A state-owned enterprise (SOE) is a government entity which is established or nationalised by the ''national government'' or ''provincial government'' by an executive order or an act of legislation in order to earn profit for the

government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government ...

, control monopoly of the private sector entities, provide products and services to citizens at a lower price and for the achievement of overall financial goals & developmental objectives in a particular country. The national government or provincial government has majority

ownership Ownership is the state or fact of legal possession and control over property, which may be any asset, tangible or intangible. Ownership can involve multiple rights, collectively referred to as title, which may be separated and held by different ...

over these ''state owned enterprises''. These ''state owned enterprises'' are also known as public sector undertakings in some countries. Defining characteristics of SOEs are their distinct legal form and possession of financial goals & developmental objectives (e.g., a state railway company may aim to make transportation more accessible and earn profit for the government), SOEs are government entities established to pursue financial objectives and developmental goals.

Terminology

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 State ownership, also called government ownership and public ownership, is the ownership of an industry, asset, or enterprise by the state or a public body representing a community, as opposed to an individual or private party. Public owner ...

would qualify an entity to be considered as state-owned since governments can also own regular

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

, 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. Thus, SOEs are known under many other terms: state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, government-owned company, government-owned corporation,

government-sponsored enterprise A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United States Congress. Their intended function is to enhance the flow of credit to targeted sectors of the economy, to make those segments of th ...

, 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 entity A Crown entity (from the Commonwealth term '' Crown'') is an organisation that forms part of New Zealand's state sector established under the Crown Entities Act 2004, a unique umbrella governance and accountability statute. The Crown Entities Act ...

", as cabinet ministers ( Ministers of the Crown) often control the shares in them. 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

owns a stake using a

holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...

. The 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.

Use

Economic reasons

Natural monopolies

SOEs are common with natural monopolies, because they allow capturing

economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables a ...

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 beverage An alcoholic beverage (also called an alcoholic drink, adult beverage, or a drink) is a drink that contains ethanol, a type of alcohol that acts as a drug and is produced by fermentation of grains, fruits, or other sources of sugar. The c ...

s), and merit goods (healthcare).

Infant industries

SOEs can also help foster industries that are "considered economically desirable and that would otherwise not be developed through private investments". 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.

Political reasons

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

Effects

Compared to government bureaucracy

Compared to government bureaucracy, state owned enterprises might be beneficial because they reduce politicians' influence over the service. 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.

Compared to regular enterprises

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 government objectives.

Around the world

Eastern Europe Eastern Europe is a subregion of the European continent. As a largely ambiguous term, it has a wide range of geopolitical, geographical, ethnic, cultural, and socio-economic connotations. The vast majority of the region is covered by Russia, wh ...

and

Western Europe Western Europe is the western region of Europe. The region's countries and territories vary depending on context. The concept of "the West" appeared in Europe in juxtaposition to "the East" and originally applied to the ancient Mediterranean ...

, there was a massive

nationalization Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization usually refers to priv ...

throughout the 20th century, especially after

World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the World War II by country, vast majority of the world's countries—including all of the great power ...

. In the

Eastern Bloc The Eastern Bloc, also known as the Communist Bloc and the Soviet Bloc, was the group of socialist states of Central and Eastern Europe, East Asia, Southeast Asia, Africa, and Latin America under the influence of the Soviet Union that existed du ...

, countries adopted very similar policies and models to the USSR. Governments in Western Europe, both left and right of centre, saw state intervention as necessary to rebuild economies shattered by war. Government control over natural monopolies like industry was the norm. Typical sectors included

telephones A telephone is a telecommunications device that permits two or more users to conduct a conversation when they are too far apart to be easily heard directly. A telephone converts sound, typically and most efficiently the human voice, into e ...

electric power Electric power is the rate at which electrical energy is transferred by an electric circuit. The SI unit of power is the watt, one joule per second. Standard prefixes apply to watts as with other SI units: thousands, millions and billions ...

, fossil fuels,

iron ore Iron ores are rocks and minerals from which metallic iron can be economically extracted. The ores are usually rich in iron oxides and vary in color from dark grey, bright yellow, or deep purple to rusty red. The iron is usually found in the ...

, railways,

airline An airline is a company that provides air transport services for traveling passengers and freight. Airlines use aircraft to supply these services and may form partnerships or alliances with other airlines for codeshare agreements, in which ...

media Media may refer to: Communication * Media (communication), tools used to deliver information or data ** Advertising media, various media, content, buying and placement for advertising ** Broadcast media, communications delivered over mass el ...

postal services The mail or post is a system for physically transporting postcards, letter (message), letters, and parcel (package), parcels. A postal service can be private or public, though many governments place restrictions on private systems. Since the mid ...

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Becau ...

s, and

water Water (chemical formula ) is an inorganic, transparent, tasteless, odorless, and nearly colorless chemical substance, which is the main constituent of Earth's hydrosphere and the fluids of all known living organisms (in which it acts as ...

. Many large industrial corporations were also nationalized or created as government corporations, including, among many others: 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 laws. 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 Saudi Aramco ( ar, أرامكو السعودية '), officially the Saudi Arabian Oil Company (formerly Arabian-American Oil Company) or simply Aramco, is a Saudi Arabian public petroleum and natural gas company based in Dhahran. , it is one of ...

, 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. In the EU directives were issued, and signed into law in member countries, that railways should be split into branches. So where everything from infrastructure to running the trains had been in one company (often owned by the local state or other authorities), now the various activities were to be separated into independent companies. A major motivation was to more easily enable free access to run trains in the various countries, and thereby increase competition and offer lower fees.

Economic theory

In economic theory, the question of 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. 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. 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.

References

Citations

Sources

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