State-owned enterprise (SOE) reform can expose taxpayers to hidden liabilities, weaken public services, blur accountability, or distort competition if it is poorly designed. Those outcomes are not inevitable, and they do not make privatization a universal solution: risks depend on the enterprise, sector, public-service duties, regulatory capacity, and the reform chosen.
SOE reform can mean changing governance, restructuring operations, improving fiscal oversight, opening a market to competition, or changing ownership. Some risks are already present in an enterprise and become more visible during reform; others arise if a change is made without protecting essential services or establishing effective oversight. A useful assessment asks what could go wrong, who would bear the cost, and what safeguards are in place.
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How reform can create or expose fiscal risks
An SOE’s losses or debt do not automatically become sovereign debt. But when an enterprise cannot meet its obligations, government support may be sought or required, shifting costs to public budgets. Exposure can include direct spending, explicit guarantees, and contingent liabilities that may crystallize later. Ordinary budget reporting may not make all of these visible.
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Performance can also deteriorate when demand falls, input costs rise, exchange rates move, public-policy obligations go uncompensated, or governance and management are weak. The IMF’s SOE stress-test tool treats these as factors to assess rather than assuming that financial distress has a single cause.
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The IMF’s 2020 working paper recommends monitoring and mitigating SOE-related fiscal risks, including enterprises in overall fiscal targets, and using stress tests and peer comparisons. That is a policy recommendation, not a guarantee that any one measure will prevent losses. In one country-specific example, the World Bank estimated that the projected fiscal cost of SOEs in The Gambia would be 5.0% of GDP over 2021–2030 in a no-reform scenario. That estimate is neither a global benchmark nor an estimate of reform’s effect elsewhere.
Governance changes can leave accountability unclear
Governments may be an enterprise’s owner, policymaker, and regulator at the same time. If responsibilities are scattered or overlapping, it can be difficult to distinguish commercial decisions from policy instructions, determine who is accountable for poor results, or ensure that regulation is impartial. A change in ownership alone does not resolve those conflicts if the rules, oversight, and regulatory capacity remain weak.
The OECD’s 2024 survey of nearly 59 jurisdictions found that 27% had dispersed ownership arrangements, which can make separation from policymaking and regulation challenging. It also found that 38% did not require reporting contractual and contingent liabilities, limiting stakeholders’ ability to assess risk. These are findings about jurisdictional frameworks, not rates of failure among individual enterprises.
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Weak board oversight, unclear targets, political intervention, or incomplete reporting can compound these problems. If reform changes the owner but does not clarify board responsibilities and public objectives, accountability may remain just as difficult to trace.
Public-service access and affordability may be put at risk
Some SOEs are expected to provide universal coverage, affordable tariffs, or service in remote areas. Those duties can carry real costs. If they are imposed without clear definitions, separate accounts, and adequate compensation, the enterprise may hide cross-subsidies, accumulate losses, or underinvest. The opposite risk arises when reform focuses narrowly on commercial returns: access or affordability may suffer if public-service duties are removed or left unfunded.
In the OECD’s 2024 survey, 21% of jurisdictions did not require separate accounting for public-service obligations, and 26% lacked adequate compensation requirements. These figures describe rules reported by jurisdictions; they do not measure how often services actually fail. The IMF likewise identifies uncompensated policy obligations as a factor that can affect SOE financial performance.
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Competition can be distorted rather than improved
An SOE may receive advantages such as state guarantees, preferential finance, special tax treatment, or different insolvency rules. Such treatment can obscure the enterprise’s true cost of borrowing and disadvantage private competitors. In the OECD’s 2024 survey, 74% of jurisdictions provided SOEs preferential access to finance, including through implicit or explicit state guarantees on commercial debt. This does not mean that 74% of enterprises received a subsidy.
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Changing ownership is not enough to create effective competition where a company controls monopoly infrastructure or provides an essential service. Market structure, independent regulation, and fair rules for all providers matter too. State ownership may also have a public-service or natural-monopoly rationale; the relevant question is whether that purpose is explicit and whether competition is treated fairly where it is possible.
Risks can spread to financial stability and productivity
Poor SOE performance may affect more than the enterprise and its owner. An IMF study of Emerging Europe identified three possible macroeconomic channels: contingent liabilities that strain public finances, weak governance in state-owned banks that could threaten financial stability, and negative productivity spillovers. These are risks analyzed in that regional study, not universal measured effects of SOE reform.
Financial links between enterprises and the state can make it harder to see where losses ultimately fall. If public banks lend to troubled SOEs, for example, weaknesses can interact across institutions. Monitoring risks at the portfolio level can help governments identify connections that an enterprise-by-enterprise review might miss.
