State-owned enterprise (SOE) reform can expose taxpayers to hidden costs, weaken public services, distort competition, or leave governance problems unresolved. None of these outcomes is inevitable: the risks depend on the enterprise, the reform chosen, and whether oversight, regulation, and public-service duties are properly designed.
Why reform can create risks
SOE reform is not one policy. It can change how an enterprise is governed, financed, regulated, operated, or owned. A change that improves one objective—such as reducing fiscal losses—can undermine another if service obligations, competition, or oversight are not addressed at the same time.
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The practical question is therefore not simply whether to reform, but whether the plan makes responsibilities, costs, and safeguards clear. Common reform areas include corporate governance; business operations; competition and regulation; ownership changes, including privatization; and fiscal and public-financial management, as summarized by the World Bank Independent Evaluation Group.
What are the main risks of SOE reform?
Fiscal costs that migrate to taxpayers
An enterprise’s losses and debt do not automatically become sovereign debt, but financial distress can still create public exposure. Costs may arise through direct budget support, calls on explicit guarantees, or other contingent liabilities. If these exposures are not tracked, a government may face an unexpected bill or repeated pressure to bail out an enterprise.
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The IMF recommends stronger monitoring and mitigation of fiscal risks, including incorporating SOEs into overall fiscal targets. Its 2020 working paper states that doing so “would promote greater fiscal discipline and transparency.” That is a policy recommendation, not a guarantee that fiscal problems will be prevented. The IMF’s SOE Stress Test Tool also identifies demand, input costs, exchange rates, uncompensated policy obligations, governance, and management as factors that can affect performance.
The size of the possible exposure is country-specific. In a 2022 announcement about The Gambia, the World Bank estimated that the projected fiscal cost of SOEs over 2021–2030 would be 5.0% of GDP in a no-reform scenario. This was a scenario estimate for The Gambia, not a general forecast of reform costs or a global average. The report lead author, World Bank Country Economist Mehwish Ashraf, described that projection in the World Bank announcement.
Conflicts of interest and weak accountability
A government may act at once as an SOE’s owner, the policymaker for its sector, and the regulator of its conduct. When those roles are not clearly separated, commercial decisions can be pulled between political priorities and business objectives, while it becomes harder to determine who is accountable for results.
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The OECD’s 2024 survey of nearly 59 jurisdictions found that 27% still had dispersed ownership arrangements, which can make separating ownership from policy and regulatory roles challenging. The same survey found that 38% of jurisdictions did not require SOEs to report contractual and contingent liabilities, limiting the ability of non-state equity owners and other stakeholders to assess risk. These are findings about jurisdictional frameworks, not direct measurements of how individual enterprises perform.
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Changing ownership without clarifying board responsibilities, ownership oversight, targets, and regulatory capacity can leave these governance problems in place under a new structure. The OECD’s Guidelines on Corporate Governance of State-Owned Enterprises treat sound corporate governance as important to effective ownership and oversight.
Public-service access and affordability
Some SOEs are tasked with services such as universal coverage, affordable tariffs, or provision to remote areas. If these non-commercial duties are not clearly specified, separately accounted for, and adequately funded, their cost may be hidden in cross-subsidies or enterprise losses. Conversely, a reform focused only on commercial returns can put access or affordability at risk if it does not preserve and fund those duties.
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The OECD’s 2024 survey found that 21% of jurisdictions did not require separate accounting for public-service obligations, while 26% lacked adequate compensation requirements. These figures describe rules and practices across jurisdictions; they are not rates of service failure. The IMF also identifies uncompensated policy obligations as a factor affecting SOE finances in its stress-test tool.
Distorted competition and market structure
State-backed borrowing, special tax treatment, regulatory advantages, or different insolvency treatment can give an SOE an advantage over private competitors—or obscure its actual financing costs. The OECD’s 2024 survey found preferential access to finance in 74% of jurisdictions, including implicit or explicit state guarantees on commercial debt. That is a jurisdiction-level finding; it does not mean that 74% of SOEs receive a subsidy.
A change in ownership by itself does not create effective competition. Where a firm operates monopoly infrastructure or provides an essential service, competition and independent regulation may matter as much as who owns the firm. The OECD Guidelines recognize public-service and natural-monopoly rationales for state ownership, so reform should account for the market structure rather than assume that privatization alone will solve it.
Operational, sustainability, corruption, and integrity risks
Financial indicators do not capture every vulnerability. Poor operational performance can weaken service continuity, while corruption or integrity failures can undermine procurement and public confidence. These risks may interact across an SOE portfolio rather than remain isolated within one company.
In its 2026 analysis, the OECD reported that 75% of respondents identified sustainability-related risks among the risks governments most frequently focus on, 58% cited financial and performance risks, and 50% identified corruption and integrity risks among their top three priorities. These are respondent shares about risk priorities, not estimates of the proportion of enterprises affected. The OECD also points to exposure in extractives and infrastructure, where valuable concessions and large procurement can bring public and private actors together.
Financial stability and productivity spillovers
SOE problems can extend beyond the company itself. An IMF study of Emerging Europe identified three macroeconomic risk channels associated with poor SOE performance: contingent liabilities that strain public finances, poor governance in state-owned banks that could threaten financial stability, and negative productivity spillovers. These are risks analyzed in that study’s regional context, not measured effects that apply uniformly to all countries or reforms. See the IMF’s 2017 study.
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| Reform area | Risk to examine | Safeguard to assess |
|---|---|---|
| Governance and ownership oversight | Unclear roles, weak boards, or political influence can blur accountability. | Explicit ownership objectives, clear board responsibilities, and capable oversight. |
| Operations and restructuring | Cost-cutting or commercial targets may conflict with service continuity or public-service duties. | Defined service standards, transparent costs, and a plan for funding non-commercial obligations. |
| Competition and regulation | Preferential treatment or monopoly power can disadvantage competitors and consumers. | Independent regulation and rules that support competitive neutrality where competition is feasible. |
| Fiscal and public-financial management | Unreported debt, guarantees, and contingent liabilities can hide exposure from budgets and stakeholders. | Regular reporting, monitoring, stress testing, and inclusion in fiscal-risk oversight. |
| Privatization or other ownership change | Weak governance, poor valuation, or inadequate regulation can undermine the intended economic or fiscal result. | Governance readiness, sound valuation, regulatory capacity, and an explicit approach to service duties. |
The OECD says good corporate governance is an important prerequisite for economically effective privatization and can enhance valuation and fiscal proceeds. That is institutional guidance about preparation, not evidence that privatization is always preferable or that a particular sale will achieve those results.
What should decision-makers check before changing an SOE?
- Objectives: Are ownership, commercial, and public-policy goals explicit, and is it clear who sets and monitors each one?
- Public-service duties: Are access and affordability obligations defined, costed, separately accounted for, and funded?
- Fiscal exposure: Are debt, guarantees, and contingent liabilities disclosed and assessed under plausible stress scenarios?
- Competition and regulation: Will the market remain competitive, and is there a capable, independent regulator where needed?
- Governance capacity: Do boards and ownership authorities have clear duties, appropriate expertise, and reliable reporting?
- Wider risks: Does oversight cover operational performance, sustainability, procurement integrity, and risks shared across the portfolio?
- Service outcomes: How will reform affect service quality, affordability, and continuity, and who will be accountable for monitoring them?
Employment effects also require care: the sources here do not establish a typical causal effect of SOE reform on jobs. Any claim about employment should be based on evidence for the particular country, sector, reform, and time period rather than assumed from a change in ownership or operating model.
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