executive directors' remuneration from that of executives. 9.4 Ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders. 10.1 Establish and disclose a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders. Source: ASX Corporate Governance Council, 2003. Applying private-sector company law Legislating and contracting for new public- sector governance One way of raising the cost of political interference is to ensure that the utility is legally separate from the Because general company law is not designed to deal government and the government can influence it only in with the special problems affecting the relationship certain ways. One way of at least partially achieving this between government and government-owned utilities, outcome is to make the utility a company subject to establishing additional or different rules to govern that standard private-sector company law--an option adopted relationship may be helpful (see Box 3 for an example). by New Zealand and South Africa. While the effects of this Because we are looking for higher-level rules that can will obviously depend on the nature of the laws regarding constrain politicians' and officials' lower-level decisions, companies in the country, applying company law may: the rules need to be embedded in legislation or other instruments that are not easily changed. These rules · ensure the utility has a legal identity separate from the might, for example, government's, implying that, from a legal perspective, choices of the government are not automatically · give the utility the objective of operating as profitably choices of the utility, as possible (while relying on competition or regulation · give the directors of the utility certain legal rights and to constrain the utility's ability to achieve this objective duties that make political interference more difficult (for by increasing prices), 13 example, it may establish that directors, not shareholders, · establish the ways in which politicians and officials are legally responsible for managing the company), and can, and cannot, direct or influence the utility--for · subject politicians and officials to new legal example, setting up procedures for negotiating disciplines--for example, ministers in New Zealand contracts or business plans between the government are warned that company law may deem them and the utility, directors and thus subject them to potential personal · provide for the government to pay the utility to pursue legal liability if they direct state-owned enterprises noncommercial goals and prevent it from directing (CCMAU 2002a). the utility to pursue such goals without paying, BOX 3. Legislating for new governance arrangements for state-owned enterprises in Uganda In 1993 the Government of Uganda enacted legislation (the Public Enterprise Reform and Divestiture Statute) to define new governance arrangements for public enterprises and enable their restructuring and privatization. The legislation required public enterprises to report financial and operational performance, including: submission of audited accounts within a defined period and annual certification of the safekeeping of the enterprise's assets. The law also required public enterprises slated for privatization to seek approval from the privatization agency for investments with a recovery period greater than one year. Compliance with the requirements of the PERD statute was monitored by the government, reported to parliament, and disclosed to the public. The government also established a specialized agency, the Parastatal Monitoring Unit, which prepared and published reports summarizing for each public enterprise (i) financial and operational performance, including agreed actions to improve performance, (ii) the value of direct and indirect government subsidies, and (iii) the value and terms of its debt stock. The PERD statute also transferred the ownership of the shares in companies slated for privatization to the Minister of Finance, the chairperson of the "Divestiture and Reform Implementation Committee", which was established by the same law with the authority to implement pubic-enterprise reform and privatization. The combination of disclosure of information on financial performance, coupled with clearly defined authority in the government to appoint the directors of public enterprises and implement their restructuring, is believed to have been an important factor in improving the financial performance of public enterprises and preparing them for reform and privatization. Source: World Bank. · require the appointment of directors who are not example, according either to local generally accepted government employees and thus cannot be directed accounting principles (GAAP) or, if those are inadequate, on a day-to-day basis by shareholders and don't face an internationally accepted set of standards such as the threat of punishment in their main job if they resist United States GAAP or the International Financial political interference, Reporting Standards promulgated by the International · specify the procedure the government must use to Accounting Standards Board, appoint directors, · establish additional criteria for the appointment of · auditing of financial reports according to private- directors that favor people that are more likely to resist sector auditing standards, in addition to public political interference (perhaps people with considerable auditing requirements, experience as directors of other, similar businesses · further reporting of financially relevant information not and a certain standing in the community), and required by private-sector reporting standards, such as · establish performance pay for directors (who in turn of economic profitability, taking into account an may establish it for managers). estimated cost of the government's equity in the utility, · disclosure of certain events or aspects of performance The case studies of Mexico and New Zealand illustrate that are matters of particular concern with the importance of the utilities' objectives. In Mexico, government-owned utilities, including, for example, 14 CFE's problems have been blamed in part on its being ­ any directions given to the utility by the government given conflicting electricity-related and development- (or parties related to the government) during the related objectives. In New Zealand, the State-Owned reporting period, Enterprises Act gives government-owned businesses the ­ any "non-financial" transactions between the objective of being "as profitable and efficient as government and the utility, that is, transactions in comparable businesses not owned by the Crown". which the benefits received by the government However, the existence of other legal objectives relating were not financial (for example, dividends) but of a to being a good employer and member of the local political nature, community makes it harder for the government to hold ­ any instances of corruption or theft or fraud managers accountable for profitability and facilitates the associated with the company, use of the companies to pursue noncommercial goals. ­ the utility's performance in billing and collection, and ­ the number of the utility's employees, possibly relative In both New Zealand and South Africa, governments to other variables such as the number of customers use annual documents (statements of corporate intent or amount of energy produced or sold, and and shareholder compacts, respectively) to set out · disclosure of the utility's policies relating to the issues objectives and structure the relationship between the just listed (for example, policies toward corruption, government and the companies. billing and collection, employment, non-financial transactions with the government). Requiring additional public reporting of performance and policies All the utilities in the case studies prepare financial reports based on local generally accepted accounting principles. Rules requiring the public reporting of information may All except Napocor in the Philippines have their accounts also help, since they help interested outsiders (journalists, audited by a private-sector auditing company (sometimes think tanks, academics, and interested customers, under the delegated authority of the public audit body). taxpayers, and other citizens) to understand utility's Napocor's report is the least detailed, while that of the performance. They can help clarify the existence of poor Comisión Federal de Electricidad is one of the most performance and its costs and increase the likelihood of detailed, even though its corporate governance is generally informed pressure to improve performance. Possible traditional, perhaps reflecting the influence of US disclosure reporting requirements include the following: requirements on Mexican firms (see Campos and others 2002). In New Zealand, the government-owned · periodic reporting according to standards applying to transmission company, Transpower, reports economic all private-sector companies or specifically to those as well as accounting profitability. that are listed on the local stock exchange--for Instilling a commercial culture utility's. Thus the government cannot provide an open- ended guarantee of the utility's debt and may have to There may be benefits not only in changing the formal require the utility to state, when borrowing, that it rules applying to the utility and its relationship with the benefits from no government guarantee (as happens in government, but in taking other steps to instill a New Zealand). The government could, however, provide commercial culture in the utility. Appointing business selective guarantees relating to certain aspects of the people as directors may help, for example, by utility's performance. For example, it could provide a increasing (slightly) the probability that directors will guarantee of the utility's debt callable only if the utility resist political interference and ensuring the top defaulted because the government refused to increase management of the company has commercial rather tariffs according to a specified agreement. than political habits. Eskom in South Africa decided to adopt the code of corporate governance set out in the Similarly, the lenders must be independent of the "King II" report, which may have similar benefits. government if the borrowing is to be effective; more lending from state-owned or state-controlled banks One big difference among the case studies is the use of cannot be expected to help in the same way as lending nongovernmental directors. In South Africa, the Board from independent private banks. of Eskom has only one government employee, while in New Zealand the boards have no government Requiring the utility to borrow will encourage it to get 15 employees. In Mexico and the Philippines, on the other credit ratings from agencies such as Standard and hand, the boards are dominated by government Poor's, Moody's, and Fitch. Scrutiny by credit-rating officials. One might expect this difference to have a agencies may provide benefits in addition to those significant impact on the behavior of the firms. deriving from lenders' monitoring. And, even if the utility did not borrow, the government could require