A SOE is distinct from a government department or a private firm by the degree of public control.68 Simply put, SOEs/public undertakings are those over which the state „has significant control, through full, majority or significant minority ownership‟, according to an OECD definition.69 The concept of „state control‟ is closely related to the question of corporate governance in SOEs. How the state exercises its control in a SOE depends on its status and form under its legal system and this is determined by the ownership policy of each government.70 This section examines the notion of „state control‟ through the following four factors: financial contribution, legal status, categories and ways of implementing state control in SOEs.
First of all the financial contribution is undoubtedly one of the most important factors. In former socialist and transitional countries, before undertaking their SOE reforms SOEs were established by the state and the establishment implied a financial contribution. Since the state was the only owner, assets and capital were simply entrusted to state enterprises in order to implement the state‟s plans and objectives. Under the reforms and privatisation of SOEs around the world, the financial contribution of the state in the enterprise is currently viewed as a portion of the investment. In this regard, the state acts as an investor in such an enterprise. This can be observed in state shareholding companies, which allow the participation of the private sector.
Secondly, it is evident that the legal status of SOEs varies in from country to country.
Generally, they are in the form of a shareholder owned company. In some countries a uniform system for the legal status of SOEs is followed, as the state is a shareholder, even when the state is the only shareholder. The state powers are exercised through the general meeting of shareholders, including the ability to select board members.71 In other countries a wider range of legal forms for SOEs is employed, depending on what level of government owns the enterprise, how the enterprise was founded, where it falls within public administration, the purpose of the SOE and whether or not the enterprise is in the
68 Shirley, above n 25.
69 OECD, Guidelines on the Corporate Governance, above n 26.
70 World Bank, Held by the Visible Hand, above n 32, 7.
71 Ibid. For example in Bulgaria, Chile, Peru and Singapore.
26 process of being privatized.72 Such forms can be seen in the state wholly owned enterprises, including departmental corporations, statutory corporations and government limited liability companies;73 or shareholding companies which can be listed or not listed in the stock market, where the state holds the majority of shares or significant ownership,74 or joint-ventures with private companies or government linked companies, where the state owns the shares through government pension funds, asset management, or restructured corporations, development lenders, or some other part of the government.75 Depending on the legal status, there are two situations in which an undertaking is deemed to be a public undertaking.76 First, if an undertaking is governed by public law, it will be under the control of public powers and therefore is clearly a public undertaking. Second, in the case where an undertaking is structured under private law, such as a limited company, it is also a public undertaking if it is controlled by a public authority. Public control is presumed when a majority of shares is owned by public authorities. If the state just has a minority shareholding, but this is still sufficient to allow the state to control the company, public control will still exist.77
Thus, in the case of a state wholly owned enterprise, the control of the state is quite apparent. The state can set out objectives for the SOE performance which include government policies other than business interests and can require an agreement between
72 World Bank, Held by the Visible Hand, above n 32, 7.
73 For example, in New Zealand, as the result of public sector reform taking place in 1984, the model of limited liability companies was introduced and corporatization became the major method of the
deregulation which went with the privatisation process, targeted at encouraging competition on a `level playing field' basis. Thus, the government's major trading undertakings as state-owned enterprises (SOEs) were corporatized and other services previously run by the government such as research institutes, public hospitals, government's social housing and specialist education services were restructured in the form of companies. See Peter Mc Kinlay, „State-owned Enterprises and Crown Companies in New Zealand‟ (1998) 18 (3) Public Administration and Development 229. India, another example, has three types of state wholly owned enterprises: departmental enterprises (or undertakings) are integrated into their controlling ministry and follow many of the same procedures as other government departments; statutory corporations are established by an official act of the legislature, wholly owned by the state but organized to have greater operational autonomy; and government limited companies which are organized like companies in the private sector, with the state as the main shareholder. See World Bank, Held by the Visible Hand, above n 32, 8.
74 World Bank, Held by the Visible Hand, above n 32, 8.
75 Ibid; OECD, Corporate Governance of SOEs, above n 4, 36.
76 Sierra, above n 3, 38-39.
77 Ibid 39-40.
27 the government and the enterprise or its board and chief executive.78 In the case of a share holding company, the control of the state is exercised through the powers of the majority share holders in deciding the vital matters of the enterprises. Representatives of the state capital in shareholding companies will participate in the general meeting of the SOE, nominating board members and exercising other powers held by shareholders.79
Thirdly, how the state exercises its control over state owned enterprises depends on different ownership forms for SOEs: centralised, decentralised and dual.80 In the first case, a government body, acting as an ownership entity such as a ministry or holding company, will be responsible for the government‟s stake in all SOEs.81 In the second case, different ministries will be responsible for overseeing SOEs and and SOEs may also have widely varying requirements and relationships with other parts of the administration.82 The last type is characterised by indirect control by the state, while certain ownership functions for all SOEs are performed by one single ministry, such as the ministry of finance, or a specialized body, but other functions are performed by different ministries for different SOEs.83
Finally, the control of the state is implemented through its representatives in the
78 World Bank, Held by the Visible Hand, above n 32, 9.
79 Ibid 13.
80 Ibid 11.
81 Ibid. For example, Singapore, Poland and Indonesia. In Singapore, Temasek is the national holding company, which is 100 per cent owned by the Ministry of Finance, holding responsibility for the state investment in all SOES. In Poland, the Ministry of the Treasury is responsible for privatisation and SOE governance. In Indonesia, the Ministry of State-Owned Enterprises exercises the state‟s ownership rights in SOEs.
