State-Owned Enterprise - SOE

What is a 'State-Owned Enterprise - SOE'

A state-owned enterprise (SOE) is a legal entity that is created by the government in order to partake in commercial activities on the government's behalf. It can be either wholly or partially owned by a government and is typically earmarked to participate in commercial activities.

SOEs are common across the globe, including in the United States, where mortgage companies Freddie Mac and Fannie Mae are considered government-sponsored enterprises (GSEs).

BREAKING DOWN 'State-Owned Enterprise - SOE'

Also known as government-owned corporations (GOC), state-owned entities should not be confused with companies with stocks that are owned in part by a government body, as these companies are truly public corporations which happen to have a government entity as one of their shareholders.

The state-owned enterprise (SOE) is a global phenomenon, and such organizations exist in the United States, China, South Africa and New Zealand. Legally, most SOEs qualify as business entities, providing them with all the rights and responsibilities associated with them. This means that they are normally required to follow any laws and regulations governing the operation of their business type, and they can also be held liable for their actions.

Examples of State-Owned Enterprises Across the Globe

Within the United States, mortgage companies Freddie Mac and Fannie Mae are some of the most recognized SOEs by its citizens, but SOEs are not limited to lending. In China, the Jin Jiang Hotel is owned and controlled by the government of Shanghai. The South Africa-based power utility Eskom is the 11-largest company in the world in terms of generating capacity, and it is an SOE of South Africa. Many public transportation systems are SOEs, as well as postal services and some mining operations.

SOEs and Corporatization

At times, an SOE is created out of a government agency through a process called corporatization. This allows the agency to convert itself into a for-profit business. Often, the newly formed SOE still operates with government goals in mind, but officially it operate as a commercial enterprise.

SOEs and Profit

Even though an SOE is a for-profit business entity, there are some that do not produce a profit. For example, the U.S. postal system may be operating at a loss. While some SOEs may be permitted to fail, those of importance to the operation of the state may receive government funding to continue its operations — particularly those deemed as critical infrastructure. In these cases, the SOEs actually cost the government money instead of generating revenue.