the utility Subjecting the utility to new pressures from to obtain and disclose a credit-rating from a reputable lenders credit-rating agency (see public reporting above). In addition to changing the incentives that politicians In typical Anglo-Saxon arrangements for corporate and officials face to pressure the utility, the government governance, shareholders alone appoint directors and can use its power as owner to impose new sources of directors must represent the interest of all shareholders. commercial pressure on the utilities that may, to a Nonetheless, bankers are not uncommon on the boards greater or lesser extent, substitute for the pressure of American companies (Kroszner and Strahan, 2001). created by private owners. And, in other systems, directors sometimes represent other stakeholders, such as employees and lenders. For Lenders are a common source of commercial pressure example, the Board of Mexico's Comisión Federal de on privately owned firms, and the government may be Electricidad must by law contain three union members, able to make use of that pressure by requiring a state- while in some countries lenders can appoint directors. owned utility to borrow (or borrow more) from lenders Where it fits with existing principles of corporate other than the government. It could either refuse to governance, including in the board representatives of provide new equity funding or make a capital private-sector lenders (not benefiting from government withdrawal. If lenders' money is genuinely exposed to guarantees) may help bring new commercial pressures risks related to the utility's performance, the lenders on the company. should care about the utility's financial performance and position. Listing a minority of shares For this approach to work, of course, the utility must be Minority shareholders offer another potential source of sufficiently creditworthy to get a loan from outside, if pressure. Because shareholders have a residual rather only for a small amount and short term. Further, the than a prior claim on the firm's assets, the value of lenders cannot believe that the utility's debt is minority shareholders' investments in the utility depends guaranteed by the government; otherwise, they will care more strongly on the performance of the utility than only about the government's creditworthiness, not the does lenders'. The lenders get all their money back in most circumstances, risking losses only in the case of interference and allow performance pay based on very poor performance or high leverage. As a result, market values (employee share ownership, option minority shareholders should monitor the firm in ways grants, and so on). that complement monitoring by lenders. For this approach to work, of course, the utility must be The government can retain control of the firm (and thus able to satisfy listing requirements, which may not be achieve at least some of the goals of full public easy if, for example, those requirements include a track ownership) while selling a minority of shares. It can also record of reliable accounts or even profitability. sell hybrid securities that are not ordinary shares, but have some of the characteristics of equity. For example, Box 4 describes Pakistan's experience with the privatization if it doesn't want to give up any voting control at all, it of minority shareholding in two natural-gas utilities. can sell securities that give their holders the same rights to cashflows as its own ordinary shares, but to which no Although minority private shareholdings bring potential voting rights attach (New Zealand SOEs may issue benefits for corporate governance, they also create risks "equity bonds" with such characteristics). If the utilities' for the government as the majority shareholder. In New performance is sufficiently fragile, ordinary bonds will Zealand, where the government has generally chosen also come to take on some of the characteristics of to divest all or none of its shares in government-owned 16 equity because of the increased risk, as with any junk bond. business, the Crown Company Monitoring and Advisory Unit (2002a: 37) notes that minority shareholdings have Listing the minority shares on a stock exchange would created problems when the government has wanted to also bring to bear the exchange's rules of corporate sell its shares and when it has wanted to refinance a governance. Depending on the exchange, it may company in financial distress. require the utility to include independent directors on its board, treat minority shareholders fairly, and provide There may be other ways in which similar pressures can comprehensive and timely financial reporting--all of be brought to bear on the company. One of the license which may help temper noncommercial political conditions imposed by the Rail Regulator in the United interference. A public offering of a minority stake in the Kingdom on Network Rail is that it must follow rules of utility also means that an estimate of value of shares in corporate governance set by the financial-market regulator, the utility will be available in the share price. That in even though the company is financed entirely by debt turn may help reveal the commercial cost of political (Department of Transport [United Kingdom]. 2003). BOX 4. Minority ownership in state-owned gas utilities in Pakistan The government of Pakistan is the majority owner of two gas transmission-and-distribution utilities, Sui Northern and Sui Southern, which have had minority private shareholdings for many years. In the case of Sui Northern, the larger of the two companies in terms of consumers (about 2.2 million as opposed to 1.6 million), private shareholders hold 40.5 percent of the equity while they hold 29.6 percent in Sui Southern. Each company has 14 directors. In both cases, ten of the directors are selected by the government and government-controlled institutions and the four remaining directors are selected by private shareholders. The managing director of each company sits on the board of the other. Three directors sit on both boards. Information on Sui Southern shows that the key audit committee only contains one of the three directors sitting on both boards and does not contain either the chairman or the managing director. Both companies have a reputation for being well run and commercial in culture--even though there is no direct competition between the two businesses and only partial competition with alternative fuels. Source: SASEI. Strengthening more-efficient instruments of Three options may alleviate, without entirely removing, social policy this conflict of interest: The policies identified earlier under the heading of · changing which minister or ministers in the corporate governance are mainly intended to make it government are, legally, the shareholders and making more difficult for politicians and officials to interfere them different from the minister or ministers with inefficiently and nontransparently in the operation of responsibility for other aspects of electricity policy the utility. Facilitating efficient, transparent interventions (Annex 2 notes that in New Zealand the ministers of designed to address the same or similar goals may also state-owned enterprises and finance have help. As mentioned above, higher-level rules can clarify responsibility for shareholding, while the ministers of the ways in which politicians can legally direct the utility, energy and commerce have responsibility for perhaps requiring a cash subsidy, or an explicit estimate electricity policy--an approach adopted more recently of the financial cost of the direction. In addition, in the electricity sector in Uganda and mentioned by strengthening the government's influence over instruments the government of the United Kingdom as one way of of social policy not tied to the utility will be useful. "becoming a better shareholder" (United Kingdom government 2000: 31)) Alleviating the government's conflict of · creating and using independent utility-regulatory and interest as owner and policy-maker competition-policy agencies to make and enforce 17 some of the rules (in all the case-study countries, As policy-maker for the electricity sector, the government governments have created independent regulatory should have an interest in setting rules that enable agencies, though in Mexico the independent customers to receive the best service they can, now and in regulatory agency's responsibility only extends to the future. Such rules are likely to allow competition in at private companies), and least some segments of the electricity industry. But as an · establishing high-level rules that create a bias in favor owner of a utility the government has an interest in of competition that politicians and officials cannot protecting the utility from competition--not necessarily to easily undermine when making lower-level decisions. increase profits, as governments are typically tolerant of low profits, but to allow it to continue to use the utility to make Figure 1 shows one way the government can allocate roles (inefficient and nontransparent) transfers to favored groups. among two ministers and a regulator so as to have one minister acting as a shareholder and only a shareholder. FIGURE 1. Separating government roles: one option Shareholding Minister Pressures company to maximize profits Purchases (or subsidizes) Company Sets rules for prices, services not fully paid for quality and monitors by customers compliance with rules Policy minister Regulator 4. SOME EMPIRICAL EVIDENCE competitive environments and found that private ownership was better than public. The worst type of If the diagnosis of fundamental problems afflicting ownership, they found, was part private, part public. government-owned utilities is correct, there is some reason In a subsequent study, however (Vining and Boardman to think that the options discussed above will improve the 1992), looking at a different sample, they found that performance of utilities if they can be introduced. High- mixed ownership was better than public ownership quality empirical evidence on the effects of different reforms (private ownership was again the best). would, however, give us much more confidence. As is often the case with difficult policy questions, such evidence is Evidence for the electricity industry and other industries in short supply. where competition is difficult to create is not clear-cut. For example, many of the studies that have compared Studies of the effects of different approaches to the performance of publicly and privately owned government-owned utilities, especially electricity utilities, electricity utilities in the United States find in favor of potentially provide the most-relevant evidence about the public ownership (Kwoka 1996). Some argue that the effectiveness of the options addressed here. Unfortunately, inefficiencies caused by price regulation of private while some evidence relating to the package of reforms companies in the United States are as great as those known as "corporatization" is available, information on caused by public ownership. In developing countries, 18 many of the specific proposals discussed here is, as far the evidence while