Why Performance Contracts for State-Owned Enterprises Haven’t Worked

Written contracts between governments and state enterprises have been widely used in World Bank projects since the first Bank operation supporting performance contracts, a 1975 operation in Senegal. A Bank survey of developing countries found 565 such contracts in thirty-two countries, and another 103,000 in China as of June 1994 (World Bank 1995). Although these performance contracts go by different names— contrat-plan, memorandum of understanding, signaling system—they share common features. All are negotiated, written agreements between governments and the managers of state enterprises that specify targets that management pledges to achieve in a given time frame and define how performance will be measured at the end of a specified period.