Keeping State-Linked Organisations Effective for Penang's Development: Lessons from Germany and India

PENANG, 3 OCTOBER 2026 —

Policy implementation increasingly involves organisations located beyond conventional government departments. The discussion in this ISSUES focuses on state-linked organisations (SLOs) 1; these are publicly owned but legally separate entities that operate with varying degrees of organisational and managerial autonomy. Why governments create such organisations varies across institutional settings. Some seek greater efficiency, flexibility or specialised capacity, while others use alternative organisational arrangements to expand implementation capacity within existing constraints.

Corporatisation involves transferring public functions to legally separate corporate entities while retaining them in the “government’s hands” 2. These government-owned companies are then able to operate with greater organisational autonomy while remaining under public ownership 3. This combination of public ownership and organisational separation distinguishes corporatisation from other forms of public service innovations.

Unlike privatisation, ownership is not transferred to private actors, and remains with the government 4; unlike outsourcing, service delivery is not contracted to an external provider 5. Corporatisation also differs from agentification, where semi-autonomous agencies generally remain within the public sector and operate under public law 6. Corporatised entities are legally separate, often established under company law while remaining wholly or government-owned.

They therefore occupy an intermediate position between conventional bureaucratic provision and private-sector delivery. Table 1 summarises these distinctions by comparing how ownership, organisational separation and service delivery are structured under each arrangement. Why governments choose this arrangement varies. Financial pressures can encourage governments to establish corporate entities to diversify revenue sources, access alternative forms of financing, and reduce reliance on direct government funding. However, this relationship is not straightforward.

Severe fiscal constraints may also limit governments’ ability to establish and sustain such entities, as they require initial resources and may expose governments to additional financial risks. Corporatisation therefore requires a certain level of fiscal capacity even when it is intended to ease financial pressures. Besides, service demands and administrative capacity also matter. Larger or more complex service demands may encourage the creation of specialised organisations.

Governments with limited internal capacity may use separate entities to acquire expertise or overcome bureaucratic constraints, while governments with stronger capacity may be better equipped to establish and oversee more complex corporate arrangements 7. Corporatisation can therefore arise from different administrative conditions and serve different institutional purposes. Taken together, these factors suggest that corporatisation does not serve a single purpose.

Governments may adopt it in response to financial pressures, growing service demands, or limitations in existing administrative capacity. Corporatisation should therefore be understood as one way for governments to reorganise how public functions are performed while retaining public ownership. In some settings, this may primarily provide greater managerial and financial flexibility in delivering public functions; in others, separate organisations may provide additional capacity that is difficult to develop within conventional administrative structures.

These different rationales become clearer when corporatisation is examined within particular institutional settings. Germany provides a useful starting point, where extensive local autonomy has enabled municipalities to use corporatised entities as a means of increasing flexibility and efficiency in public service delivery. Germany provides an extensive example of local government corporatisation. One important rationale has been the greater flexibility available outside conventional municipal administration.

Corporate entities, particularly those established under private-law forms such as the limited liability company (GmbH) 8, face fewer conventional administrative and public-accounting constraints 9. This gives managers greater discretion over operational and investment decisions, as well as more personnel flexibility in recruiting specialised expertise on more competitive terms rather than relying entirely on civil-service remuneration structures.

Organisational separation can consequently enable faster decision-making, greater responsiveness to changing demand and more commercially oriented management, while services remain under municipal ownership. Corporatisation has consequently become an important part of German local public-service delivery. In 2019, municipalities owned 16,634 corporate entities, accounting for 87.5 per cent of all public enterprises in the country.

These entities operate across sectors including water and waste management, energy, housing, health and social care, and transport 10, illustrating the extensive role of publicly owned corporations in municipal service delivery. Scale, capacity and financial flexibility are closely related to this model. Corporate entities can access commercial borrowing and manage investments through their own balance sheets rather than relying exclusively on municipal budget processes; this makes them particularly useful for capital-intensive services 11.

Their use nevertheless varies with municipal capacity. Municipalities with more than 500,000 residents own an average of 64.1 corporate entities, compared with 30.5 among cities with 250,000–500,000 residents and 22.4 among those with 100,000–250,000 residents. Larger municipalities generally possess greater financial and administrative capacity to establish, finance and oversee separate entities, while smaller municipalities may retain services within the administration or cooperate with neighbouring municipalities.

Similar patterns across other countries suggest that corporatisation depends not only on demand for greater flexibility, but also on the capacity to sustain and govern that process 12. The widespread use of corporatisation in Germany also needs to be understood within the country’s decentralised system of government.

Municipalities enjoy constitutionally protected local self-government and undertake substantial responsibilities for implementing public policy and delivering services across areas such as energy, water, waste management, housing and transport. Municipal laws at the Länder level also provide local governments with the organisational authority to establish or hold shares in corporate entities for public purposes.

Corporatisation therefore operates within a system in which municipalities already possess substantial policy, administrative and organisational space; corporate entities provide an additional means of exercising these responsibilities rather than compensating for an absence of local authority. Greater organisational autonomy nevertheless creates its own governance challenges, particularly in coordinating and overseeing municipally-owned entities.

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