scarce is more favorable to private as we know, scarce or nonexistent. Some evidence is ownership (see Gray 2001 and Briceńo 2003 for available from the case studies, but as with all case surveys and also Pollitt 1995 and Zhang 2002). studies, generalizing is difficult. Studies of the effects of different types of More common, especially in the last decade or so, are governance in the private sector studies of the effects of the privatizing utilities. Since one of the avenues by which privatization is intended to improve Studies that examine the effects of corporate performance is bringing to bear commercially oriented governance in the private sector may also be relevant. corporate governance, studies of the effectiveness of privatization may tell us something about the benefits Several recent studies consider whether good corporate of commercial corporate governance. It also bears on the governance affects firms' market values. In a study of the question of whether the pursuit of such reforms is likely firms in the United States, Gompers and others 2003 to achieve the same benefits as privatization. There are find that the market value of firms with good corporate also studies of the effects of different forms of governance governance is higher, relative to their accounting book of private companies, which--to the extent that the values, than for firms with poor corporate governance. government-owned companies resemble private Campos and others 2002 provide evidence that good companies--may shed light on the effects of reforms corporate governance is also valued in emerging such as those discussed here. We review in turn some markets. They argue that in their sample from six of the relevant evidence under each of these rubrics. developing countries "a firm could expect a 10 to 12 percent increase in its market valuation by moving from Studies of private versus public ownership the worst to best on any one of the 15 elements of corporate governance" (page 17). In another study of Although the question remains controversial among developing countries, Klapper and Love 2002 find that researchers, two recent surveys conclude that the weight "better corporate governance is highly correlated with of the evidence suggests private ownership in general better operating performance and market valuation". (not specifically in electricity) improves performance, holding other things constant (Megginson and Netter Studies of the effects of performance pay are also 2001 and Shirley and Walsh 2000). Two particular relevant. Some argue that it is crucial, because it is the studies are interesting for our purposes because they only way of aligning the interests of owners and consider the benefits of partial private ownership. managers. Others argue that it can be counterproductive, Boardman and Vining 1989 undertook a large study of because it allows managers to extract excessive profits the performance of publicly and private owned firms in or because extrinsic motivation (such as money) sometimes seems to reduce intrinsic motivation (such as More recent evidence is also mixed. On the one hand, wanting to do a good job for its own sake)--see a detailed study undertaken by the World Bank (and Gibbons 1998 and Abowd and Kaplan 1999 for reported in World Bank 1995, Shirley 1998, and Shirley surveys. Most economists would probably conclude that and Xu 1998) provides further evidence casting doubt performance-pay is important and for senior managers on the value of corporatization as an alternative to should be based in some way on share prices. There is privatization. Among the conclusions are the following: at least some evidence that shareholders also believe such governance mechanisms are valuable (Morgan · "[p]rivatization and corporatization have similar and Poulsen 2001). political costs and tend to succeed or fail together. Where reform was politically desirable, politically Studies of the effects of corporatization feasible, and credible, countries privatized and corporatized successfully." ("Corporatization is Kikeri, Nellis, and Shirley (1992: 16-17) provide a defined in this article as efforts to make SOEs summary of evidence, as of 1992, of the effects of operate as if they were private firms facing a "state-owned enterprise reform" that is worth quoting at competitive market or, if monopolies, efficient some length: regulation") (Shirley 1998: 115). · Performance contracts don't work. Performance During the past twenty years virtually all developing targets tend to be too soft or too numerous and 19 countries have adopted reform programs--short of bonuses for meeting them tend not to be credible ownership transfer--to remedy the causes of poor (World Bank 1995 and Shirley and Xu 1998). SOE performance. These reforms aimed at (a) exposing SOEs to domestic and external competition Over the last couple of decades, China has undertaken and ending preferential treatment in order to create a a massive program of reform of state-owned enterprises level playing field; (b) eliminating easy SOE access to that has been the subject of many empirical studies. credit from the budget and banking system and Shirley and Xu (2000) look at the use of performance instituting a hard budget constraint; (c) increasing the contracts in China and also conclude that they autonomy of SOEs and freeing managers from generally do not work: "Our findings indicate that on government interference in day-to-day operational average PCs did not improve performance and may decisionmaking and from noncommercial goals; and have made it worse (page 2)." The authors do note, (d) developing institutional mechanisms, such as however, that the performance contracts "were not contract plans and performance evaluation systems, uniformly bad ... Successful PCs were those which to hold managers accountable for results. simultaneously provided sensible targets, stronger incentives, longer terms, and were in more competitive Recent assessments of SOE reforms reveal that some industries (page 2)." In a review of evidence improvements in performance have indeed taken privatization that also touches upon corporatization, place .... But three problems have emerged. Megginson and Netter (2001: 48) come to a more positive view of the evidence of SOE reform in China. · First, SOE reforms are technically and politically They conclude "that there is limited empirical evidence, difficult to implement... especially from China, that suggests that non-privatizing reform measures, such as price deregulation, market · Second, performance does improve when the full liberalization, and increased use of incentives, can package is put I place, but the necessary reforms are improve the efficiency of SOEs, but it also seems likely numerous and hard to coordinate, and the entire that these reforms would be even more effective if reform program has seldom been enacted.... coupled with privatization". · Third, and most important, performance The evidence from the case study of New Zealand, improvements have proved difficult to sustain once where reforms were introduced many years ago and the crisis that instigated the reforms has dissipated. have been the subject of some research, is mixed but, on balance, probably positive. Early studies of electricity and other corporatized industries generally found significantly improved performance (Spicer and others ANNEX 1: COMISIÓN FEDERAL DE 1991, Duncan and Bollard, 1992). There are some ELECTRICIDAD, MEXICO concerns that the improvements have not endured, but the evidence of actual declines in performance does not Mexico is an example of country whose electricity sector seem strong. has an independent regulator but is dominated by a single state-owned utility. Although the utility discloses detailed financial information in its financial reports, the 5. CONCLUSIONS case is useful mainly because it offers an example of a relatively traditional approach to electricity policy and Many reforms in the fields of corporate governance and the governance of state-owned electricity utilities and a sector policy seem likely, if implemented, to improve the contrast with the other cases examined here.1 performance of government-owned utilities. In particular, performance could be expected to improve as a result Background of measures that Market structure and ownership · reduce the net benefits to politicians and officials of using the utilities to achieve political goals in non- The largest public utility in Mexico, the Comisión 20 transparent or inefficient ways--either by raising the Federal de Electricidad (CFE), owns most of Mexico's cost to politicians of such actions or reducing its benefits, installed electric generating capacity and generates · subject the utilities to commercial pressures from about 90 percent of the country's electricity. Another sources other than the government, and state-owned electric utility, Luz y Fuerza del Centro · remove or alleviate the conflict of interest the (LFC), generates a small percentage of electricity mainly government faces as owner and policy-maker. around Mexico City, as does Petróleos de México SA (Pemex), a state-owned petroleum company. Various This paper has identified many reforms that could be private IPPs and cogeneration facilities also produce expected to further these goals. While welfare- some electricity, selling it to CFE. enhancing reforms appear available, however, grounds for caution remain. Many of the reforms discussed here The constitution mandates that the Mexican government have been discussed for decades. Yet most governments have "direct, permanent, and non-transferable have either chosen not to adopt them or to undermine dominion over electricity distribution and transmission to them in practice: it is much easier to discuss such public users." As such, the transmission and distribution reforms than to implement them rigorously. of electricity is operated solely by public sector. CFE is in charge of transmission. LFC is in charge of Privatization is different from commercialization under distributing electricity in the Mexico City and public ownership in that it directly brings to bear the surrounding areas, and CFE is in charge of distributing influence of new parties with stronger incentives than electricity in the rest of the country. state-owned enterprises to resist political interference. Thus it seems more promising as a way of resolving the Regulation problems underlying the poor performance of most state-owned electricity utilities. Privatization is not easy The Ministry of Treasury and Public Credit is in charge to implement either, however, and if it seems of setting tariffs and policies regarding the subsidies. unavailable as a policy option in the short term, the The Energy Regulatory Commission (CRE) awards and implementation of options such as those discussed here rejects permits for those activities that are carried out by appears worthwhile. private entities, such as IPPs. CRE is also in charge of supervising the performance of contracts between permit grantees and CFE. According to the Energy Regulatory Commission Act, CRE is "an administrative Much of information in this annex is taken from www.cfe.gob.mx and www.cre.gob.mx. 1 agency of the Ministry of Energy" with "technical and Wall Street Journal, December 3, 1999) as saying that operational autonomy." It consists of five members, LFC has served as the medium by which power subsidies including the Chairman. Members of the CRE are had been delivered to urban voters, as it must purchase nominated by the Minister of Energy and appointed by electricity from CFE and sell it at a lower price. LFC has the President. lost money since 1975 and needed a $1 billion operational subsidy to remain viable in 1999. Governance The Board Legal identity CFE is governed by a board of governors, made up The Electric Energy Public Services Law makes CFE entirely of non-executive governors. In accordance with a decentralized public organization with its own legal the CFE Charter, the Board consists of the Secretary of identity and assets. As a decentralized public organization, Energy as the chairman and additional eight governors. the CFE is not subject to general corporate laws that Five members represent the public sector, including the govern private companies in Mexico. Secretary of Commercial and Industrial Promotion; the Secretary of Treasury and Public Credit; the Secretary of Responsibility for government shareholding Social Development; the Secretary of Environment and Natural Resources, and the Director General of Pemex. 