ISSUES OF THE ECONOMIC EFFICIENCY OF APPLYING INSOLVENCY PROCEDURES TO LOSS-MAKING ENTERPRISES WITH STATE PARTICIPATION
Abstract
Loss-making enterprises with state participation impose a persistent fiscal burden on transition economies and frequently distort competition in the markets in which they operate. Insolvency procedures — financial rehabilitation, external administration, and liquidation — are, in principle, the standard mechanism for resolving such enterprises, yet they are applied to state-owned enterprises (SOEs) far more rarely and reluctantly than to private firms. This article addresses the question of the economic efficiency of applying insolvency procedures to loss-making SOEs: under what conditions does the application of an insolvency procedure increase social welfare relative to the continuation of state support, and which procedure should be selected. Using a mixed-methods design that combines comparative institutional analysis, descriptive statistics on a sample of loss-making SOEs, a cost–benefit framework, and a viability-based decision model, the study shows that the inefficiency surrounding SOE insolvency is driven primarily by the soft budget constraint, the bundling of commercial and social functions, delayed initiation of procedures, and weak ownership incentives. The empirical results indicate that the accumulated fiscal cost of continued subsidization, the duration of loss-making before intervention, and the share of non-core (social) assets are the strongest determinants of the net efficiency of insolvency.
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