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 (e.g., it is unclear whether municipally owned corporations and enterprises held by regional public bodies are considered state-owned). Next, 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 term "Crown corporation", or "Crown entities", as 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.

The act of turning a part of government bureaucracy into a SOE is called corporatization.[5][6][7]

Use[edit]

Economic reasons[edit]

Natural monopolies[edit]

SOEs are common with natural monopolies, because they allow capturing economies of scale while they can simultaneously achieve a public objective. For that reason, SOEs 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).

Infant industries[edit]

SOEs can also help foster industries that are "considered economically desirable and that would otherwise not be developed through private investments".[8] When nascent or 'infant' industries have difficulty getting investments from the private sector (perhaps because the good that is being produced requires very risky investments, when patenting is difficult, or when spillover effects exist), the government can help these industries get on the market with positive economic effects. However, the government cannot necessarily predict which industries would qualify as such 'infant industries', and so the extent to which this is a viable argument for SOEs is debated.[9]

Political reasons[edit]

SOEs are also frequently employed in areas where the government wants to levy user fees, but finds it politically difficult to introduce new taxation.[3] Next, SOEs can be used to improve efficiency of public service delivery or as a step towards (partial) privatization or hybridization.[10] SOEs can also be a means to alleviate fiscal stress, as SOEs may not count towards states' budgets.[10][5][6][7][11]

Effects[edit]

Compared to government bureaucracy[edit]

Compared to government bureaucracy, state owned enterprises might be beneficial because they reduce politicians' influence over the service.[12][13] Conversely, they might be detrimental because they reduce oversight and increase transaction costs (such as monitoring costs, i.e., it is more difficult and costly to govern and regulate an autonomous SOE than it is the public bureaucracy). Evidence suggests that 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 regular enterprises[edit]

Compared to a regular enterprise, state-owned enterprises are typically expected to be less efficient due to political interference, but unlike profit-driven enterprises they are more likely to focus on public objectives.[13]

Around the world[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.[14] Government control over so-called natural monopolies like industry was the norm. Typical sectors included telecommunications, power, fossil fuels, railways, airports, airlines, public transport, iron ore, 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 may operate differently from an ordinary limited liability corporation. 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 most OPEC countries, the governments own the oil companies operating on their soil. A notable example is the Saudi Arabian 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.[citation needed]

In some countries, the governments own the electricity companies operating on their land. A notable example is the Sri Lanka Ceylon Electricity Board Lanka Electricity Company (Private) Limited, which the Sri Lankan government operates.[citation needed]

Economic theory[edit]

In economic theory, the question whether a firm should be owned by the state or by the private sector is studied in the theory of incomplete contracts that was developed by Oliver Hart and his co-authors.[15] In a world in which complete contracts were feasible ownership would not matter, because the same incentive structure that prevails under one ownership structure could be replicated under the other ownership structure. Hart, Shleifer, and Vishny (1997) have developed the leading application of the incomplete contract theory to the issue of state-owned enterprises.[16] These authors compare a situation in which the government is in control of a firm to a situation in which a private manager is in control. The manager can invest to come up with cost-reducing and quality-enhancing innovations. The government and the manager bargain over the implementation of the innovations. If the negotiations fail, the owner can decide about the implementation. It turns out that when cost-reducing innovations do not harm quality significantly, then private firms are to be preferred. Yet, when cost-reductions may strongly reduce quality, state-owned enterprises are superior. Hoppe and Schmitz (2010) have extended this theory in order to allow for a richer set of governance structures, including different forms of public-private partnerships.[17]  

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. ^ a b Grossi, Giuseppe, and Reichard, C. (2008). "Municipal corporatization in Germany and Italy". Public Management Review, 10(5): 597–617.
  6. ^ a b Ferry, Laurence, Rhys Andrews, Chris Skelcher, and Piotr Wegorowski (2018). "New development: Corporatization of local authorities in England in the wake of austerity 2010–2016". Public Money & Management.
  7. ^ a b Voorn, Bart, Sandra Van Thiel, and Marieke van Genugten (2018). "Debate: Corporatization as more than a recent crisis-driven development". Public Money & Management.
  8. ^ Kowalski, P., Büge, M., Sztajerowska, M. and Egeland, M. (2013). "State-Owned Enterprises: Trade Effects and Policy Implications" (PDF). OECD Trade Policy Papers, No. 147. line feed character in |publisher= at position 18 (help)
  9. ^ Baldwin, R. E. (1969). "The case against infant-industry tariff protection" (PDF). Journal of political economy, 77(3), 295-305.
  10. ^ a b 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.
  11. ^ Citroni, Giulio, Andrea Lippi, and Stefania Profeti (2013). "Remapping the state: inter-municipal cooperation through corporatization and public-private governance structures". Local Government Studies.
  12. ^ Shleifer, Andrei, and Robert W. Vishny (1994). "Politicians and firms". Quarterly Journal of Economics, 109(4): 995–1025.
  13. ^ a b Shleifer, Andrei, and Robert W. Vishny (1997). "A survey of corporate governance". Journal of Finance, 52(2): 737–783.
  14. ^ "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»
  15. ^ Hart, Oliver (2017). "Incomplete Contracts and Control". American Economic Review. 107 (7): 1731–1752. doi:10.1257/aer.107.7.1731. ISSN 0002-8282.
  16. ^ Hart, O.; Shleifer, A.; Vishny, R. W. (1997). "The Proper Scope of Government: Theory and an Application to Prisons". The Quarterly Journal of Economics. 112 (4): 1127–1161. doi:10.1162/003355300555448. ISSN 0033-5533.
  17. ^ Hoppe, Eva I.; Schmitz, Patrick W. (2010). "Public versus private ownership: Quantity contracts and the allocation of investment tasks". Journal of Public Economics. 94 (3–4): 258–268. doi:10.1016/j.jpubeco.2009.11.009. ISSN 0047-2727.

Sources[edit]

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