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What surfing taught me on reforming state-owned enterprises
Rafayil Abbasov - ADB

What surfing taught me on reforming state-owned enterprises

By Rafayil Abbasov
Reforming state-owned enterprises can be an extraordinarily complex activity but it is underpinned by a single clear goal.

Surfing taught about reforming SOEs .. ABD

Recently I spent couple of weekends attending my daughter’s surfing class and truly enjoying her fast progress. I learned from her lessons that surfing requires a combination of timely judgment on the quality and type of waves and fast decision making based on physical strength to make one single, strong action – standing up on the board when you think it is right time.
I noticed that the coach kept repeating a single bit of advice to my daughter: “pull yourself up on the board, paddle well and get ready to stand-up!” Surprisingly, the coach was not really interested in the details of the process but was watching the end result, appreciating when she was able to jump on her feet and surf.
Surfing is a more fun activity than my line of work: helping to reform state-owned enterprises in Central Asia, but there is one striking similarity.
Looking at governments’ efforts to reform state-owned enterprises, one may get lost in restructuring plans, reform actions and resource needs. Understanding any country’s state-owned enterprise reform commitments is not an easy task and usually I get puzzled with so many priorities and objectives stipulated in special decrees, administrative circulars and different sorts of programs.
What I learned from my ten-year-old daughter is that despite the complexity of actions required, these state-owned enterprises are essentially trying to do the same thing that she is doing in her surfing class. They are trying to stand up “commercially” on their own feet.
When surfing, my daughter is given one single purpose order – “stand up”. And the decision is entirely up to her judgement and physical capacity to do it at the right time. She is not given multiple types of guidance or advice by the coach so that she is not confused while paddling into the waves. As she explained to me later, her activities
Three reasons why state-owned enterprises struggle to stand on their own commercially.
Why aren’t state-owned enterprises similarly successful in learning to stand up commercially and surf profitably in their business? Here are three reasons:
1. Multiple orders, decrees and resolutions. State-owned enterprises in Central Asia are guided and administered by complex decrees and resolutions that put forward a lot of detailed actions with different and, in some instances, unrealistic deadlines. In most of cases, these visions are politically motivated and linked with the government’s big picture agenda that sometimes contradicts the commercial and corporate nature of state-owned enterprises.
But the bigger issue about the government’s decrees and action plans is the legal and rigid nature of documents constraining state-owned enterprises’ corporate flexibility. Decrees and cabinet circulars are replacing strategic planning and responsibilities that are embedded in their corporate governance frameworks. This includes the capacity of management to make the call on planning objectives and resources, and a supervisory board to assess and validate these propositions and plans in a more predictable way.
In a complex environment with changing circumstances (like in surfing with the speed and height of waves), state-owned enterprises’ governance frameworks remain a very solid and strong basis for adjustments and improvements in resource planning. Regretfully, at present any proposition by management for changes in corporate plans will have less power compared with decrees and resolutions issued by the government.
2. Direct interference. Governments like to declare politically-backed visions in special development programs and strategies that go far beyond five or ten years. This degree of planning is an exemplary way to share an integrated long-term vision of goals, objectives and values. In an ideal world, this approach would help state-owned enterprises to align their priorities and activities with that of the government.
When government and state-owned enterprises’ objectives are aligned on core values, management can create mechanisms to translate these priorities into their own strategic plans, investments and operations. But paradoxically, this rarely happens. While a government’s vision remains focused on the long-term, government officials often enjoy direct control over state-owned enterprises’ business decision-making.
All state-owned enterprises in Central Asia are at government discretion in terms of annual budget and variation, executive staffing, procurement and contracts. Bypassing the governance framework through direct and regular interference by different ministries and state agencies discourages managerial spirit for operational efficiency and sustainability. This is particularly true for energy utilities. Given asymmetry of information, i.e. access to operational and performance data between government and state-owned enterprises, usually it is safer for state-owned enterprises to “keep on paddling” instead of standing up on their own feet and surfing a wave of meaningful commercial decisions that maximize shareholder value.
3. Limited incentives and unlimited liabilities. State-owned enterprises need motivated and responsible managers. They need to be provided with financial incentives backed with strong governance systems that promote responsible decision making at all levels. However, state-owned enterprise management is often perceived as being government employees in terms of remuneration and responsibility. They are expected to be loyal to government, though they have much less pay than available in the private sector for the same set of managerial skills. Usually, loyalty evaporates over time and is replaced with lower motivation to maximize profit and revenues.
More dangerously, in the context of weak corporate governance and asymmetry of power between governments and management, the heads of public utilities are discouraged from commercial initiatives, planning and changes. In other words, with limited incentives and unlimited liabilities, keeping the status quo while running state-owned enterprises is the best and safest way to manage.
It took a few months for my daughter to understand her single purpose objective in surfing: standing up at the right time to catch the wave. After 20 plus years of state-owned enterprise restructuring in Central Asia – marked by many confusing decrees and programs that have discouraged managerial spirit and innovation – perhaps it is time to take a lesson from the surf instructor. A single purpose objective strategy might be just what is needed to help these enterprises catch the wave to self-sufficiency and prosperity.
(Rafayil Abbasov, Finance Specialist (Energy), Central and West Asia Regional Department, ADB

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