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The State-Owned Enterprise as a Vehicle for Stability

Authored by Dr. Neil Efird. | April 2010

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Summary

As providers of essential public or commercial services, state-owned enterprises (SOEs) are important in modern economies. Since SOEs are ubiquitous in the global economy, they are likely to be present in conflict-prone societies. In such environments, the defining political and economic systems within which the SOEs exist are likely to embody the interests both of participants in the conflict and of those hoping for an end to the conflict. In stability operations, the imperative for SOEs is to become productive in a way that helps create stability.

Although revitalizing SOEs can be complex and ambiguous, the task can be a useful, intermediate objective on the road to the end state of a sustainable economy. One multinational force commander with experience in Kosovo and Afghanistan described those particular conflict environments as “mosaic wars” offering many perspectives, which therefore made them difficult to visualize.1 In similar contexts, SOEs offer focal points for visualizing the intended end state of the operational environment, precisely because they often are a microcosm of a country's pre-conflict power structure. Consequently, if handled correctly, SOEs can be stepping stones toward stability.

Recent experience in stability operations demon­strates the value of gaining early control of and effec­tively restructuring SOEs. In one Liberian example, United Nations (UN) security forces took steps to enable the state-owned electric power company and state-managed rubber plantations to serve as the basis for political stability. This action yielded three immediate benefits that enhanced stabilization: (1) economic production, (2) employment, and (3) symbolization of governmental control.

In contrast, the hands-off approach of the occupy­ing UN authority in Kosovo allowed ex-combatants to assume control of the all-important electric power company, which resulted in a politicized workforce and continued instability. In Iraq, Coalition forces lost opportunities for stabilization when they initially failed to reactivate potentially viable state enterprises, which might have absorbed into the legitimate workforce the potential recruits for the insurgency. In Mozambique, UN authorities failed to integrate the SOEs in a comprehensive short- and long-term development plan, owing to the UN agencies' own competing visions.

The experience of countries at peace confirms the potential for SOEs to contribute to mid- and long-term economic development even in conflict-prone environments. In former centrally-managed economies, as well as in free market, efforts to make SOEs more productive have centered on privatization, the process of transferring ownership to private inter­ests. Generally, post-conflict privatization is the end state of a lengthy process, the preliminary phase of which involves repair and refurbishing of plant and equipment, restructuring of management, and revision of policies and procedures, all of which aim to make

SOEs competitive in the market place. In this setting, SOEs can be focal points of development.

While the post-conflict long-term restructuring imperative of SOEs is to attract private investment, both foreign and domestic, the short-term objective of SOEs during stability operations must be to absorb or at least befriend that part of the labor force that might otherwise be recruited by insurgents. Reconstruction and revitalization of SOEs during stability operations thus require a flexible, pragmatic, and non-ideological orientation. The process must begin with a political-economic analysis of the conflict-prone country to answer the following basic questions:

  • What SOEs have been critical to the pre-conflict economy?
  • What domestic and international market conditions will support these SOEs in a competitive environment?
  • What costs are associated with the potential reconstruction of the SOEs?
  • What should be the reconstruction priority order of these SOEs?

SOEs tend to be providers of essential public services—such as electric power companies, water utilities, ports, and transportation networks—but SOEs also engage in an array of commercial activities involving airlines, banks, basic commodity planta­tions, textile manufacturing, and vehicle assembly plants. Given this array of SOE activity, during the first 6 months following conflict, entities like the Pro­vincial Reconstruction Teams (PRTs) that operate at the subnational level should screen, prioritize, select, and help in the restructure of SOEs. During the restructuring process, they should closely monitor SOE management to prevent conflict between former combatants.

Due to their scope and scale of resource use, SOE management and operations can significantly affect national-level economic development. Therefore, agents engaged in stability operations should work with development planners to ensure mid- to long­term institutional capacity building that enhances the conflict-prone country's broader capacity for sustained growth. The intended end state of SOEs in stability operations should be functioning entities that can attract new investment, perhaps by privatization when and where appropriate. Although the priority for particular SOEs in a conflict-prone environment must be restoration of those that can provide essential public services, agents engaged in stability operations should be prepared to support the revitalization of commercially-oriented SOEs as well, especially when they account for a significant proportion of regional economic output, income, and employment.

Measuring progress in these efforts is essential for evaluating the pace at which SOEs are transitioning from conflict damage repair to steady production and, ultimately, a sustainable economy. SOE-specific metrics are generally based on broader indices of stability because SOEs are often at the core of the economic and political dynamics of conflict-prone societies. In fact, experience has shown that “the main barrier to measuring progress is political, not conceptual,” meaning that the first step is to “depoliticize metrics.”2 Among the more useful sets of metrics established for stability operations are MPICE and its predecessor, the Framework for Success: Societies Emerging from Conflict, which list essential requirements for stability as discussed below. For operational purposes, it is useful to separate these stability requirements into those related to production and those related to policy.

It can be safely assumed that agents engaged in the economic aspect of stability operations will focus first on the physical production objectives; therefore, the proposed set of SOE-specific metrics addresses only those. Establishing such objectives must induce neither an exclusive focus on production objectives nor encouragement of policy reporting through stovepiped organizational channels. To avoid these potential outcomes, personnel of all agencies that play a role in stability operations must widen their peripheral vision to sense how the synergy from the coordinated effort relates to individual agency objectives. Based on the physical production objectives as complemented by policy objectives as shown in Figure 1, Section IV subsection titled “Measuring Progress” sets forth a guide for using the SOE as a vehicle for stabilization.

Production (Physical)

Development Climate (Policy)

Reconstruct public infrastructure (e.g., electric power, communications, and transportation) and the infrastructure of commercial entities, if appropriate

Promote sound fiscal policy

Build effective and predictable regulatory and legal environment

Build effective financial and economic institutions (e.g., banks)

Promote business development and sustainable employment

Create viable workforce (employment)

Increase access to capital

Limit corruption and illicit economy

Protect, manage, and equitably distribute natural resources

Figure 1. Production (Physical) and Development
Climate (Policy) Objectives.

This paper will describe the importance of SOEs and their treatment in five post-conflict environments and suggest lessons and metrics for measuring progress.

Endnotes - Summary

  1. Major General A. J. H. Van Loon (The Netherlands), “Coalition Operations,” presentation to the U.S. Army War College, Class of 2009, January 27, 2009.
  2. Craig Cohen, “Measuring Progress in Stabilization and Reconstruction,” Stabilization and Reconstruction Series No. 1, Washington, DC: United States Institute of Peace, March 2006, pp. 3, 11.