0.11 States and markets - soes  (Page 8/9)

There is yet another reason for poor financial performance of SOEs: the need to deal with social responsibilities imposed upon them by the government as owners.

These “social responsibilities” are significant for two reasons:

1. They typically do inflate SOE costs, and are partly responsible for failure of many SOE ^s to minimize costs.
2. The social responsibilities assigned or presumed for SOE ^s are very often used as an excuse for SOE operating losses.

Some of the social responsibilities assigned to or otherwise accepted by SOE ^s around the world are:

1. Rectifying social imbalances, such as those resulting from past ethnic or other discrimination - India, Malaysia, Bolivia.
2. Provision of expensive housing and other amenities for managers of SOE ^s (including golf courses as in Indonesia’s P.T Timah (tin) and limousines in Ghana).
3. Rectifying regional imbalances (using SOE budgets to help lagging regions catch up through requiring the firm to invest heavily road construction or infrastructure).
4. Performing giant building projects for the government as owner. (Pertamina – The National Legislature Assembly was largely constructed from building materials flown in on C-140s from the U.S. This is no way to minimize costs. Another example: Aramco – built the entire campus for King Saud University of Science and Technology at costs of tens of billions of dollars.

All of these factors distract SOE ^s from their principal activities and clearly drive up costs.

The “social obligations” of SOE ^s are very often used to justify their losses. That is the tired old apologies for inefficiency and losses in SOE ^s long offered in Bolivia, Indonesia, Italy and the U.S.

Example: Fannie Mae and Freddie Mac, the mortgage giants created decades ago as SOE ^S to ensure home mortgages. In the eighties, both SOE ^S were partially privatized. Both cost taxpayers hundreds of billions of dollars in the economic meltdown of 2008. But even in 1999, the two firms were in terrible shape. Larry Summer was President Bill Clinton’s Secretary of Treasury in 1999. Here is what he had to say about them. To quote,

“The illusion that the Fannie Mae and Freddie Mac were doing virtuous work made it impossible to build a political case for regulations. When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always (said to be) the result of their social obligations. Government budget discipline was not appropriate because it was always emphasized that they were ‘private companies.’ But market discipline was nearly nonexistent given the general perception -- now validated -- that their debt was government backed. Little wonder with gains privatized / and losses socialized / that the enterprises gambled their way into financial catastrophe .”

Soe ^S And the environment