Good Practices

Corporate Governance for State-Owned Enterprises - Enhancing Institutions, Enabling Access to Finance, Strengthening Service Delivery

  • Oct 2015

Enormous amounts of public funds flow to India’s state-owned enterprises every year. These institutions deliver critical goods and services such as electricity, water, roads, schools and hospitals; they are a primary source of jobs; they generate significant revenue for the country; they account for one quarter of the nation’s GDP. If these firms aren’t managed properly, precious funds will be wasted. Citizens may not receive services to which they are entitled, development challenges could be more difficult to overcome and India’s poor could struggle even more. India’s private sector has long understood the connection between good corporate governance and better-run businesses, increased efficiency, enhanced access to finance and improved business results. But most of the nation’s state-owned enterprises were slow to embrace the concept. It was a significant problem, given the dominance of state-owned enterprises in the Indian economy. Such companies account for 25 percent of the Bombay Stock Exchange’s market capitalization and a large portion of firms in key industry sectors, including infrastructure, utilities, oil, gas and mining, and manufacturing. Now, this is starting to change, thanks to an innovative approach that integrates corporate governance considerations into the Bank’s funding determinations for projects with India’s state-owned companies. The goal: to raise awareness of the importance of good corporate governance, the value that governance improvements can bring, and the steps firms can take to improve their governance. The Corporate Governance and Financial Accountability assessment has become a key aspect of the Bank’s overall financial management due diligence on stand-alone, state-owned firms that might be eligible for Bank funding. Since the program’s inception, a number of state-run firms have made significant governance improvements, based on recommendations from action plans that came out of their assessments and became part of project preparation and supervision. And more than 15 state-owned enterprises—in key infrastructure sectors—have received Bank funding following this assessment, representing a total of $7 billion in Bank funding. By building, strengthening and mainstreaming their corporate governance in line with internationally and nationally-accepted practices, these firms are enhancing their competitiveness—and their value—enabling them to raise funds in the market. In fact, some are divesting themselves of state support as a result. Delivery of power and upkeep on India’s vital freight rail grid has improved as India’s state-owned firms improve their corporate governance practices. Ultimately, this heightened focus on corporate governance will benefit the people of India, freeing up public funds for critical social services and infrastructure, improving the competitiveness of the economy and enabling reliable delivery of affordable services to more people in more parts of the country.