What Is a State-Owned Enterprise?
A state-owned enterprise (SOE) is a legal entity that is created by a 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 specific 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).
- A state-owned enterprise (SOE) is an entity formed by the government for the purpose of engaging in commercial activities.
- The government usually takes either full or partial ownership of any SOEs, which are typically approved to engage in specific activities.
- SOEs represent the government in commercial endeavors and also sell physical resources to trading entities and corporations.
- SOEs operate in all countries but are especially prolific in China, the United States, New Zealand, South Africa, India, and Russia.
Understanding State-Owned Enterprises (SOE)
Also known as government-owned corporations (GOC), state-owned entities should not be confused with listed companies with stocks that are owned in part by a government body, as these companies are truly public corporations that 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, Norway, 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.
The current value of state-owned enterprises' assets worldwide, as of 2020, according to the International Monetary Fund (IMF). The figure reflects a huge jump in size for SOEs over the last few years, with emerging markets leading the charge.
State-Owned Enterprise Example
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, several companies have state backing, such as the Jin Jiang Hotel, which is owned and controlled by the government of Shanghai. The South Africa-based power utility Eskom is the 11th-largest company in the world in terms of electric-generating capacity, and it is an SOE of the South African government. Many public transportation systems and utilities are SOEs, as are 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 operates as a commercial enterprise. Sometimes, governments of developing countries will create a state-run business in a sector that it wishes to develop or exploit to boost their economic standing on the global stage, such as the oil industry in Brazil, or the telecom industry in Argentina.
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 for long periods of time. 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 to a country's infrastructure. In these cases, the SOEs actually cost the government money instead of generating revenue. In the case of China, this has led some to accuse the government of artificially propping up so-called zombie corporations that would otherwise go out of business.