State-Owned Enterprise (SOE)

What is a state-owned enterprise (SOE)?

A state-owned enterprise (SOE) runs commercial activities to generate money for the government. Usually, the government establishes a state-owned enterprise through a statute passes in by it. Therefore, it can partake in commercial activities in an economy. Also called government-sponsored enterprises (GSEs) are formed to trade on behalf of the government. An SOE is a legal entity that a government creates, and a government can wholly or partially own it. It is typically earmarked for a specific commercial activity.

Highlights

• State-owned enterprise (SOE) runs commercial activities to generate revenue for the government in a socialistic way.
• The government department, directly and indirectly, controls it and runs it through state-owned funding.
• SOEs improve labour relations, particularly in critical and essential services sectors.

Frequently Asked Questions (FAQ)

What are the features of an SOE?

The following are the key features of state-owned enterprises:

• The government manages ownership of these enterprises. In some cases, the government has set up enterprises under its departments.
• The government department, directly and indirectly, controls even autonomous bodies.
• The government finances operations from state-owned resources.
• The government is the sole investor or finances most of the investment in them.
• The primary motive of state enterprises is providing service to society and not work for a profit.
• Often these enterprises create a monopoly in a sector where entry to private players is not allowed.
• SOEs can also work under the total control of government departments; in some other cases, they may be set up under an act.

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A few examples of state-owned enterprises across the globe are-

• Freddie Mac state-owned enterprises of the USA engage in commercial mortgage activity for the government of the United States.
• Eskom is another well-known SOE from South Arica, providing power utility services.
• Indian railways are also an example of an SOE in Asia.

Why are SOEs important?

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• They provide utility goods and services for the nation (e.g. defence manufacturing, public parks or electricity transmission). They also provide merit services like public health and education for the benefit of the entire society.
• SOEs improve labour relations, particularly in critical and essential services sectors.
• They limit private and foreign investment and control in the domestic economy, keeping reigns in the hands of the government.
• They generate public funds to invest in specific sectors and hold a monopoly on them.
• It increases access to public services at reduced prices to targeted socially marginalised groups.
• It encourages economic development and industrialisation through preserving employment.
• SOEs help in launching emerging industries by channeling government funds into the sector.
• It is possible to control the decline of sunset industries, as government receives ownership stake and becomes responsible for enterprise restructuring.
• Often governments create and invest in SOEs to remedy the poor market conditions, which was otherwise tricky seeing the critical societal needs.
• Other than being government’s representative in commercial activities, a state-owned enterprise also trades in physical resources, mostly with trading associations bodies and companies. They can therefore be held accountable on matters involving extractive resources.
• Even though an SOE is a for-profit business entity, some do not produce a profit, particularly those deemed critical to a country's infrastructure.

What is the corporatisation of SOEs?

Corporatisation is when an SOE is converted into a government agency. The process makes the SOE a for-profit organisation. Even though it operates as a commercial enterprise, the organisation still works for the governments' goals.  With Corporatisation, SOEs can take up commercial activities and generate revenues and profits for the government. After corporatisation, although the government owns a certain level of control and ownership, the management is independent. Most SOEs are corporatised in sectors where the government wants to shift from welfare to a profit motive.

What are the positives and negatives of SOE?

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Positives

• As private enterprises encourage capitalism, the government tries to eliminate capitalism by establishing state enterprises.
• SOEs are essential for the establishment of basic industries. They also help in the development of key sectors of an economy.
• State enterprises work for the welfare of citizens and the government and are often set up for basic needs like electricity and water supply, transportation needs, roadways, etc.
• In sectors where private investors do not wish to block their capital, the government sets up SOEs. It is only done in key sectors where; very heavy investment is needed.
• SOEs also ensure that natural resources are utilised optimally and for national advantage. It, in return helps in cheaper and better production.
• SOEs, by getting into critical industries, strike a balance in demand and supply of goods and services.
• SOEs help implement government policies and help it achieve significant output, employment, and budgetary targets.
• SOEs eliminate any wasteful competition while enjoying the benefits of large-scale economies.
• State enterprises help to establish socialistic patterns and bridge the gap between rich and poor. 

Negatives

• State enterprises are known for red-tapism and delayed decision making. It acts as a deterrent for progress.
• There is often excessive government interference in SOEs, taking away managements’ freedom on operations.
• SOEs often neglect losses or are absorbed by the government, encouraging them to remain inefficient.
• SOEs also have centralisation of power, being concentrated mostly with the government departments controlling it.