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What is a State-Owned Enterprise?
Governments need revenue to operate, and business is one means that can be used to provide it. A business that is owned by the government and operated for profit is a state-owned enterprise, also referred to as an SOE. The characteristics that define these businesses vary from one country to another.
A state-owned enterprise is usually a legal entity. This means that generally it can be held liable and can hold other entities liable. These businesses are often subject to many of the same regulations and procedures as a similar business that is not state-owned would be subject to. For example, the state-owned business may have to acquire licensing and permits and tailor its operations to be in compliance with federal or local law.
Providing an inclusive definition of a state-owned enterprise can be difficult because each country can outline the characteristics of such an arrangement. In some instances, for example, an SOE may be only partially owned by the government. The country’s laws may simply require the government to own the largest portion. Examples of countries with state-owned enterprises include New Zealand, China, and South Africa. Industries where this type of ownership arrangement is common include mining, public transportation, and postal services.
Sometimes a state-owned enterprise develops from a government agency that was converted into a for-profit business venture. This is known as corporatization. Although it becomes commercial, the SOE may still be operated in a manner that helps achieve government goals and objectives. In other instances, a government may purchase an existing corporation. This may be seen when a business that is essential to the economy or one that employs large numbers of people experiences financial difficulty.
Some countries’ economies are heavily dependent on the revenue generated by these business ventures. The manner in which these funds are distributed or used will vary from one state to another. On the contrary, SOEs are not always successful, but allowing the business to close may not be feasible.
In these instances, the government that owns the business generally must provide subsidies, which are basically funds used to continue operations. In these instances, the government is actually paying to have the enterprise instead of benefiting from it. An example of when this type of action may be required is in the instance of a postal service that is operating at a loss. Generally, a country will not allow a business as important as the postal service to fail and close simply because there are not profits.
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![South Africa has a number of state-owned enterprises.]()
By: Loic LE BRUSQSouth Africa has a number of state-owned enterprises.
Discussion Comments
One state-owned enterprise I think of first is the Veteran's Administration (often called the VA), but that is not because of personal experience in needing the Veteran's Administrations help, rather it is because my Dad and Grandmother both worked for them.
My Dad is still working there and he has been amazed at all of the changes as they become more and more electronic in the way that they go about business to streamline the process.
From what I know and feel, streamlining is important to what my Dad does every day because his area of expertise is helping veterans who of course have fought in our wars for us to receive the benefits they are owed. And The more streamlined, I would assume the quicker the veterans find out about their benefits.
I also know that my Dad works a ton of overtime, so more reason for streamlining. I can only imagine the amount of planning and time it takes to make changes in some government run businesses such as the Veteran's Administration because of the need to make the changes uniform over such a large organization.
@Speechie - You posed an even more interesting question that you may have known you were asking!
The government made up a law that gives the post office the rights to all of the residential mailing business. However, in being given this right, the law did not also require the post office to make a profit only break even.
But they do make a profit, the last estimate I saw was one billion dollars a year.
Which I would say is impressive but they do have a monopoly on something that almost every American uses in some way or another.
I read a really interesting book about Benjamin Franklin and it really made me look at state-owned enterprises differently. For example, the article points out that country's often run post offices but because it is an important service it doesn't close down if it is not profitable.
This is exactly what happened in Benjamin Franklin's day, so he was asked to take over the postal service to make it not run at a loss. And he turned it around.
So the book makes me now look at state owned businesses as possibly not well run businesses secondary to the job security of knowing that your business is backed by the federal government's money?
In the end, I think it is important to remember that Benjamin Franklin proved that even government run businesses could run well if managed correctly.
I wonder how many government owned or semi-government businesses are running at a loss, but the business stays alive because it is an important service.
I am also curious as to if the postal service today still runs at a profit...
@allenJo - In the industry that I work in – electrical utilities – we see some countries that have their own state owned enterprises.
Once such country is Mexico. Mexico has one electrical utility; it’s a completely national operation, all government control.
Is that a good thing or a bad thing? I personally believe that private enterprises do a better job, but as I don’t get electricity from Mexico, I can’t really pass judgment on whether the system works for them.
All I know is that if there is an electrical outage here in the United States, the utilities feel intense pressure to resolve the situation quickly or face the ire of their customers and intense media scrutiny.
I don’t know if that would happen with a government institution in my opinion.
@SkyWhisperer - I think it depends on where you live. The subprime mortgage crisis happened because of the political pressure you cited, not because these institutions themselves are bad.
At worse, I think state owned mortgage institutions might be bureaucratic, but not inherently responsible for widespread financial collapse in the mortgage industry.
The mortgage industry experienced much needed economic reforms as a result. I don't think this fiasco will happen again.
@NathanG - To answer your question, yes we do. The biggest example of a state-owned enterprise in the United States is Fannie Mae and Freddie Mac, mortgage companies set up by the U.S. government.
To answer your second question, I don’t personally believe that these types of public ownership companies are a good thing, again pointing to the example of Fannie Mae and Freddie Mac.
When the subprime mortgage crisis hit the United States, these two lenders were implicated. They held a majority of the subprime mortgages loans, which were very risky loans to people with questionable credit.
However, it’s my understanding that they were pressured to continue to issue the loans because again, the government said that they would back the loans and there was a big political push to see that every American owned a home.
A private mortgage lender would not have assumed such risk, in my opinion. So I am not in favor of these kinds of enterprises.
I take it that since the United States mainly operates as a free market economy, we don’t have many organizations that would be classified as a state-owned enterprise, do we?
My first question is do we have any such organizations, and if so, do you think that a state-owned enterprise is a good thing or a bad thing – at least in our country?
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