What is State-Owned Enterprise?

September 1, 20202:01 pm1533 views
What is State-Owned Enterprise?
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State-Owned Enterprise (SOE) is known by many names, including government corporations, government business enterprises, government-linked companies, parastatals, public enterprises, public sector units or enterprises. The term itself is defined as a legal entity that is created by a government in order to partake in commercial activities on the government’s behalf. 

The motivations for state ownership can change over time, but SOEs appear to be an enduring feature of the economic landscape. There is no doubt that SOEs are an influential force globally, but how are they contributing to governmental strategy and the national, regional or local economy? 

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OECD research suggested that there is a wide range of legal forms for SOEs, depending on the following factors: 

  • The level of government that owns the enterprise (central/federal, state/regional or local).
  • The way in which the enterprise was founded.
  • The position in the public administration hierarchy.
  • The purpose of the state-owned enterprise.
  • The status of the state-owned enterprise if it is in the process of being privatised. 
  • Full majority or minority ownership by the government, listing (or not) on a stock exchange.
  • Government shareholdings through vehicles such as government pension funds, asset management funds, restructuring corporations and development lenders.
  • State-enabled, for example enterprises which have been granted exclusive rights by the state, as opposed to state-owned. 

While the varying forms of SOEs might provide governments with flexibility, these multiple forms might also serve to complicate ownership policy, make them less transparent and insulate SOEs from the legal framework applicable to other companies, including competition laws, bankruptcy provisions or securities laws. 

Why state ownership?  

There are some common motivations behind state ownership, such as developing strategic sectors and boosting the national economy, as well as fiscal, political and social considerations. But what makes SOEs different from private sector enterprises? 

The OECD and World Bank have set out a range of commonly stated reasons for state ownership where SOEs might:

  • Provide public goods (e.g. national defence and public parks) and merit goods (e.g. public health and education), both of which benefit all individuals within a society and where collective payment through tax might be preferred to users paying individually. 
  • Improve labour relations, particularly in ‘strategic’ sectors.
  • Limit private and foreign control in the domestic economy.
  • Generate public funds. For instance, the state could invest in certain sectors and control entry in order to impose monopoly prices and then use the resulting SOE revenues as income.
  • Increase access to public services. The state could enforce SOEs to sell certain goods and services at reduced prices to targeted groups as a means of making certain services more affordable for the public good through cross-subsidisation.
  • Encourage economic development and industrialisation through sustaining sectors of special interest for the economy, and in particular to preserve employment; launching new and emerging industries by channelling capital into SOEs which are, or can become, large enough to achieve economies of scale in sectors where the start-up costs are otherwise significant; controlling the decline of sunset industries, with the state receiving ownership stakes as part of enterprise restructuring. 

Often governments have created and invested in SOEs because markets were imperfect or unable to accomplish critical societal needs such as effectively mobilising capital or building enabling infrastructure for economic development e.g. a nationwide electricity grid or water system. Depending on the motivation, which often impacts the desired level of government control. These provide differing degrees of state ownership and influence and also a range of models which governments might choose on the path to private ownership where there is no longer value seen in maintaining state involvement. 

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