Operational, sustainability, and integrity risks can interact
Reform can fail to address operational weaknesses, or a rapid restructuring can disrupt services if continuity plans are inadequate. Other risks can compound financial and service problems: corruption in procurement, weak internal controls, environmental liabilities, and exposure to climate transition or other sustainability pressures. These concerns are especially relevant in sectors such as extractives and infrastructure, where valuable concessions and large procurement contracts bring public and private actors together.
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1Fix the driver behind crashes, sound loss and screen glitches2Clear out junk files and repair common Windows errors3Scan for outdated or missing drivers - takes under a minuteThe OECD’s 2026 analysis emphasizes that risks can accumulate and interact across SOE portfolios, affecting service delivery, market confidence, and public trust. Among respondents, 75% identified sustainability-related risks as a frequent government focus, 58% cited financial and performance risks, and 50% identified corruption and integrity risks among their top three priorities. These are respondent shares on priority areas—not the proportion of enterprises experiencing those risks.
What comparative evidence says—and does not say
| Evidence | Reported result | How to interpret it |
|---|---|---|
| OECD, 2024 survey | 27% of jurisdictions had dispersed ownership arrangements; 38% did not require reporting contractual and contingent liabilities. | Jurisdiction-level governance and reporting frameworks, not enterprise outcomes. |
| OECD, 2024 survey | 21% of jurisdictions did not require separate accounting for public-service obligations; 26% lacked adequate compensation requirements. | Jurisdiction-level rules; these figures do not quantify service failures. |
| OECD, 2024 survey | 74% of jurisdictions provided SOEs preferential access to finance. | Includes implicit or explicit state guarantees on commercial debt; it is not a subsidy rate for enterprises. |
| OECD, 2026 analysis | 75% of respondents cited sustainability-related risks; 58% cited financial and performance risks; 50% cited corruption and integrity risks among their top three priorities. | Respondent priorities, not the incidence of risk among SOEs. |
| World Bank, The Gambia, 2022 | Projected SOE fiscal cost of 5.0% of GDP over 2021–2030 in a no-reform scenario. | A country- and scenario-specific estimate, not a general forecast or measured reform effect. |
The evidence comes from different sources and measures different things: jurisdiction rules, respondent priorities, a regional analysis, and a country-specific scenario. It should not be combined into a global reform failure rate or treated as proof that reform itself caused the reported risks.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to assess a reform before changing ownership or operations
Reform options include governance improvements, operational restructuring, stronger fiscal oversight, competition and regulatory changes, and privatization or other ownership changes. The World Bank Independent Evaluation Group’s summary groups SOE reform work into corporate governance; business and operations; competition and regulation; privatization and ownership reform; and macro, fiscal, and public financial management. For any approach, test the design against these questions:
- Are the objectives explicit? Separate the government’s ownership goals from its policy and regulatory roles, and give the board clear responsibilities.
- Are public-service duties defined and funded? Specify coverage, affordability, and other obligations; account for their costs separately and establish how they will be compensated.
- Can taxpayers and stakeholders see the exposure? Report debt, guarantees, contractual commitments, and contingent liabilities, and monitor risks across the portfolio.
- Will the market be fair and regulated? Identify preferential treatment, assess whether competition is feasible, and ensure capable independent regulation where needed.
- Will service continuity and quality be protected? Consider how the change affects access, affordability, and reliability, including during transition.
- Are non-financial risks covered? Include operational controls, environmental and sustainability exposure, procurement integrity, and corruption risks in oversight.
Privatization requires additional preparation around valuation, market structure, regulatory capacity, and service obligations. The OECD Guidelines on Corporate Governance of State-Owned Enterprises state that good corporate governance is an important prerequisite for economically effective privatization and can enhance valuation and fiscal proceeds. This is institutional guidance about preparation, not evidence that divestment is always preferable.
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What can be said about jobs?
There is no general causal employment effect established here for SOE reform. Governments may assign employment purposes to SOEs, but that fact does not quantify what a particular reform does to jobs. Assessing employment impacts requires evidence specific to the country, sector, reform design, and time period; avoid treating a workforce change in one case as a universal result.
Quick Recap
Sources
- OECD, Ownership and Governance of State-Owned Enterprises 2024
- OECD, Managing Risk Across State-Owned Enterprises (2026)
- IMF, State-Owned Enterprises in Emerging Europe: The Good, the Bad, and the Ugly (2017)
- IMF, Managing Fiscal Risks from State-Owned Enterprises (2020)
- IMF, State-Owned Enterprise Stress Test Tool
- OECD, Guidelines on Corporate Governance of State-Owned Enterprises
- World Bank, New World Bank Report Identifies Reforms to Improve State-Owned Enterprises (The Gambia, 2022)
- OECD, Corporate Governance of State-Owned Enterprises
- World Bank Independent Evaluation Group, State-Owned Enterprise Challenges and World Bank Group Reforms, Chapter 1
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