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.