VoxEU Column Competition Policy COVID-19 EU policies

State ownership will gain importance as a result of COVID-19

In response to the COVID-19 crisis, governments are taking equity stakes in financially distressed companies, potentially risking market distortions. Using micro-level evidence for OECD members, this column shows that in countries where state-owned enterprises are subject to the same market forces as their competitors, they perform on par with private firms. Additionally, it analyses OECD product market regulation indicators to gain insights into areas of corporate governance that would benefit from reforms. It recommends governments to impose strict recovery plans on the firms benefiting from state interventions, set clear conditions for exit from state ownership, and rely on independent advisors to ensure sound valuations of investments and divestments.

State ownership in many economies is already extensive and may grow further during the current COVID-19 crisis. Globally, state-owned enterprises (SOEs) have been among the largest and fastest expanding multinational companies in the past two decades, especially in emerging market economies (Kowalski et al. 2013, IMF 2020). During ‘normal times’, SOEs in most OECD countries have been present in upstream sectors such as energy, rail transport, finance, and telecoms. However, in a significant share of countries, state-owned companies operate in many other sectors, including manufacturing and services. COVID-linked interventions to support firms in financial distress are likely to increase state ownership in many countries, judging from the discussions and actions that are already taking place across the OECD. 

However, state ownership can be a source of distortions. The state may provide unfair advantages to SOEs relative to domestic or foreign competitors. SOEs that are insulated from competitive pressures may lack the incentives to improve efficiency and innovate. Private competitors may also perform poorly because of an uneven playing field vis-à-vis the SOEs. In addition, the state may be tempted to interfere in the direct running of these companies – appointing unqualified but politically connected board members or using SOEs to cater to political needs rather than pursue economic performance. All such distortions can result in lower levels of productivity and innovation, poorer quality of goods and services and higher prices in the sectors where SOEs are active. This poorer performance can have knock-on effects on downstream sectors and, hence, on the economy as a whole, especially in countries where state-ownership is extensive (Égert and Wanner 2016).

To minimise the potentially negative impacts of state ownership on the economy and ensure efficient use of taxpayer money, the OECD has developed guidelines on the corporate governance of state-owned enterprises, which spell out the conditions that SOEs should meet to operate in a sound competitive and regulatory environment conducive to economic growth. To measure the de jure compliance with the guidelines and gauge the quality of SOE governance, the OECD also built a product market regulation (PMR) indicator on the quality of SOE governance (Figure 1). This indicator summarises the extent to which a policy setting ensures that SOEs are exposed to the same market discipline as their privately-owned competitors and are insulated from political interferences in their business decisions. Of course, in practice the enforcement of such rules can be an additional source of variation.

Figure 1 The PMR indicator on the corporate governance of state-owned enterprises for OECD countries in 2018

Note: The governance of SOEs measures to what extent OECD countries are aligned with key best practices, derived from the OECD 2015 guidelines on corporate governance of SOEs. but does not represent a formal OECD position on each country’s implementation of these guidelines. Information refers to laws and regulation in force on 1 January 2018. For more information, refer to the PMR webpage. If the blue bar does not appear on the chart, it means that its value is 0.
Source: OECD Product Market Regulation Database 

Corporate governance of SOEs matters for their performance

Using the OECD PMR indicator on the quality of SOE governance jointly with firm-level data, we assess the performance of SOEs versus privately-owned firms in two sectors: passenger air transport and manufacturing of motor vehicles. These sectors are among those most adversely affected by the COVID-19 lockdown measures (OECD 2020b). Governments often consider these sectors as having ‘strategic’ economic importance – as shown by past and more recent COVID-19 related nationalisation discussions. As there is no generally accepted definition of SOEs, for the purpose of the empirical exercise we define SOEs as firms in which governments hold, either directly or indirectly, over 25% of the equity capital. Overall, the approach is similar to that of (Baum et al. 2019) who look at SOE performance in light of different levels of (perceived) corruption. 

We find that SOEs tend to have significantly lower returns on equity than their privately-owned competitors. However, in countries where the governance of SOEs is closer to best practice, SOEs do not seem to perform worse than privately owned firms (Figure 2). Finally, the data suggest the quality of governance of SOEs does not seem to have a significant relationship with the performance of their privately-owned counterparts).