21 The Mexican government does not hold shares in CFE, The remaining three governors are representatives of as CFE is not considered a company but a the Sole Union for Electrical Workers of the Mexican decentralized public organization. The Ministry of Republic. Energy acts as the sector coordinator as established in the Federal Public Administration Organization Law. The Legal duties of the Board of Governors include, among Federal Law of Parastatal Entities mandates the others, approving the budget and submitting it for Secretary of Energy to act as the chairman of the Board, authorization to the Secretary of Energy and the in his capacity of sector coordinator. In addition, four Secretary of Treasury and Public Credit. cabinet secretaries and one state-owned enterprise are represented on the Board. Neither the CFE Charter, the Federal Law of Parastatal Entities, nor CFE's annual reports specifies that the Objectives Board of Governors has any sub-committees. The Public Services on Electricity Services Act makes By comparison, Telemex, a private telephone company CFE responsible for the public service of electricity, in Mexico, has a board of 17 directors, 10 of whom which includes planning of national electricity system, are non-executive, independent directors. All non- generation, transmission, distribution, and sale of executive directors have substantial business electricity, and other acts related to planning, execution, backgrounds, typically holding such positions as chief operation, and maintenance of national electricity executive officer, president, and chairman of the board system (Article 4). No law requires CFE is to be profitable. in a variety of industries ranging from telecoms, media, and textiles to chemicals and real estate. The Telemex The UN Economic Commission for Latin America and board has both auditing and remuneration committees. Caribbean (CEPAL) argues that CFE is in practice mandated to achieve conflicting objectives--one is to Accounting and auditing provide electricity, and the other is to help the government develop the country. Historically, it argues, the government CFE follows generally accepted accounting principles in has given priority to using CFE as instrument to pursue Mexico. PricewaterhouseCoopers audited its 2001 its social and economic development strategy. financial statement. CFE's financial reports are quite detailed compared to those of some other state-owned The problem is also faced by the other public electricity electricity utilities, including Napocor's. utility, LFC. The chairman of the lower house's energy committee in Congress was quoted in the press (The Borrowing The Electric Energy Pubic Services Law requires CFE to pay a fee to the government for using assets to supply CFE borrows from private lenders, both domestically electricity (Article 46). This capital charge, or "duty" in and internationally. According to the company's website, the language of the Law, is determined by the Secretary as of 31 December 2002, about 75 percent of the CFE's of Treasury. It is calculated from a profitability rate debts were foreign (Table 2). In accordance with Federal established for state-owned entities each fiscal year. Law of Parastatal Entities, the Secretary of Treasury and For 2001 and 2000, the rate was 9 percent. Public Credit authorizes CFE's borrowing. The Treasury Department registers loans from foreign financial institutions CFE receives non-cash subsidies from the federal to its Public Debt books and offers implicit guarantee. government to supplement deficient tariffs. The capital charge owed to the government and subsides owed to Table 2. CFE's liabilities CFE often largely cancel each other out. Up to 1999, TYPE AMOUNT the capital charge turned out to be larger, while in ($ MILLION) 2000 and 2001, the subsidies owed to the CFE became larger. IPD Latin America estimates that net subsidies to Lease 1,461 CFE (less taxes paid by CFE) have been equal to $6 to PIDIREGAS2 3,206 $7 billion pesos a year (www.infrastrategy.com). 22 Debt 2,372 The World Energy Council estimates that the residential Domestic 623 sector enjoys a subsidy of nearly 50 percent. During the Long term 610 last few years, residential tariffs have fallen by over 20 percent in real terms, affecting the CFE's ability to finance Short term 13 investments in building generation or transmission capacity Foreign 1,749 (www.worldenergy.org). Long term 1,399 Comments Short term 351 Total liabilities 7,039 The government of Mexico seems to influence the CFE's operation and profitability, sometimes negatively, perhaps Note: total assets 56,443 in part because it acts both as the "sector coordinator" and as CFE's owner. Even with legislation that mandates Source: CFE website. the CFE to supply electricity, the government requires it to pursue other objectives, for instance, by setting tariffs Currently, Standard and Poor's rates CFE's foreign- to achieve social policy goals, rather than to allow CFE currency debt BBB-, the same as for the Mexican to recover its full costs. In April 2003, for example, the government, suggesting the debt has an explicit or senate approved a bill to cut electricity prices for implicit government guarantee. (But note that the households (this is to be passed by the Chamber foreign-currency debt of Telemex, a private company, of Deputies), which may cost CFE and the energy is also rated BBB-.) CFE's local-currency debt is rated department some $11 billion pesos in revenue (Business BBB+, one notch below the sovereign rating. News Americas, 11 April 2003). The government's approach is also reflected in the composition of the board, Profitability, tax, and subsidies which largely consists of government officials and includes the Secretary of Treasury and Public Credit, whose Ministry CFE's net income was $6.0 billion pesos in 2000 is in charge of setting electricity tariffs and subsidies. and 6.2 billion pesos in 2001, or about 1.2 percent of total assets. Los Proyectos de Impacto Diferido en el Registro del Gasto Público (PIDIREGAS) is a scheme to finance strategic projects, such as electricity 2 generation, with private funding. Following PIDIREGAS recording guidelines, CFE records only the obligation due in current and subsequent few years. As the remaining obligation is not accounted for, remaining an off-balance sheet liability, obligations due in future are underrepresented. See Annex 3 for a contrasting accounting treatment in the Philippines. Industrial users have expressed concerns over the distribution companies). No company has any legal reliability and affordability of electricity supply. Many monopoly, but Transpower has a de facto near monopoly plants are old and have exceeded their planned life on transmission over the whole country and each spans (FAC/Corporate Mexico, 2 June, 2003). To distribution company has a de facto near monopoly address these concerns, the government has proposed in its area. an electricity sector reform in August 2002 (FAC/EFE News Service, 21 October, 2002), which will involve Ownership of the electricity industry more private-sector participation, competition, and will grant autonomy to CFE and LFC. The reform process The central government owns three large has been stalled in the Congress, however, and analysts generator­retailers--Genesis, Meridian, and Mighty doubt whether the utilities will be allowed to be truly River Power--that own about two thirds of the country's antonymous, even if the reform goes through (Reuters generation capacity and supply about half the customers News 30 April 2003). (see www.m-co.co.nz). Although they have a common owner, they compete with each other, as well as with private generator­retailers. ANNEX 2: STATE-OWNED ELECTRICITY COMPANIES IN NEWZEALAND The central government also owns Transpower, the transmission company. Most of the distribution network 23 The case of New Zealand is interesting because it companies are owned by community trusts, but two-- represents an ambitious attempt to make state-owned Delta and Orion--are owned by local governments, electricity firms operate like privately owned firms. The and one (Powerco) is partly privately owned. major reforms date back to 1986, so enough time has passed to form an impression of their effects and Regulation whether the ambitions have been achieved. Regulation does not legally distinguish among companies Background according to their ownership, and, although regulators might make distinctions in practice, we are not aware of Market structure evidence that they have done so. All generator­retailers, including those owned by the central government, are Three types of company make up most of the electricity subject to competition law and various rules governing industry in New Zealand: the operation of the wholesale and retail electricity markets. But they are subject neither to formal price regulation · Generator­retailers, which generate electricity and nor to the electricity information-disclosure regulations. sell it to final consumers over other companies' wires · One transmission company, Transpower Transpower and the distribution companies are regulated · About twenty-eight network distribution companies by the Commerce Commission, an independent utility- that transport but do not sell electricity. regulation agency that also administers the competition law that applies to generator­retailers. The Commission The generator­retailers and other companies wanting is in the process of introducing what it calls "targeted to buy or sell electricity trade in a wholesale market. price regulation", which may operate somewhat like CPI Retailers can sell electricity to end-consumers without ­ X price regulation (companies can avoid formal price- also being generators, but in practice retailing is control if they reduce their prices by CPI ­ X