State-owned Enterprises in Services: The Need for Policy Coherence

Dr. Sherry Stephenson

Senior Fellow

ICTSD

New Horizons in Services Trade Governance 25-26th November, 2014

Setting the stage

• State-owned Enterprises (SOEs) pose a challenge to trade policy because of their

size and privileges

• SOEs may have different policy goals than private firms

• There is a lack of coherent international governance mechanisms on SOEs

• Governments wish to retain the freedom to use SOEs to further national

objectives

• SOEs are particularly prominent in services sectors as well as natural resources

What are SOEs?

• No universally accepted definition: wide variety in different countries

• Enterprises in which the state has “significant control, through full, majority, or

significant minority ownership” (OECD, 2005)

• State-Ownership- direct or indirect, at any level of government has to be at least

10% (OECD).

• Should include companies that benefit from the influence of the State or SSEs

(State Supported Enterprises), and statutory bodies (postal services, toll roads

etc).

SOEs and the Global Economy

How big are SOEs in the global economy?

• 10% of the worlds biggest companies and 4 of the top 10 are SOEs

• SOEs account for 6% of global GDP

• Total sales from 204 of the biggest SOEs account for 2.5 times global FDI

flows (OECD)

• In some countries SOEs account for almost 50% of domestic GDP

• Understandably, SOEs have a huge impact on employment, investment

flows and competition

How big are SOEs in the global economy?

How big are SOEs in the global economy?

Summary of the 204 biggest SOEs in the world.

Where are SOEs present?

Where are SOEs present?

• Not limited to Developing countries, developed countries also have

significant SOE presence (e.g., Japan Post, Électricité de France,

Crown corporations in UK, Australia etc)

• Level of Government- many countries have SOEs at the sub-national

level (New York Port Authority, SaskEnergy in Saskatchewan Canada)

• Sector- Services SOEs account for 86% of all SOEs

SOEs in developing countries

• SOEs account for one-third of outward FDI from ‘emerging economies’

(Economist, 2012)

• SOEs in developing countries are notable not just for their absolute size,

but also their relative importance in the domestic economies

• SOEs in China, Argentina, Russia, Indonesia, Malaysia, Saudi Arabia, India

and Brazil control 50 percent or more of the “commanding heights” of the

national economies

SOEs in developed countries

• Misconception that only developing countries have SOEs

• OECD countries like France (68), Latvia (75), Mexico (69) and Portugal (84)

have as many SOEs as China.

• Hungary (373), Lithuania (138), Poland (336) and Czech Republic (125)

support far more SOEs than most developing countries

• On average OECD countries have 52 SOEs (OECD, authors’ calculations)

• But their size relative to their domestic economy is very small

In what countries are SOEs most prominent?

Source: OECD, 2013. Representation of Country SOE Scores (CSS)

In what sectors do SOEs operate?

• Mining activities exhibit the highest SOE share (42%)

• In OECD countries • Electricity, gas and steam sector (18.3%) contains a significant fraction of the

large SOEs

• Tobacco, warehousing, motor vehicles and financial intermediation also contribute a high proportion of large SOEs

• In developing countries, • energy sector accounts for the highest SOE presence (almost two-thirds of the

sector)

• utilities and telecom services also have high SOE presence

Where are SOEs present?

Source: OECD, 2013

SOEs and Services

SOEs and services

• Most SOEs operate in or rely on the services sector

• On average 86% of all SOEs operate in the services sector (OECD, authors’ calculations)

• In Belgium, Denmark, Mexico, Netherlands, Ireland and Switzerland all SOEs operate in the services sector

• In China, 60% of the SOEs operate in the services sector

• SOEs are important for employment- 85% of all SOE employees work in the services sector (OECD, authors’ calculations)

Challenges posed by SOEs

Why do SOEs create challenges?

• SOEs are different from private firms as they are sometimes driven by

public goals like

• increasing employment,

• favouring domestic suppliers and buyers in their pricing arrangements,

• fulfilling foreign policy goals

• This is in contrast to private firms who are driver by the profit motive

• But many SOEs compete against private sector firms creating an uneven

playing field

How do SOEs distort competition?