Figure 2 Firm-level insights on the performance of SOEs relative to other firms: Air transport and manufacturing of motor vehicles1 

Note: The bars show the ranges between the 25th and 75th percentiles (lower and upper limits respectively) of the distribution and the median (the middle line). The results are limited to a sample of firms in the air transport sector (NACE code 5110) and the motor vehicle manufacturing sector (NACE code 2910). The sample includes OECD economies except the United States due to the lack of a PMR indicator on Governance of SOEs. For the governance of SOEs see Figure 1. The countries with strong SOE governance are those with an indicator value above the median value for OECD countries in the sample. 
Source: Based on ORBIS (2018) and OECD Product Market Regulation Database.   

While the results pass a number of robustness tests, this exercise is limited in terms of sectors and time periods and does not claim causality. As such, there may be alternative explanations behind the generally weaker performance of SOEs as compared to private companies. For example, as firms are often nationalised because of severe financial distress, they may continue to perform poorly after the government acquisition, regardless of how well they are managed. SOEs may also be tasked with unprofitable public policy objectives. Airlines, for instance, can be required to provide flights that governments consider necessary either to ensure connections with remote or poorer areas of their countries or to support tourism and other economic activities in specific locations.

What can governments do to get the most out of state ownership? 

The COVID-19 related interventions to support firms provide a good opportunity to examine the quality of corporate governance of SOEs and determine the extent to which it ensures competitive neutrality between SOEs and their private competitors. Where the quality of SOE governance is lagging behind international best practice, aligning them with the OECD Guidelines will help ensure a better use of public resources, in particular in countries with high state ownership. 

Ensure a level playing field between SOEs and privately owned competitors

In many OECD economies, existing rules often do not guarantee the existence of a level playing field between privately-owned enterprises and SOEs. For example, there are countries where some SOEs operating in competitive markets still benefit from a privileged legal status that may shield them from the (full) application of private company law. Similarly, in most OECD countries, accounting or legal separation between commercial and non-commercial activities could be imposed more extensively on those SOEs that have to fulfil public service obligations to avoid the distortions caused by possible cross-subsidies.

Prevent political interference with the managing of the company

The OECD PMR indicator also reveals that many OECD countries could better ensure that public authorities are not involved in the direct management of SOEs and do not interfere with business decisions. This can be done through rules that shield SOEs from undue political influence, for example, by separating sector regulators and government bodies that exercise ownership rights in the SOEs, or by ensuring that the board of the firm, rather than public authorities, selects the chief executive officer. The experience of Alitalia, the Italian air carrier, provides a well-documented case of successive interventions and the challenges associated with maintaining an arms-length relationship between the state owner and the company management, contributing to the company’s problems throughout the 1990s and 2000s (European Commission 1997, 2001, Beria and Scholz 2010, Beria et al. 2013). 

Reduce the risk of moral hazard through appropriate targeting and strict conditionality 

In the context of the COVID-19 pandemic, or any economic crisis, equity injections should be directed at firms facing financial difficulties that cannot be easily addressed through recourse to capital markets. This can help minimise the negative long-term effects of interfering with market selection mechanisms, whose functioning may be impaired during a deep crisis. Hence, equity injections should target firms whose financial distress is related to the crisis and which are likely to return to profitability. One way to help ensure that firms benefitting from equity injections restore viability is to require them to provide and adopt detailed plans on how they intend to do so. 

Such plans can help governments contain the moral hazard problems and avoid creating incentives for companies to take riskier decisions in the future – expecting the government to step in if these risks materialise. For example, under the Troubled Assets and Relief Programme (TARP) automotive sector bailout in the US, equity injections were combined with bankruptcy proceedings and existing shareholders had to lose their investment (Goolsbee and Krueger 2015). Secured creditors in Chrysler saw their debt severely restructured. Most of the unsecured creditors in both General Motors and Chrysler lost their claims altogether. Employment was reduced and top management was replaced. 

Provide a rationale for state ownership from the onset to facilitate future exit 

Transparency about the reasons for the state taking equity in a company is also indispensable. This implies that when the conditions that justify state ownership cease to exist, the need for state ownership should be reconsidered. Often the argument that a firm is of ‘strategic importance’ to the economy justifies the intervention. However, this concept is not well defined (Ding and Dafoe 2020). Governments should, therefore, define what is ‘strategic’ about the company that makes it worth saving with public money. 

