State-owned enterprise

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A state-owned enterprise (SOE) is a business enterprise where the state has significant control through full, majority, or significant minority ownership.[1] Defining characteristics of SOEs are their distinct legal form and operation in commercial affairs and activities. While they may also have public policy objectives (e.g., a state railway company may aim to make transportation more accessible), SOEs should be differentiated from government agencies or state entities established to pursue purely nonfinancial objectives.[2]

Terminology[edit]

The terminology around the term state-owned enterprise is murky. All three words in the term are challenged and subject to interpretation. First, it is debatable what the term "state" implies (for instance, it is unclear whether municipally owned corporations and enterprises held by regional public bodies are considered state-owned). It is contestable under what circumstances a SOE qualifies as "owned" by a state (SOEs can be fully owned or partially owned; it is difficult to determine categorically what level of state ownership would qualify an entity to be considered as state-owned since governments can also own regular stock, without implying any special interference). Finally, the term 'enterprise' is challenged, as it implies statutes in private law which may not always be present, and so the term 'corporations' is frequently used instead.[3][4]

Thus, SOEs are known under many other terms: state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, crown corporation, government-owned corporation, government-sponsored enterprises, commercial government agency, state-privatised industry public sector undertaking, or parastatal, among others. In the Commonwealth realms, particularly in Australia, Canada, New Zealand, and the United Kingdom, country-wide SOEs often use the style "Crown corporation", or "Crown entities". Examples of Crown corporations include the Canadian Broadcasting Corporation and Air Canada before the latter underwent privatization; cabinet ministers (ministers of the Crown) often control the shares in such public corporations.

The term 'government-linked company' (GLC) is sometimes used to refer to corporate entities that may be private or public (listed on a stock exchange) where an existing government owns a stake using a holding company. There are two main definitions of GLCs are dependent on the proportion of the corporate entity a government owns. One definition purports that a company is classified as a GLC if a government owns an effective controlling interest (more than 50%), while the second definition suggests that any corporate entity that has a government as a shareholder is a GLC.

Sectors[edit]

SOEs are common with natural monopolies. They primarily operate in the domain of infrastructure (e.g. railway companies), strategic goods and services (e.g. postal services, arms manufacturing and procurement), natural resources and energy (e.g. nuclear facilities, alternative energy delivery), politically sensitive business, broadcasting, banking, demerit goods (e.g. alcoholic beverages), and merit goods (healthcare). SOEs are also frequently employed in areas where user fees are levied.[3] SOEs can be used to improve efficiency of public service delivery or as a step towards (partial) privatization or hybridization.[5] The act of turning a part of government bureaucracy into a SOE is called corporatization.[6]

Effects[edit]

Compared to government bureaucracy, state owned enterprises might be beneficial because they reduce politicians' influence over the service.[7][8] Conversely, they might be detrimental because they reduce oversight and increase transaction costs (such as monitoring costs and contracting problems). Evidence suggests that the former may be more important than the latter (i.e. existing SOEs are typically more efficient than government bureaucracy), but that this benefit diminishes as services get more technical and have less overt public objectives.[4]

Compared to a regular enterprise, state-owned enterprises are typically expected to be less efficient, but unlike profit-driven enterprises they are more likely to focus on public objectives.[8]

SOEs around the world[edit]

Europe[edit]

In Western Europe and Eastern Europe there was a massive nationalization throughout the 20th century, especially after World War II. In Eastern Europe, governments dominated by Communists adopted the Soviet model. Governments in Western Europe, both left and right of centre, saw state intervention as necessary to rebuild economies shattered by war.[9] Government control over so-called natural monopolies like industry was the norm. Typical sectors included telecommunications, power, petroleum, railways, airports, airlines, public transport, health care, postal services and sometimes banks. Many large industrial corporations were also nationalized or created as Government corporations, including among many British Steel Corporation, Statoil and Irish Sugar. Starting in the late 1970s and accelerating through the 1980s and 1990s many of these corporations were privatized, though many still remain wholly or partially owned by the respective governments.

A state-run enterprise needs to be distinguished from an ordinary limited liability corporation owned by the state. For example, in Finland, state-run enterprises (liikelaitos) are governed by a separate act. Even though responsible for their own finances, they cannot be declared bankrupt; the state answers for the liabilities. Stocks of the corporation are not sold and loans have to be government-approved, as they are government liabilities. In contrast, the state also owns controlling interest in ordinary limited liability corporations. A state-run enterprise is technically not always a corporation, it might also be a separate state entity, or simply a governmental agency acting as an enterprise, perhaps having its own budget. Conversely, the state can directly fund unprofitable business, such as railway services to remote areas, regardless of whether the operator is a private corporation.

Middle East[edit]

In most OPEC countries, the governments own the oil companies operating on their soil. A notable example is the Saudi national oil company, Saudi Aramco, which the Saudi government bought in 1988, changing its name from Arabian American Oil Company to Saudi Arabian Oil Company. The Saudi government also owns and operates Saudi Arabian Airlines, and owns 70% of SABIC as well as many other companies. They are, however, being privatized gradually.

See also[edit]

References[edit]

Citations[edit]

  1. ^ "State-Owned Enterprises Catalysts for public value creation?" (PDF). PwC. Retrieved 16 January 2018. 
  2. ^ Profiles of Existing Government Corporations, pp. 1–16
  3. ^ a b António F. Tavares and Pedro J. Camões (2007). "Local service delivery choices in Portugal: A political transaction costs network". Local Government Studies, 33(4): 535-553. 
  4. ^ a b Voorn, Bart, Marieke L. Van Genugten, and Sandra Van Thiel (2017). "The efficiency and effectiveness of municipally owned corporations: A systematic review". Local Government Studies, 43(5): 820-841. 
  5. ^ António F. Tavares (2017). "Ten years after: revisiting the determinants of the adoption of municipal corporations for local service delivery". Local Government Studies, 43(5): 697-706. 
  6. ^ Grossi, Giuseppe, and Reichard, C. (2008). "Municipal corporatization in Germany and Italy". Public Management Review, 10(5): 597-617. 
  7. ^ Shleifer, Andrei, and Robert W. Vishny (1994). "Politicians and firms". Quarterly Journal of Economics, 109(4): 995-1025. 
  8. ^ a b Shleifer, Andrei, and Robert W. Vishny (1997). "A survey of corporate governance". Journal of Finance, 52(2): 737-783. 
  9. ^ "All Men Are Created Unequal". The Economist. 4 January 2014. Retrieved 27 September 2015. Quote: «The wars and depressions between 1914 and 1950 dragged the wealthy back to earth. Wars brought physical destruction of capital, nationalisation, taxation and inflation» 

Sources[edit]

Further reading[edit]