each year). dominated by companies that also generate power.3 Transpower and the distribution companies (but not the generator­retailers) must also publicly disclose There are no restrictions on entry into and exit from the information on their performance under the electricity- electricity industry, except that companies that buy or sell industry information-disclosure regulations. electricity may not own wires businesses (transmission or Part of the reason is that retail prices tend to be sticky (although they are not regulated, retailers appear to believe customers prefer stable 3 prices), whereas wholesale prices fluctuate widely. So companies that sell more electricity than they produce are exposed to considerable risk arising from volatility in the spread between wholesale and retail prices. Governance exercise of the government's role as a shareholder in its electricity companies. The governance of the generator­retailers is similar to governance of large privately owned companies in The Minister of State-Owned Enterprises receives advice New Zealand. from an agency called the Crown Company Monitory and Advisory Unit, or CCMAU. CCMAU is owned by the Legal identity Treasury operates independently of it. The Minister of Finance receives advice from the Treasury. Major The generator­retailers are all limited-liability decisions are typically made, or endorsed, by the companies, having legal identities separate from the Cabinet, and all ministers would see advice from both government's. Laws that apply to privately owned agencies relating to such decisions. companies apply also to the state-owned generator­retailers and other state-owned enterprises, Overall, the board of the companies is accountable to including those relating to taxation, employment the shareholding ministers, who in turn are accountable conditions, the organization and operation of to the Parliament (State-Owned Enterprises Act 1986, companies (the Companies Act 1993), and financial Section 6). reporting (Financial Reporting Act 1993). 24 Objectives State-owned companies are also subject, however, to some laws that don't apply to privately owned companies, Under the State-Owned Enterprises Act 1986, the including the State-Owned Enterprise Act 1986, the "principal objective of every State enterprise [including Public Audit Act 2001, the Official Information Act the generator­retailers] shall be to operate as a 1982, and the Ombudsmen Act 1975. The Official successful business and, to this end, to be: Information Act 1982 is designed "to make official information more freely available" and gives the public · As profitable and efficient as comparable businesses rights to certain information about state-owned companies not owned by the Crown that they don't have in relation to privately owned · A good employer companies. Government-owned companies can, however, · An organization that exhibits a sense of social withhold certain commercially sensitive information as responsibility having regard to the interests of the defined by the Act. Under the Ombudsmen Act 1975, communities in which it operates and by ombudsmen can investigate any administrative decisions endeavouring to accommodate or encourage those of government-owned companies that affect individuals interests when able to do so (Section 4)". (such as a refusal to release information on grounds of commercial secrecy under the Official Information Act). Disputes have arisen about whether this important Some of the main implications of the State-Owned provision requires state-owned enterprises essentially to Enterprises and Public Audits acts are discussed below. act as profit-motivated private-sector-like businesses (which may also want, as secondary objectives, to be Responsibility for government shareholding and good employers and good members of their accountability framework communities) or whether it requires them to place more emphasize than other firms on the latter two objectives. The central government owns all the shares of the Until 1994, New Zealand courts interpreted the State- generator­retailers. When the major reform of policy Owned Enterprises Act to imply that the requirement to toward state-owned enterprises was ushered in by the be profitable was paramount (CCMAU 2002a: 43). In State-Owned Enterprises Act 1986, companies were legally 1994, however, the Privy Council, which act as the required to have at least two shareholders (Brumby and supreme court for New Zealand, overturned this Hyndman (1998: 35)) and, accordingly, two ministers-- interpretation, allowing "a broader scope for social- the Minister for State-Owned Enterprises and the Minister policy objectives to be reflected in" the companies' of Finance--each hold half the government's shares in statements of corporate intent. the generator­retailers. The Minister of Energy has responsibility for electricity policy, but not for the BOX 5. The statement of corporate intent for New Zealand state-owned enterprises The State-Owned Enterprises Act requires (Section 14) the following: 1. The board of every State enterprise shall deliver to the shareholding Ministers a draft statement of corporate intent not later than 1 month after the commencement of each financial year of the State enterprise. 2. Each statement of corporate intent shall specify for the group comprising the State enterprise and its subsidiaries (if any), and in respect of the financial year in which it is delivered and each of the immediately following 2 financial years, the following information: (a) The objectives of the group. (b) The nature and scope of the activities to be undertaken. (c) The ratio of consolidated shareholders' funds to total assets, and definitions of those terms. (d) The accounting policies. (e) The performance targets and other measures by which the performance of the group may be judged in relation to its objectives. (f) An estimate of the amount or proportion of accumulated profits and capital reserves that is intended to 25 be distributed to the Crown. (g) The kind of information to be provided to the shareholding Ministers by the State enterprise during the course of those financial years, including the information to be included in each half-yearly report. (h) The procedures to be followed before any member of the group subscribes for, purchases, or otherwise acquires shares in any company or other organization. (i) Any activities for which the board seeks compensation from the Crown (whether or not the Crown has agreed to provide such compensation). (j) The board's estimate of the commercial value of the Crown's investment in the group and the manner in which, and the times at which, this value is to be reassessed. (k) Such other matters as are agreed by the shareholding Ministers and the board. 3. The board shall consider any comments on the draft statement of corporate intent that are made to it within 2 months of the commencement of the financial year by the shareholding Ministers, and shall deliver the completed statement of corporate intent to the shareholding Ministers within 3 months of the commencement of the financial year. 4. A statement of corporate intent for a State enterprise may be modified at any time by written notice from the board to the shareholding Ministers, so long as the board has first given written notice to the shareholding Ministers of the proposed modification and considered any comments made thereon by the shareholding Ministers within 1 month of the date on which that notice was given. Original numbering has been retained. Statements of corporate intent are documents in which of net profit after tax in 2001/2002 and of 70 percent the companies set out their objectives (see Box 5). thereafter--reflecting a plan to lower the company's leverage over the next year. As an example, Mighty River Power's statement of corporate intent sets out the "financial and commercial In practice, the companies also provide shareholding performance targets" for the 2002 financial year ministers with their business plans, which set out the presented in Table 3. companies' objectives and strategies in more detail (CCMAU 2002). Mighty River Power's statement of corporate intent also sets out dividend-payout targets, contemplating the The companies must also give the shareholding payment to the government of a dividend of 25 percent ministers annual and semi-annual reports, including financial statements, which the shareholding ministers Among directors' other duties are the following: must provide to Parliament. In practice, the companies also provide quarterly reports to their shareholding · to avoid reckless trading, defined as "carrying on of ministers (CCMAU 2002). The companies typically the business of the company in a manner likely to post the annual and semi-annual, but not the create a substantial risk of serious loss to the company's quarterly, reports on their websites. creditors" (Beck and Borrowdale 2002: 66), · to avoid the company's trading while it is insolvent, and Table 3: Performance targets from Mighty · to exercise the care, diligence, and skill of a River Power's statement of corporate intent reasonable director. INDICATOR TARGET 2003/2004 People can be deemed to be directors, even if not officially so appointed, if they exercise "de facto control (a) Financial of the company even in respect of a single issue" Return on shareholders' funds as a percentage 8.8 (CCMAU 2002). As a result, such shadow directors can Equity as a percentage of total assets 53.5 be held "personally accountable for the liabilities of the company incurred as a result of their actions". CCMAU Free funds from operation as a percentage of 474 (2002:10) notes in its briefing to the Minister of State- interest expense 26 Owned Enterprises that "Shareholding ministers and (b) Nonfinancial their advisers (including CCMAU) must take care to Lost-time accidents per 100,000 hours worked <1.25 avoid conduct that could result in them being deemed directors of a [government-owned] company or if such Hours lost per 1,000 hours worked <0.25 conduct is considered to be required and appropriate, it Number of regulatory enforcement actions arising 0 should be undertaken in a fully informed manner." from breach of environmental controls and standards The appointment of directors Percentage of requests to switch customers 100 achieved within 48 hours The shareholding ministers appoint the directors and Number of telephone calls to call centers per 2.5 decide who will be the chairman and the "deputy chair". customer per year They appoint them for three-year terms with the expectation Percentage of time hydro generation plant is 93 that the appointments will be renewed once, but not available for use twice (CCMAU 2002). Although the two ministers have Percentage of time hydro generation plant is 0.9 the authority and the responsibility to make appointments unavailable due to unplanned outages themselves, they often ask the Cabinet to review and endorse their proposals (CCMAU 2002: 21). The Board Criteria for appointment Directors and their duties According to the State-Owned Enterprises Act 1986," The Companies Act sets out the legal duties of all The directors of a State enterprise shall