• State support can distort competition through

• Regulatory favouritism

• Financial support

• The distortions allow SOEs to sell on more favourable terms

than private firms to both domestic and international

markets

Government practices that distort competition

• Outright subsidization

• Concessionary financing and guarantees

• Preferential treatment in regulation and procurement

• Monopoly rights and incumbency advantages

• Captive equity

The cost of SOEs- example from U.S.

• US Postal Services has an exclusive monopoly over the use of customers’ mailboxes

• Allowed to borrow directly from the Federal Financing Bank which guarantees public bonds at below market interest rates

• Debt guaranteed by federal government

• US Postal Services also has the power of eminent domain • Can purchase fuel on a tax free basis

• does not have to conform to local zoning regulations.

The cost of SOEs- example from China

• Chinese SOEs immune from competition law

• Chinese SOEs can borrow at 1.6% while rate for private firms is 4.7%

• Private firms account for only 2% of all the outstanding loans in China (2009)

• The State Owned Assets Supervision and Administration Commission (SASAC) is

the world’s largest controlling shareholder and has wide-ranging powers like

• Ability to appoint and remove top executives in SOEs

• Draft regulations on the management of SOE assets

SOEs and Development

• There is a lack of consensus around the need to regulate the governance of SOEs internationally

• SOEs pursue socially beneficial objectives by reducing pressure to maximize profits

• Freedom from profit maximization can allow SOEs to pursue long-term goals

• This allows SOEs to focus on public policy goals like • Job creation

• Provision of energy security

• Poverty alleviation

SOE Governance

What is the situation at the WTO?

• Legal regime at the WTO creates a rulebook for a world economy

dominated by private firms

• Market systems are the norm, state-run systems are the exception

• Most WTO rules do not distinguish between SOEs and private firms

Existing WTO rules relevant to SOEs

Goods • Article XVII of GATT, State Trading Enterprises:

Each contracting party undertakes that if it establishes or maintains a State enterprise, wherever located, or grants to any enterprise, formally or in effect, exclusive or special privileges, such enterprise shall, in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders.

• Canada- Wheat (2004)- only case decided by AB on Art. XVII • Should transactions be conducted in accordance with “Commercial

considerations?”

• Unsettled question of ‘public body’ in the SCM Agreement

Existing WTO rules relevant to SOEs

Services

• Article VIII of GATS, Monopolies and Exclusive Service Suppliers • Observe MFN principles with respect to other Members

• Prohibits abuse of monopoly position

• Since GATS Article VIII has not yet been tested in a case before the Appellate Body, it is difficult to know whether the provisions will significantly curb abusive SOE practices

Existing WTO rules relevant to SOEs

• Government Procurement Agreement (GPA)

• No explicit mention of SOEs or SSEs

• Annex 3 on ‘other entities’ can cover SOEs

• SOEs at sub-federal level covered (e.g. New York Port Authority)

• SOEs crucial part of Chinese accession negotiations to GPA

New Approaches to SOEs

1. OECD Competitive Neutrality Framework

• Adopted by Australia in 1990’s

• Recommended by OECD in 2009

• Government businesses should not enjoy a competitive advantage

• Focus on regulatory and business environment rather than firm

• Use of anti-competition law

New Approaches to SOEs

2. OECD Guidelines on SOE Governance

• Based on Corporate Governance guidelines

• Ensuring an effective legal and regulatory framework for SOEs

• State acting as an owner

• Equitable treatment of shareholders

• Relations with stakeholders

• Transparency and disclosure

• Responsibilities of boards of SOEs

Most Recent Disciplines on SOEs in PTAs

• Can be found in new generation FTAs like US-Singapore, KORUS FTA

• Focus of these disciplines is on changing firm behaviour rather than

the regulatory environment

• Policies aimed at eliminating preferential measures granted to SOEs

• Prohibit financial support and ensure non-discriminatory treatment

Recommendations for SOE Governance

• Disciplines on services SOEs should be thought of in a plurilateral setting

• Definition of SOEs should be broad enough to include SSEs

• SOEs should be subject to disclosure requirements

• Procurement by SOEs should be subject to WTO GPA

• Competitive Neutrality should be guiding principle as basis for governance

• National treatment should be guiding principle for inbound services and investments for private firms and SOEs