82 World Bank, Held by the Visible Hand, above n 32, 12. An example for this category is China. The Chinese State-owned Assets Supervision and Administration Commission of the State Council (SASAC) is an organisation authorised by the State Council to perform the responsibility of the investor and guide and of pushing forward the reform and restructuring of state-owned enterprises; supervision of the preservation and incrementation of the value of state-owned assets for enterprises under its supervision and
enhancement of the management of state-owned assets; advancement of the establishment of a modern enterprise system in SOEs and perfection of corporate governance; and propelling the strategic adjustment of the structure and layout of the state economy. See SASAC website
<http://www.sasac.gov.cn/n2963340/n2963393/2965120.html>. There is an allocation in carrying out these activities between central and local SASAC for large and smaller SOEs. Other SOEs or the national pension fund may also be important shareholders. The Ministry of Finance or a local finance bureau acts as the designated shareholder for banks or financial institutions, See also William P Mako and Zhang Chunlin,
„State Equity Ownership and Management in China: Issues and Lessons from International Experience‟
(Paper presented at the Policy Dialogue on Corporate Governance in Shanghai, China, 2004).
83 Examples for this form are Brazil, Bulgaria, India, Kenya, Mexico, South Africa, Turkey and Vietnam.
See World Bank, Held by the Visible Hand, above n 32, 11-12.
28 composition of the managing board. However, the state representative in the composition of SOE boards varies considerably from country to country and is decided by the relative influence of the state, the presence of employee representatives and the significance of private sector experts and „independent‟ members.84 Besides, the number of state representatives on the board is different in each country and and can range from „zero‟
(no state representative85) to almost the entire board,86 according to country-specific legislation.
In the EU, the concept „control‟ is clarified through EC regulations and academic works, but the term „influence‟ is preferably employed. In summary, the state participation in the provision of capital and and state involvement in administrative and managerial issues is a core constituent of the „state influence‟ concept.87 Similarly, the exercise of state control is summarized in the European Commission’s Transparency Directive when the public authorities:
(i) directly or indirectly hold the major part of the undertaking subscribed capital;
(ii) control the majority of the votes, or
(iii) can appoint more than half of the members of its administrative, managerial or
84 According to an OECD survey, state representatives can be civil servants from the ownership or sector ministries; or „external‟ personalities from the private sector, or others (academics, experts, etc.). OECD, Corporate Governance of SOEs, above n 4, 123.
85 Ibid 123-124. It can be seen in those countries that follow a centralised ownership model such as Demark, Norway, the Netherlands, Australia and Korea or in the type of wholly owned SOEs in such countries as the UK. In some countries such as Sweden, Germany and Finland, Italy or in the UK when the state is not a sole shareholder, the number of state representatives varies from one to two; or a proportion corresponding to the ownership in the case of Austria, Czech Republic, Slovak Republic, New Zealand and Spain; or a fix number in those countries such as France (1/3) or Mexico (50 per cent).
86 Ibid 123.
87 As observed in Muller-Hein, a company is deemed to be a public undertaking under Article 90 (1) if it has the following features: (i) the state participates in the capital of a company; (ii) the establishment of the company must arise from a unilateral act of the public authorities (e.g. a law) and (iii) the state must participate in the management of the company. According to Advocate General, this is evidenced by the power to choose the number of members representing the public authorities on the managing bodies. See Recommendation by the General Advocate in Muller-Hein [1971] ECR 723.
29 supervisory body.88
The term „influence‟ can be used interchangeably with „control‟, because the influential activities of the state in the managerial matters of state firms make it possible for the state to control and direct the operations of the firms in question. Besides, as the concept of
„state control‟ has changed with the introduction of financial contributions, legal forms of firms, ownership and methods of management, „influence‟ can be seen as being in accordance with the „control‟ concept.
State control can be in direct or indirect form. The direct form means the state will control the company through its public authorities and and the indirect form means this control is exercised through state holding companies. Besides, it does not necessarily mean that the state should exercise this control. The decisive point is the existence of control, rather than its exercise.89 Based on answers to the International Competition Network (ICN) by its state members,90 there are also several terms relating to the term „state monopoly‟.
Among other things, „state-owned monopolies‟ are those undertakings that are under 100 per cent ownership of the state and and „state controlled monopolies‟ are those that are under state shareholding, regardless of the percentage of the state share.91