be persons who, directors, including those of the government-owned in the opinion of those appointing them, will assist the generator­retailers. According to the Act, boards (not State enterprise to achieve its principal objective (Section 5)." shareholders) are responsible for managing the company. According to CCMAU 2002, "Whilst appointments are on skills-based merits, CCMAU and Ministers devote The principal duty of directors under the law is to act in considerable energy to ensuring, as far as possible, good faith and in what the director believes to be the appointments reflect the demographic diversity of best interests of the company. our community." The mix of executive and non-executive directors Committees The boards of the government's electricity companies All the boards of the state-owned generator-retailers contain only non-executive directors (see Table 4). have committees responsible for audit and Some boards of listed private-sector companies in New remuneration. Zealand are also entirely non-executive, but most also include the chief executive and sometimes other executive Accounting and auditing directors. The chairman is typically a non-executive director. The boards typically meet a dozen times a year. The companies prepare financial statements that comply with the Financial Reporting Act 1993, which applies Table 4: Composition of boards of also to private companies, and requires reporting generator­retailers in New Zealand, according to generally accepted accounting practice in February 2003 New Zealand. New Zealand GAAP is intended to NUMBER OF NUMBER TOTAL converge with International Accounting Standards over EXECUTIVE OF NON- the next three or four years. DIRECTORS EXECUTIVE DIRECTORS The government audit body, the Auditor-General, has Privately responsibility for auditing the government-owned 27 owned generator­retailers' accounts (as a result of a provision companies in the State-Owned Enterprises Act), but can delegate Contact 1 5 6 the audit task to private audit firms. The accounts of Trustpower 0 6 6 Genesis and Meridian for 2002 were audited by Deloitte Touche, while Mighty River Power's were audited by Ernst State-owned & Young--in each case on behalf of the Auditor-General. companies Genesis 0 8 8 Borrowing Meridian 0 7 7 According to the State-Owned Enterprises Act, the Mighty River 0 7 7 Power companies may issue what the Act calls "state enterprise equity bonds", which are like equity except they don't give the holder any voting rights. No company, so far as we know, has done so. Experience of non-executive directors The companies can also borrow from banks and issue The directors of the state-owned generator­retailers ordinary bonds. All have credit ratings (see Table 5). typically have business experience and are often also Their borrowings carry no legal guarantee from the directors of large privately owned companies. None are New Zealand government. Although the willingness from government departments. Consistent with the of the government to allow large state-owned government's concerns about "demographic diversity", companies to go bankrupt has been questioned, some of the generator­retailers' board members appear state-owned electricity companies have credit ratings to have less business experience than, say, those of their lower than that of the government and their credit privately owned counterpart, Contact. ratings vary; the generator­retailers, which operate in a competitive market have lower ratings than Remuneration Transpower, which has a near monopoly in transmission, and among the generator­retailers the one with the The shareholding ministers determine the total highest debt­equity ratio has the lowest credit rating. remuneration of the board; the board determines the allocation of the remuneration among board members. Annual reports disclose the amount each director is paid. Table 5: Credit ratings by Standard and Poor's Table 6: Recent accounting profitability of of generator­retailers and others New Zealand electricity generator­retailers RATING ON RATIO OF EQUITY ACCOUNTING RETURN ON LONG-TERM TO TOTAL ASSETS EQUITY (%) FOREIGN- AT BOOK VALUES CURRENCY DEBT FROM MOST- Privately owned companies FEBRUARY 2003 RECENT ANNUAL REPORT Contact 6.4 Privately owned Trustpower 0.2 companies State-owned companies Contact BBB 0.75 Genesis 5.7 Trustpower Not rated 0.66 Meridian 5.2 State-owned companies Mighty River Power 6.6 Genesis BBB+ 0.79 Note: The accounting return on equity is measured as net profit after tax Meridian BBB+ 0.64 as percentage of equity at book value at the beginning of the year. Mighty BBB 0.51 28 River Power Others government-owned generator­retailers were profitable in an accounting sense in 2002 (see Table 6), though some Transpower AA 0.44 made profits that may not cover their cost of equity capital. New AA+ 0.254 Zealand Government According to the State-Owned Enterprises Act 1986, Where the Crown wishes a State enterprise to provide In addition, the government has let one small government- goods or services to any persons, the Crown and the owned business fail, without bailing out its creditors. The State enterprise shall enter into an agreement under business, called Terralink, used to be part of the Department which the State enterprise will provide the goods or of Lands and Survey Information and provided maps and services in return for the payment by the Crown of similar information. According to newspaper reports, the whole or part of the price thereof. "Terralink was placed in Receivership on 15 January 2001. The Receivership was successfully completed on Thus the Act establishes a procedure by which the 28 March 2002 and the company is now in Liquidation, government can cause state-owned electricity companies pending final wind-up."5 Secured creditors, including the to provide noncommercial services in return for an explicit government (which apparently had lent the company about subsidy. In practice, this provision has been little used. US$0.5 million), appear to have been paid in full, while unsecured creditors "could get up to 38 cents for every Comments dollar they are owed."6 Although the government would face stronger pressure to bail out a large electricity Overall, the reforms ushered in by the State- company, lenders to these companies may take seriously Owned Enterprises Act 1986 of the governance of the prospect of their loans not being repaid. generator­retailers and other state-owned businesses appear to have depoliticized the management of the Profitability, tax, and subsidies business. After reform, the generator­retailers acted much more like privately owned businesses than their The state-owned electricity companies pay corporate predecessors did (Spicer and others 2001 and Duncan income tax and generally have no financial privileges of a and Bollard 1992). legal nature compared with private-sector firms. All the Calculated as the difference between the value of the government's assets and its debts, as recorded on its balance sheet, and called the 4 "crown balance". Of course, the government's credit rating does not depend on its balance sheet in same way as those of companies. See . 5 Adam Gifford, "Terralink creditors wait on EDS claim." New Zealand Herald, 7 August 2001. 6 Concerns are often expressed, however, that the benefits ANNEX 3: THE NATIONAL POWER of corporatization are somewhat fragile and that reforms CORPORATION, PHILIPPINES have not brought all the benefits that privatization would. The Philippines provides an example of a large In a review of the performance of other state-owned government-owned electricity utility that competes to enterprises and the now privately owned New Zealand some extent with private companies and is regulated by rail company, the New Zealand Institute for the Study of an independent government agency.7 For the moment, Competition and Regulation (2000) argues as follows however, most aspects of corporate governance remain similar to the traditional model for public-sector businesses. In its period of public ownership, New Zealand railways underwent five corporate-like restructuring episodes that Background attempted to place business at arms-length from political control of operations, and to establish sharper business Market structure and ownership objectives: the first commencing in 1888. From historical gross revenue and operating expense data, it seems Both public utilities and private companies generate that there was a financial improvement around the electricity and sell it to distributors and large industrial beginning of each of these episodes and deterioration users. In 1993, the Electric Power Crisis Act (Republic toward the end. This suggests the hypothesis that Act 7648) opened generation to private participation, 29 corporate forms of governance in public ownership and reform was further reinforced by the Electric Power yield only short-lived improvements in productivity. Industry Reform Act (Republic Act 9136) of 2001, which mandates that "generation of electric power, a business CCMAU (2002:46) also notes in its briefing to the new affected with public interest, shall be competitive and government in 2002 that state-owned enterprises are open". In 1998, National Power Corporation (Napocor) "exposed" to problems because: owned and operated about 50 percent of total installed generating capacity, and IPPs contracted by Napocor · They face no threat of takeover. owned and operated about 45 percent of the total · They do not have to compete for their equity capital. capacity. The remaining power was produced by · Lenders monitor their performance less vigorously privately owned generation facilities that served than they do the performance of private companies, distributors or acted as self-generation. The government where the likelihood of government bailout is remote. owns Napocor but is in the process of privatizing it. Various aspects of the legal framework reduce the The National Transmission Corporation (Transco) was commercial focus of the government-owned carved out of the Napocor by the Electric Power Industry generator­retailers, including non-commercial statutory Reform Act and is the only company involved in objectives (such as being a good employer) and the transmission. The government owns Transco, but is in application of public-sector legislation, such as the the process of privatizing it. Official Information Act. The biggest issue, however, is probably the extent to which the actual pressures exerted Several larger private distributors and many rural by government, as shareholder, are commercial or not. cooperatives distribute electricity. Napocor does not. There is a risk of course of "behind-the-scenes", "nontransparent" pressure on the companies to achieve Regulation non-commercial objectives and absence of pressure to achieve commercial objectives. The legal framework The Electricity Regulation Commission (ERC) regulates prices probably reduces, without eliminating, these effects. in the industry. The Energy Industry Administration Bureau within the Department of Energy is responsible for nonprice Despite these weaknesses, however, there does not regulation of generators and distribution