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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 i ...
, 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 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 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
goals & developmental objectives (e.g., a state
railway company A railway company is a company within the rail industry. It can be a manufacturing firm or an operator. Some railway companies operate both the trains and the track, while, particularly in the European Union, operation of the track is undertak ...
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 corporation A municipally owned corporation is a corporation owned by a municipality. They are typically "organisations with independent corporate status, managed by an executive board appointed primarily by local government officials, and with majority public ...
s 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 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. 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 the ...
, commercial government agency, state-privatised industry public sector undertaking, or parastatal, among others. In the
Commonwealth realms A Commonwealth realm is a sovereign state in the Commonwealth of Nations whose monarch and head of state is shared among the other realms. Each realm functions as an independent state, equal with the other realms and nations of the Commonwealt ...
, 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
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 i ...
owns a stake using a holding company. 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 Corporatization is the process of transforming and restructuring state assets, government agencies, public organizations, or municipal organizations into corporations. It involves the adoption and application of business management practices and ...
.


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 con ...
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 effect In economics a spillover is an economic event in one context that occurs because of something else in a seemingly unrelated context. For example, externalities of economic activity are non-monetary spillover effects upon non-participants. Odors f ...
s 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 In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pro ...
(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

In
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, whi ...
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 p ...
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 vast majority of the world's countries—including all of the great powers—forming two opposing ...
. 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 ...
, 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, electric power, fossil fuels, iron ore,
railways Rail transport (also known as train transport) is a means of transport that transfers passengers and goods on wheeled vehicles running on rails, which are incorporated in Track (rail transport), tracks. In contrast to road transport, where the ...
, airlines, media,
postal services The mail or post is a system for physically transporting postcards, letters, and parcels. A postal service can be private or public, though many governments place restrictions on private systems. Since the mid-19th century, national postal syst ...
,
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. Because ...
s, and
water Water (chemical formula ) is an Inorganic compound, inorganic, transparent, tasteless, odorless, and Color of water, nearly colorless chemical substance, which is the main constituent of Earth's hydrosphere and the fluids of all known living ...
. Many large industrial corporations were also nationalized or created as government corporations, including, among many others: British Steel Corporation,
Statoil Equinor ASA (formerly Statoil and StatoilHydro) is a Norwegian state-owned multinational energy company headquartered in Stavanger. It is primarily a petroleum company, operating in 36 countries with additional investments in renewable energy. I ...
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 A national oil company (NOC) is an oil and gas company fully or in the majority-owned by a national government. According to the World Bank, NOCs accounted for 75% global oil production and controlled 90% of proven oil reserves in 2010. Due to thei ...
,
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 In economic theory, the field of contract theory can be subdivided in the theory of complete contracts and the theory of incomplete contracts. In contract law, an incomplete contract is one that is defective or uncertain in a material respect. A ...
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.


See also


References


Citations


Sources

* .
Alternate location:
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Further reading

*Jewellord Nem Singh; Geoffrey C. Chen (2018),
State-owned enterprises and the political economy of state–state relations in the developing world
', Third World Quarterly, 39:6, 1077–1097, DOI: 10.1080/01436597.2017.1333888
The Public Firm with Managerial Incentives
by Elmer G. Wiens. {{Authority control * Types of business entity