The OECD defines an SOE as being “under the control of the state, either by the state being the ultimate beneficial owner of the majority of voting shares or otherwise exercising an equivalent degree of control”. [6]
The EITI defines an SOE as a wholly or majority (50%+1 share [7]) government-owned company that is engaged in extractive activities on behalf of the government.
State participation in the extractive industries: Mapping the fiscal relationship between the state and the extractives communities
Source: EITI [8]
SOEs often have complex corporate structures – sometimes spread across multiple jurisdictions – which intertwine with governments in diverse ways via direct or indirect ownership stakes or controlling interests.
A state can be a minority owner and still exercise significant influence and control over a company or an SOE
Visualising elements of the ownership and control of Pertamina using structured data
The diagram above shows the Indonesian SOE Pertamina and one arm of its subsidiaries and associates. Pertamina owns a majority shareholding of 71.09% [9] in Maurel & Prom. It, in turn, is the largest single shareholder in the publicly listed Nigerian oil and gas company Seplat Energy PLC, with a 20.44% stake.
This example illustrates some of the considerations that would need to be taken into account by various parties in their beneficial ownership regimes, for instance:
- The Nigerian government may wish to ensure that foreign state interests, such as that of Pertamina, fall within their beneficial ownership disclosure regime.
- The French government may wish to ensure that Pertamina’s ownership interest is declared by Maurel & Prom.
In Indonesia, to be considered an SOE, at least 51% of shares must be directly owned by the state. [10] By setting a definition with a threshold as high as 51% and requiring direct government ownership, Indonesia’s list of SOEs will exclude companies, such as Maurel & Prom, where the government has substantial ownership or control stakes, albeit indirectly or just below a majority. This makes it more difficult to get a holistic picture of state ownership globally, hindering transparency and anti-corruption initiatives.
By over-relying on ownership mechanisms, such as shares, there is a risk of excluding SOEs that are controlled by the state in other ways. It is common for legislation to set out additional rights, such as appointing both executive and non-executive positions, and companies themselves may have clauses in their articles affecting control.
With reference to Maurel & Prom, shares held for more than four years, without interruption, confer a double voting right. [11] While this clause is not exclusive to SOEs, it highlights the complexity of control mechanisms. Clauses like this can result in changes in beneficial ownership without changes in shareholdings, and where such shares are held by government, such rights could potentially result in a company falling under the definition of an SOE.
When defining an SOE, consideration should be given to the following:
- Shareholdings and thresholds
- Direct and indirect ownership and control
- Foreign entities, states and interests
Endnotes
[6] OECD (2022), Recommendation of the Council on Guidelines on Anti-Corruption and Integrity in State-Owned Enterprises. OECD/LEGAL/0451. Retrieved from https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0451.
[7] EITI (2020), EITI Requirement 2.6 – State participation and state-owned enterprises: Guidance Note, 6. Retrieved from https://eiti.org/sites/default/files/2022-02/en_eiti_gn_2.6.pdf.
[8] EITI, EITI Requirement 2.6 – State participation and state-owned enterprises: Guidance Note.
[9] Maurel & Prom (2022), 2021 Universal Registration Document : Including the Annual Financial Report, 202. Retrieved from https://www.maureletprom.fr/en/documents/download/1343/2021-universal-registration-document.
[10] Presiden Republik Indonesia (n.d.), Undang-Undang Republik Indonesia Nomor 19 Tahun 2003 Tentang Badan Usaha Milik Negara, Chapter 1, General Requirements, Article 1, 2-3. Retrieved from https://peraturan.go.id/common/dokumen/ln/2003/UU0192003.pdf.
[11] Maurel & Prom, 2021 Universal Registration Document : Including the Annual Financial Report, 201.
Next page: Ensuring comprehensive coverage of state-owned enterprises
FAQs
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.
What are the characteristics of a SOE? ›
Defining characteristics of SOEs are their distinct legal form and possession of financial goals and developmental objectives (e.g., a state railway company may aim to make transportation more accessible and earn profit for the government).
What are the advantages of state-owned enterprises? ›
Advantages and Disadvantages of State-Owned Enterprise
| Advantages | Disadvantages |
|---|
| Employment creation | Poor localization of industries |
| Inexpensive production of items | Management disorganization |
| Affordable services | Too much political interference |
| No more exploitation from private enterprises | Swift decisions are impossible |
5 more rowsOverall, state enterprises are concentrated in manufacturing and utilities in developing countries and utilities, transportation and storage, and real estate in advanced countries. In terms of assets, there are differences in the countries with large state enterprise segments and their sectoral distribution (Table 4).
How to identify a state-owned entity? ›
An entity should be treated as state owned if 1) it is controlled by the government or 2) it performs a function the controlling government treats as its own.
What qualifies a business as an enterprise? ›
The term business enterprise, in general, includes the active conduct of a trade or business including any activity that is regularly carried on for the production of income from the sale of goods or the performance of services and that constitutes an unrelated trade or business under section 513 of the Code.
What is a state-owned 50%? ›
The EITI defines an SOE as a wholly or majority (50%+1 share [7]) government-owned company that is engaged in extractive activities on behalf of the government.
What is a major impact of privatizing state owned enterprises? ›
SOE privatization promotes innovation and has greater effects over the long term. This occurs only for privatized firms controlled by domestic non-state-owned capital. The positive effects are mainly the result of reduced agency costs. Progressive privatization benefits innovation more than radical privatization.
What are three advantages of public enterprises? ›
Advantages of Public Sector Enterprises
Universal Access: Public enterprises ensure that essential services are accessible to all citizens, regardless of their financial status. Stability: They provide stability in key industries and infrastructure, safeguarding the interests of the nation.
Why are enterprises important to the economy? ›
Entrepreneurship promotes economic growth, provides access to goods and services, and improves the overall standard of living. Many entrepreneurs also make a positive impact on their communities and improve their well-being by catering to underserved areas and developing environment-friendly products.
Most industries in command economies are publicly owned. The main alternative to a command economy is a free-market system, in which supply and demand dictate production and prices. The command economy is a component of a communist political system, while a free-market system exists in capitalist societies.
Is state ownership of business capitalism? ›
State capitalism is an economic system in which the state undertakes business and commercial (i.e., for-profit) economic activity and where the means of production are nationalized as state-owned enterprises (including the processes of capital accumulation, centralized management and wage labor).
What is an example of a soe? ›
SOEs can be owned wholly or in part by the government and are common throughout the world. In the United States, Amtrak, the U.S. Postal Service, and federal mortgage corporations Fannie Mae and Freddie Mac are all examples of state-owned enterprises.
What is a state owned enterprise under the FCPA? ›
The U.S. Foreign Corrupt Practices Act (FCPA) prohibits U.S. companies and their employees from paying bribes to foreign officials in order to retain or obtain business and provides both civil and criminal penalties for doing so.
How state-owned enterprises differ from private owned enterprises? ›
A publicly funded enterprise raises money by selling shares to the “public” (qualified investors). A state owned enterprise uses tax payers funds to create the enterprise. The state owns it for the benefit of citizens (as opposed to benefit shareholders).
What companies are considered enterprise? ›
An enterprise may be a corporation, a quasi- corporation, a non-profit institution, or an unincorporated enterprise. Enterprises can be classified in different categories according to their size; for this purpose, different criteria may be used, but the most common is number of people employed.