utilities. appear to be strong evidence of actual declines in performance. And after noting the problems above, CCMAU (2002:47) goes on to state that actual performance has nevertheless been good. Much of information in this annex is taken from www.napocor.com.ph, www.coa.gov.ph, and www.erc.gov.ph. 7 Governance Remuneration Legal identity Napocor's annual report does not disclose how much remuneration board members received. However, the Napocor is legally separate from the government, being revised Napocor Charter states that the members of the a wholly government-owned stock corporation (Republic board receive a per diem of no more than 300 pesos Act No. 2641.) for each regular meeting of the Board and 100 pesos for each special meeting actually attended by them, The board provided such per diem does not exceed 1500 pesos per month, and that no allowances are paid other than Directors and their duties actual expense of traveling to attend thee meetings. Before the passage of the Electric Power Industry Reform Committees Act, Napocor's Board had seven members--a chairman, vice chairman, and five other directors. All directors were Napocor's annual report does not mention committees appointed by the President of the Philippines, except for of the Board. the vice chairman, which was the General Manager ex 30 officio. Every member of the Board had to be a professional Accounting and auditing of recognized competence in engineering, business management and finance, or law, with at least ten years' Napocor follows generally accepted accounting actual and distinguished experience. Three directors were principles in the Philippines. to represent three main islands--Luzon, Visayas, and Mindanao--one was to represent labor, and one was to The government's Commission on Audit audited represent the business sector. Duties of the Board included: Napocor's financial statements for 2001. The auditor rendered a qualified opinion on the fairness of the · Formulating and adopting policies and measures for presentation of the statements. Moreover, according to the management and operation; a report by the Commission, of the nine prior years' · Adopting budget of receipts and expenditures; audit recommendations on financial and compliance · Appointing and removing General Manager and audit embodied in the 2000 Annual Audit Report, only fixing his or her compensation, subject to the six were fully implemented. Napocor's annual report is approval of the President of the Philippines; and not very detailed compared with those discussed in the · Adopting guidelines for the employment of personnel. other annexes. The Electric Power Industry Reform Act organized a new Borrowing Board, composed of the Secretary of Finance as chairman, with the following eight other members: the Secretary of Napocor borrows from private lenders. Currently, Energy, the Secretary of Budget and Management, the Standard Poor's rates Napocor's foreign-currency Secretary of Agriculture, the Director-General of the denominated debt as BB+, the same as the sovereign National Economic and Development Authority, the rating, possibly suggesting that the government provides Secretary of Environment and Natural Resources, the an explicit or implicit guarantee of Napocor's debt. Secretary of Interior and Local Government, the Secretary Napocor's local-currency debt is rated BBB, one notch of the Department of Trade and Industry, and the below the sovereign rating. President of the Napocor. Profitability, tax, and subsidies As a comparison, Meralco, a private distribution company operating in metro Manila, has a 12-member board of While Napocor's net income averaged 5 billion pesos a directors. The chief executive officer of Meralco serves as year between 1994 and 1997, it has been negative for the chairman of the board, and the chief operations officer the following four years. In 2001, the loss amounted to is also a member of the board. The remaining 10 directors 10.4 billion pesos (Table 7), or about 1 percent of are non-executive, all with business backgrounds. Napocor's total assets of 1 trillion pesos. Table 7: Napocor's net income in billion pesos Background YEAR NET INCOME - Market structure and ownership 1997 3.0 1998 -3.6 Eskom generates approximately 96 percent of South 1999 -6.0 Africa's electricity. Eight municipalities generate the remaining 4 percent for their own distribution companies. 2000 -13.0 Eskom is the only transmission company. In distribution 2001 -10.4 subsector, Eskom and several hundred municipalities separately operate the country's electricity distribution networks. Eskom distributes electricity to a geographically According to the Report by the Commission on Audit, dispersed customer base, while municipal distributors the net losses incurred for 2000 and 2001 were mainly generally supply consumers within their geographic due to the high cost of long-term power-purchase contracts areas. Municipal distributors serve about 60 percent of with IPPs, some of whom are receiving payment for the customers and 40 percent of electricity by sales volume. capacity that Napocor does not currently require (Oxford Analytica, May 2002). In 2001, Napocor paid IPPs 30 Regulation billion pesos in capacity fees. Note that, in contrast to 31 the case of Mexico described in Annex 1, Napocor's The National Electricity Regulator (NER) regulates the balance sheet reflects the full cost of its obligations to electricity sector. Although the Department of Minerals IPPs under long-term power purchase contracts. and Energy appoints the board members of NER, the NER acts independently and reports directly to parliament. Napocor is exempt from paying corporate income tax (BIR Ruling #018-2000, Section 32(B)(7)(b).) No person is allowed to undertake the generation of electricity without a license, except for a local authority Comments that does not sell more than five gigawatt hours of electricity a year (the Electricity Act 41, 1987). Every Napocor's corporate governance structure is fairly license contains a schedule of the approved tariffs to traditional. For example, government officials have be charged by the licensee for the supply, provision, or dominated its board, and its financial reporting does distribution of electricity to different classes of consumers. not disclose as much information as in the other cases examined here. Governance The company has faced financial difficulties, particularly Legal identity in recent years, and the government has decided that privatization, rather than further reforms of corporate Eskom is legally separate from the government. It was governance under public ownership, offers the best converted from a statutory body to a public company, solution to address the company's problems. Eskom Holdings Limited, on 1 July 2001 (Eskom Conversion Act 2001). ANNEX 4: ESKOM, SOUTH AFRICA Responsibility for government shareholding Like Mexico, South Africa offers an example of an electricity The South African government, represented by the industry with an independent regulator that is dominated Department of Public Enterprises, is the sole shareholder by a state-owned electricity utility. In contrast with Mexico, of Eskom. Eskom and the Minister of Public Enterprises however, the company's corporate governance is modeled sign a shareholder compact every year (according to closely on that of private South African companies.8 Treasury Regulations issued under the Public Finance Management Act of 1999). Much of information in this annex is taken from www.eskom.co.za 8 The shareholder compact sets out key performance · Monitoring and ensuring triple bottom line objectives and key performance indicators for Eskom performance in the context of integrated sustainable and provides a framework to guide the relationship economic, social and environmental performance, between Eskom and its shareholder. The performance and issuing the Board's assessment of the company's indicators cover financial indicators such as profit, ability to continue as a going concern in respect thereof; revenue growth, and price increases, as well as social · Succession planning; targets such as equal opportunities, gender equity, · Guiding restructuring and transformation; disability targets, electrification targets, and black · Ensuring effective communication with relevant economic empowerment. stakeholders (transparency); · Liaising with and reporting to the shareholders; Reporting · Guiding key initiatives, for example, AIDS/HIV strategy; and The Public Finance Management Act requires public · Approval of transactions beyond the authority entities such as Eskom to keep full and proper records of management. of the financial affairs and prepare financial statement for each fiscal year in accordance with generally The Board meets quarterly and monitors accepted accounting practice. These financial management's compliance with policy and 32 statements are to be audited and submitted to the its achievement against objectives. Minister of Public Enterprises within two months after the end of the financial year (Public Finance Management The appointment of directors Act Chapter 6 Part 2 Subsection 55-1). The Minister of Public Enterprises appoints the directors. The board The term of office of the non-executive directors that were appointed on the conversion of Eskom is three years, while Directors and their duties the term of office of the non-executive directors that were previously members of the Electricity Council is two years. Eskom complies with the requirement of Public Finance Management Act, and the Companies Act 1973 as The mix of executive and non-executive directors amended. It is also in the process of implementing the recommendations of the King Report on Corporate In keeping with the recommendations of the King II Report, Governance for South Africa 2002 (the King II Report). Eskom board consists of a majority of non-executive The King II Report includes the Code of Corporate directors. Specifically, 13 out of the 15 directors are Practices and Conduct, as well as the Protocol on non-executive, including the chairman of the board. Corporate Governance in the Public Sector.9 The two executive directors hold, respectively, the positions of chairman and finance director. The Board has identified its role as follows:10 Experience of non-executive directors · Provision of strategic direction and leadership; · Approval of key policies including investment policy Typical non-executive directors have substantial business and strategy, risk management policies and strategy; experience, and 8 out of 13 Eskom non-executive directors · Approval and monitoring compliance with corporate serve as directors of other companies. The background plans, financial plans and budgets (including setting of Eskom board's non-executive directors seems to be objectives and targets); more diverse than for typical private companies in South · Ensuring good corporate governance and ethics; Africa. The board includes one director who serves as a · Monitoring and reviewing performance and full time employee of the Department of Public Enterprise, effectiveness of controls; one director who holds a lecturing position in a university, and one director with union background. The original King Report has established an initial framework for corporate governance practices for the South African companies and has 9 been used as a benchmark of good practice. The King II Report updates the original report. See Eskom's Board Charter and the Annual Report. 