State-owned enterprises are on the rise. Should we worry?

State-owned enterprises are more and more present in the international marketplace and this can have implications for fair competition and a level playing field for doing business. OECD’s Hans Christiansen, Chung-a Park and Emeline Denis share insights from a new report which surveys global trends in the ownership and governance of state-owned enterprises.

State-owned enterprises (SOEs) now make up 132 of the world’s 500 largest companies – up from 32 just two decades ago. This reflects mostly – but not only – the ascendancy of emerging economies, most of whom have large state owned sectors. Should policy makers be concerned?

Not necessarily. The world could yet see a new wave of mass privatisations but, even if this does not happen, the OECD’s position is that SOEs can be operated with equally high standards of governance, transparency and commercial orientations as private firms. One of our key policy instruments, the OECD Guidelines on Corporate Governance of State-Owned Enterprises provide guidance on how to achieve this in practice.

The good news is that governments do seem to be taking international best practices to heart. A new OECD publication on the ownership and governance of SOEs takes stock of their efforts. The report covers state practices in 54 countries, including all OECD and G20 members.

State ownership is becoming more professional and transparent

One noteworthy trend is that states are operating increasingly like professional investors. Where SOEs in the past were often in the hands of ‘line ministries’ and operated in connection with their policy priorities, 60% of the countries reviewed now vest their ownership role with one entity or have a central coordinating agency overseeing their SOEs on a whole-of-government basis (see figure 1). Around half of the countries surveyed now make the policies describing how they exercise ownership rights publicly available.

Figure 1: Breakdown of the application of SOE-ownership models

Governments are also becoming more transparent about their enterprise ownership. Around two-thirds of the surveyed jurisdictions produce annual aggregate reports on the entire SOE sector or have an online inventory that is considered to be functionally equivalent to an aggregate report (see figure 2).

Figure 2: National approaches to aggregate reporting in the SOE sector

It is also now a common practice, especially in OECD countries, to have SOE auditing and accounting standards that are comparable to those of companies listed on the stock market. The International Financial Reporting Standards often prevail, at least amongst the largest and most economically significant SOEs.   

All on board! SOE governing bodies are playing a growing role

Good SOE governance is not possible in the absence of a professional board of directors empowered to set corporate strategies and monitor the management. At the same time, board members should owe their loyalty to the company and be autonomous from state owners.

The report reveals a positive trend towards more autonomous boards. A majority of countries reported that they have minimum qualification criteria for SOE board members and a mix of both state and “independent” directors. The issue of board diversity is also gaining growing attention. Around one-third of countries have adopted mandatory quotas for female directors, and gender balance provisions specific to SOEs seem more ambitious than those set for listed companies in many countries.

So how level is the playing field for doing business?    

One persistent concern is the way in which SOEs may affect the competition landscape as a consequence of their state ownership. A majority of jurisdictions pursue “competitive neutrality” (i.e. a level playing field between public and private enterprises) to a certain degree through ownership practices, competition, public procurement, tax and regulatory policies.

However, few countries have established an encompassing policy framework for ensuring competitive neutrality, including suitable complaints handling, enforcement and implementation mechanisms consistent with international commitments. In particular, the report finds that important challenges remain in the areas of transparency and disclosure around cost allocation, compensation of public policy objectives, debt financing and rate-of-return requirements.

The mixture of commercial and public policy objectives in individual SOEs is another area of concern. In principle, the two could be separated but today only about half of the countries surveyed require SOEs to separate the accounts of commercial and non-commercial activities. At the same time, 60% of jurisdictions have legal provisions or other rules guiding direct state support offered to SOEs delivering public services. And even the SOEs that are required to obtain their funding from the marketplace are rarely subject to rate-of-return requirements on a par with what private investors would impose in like circumstances.

Towards more effective implementation of best practices

While many governments display a growing commitment to implementing internationally accepted best practices for SOE ownership and governance, the recent OECD report shows that more needs to be done. Starting in 2023, the OECD will initiate a revision of the OECD Guidelines on Corporate Governance of State-Owned Enterprises to ensure that they continue to reflect the emerging international policy and ownership landscape.

In parallel, the OECD assists and advises countries seeking to reform their SOE sectors according to international best practices. The OECD is currently engaged in country and regional programmes in multiple parts of the world, including in the Balkans, Central Asia, South Africa, Ukraine and Viet Nam.

The OECD’s door is open to all countries looking to improve governance in their state ownership landscapes with a view to ensuring a level playing field for all enterprises in the global marketplace, whether they be public or private.

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