Rethinking the role of the state in Tunisia

By Hanan Morsy, Anastasios Giamouridis, and Rafik Selim

Rethinking the role of the state in Tunisia

EBRD supports Tunisia’s efforts to reform state-owned enterprises

State-owned enterprises (SOEs) dominate the economy of Tunisia and their prevalence extends well beyond the provision of public goods. Benefiting from monopolies in many sectors, SOEs distort markets, hinder competition and limit innovation. As many of these firms make losses, they are also a significant burden on Tunisia’s budget and contingent liabilities.

The government has therefore embarked on reform efforts, which we believe are steps in the right direction, but there are significant risks in the design and implementation of these reforms. The EBRD is well placed to leverage its expertise in this area, and is working closely with national and international stakeholders to support the government’s efforts.

Context and operations of Tunisian SOEs

The dominance of SOEs in Tunisia distorts markets and hinders competition. The 104 SOEs that currently operate in the country account for 13 per cent of Tunisia’s GDP. There are 93 non-financial SOEs in 17 sectors, compared with an OECD average of 13 SOEs.

Some of these firms monopolise their sectors, often operating with regulated tariffs, such as in the cereals, olive oil, meat, and sugar sectors. SOEs hold market shares of 50-100 per cent in the gas and electricity sectors, rail and air transport, and fixed-line telecommunication services.

They also play a major role in mining, energy, finance, banking and insurance, and are active in the import of tea, coffee, vegetable oils, iron, and pharmaceuticals.

The government frequently uses SOEs to ensure that affordable key goods and services are available to vulnerable segments of the population. SOEs are also often required to provide services or products at regulated prices that do not reflect costs.

Nevertheless, the prevalence of SOEs extends beyond the provision of public goods to areas where their presence is not in line with international best practice. For example, a number of SOEs operate hotels and restaurants, 3 provide golf facilities, 12 offer real estate services, and an SOE has a monopoly in the tobacco supply chain.

Poor performance and governance

In Tunisia SOEs suffer from internal and external governance problems alike. Internally, they are characterised by weak transparency, accounting, reporting, budgeting, ownership, executive boards and efficiency. Externally, they lack oversight and no clear links have been established between transfers from the Ministry of Finance and the achievement of SOE performance targets.

Furthermore, a report by the Commission Nationale d'Investigation sur la Corruption et la Malversation (CNICM), published in November 2011, found that cronyism and corruption were common.

Among the practices noted in the report were (i) access to public land at non-market terms; (ii) the use of insider information to acquire assets for privatisation or restructuring at non-market terms; (iii) the abuse of public services and assets for private purposes; and (iv)politicised appointments of senior management.

This poor performance is further worsened by the high and growing level of employment in SOEs. Currently, SOEs employ some 5 per cent of the local working-age population, an increase of roughly 50 per cent on the levels seen before 2011. Employment in the public sector has been used a tool to deal with unemployment, an acute social problem in Tunisia.

Costs of the current model

SOEs are a significant, growing burden on the government’s budget and contingent liabilities. In 2013, half of all SOEs recorded losses. Non-financial SOEs registered a 4.4 per cent GDP deficit on a consolidated basis, a threefold increase relative to 2010 levels.

Accordingly, over the same period government transfers to SOEs increased from 2 to 7 per cent of GDP. Guaranteed external debt averaged 10 per cent of GDP, about a third of the total external public and publicly guaranteed debt, and SOEs’ debt to the banking sector stood at 5 per cent of GDP.

The dominance of SOEs adversely affects competition and innovation. In sectors dominated by these firms, the scope for achieving greater efficiency and innovation through competitive pressures is reduced.

Over 50 per cent of the economy remains either closed or subject to entry restrictions, including limits on participation by the private sector and on foreign ownership. Regulated tariffs prevent SOEs from operating on a cost-plus basis, which affects their financial position and necessitates transfers from the government.

At the same time, tariffs shield SOEs from private-sector competition, even where no legal restrictions are in place. As a result, SOEs lack incentives to become more efficient or to innovate.

Reform priorities

A broad SOE reform strategy is being developed by the Tunisian government. The priorities are to boost the monitoring and restructuring of SOEs by linking transfers with performance, strengthening executive boards, improving the selection of managers, enhancing control and audit, enforcing reporting and publication, and designing performance contracts (PCs) for managers. PCs for the three largest state-owned banks have been signed and PCs for the five largest non-financial SOEs are being finalised, focusing mainly on operational issues and oversight.

The reform strategy will make a distinction between SOEs operating in strategic and non-strategic sectors, as well as competitive and non-competitive sectors. In this way, the strategy will define the type of intervention required and the possibility of opening a sector to competition.

A dedicated public-private fund will be created to proceed with the recapitalisation of some SOEs. This will amount to indirect, partial privatisation in a number of sectors, starting with banking.

The reform effort is a step in the right direction, but significant risks remain in design and implementation. The intervention falls short of clearly seeking to increase competition across sectors or addressing structural issues such as heavy subsidies and regulated prices.

Moreover, there are currently no objective social, regional, or financial criteria for distinguishing between strategic and non-strategic sectors, and/or between competitive and non-competitive sectors. This leaves substantial room for discretion and decisions are likely to be made at a high political level. A key risk for implementation is the opposition expected from labour unions and parliament, and some public distrust of private-sector provision in politically sensitive sectors.

The EBRD's role

The EBRD is working closely with national and international stakeholders in order to support the Tunisian authorities in reforming SOEs. The Bank stands ready to leverage its expertise, gained through work in other countries that face similar challenges and are at similar stages of transition.

The EBRD can also leverage its relationship with other international financial institutions and with various SOEs in Tunisia, to help the Tunisian firms become more competitive, efficient, and well governed.

For example, the EBRD can add value by supporting the emergence of a broader regulatory environment that enables improvements such as price liberalisation and subsidy reforms; by providing technical and training support to the Competition Agency and administrative judges; and by helping the Competition Agency improve its capacity for enforcement.

The authors would like to thank Rika Ishii, Artur Radziwill, Antoine Sallé de Chou and Peter Sanfey for valuable comments.