10 Remuneration bonds, but does guarantee some foreign bonds. Standard Poor's rates Eskom's foreign-currency debt BBB, the same Non-executive directors receive fees for their as the sovereign rating. Eskom's local-currency denominated contribution to the Board and the committees on which debt is rated A-, one notch below the sovereign rating. they serve. The Minister of Public Enterprises determines the remuneration of the directors, with the concurrence Profitability, tax, and subsidies of the Minister of Finance. The Board committee on Human Resources, Remuneration, and Ethics makes In recent years, Eskom has been profitable in an accounting recommendations to the shareholder on the remuneration sense, but its real (that is, inflation-adjusted) rate of return policy for executive and non-executive directors. on total assets has been relatively low and declining (Table 8.) The government does not provide explicit subsidies. Committees Table 8: Eskom's real rate of return on total assets The Eskom Board has several committees including YEAR RETURN an executive-management committee, a sustainability 1994 4.33 committee, a risk-management committee, investment- 1995 3.82 and-finance committee, a tender committee, an audit 1996 3.89 committee, and a human resource, remuneration, and 33 1997 3.62 ethics committees. 1998 2.49 The audit committee reviews the activities of the corporate 1999 1.42 audit department, and is responsible for the review of 2000 2.45 accounting and auditing concerns identified by internal 2001 1.16 and external audit. The audit committee comprises five 2002 1.69 non-executive directors, including an independent non- executive director as the chairman. Source: Annual Reports The Human Resource, Remuneration, and Ethics Committee makes recommendations to the shareholder on the Eskom is responsible for paying corporate income tax. remuneration policy for Board directors, and makes recommendations to the Board on the appointment and The company intends to pay dividends to the government, removal of directors. The committee is made up of four although this did not happen in the fiscal year 2002. non-executive directors and the chief executive, including an independent non-executive director as the chairman. Comments Accounting and auditing Eskom's corporate governance structure is closer to that of private sector, compared to utilities such as CFE and Eskom's financial reports comply with International Napocor. For example, a majority of the board members Accounting Standards. The Public Finance Management are non-executive, non-governmental directors with Act mandates that the annual financial statements of a business backgrounds, while financial reporting is detailed public entity be audited by an external auditor who is and complies with international accounting standards. registered as an accountant and auditor under the Public Accountants' and Auditors' Act 1991, and engaged in public By most reports, Eskom operates reasonably well and its practice as such. KPMG Inc, SizweNtsaluba VSP, and customers are generally satisfied with the service quality Deloitte& Touche audited Eskom's financial statements and reliability. Nonetheless, the government has for the financial year 2002. announced plans to reform it. It has said it will sell 10 percent stake in Eskom's power stations to the private Borrowing sector in 2003, and additional 20 percent in 2004 (PANA 11 March 2003.) There are also plans to Eskom is allowed to borrow from private lenders. The introduce competition in generation (NER 2002). South African Government does not guarantee all Eskom REFERENCES Duncan, Ian and Alan Bollard. 1992. Corporatization and Privatization: Lessons from New Zealand. Oxford Abowd, John M. and David S. Kaplan. 1999. "Executive University Press. compensation: six questions that need answering". Journal of Economic Perspectives. 13(4):145­168. Gibbons, Robert. 1998. "Incentives in organizations". Journal of Economic Perspectives. 12(4):115­132. ASX Corporate Governance Council. 2003. Principles of Good Corporate Governance and Best Practice Gompers, Paul A., Joy L. Ishii, and Andrew Metrick. 2003. Recommendations. Annex B. March "Corporate governance and equity prices". Quarterly Journal of Economics. 118(1): 107-155. Beck, Andrew and Andrew Borrowdale. 2002. Guidebook to New Zealand Companies and Securities Law. Seventh Government of India. 2003. Economic Survey 2002­2003. edition. Auckland, New Zealand: CCH. Available at . Boardman, Anthony E. and Aidan R. Vining. 1989. Gray, Philip. 2001. "Private participation in infrastructure: a "Ownership and performance in competitive environments: a review of the evidence". mimeo. World Bank. comparison of the performance of private, mixed, and state-owned enterprises". Journal of Law and Economics. Harris, Clive. 2003. Private participation in the 35 32(1):1­33. infrastructure of developing countries: trends, impacts, and policy lessons. World Bank Working Paper Number 6. Briceńo Garmendia, Cecilia M. 2003. "Empirical literature on private participation in infrastructure: an annotated Kikeri, Sunita, John Nellis, and Mary Shirley. 1992. survey". mimeo. World Bank Privatization: the Lessons of Experience. Washington, D.C.: World Bank. Brumby, Jim, Michael Hyndman, and Stuart Shepherd. 1998. "State Owned Enterprise Governance: Focus on Klapper, Leora F. and Inessa Love. 2002. "Corporate Economic Efficiency" in Corporate Governance, State- governance, investor protection, and performance in Owned Enterprises and Privatization. OECD Proceedings. emerging markets". World Bank Policy Research Working Organisation for Economic Cooperation and Development Paper 2818. Washington, D.C. Campos, Carlos E., Robert E. Newell, and Gregory Wilson. Kroszner, Randall S. and Philip E. Strahan, 2001. "Bankers 2002. "Corporate governance develops in emerging on boards: monitoring, conflicts of interest, and lender markets." McKinsey Quarterly 3:15­18. liability". Journal of Financial Economics, 62(3):415­452. Crown Company Monitoring and Advisory Unit (New Kwoka, John. 1996. Power Structure: Ownership, Zealand). 2002a. "Briefing to the Incoming Minister for Integration, and Competition in the U.S. Electricity Industry. State Owned Enterprises". Boston: Kluwer Academic Publishers Crown Company Monitoring and Advisory Unit. 2002b Megginson, William L. 2000. "Corporate governance (New Zealand). "Owner's Expectations Manual". in publicly owned companies." Paper for conference on corporate governance of state-owned enterprises in China, Department of Transport (United Kingdom). 2003. Beijing, 18-19 January 2000. OECD, Development "Network license granted to Railtrack PLC : including Research Centre of the State Council of PRC, ADB. modification up to 1 April 2003". Available at Megginson, William L. and Jeffry M. Netter. 2001. "From State to Market: A Survey of Empirical Studies Dubash, Navroz K. and Sudhir Chella Rajan. 2001. "The on Privatization". Journal of Economic Literature politics of power sector reform in India". April. World 39(2):321-389. Resources Institute. Morgan, Angela G. and Annette B. Poulsen. 2001. Shirley, Mary M. and Patrick Walsh. 2000. "Public versus "Linking pay to performance--compensation proposals in private ownership: the current state of the debate." World the S&P 500". Journal of Financial Economics 62(3):489­523. Bank Policy Research Working Paper 2420. Washington, D.C. Muir, Russell and Joseph Saba. 1995. "State-owned Shleifer, Andrei and Robert W. Vishny. 1997. "A survey of enterprise restructuring: better performance through corporate governance." The Journal of Finance, corporate structure and competition". Viewpoint Note 57. 52(2):737-783. National Electricity Regulator. 2002. Regulatory framework for Spicer, Barry, Robert Bowman, David Emanuel, and Alister the economic regulation of the electricity supply industry Hunt. The power to manage: restructuring the New Zealand (ESI) of South Africa (a discussion document). July. Electricity Department as a State-Owned Enterprise--the Electricorp experience. Auckland: Oxford University Press. New Zealand Institute for the Study of Competition and Regulation. 2000. The economic performance of five state- Takahashi, Yoichi. 2000. "Does discipline by SOE bonds owned enterprises, 1989­1998. work? ­ Japan's experience with Zaito reform." Paper for conference on corporate governance of state-owned OECD. 1999. OECD principles of corporate governance. enterprises in China, Beijing, 18-19 January 2000. 36 Paris: OECD. OECD, Development Research Centre of the State Council of PRC, ADB. Office of the Rail Regulator. 2002. "The proposed acquisition of Railtrack PLC by Network Rail Limited: a United Kingdom Government. 2000. "Public private statement by the Rail Regulator and proposed licence partnerships: the government's approach". London: the modifications". June 2002 available at . reg.gov.uk>. United Nations Economic Commission for Latin America Pollitt, Michael G. 1995. Ownership and performance in and the Caribbean. 2001. Retos y Posibles Soluciones para electric utilities: the international evidence on privatization el Sector Energético Mexicano. and efficiency. Oxford: Published by the Oxford University Press for the Oxford Institute for Energy Studies Vining, Aidan R. and Anthony E. Boardman. 1992. "Ownership versus competition: efficiency in public Rao, S. L. 2002. "Regulating state-owned enterprises in the enterprise". Public Choice volume 73 :205­239 infrastructure sector: the experience with electricity in India". International Journal of Regulation and Governance World Bank. 1994. World Development Report 1994. 2(2):197-208. New York: Oxford University Press. Shirley, Mary. 1998. "Bureaucrats in business: the roles of World Bank. 1995. Bureaucrats in Business. New York: privatization versus corporatization in state-owned Oxford University Press. enterprise reform." World Development 27(1):115-136. World Bank and Public­Private Infrastructure Advisory Shirley, Mary and Lixin Colin Xu. 1998. "Information, Facility, 2000. A Country Framework Report--Private incentives, and commitment: an empirical analysis of Solutions for Infrastructure: Opportunities for the Philippines. contracts between government and state enterprises". Journal of Law, Economics, and Organization 14(12):358-378. Zhang, Yin-Fang, David Parker, and Colin Kirkpatrick. 2002. "Electricity Sector Reform in Developing Countries: ------ 2000. "Empirical effects of performance contracts: An Econometric Assessment of the Effects of Privatization, evidence from China". Paper for conference on corporate Competition, and Regulation". November governance of state-owned enterprises in China, Beijing, 18-19 January 2000. OECD, Development Research Centre of the State Council of PRC, ADB. THE WORLD BANK GROUP The Energy and Mining Sector Board The World Bank 1818 H Street N.W. Washington, D.C. 20433 USA