Although clearing government arrears to state-owned enterprises (SOEs) can be a laborious and expensive exercise, it can greatly strengthen SOE finances. Having settled the arrears, it is important that governments should rigorously budget their consumption of SOE output to prevent the problem from recurring. It is also important to attend to arrears of SOEs to governments. These are often settled by being converted to equity; but as SOEs do not usually pay dividends this provides no incentive to fiscal discipline and such conversions are akin to government grants. To be effective, conversions should therefore be complemented by reforms in SOE taxation and pricing.
In 1982, the Ethiopian government settled its unpaid bills to SOEs and strengthened their capital base using the proceeds of a special bond issue equivalent to 6% of GDP. Eliminating government arrears in Portugal has improved the financial ratios of several SOEs. The Moroccan government reduced by 4% its consumption of water, power and telecommunications services - all provided by SOEs - by reducing waste and by making civil servants pay the cost of utilities in government housing, although its arrears remain substantial. An integrated government cash control system in Jamaica allows adequate budgetary provision and timely payment for SOE outputs.