2026 Perspectives for the Public Sector

Furthermore, SOEs that heavily rely on imports, such as fuel and power companies, face foreign exchange shortages during cost surges or currency depreciation. This compels governments to allocate scarce foreign exchange reserves or provide external borrowing on behalf of SOEs, escalating the sovereign’s external debt. Declining SOE profitability and rising leverage are often critical early indicators of sovereign vulnerability, exposing weaknesses in governance and policy credibility. Opaque operations, off-budget activities, and politically driven mandates undermine fiscal transparency and complicate debt sustainability assessments. Persistent bailouts foster moral hazard, discouraging operational reform and strict budget constraints. In sum, SOEs act as both a stabilizer and a stress amplifier. While they provide essential goods and services, their vulnerabilities can multiply sovereign risks when shocks hit. Mitigating these risks requires credible frameworks to sustain macroeconomic stability and achieve ultimate development priorities. During periods of stress, SOE losses frequently become government liabilities through subsidies, equity injections , or assumed debt guarantees , transforming “quasi- fiscal” activities into tangible fiscal burdens , in turn resulting in widening budget deficits and increased financing needs . Best Practices In response to the vulnerabilities engendered by the dual nature of SOEs — balancing commercial imperatives with public policy objectives — international organizations such as the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), and the World Bank, among others, have established comprehensive guidelines setting out an international standard to professionalize the state’s role as an owner as well as to enhance SOE performance. The OECD Guidelines on Corporate Governance of SOEs articulate a governance model that aims to transform SOEs into accountable, transparent, and competitive entities that serve the public interest without imposing an undue fiscal burden. This comprehensive model advocates several key principles, chief among them: (1) Redefining the state’s role from a passive asset holder to an informed, active owner, and centralizing ownership functions in a professional entity separate from policymaking to prevent conflicts of interest. The state’s responsibility is to define ownership policy and broad mandates, avoiding intervention in daily management; (2) Promoting competitive neutrality to ensure that SOEs engaged in commercial activities do not receive undue advantages such as preferential financing, implicit state guarantees, or lenient regulatory treatment. This prevents cross-subsidization and ensures that SOE success is based on merit and efficiency, rather than state-conferred privilege, thereby fostering fair markets and protecting public funds; (3) Empowering the board of directors, composed of independent members selected through a transparent process free from political patronage, to serve as the linchpin of good governance. These boards are tasked with setting strategy, overseeing risk management, and appointing senior management, creating a necessary buffer between ownership and management; (4) Adhering to the same high-quality disclosure, accounting, and auditing standards as listed companies and integrating sustainability goals into the state’s ownership policy to ensure boards embed these considerations into corporate strategy and risk management for long-term value creation and resilience, and to improve transparency and accountability. Source: OECD Guidelines on Corporate Governance of State-Owned Enterprises 2024 30 FromVulnerability to Viability: Best Practices and Financial Instruments for State-Owned Enterprises