Some countries regularly review their government’s ownership rationales. In Germany, for example, the Ministry of Finance submits to Parliament a biannual report on the reduction of government holdings (OECD 2015). In Norway, the government regularly updates Parliament on the objectives of state ownership and has conducted privatisation ‘readiness reviews’ for all SOEs (OECD 2019). If such an automatic regime is not in place, an effective way to ensure a timely exit strategy is to envisage from the start a review of the intervention. 

Minimise the cost of such interventions for the taxpayer by accurately planning exit 

A carefully designed exit strategy can also help to minimise the cost of the intervention for the taxpayer. For example, the TARP legislation required the government to exit these investments “as quickly as possible”, while maximising returns, promoting financial stability and minimising market disruption. Still it left some leeway, as it did not specify the price, process or timing of the equity sales. For example, the exit from the automotive sector consisted in restarting the public trading of General Motors’ stock through an initial public offering and a debt repayment, combined with a negotiated buy-back of the Treasury’s stake in Chrysler (Massad and Kashkari 2019). 

Finally, when designing such exit strategies, the role of independent advice is critical. Independent advisors can help determine the company valuation, preferably based on the principle of fair-market value and ensure that the best value can be obtained from the sale (OECD 2019). Appropriate valuation also serves to measure post-privatisation outcomes. An independent commission, or steering group, qualified to approve the valuation can help ensure objectivity. COVID-19 linked equity injections may necessarily be urgent responses, but governments should use the opportunity to reassess and reform their SOE corporate governance rules to ensure that the taxpayer money is well spent. 

Authors’ note: For more details, see OECD (2020a), “The COVID-19 crisis and state ownership in the economy: Issues and policy considerations, OECD COVID-HUB Policy Brief”. 


Baum, A et al. (2019), “Governance and State-Owned Enterprises: How Costly is Corruption?”, IMF Working Paper, No. 19/253, IMF, Washington D.C.  

Beria, P, H Niemeier and K Fröhlich (2013), “How liberalisation can go wrong: The case of Alitalia”, Liberalization in Aviation, edited by Hartmut Wolf, Peter Forsyth, David Gillen, Kai Hüschelrath, Hans-Martin Niemeier.

Beria, P and A Scholz (2010), “Strategies for infrastructural development of airports. A comparison between Milan Malpensa and airport and Berlin Brandenburg International airport”, Journal of Air Transport Management 16: 65-73.

Ding, J and A Dafoe (2020), “The Logic of Strategic Assets: From Oil to AI”, Working paper.

European Commission (2001), Commission Decision of 18 July 2001 concerning the recapitalisation of the company Alitalia (notified under document number C(2001) 2349

European Commission (1997), 97/789/EC: Commission Decision of 15 July 1997 concerning the recapitalization of the company Alitalia.  

Égert, B and I Wanner (2016), “Regulations in services sectors and their impact on downstream industries: The OECD 2013 Regimpact Indicator”, OECD Economics Department Working Papers, No. 1303, OECD Publishing, Paris. 

Goolsbee, A and A Krueger (2015), “A retrospective look at rescuing and restructuring General Motors and Chrysler”, NBER Working Paper 21000. 

IMF (2020), "State-Owned Enterprises: The Other Government", Fiscal Monitor, April.

Kowalski, P, et al. (2013), "State-Owned Enterprises: Trade Effects and Policy Implications", OECD Trade Policy Papers, No. 147, OECD Publishing, Paris. 

Massad, T G and N T Kashkari (2019), "Implementing TARP: The Administrative Architecture of the Troubled Assets Relief Program", Working paper.

OECD (2015), State-Owned Enterprise Governance: A Stocktaking of Government Rationales for Enterprise Ownership, OECD Publishing, Paris. 

OECD (2019), A Policy Maker’s Guide to Privatisation, Corporate Governance, OECD Publishing, Paris. 

OECD (2020a), “The COVID-19 crisis and state ownership in the economy: Issues and policy considerations”, OECD COVID-HUB Policy Brief, OECD Publishing, Paris.

OECD (2020b), “Evaluating the initial impact of COVID 19 containment measures on economic activity”, OECD Publishing, Paris.


1 Significance tests are based on a two-sample Kolmogorov-Smirnov test for equality of distribution functions. See OECD (2020a) for details on sample, data cleaning, and significance and robustness tests.

1,680 Reads