0.11 States and markets - soes

State-owned enterprises

State-owned enterprise almost everywhere is known by the acronym SOE. SOE ^S turn out to have very significant, and not always positive, effects upon economic growth and development: Moreover, the role of SOE ^s in exploiting Natural Capital such as oil and mineral reserves looms quite large in several large emerging nations. As the next few chapters focus on natural capital, this is an appropriate time to examine the advantages or disadvantages of these enterprises.

Therefore, we now consider the role of SOE ^s in economic development, primarily, but not exclusively in emerging nations.

A SOE is a firm owned or controlled by the government. The government can exercise control with 100% ownership as with Mexico’s PEMEX and Saudi’s Aramco. The government can exercise control with 51% of the shares, or, as in the case of Brazil’s Petrobras (oil) 40%.

Much of what we will observe will not be cause for cheer. SOE ^s the world over are often overstaffed and inefficient. Sometimes they are quite corrupt, such as the Venezuelan oil SOE Petróleas de Venezuela, S.A. (PEVSA) or Mexico’s PEMEX.

PEMEX was created in 1938 when the Mexican government nationalized all oil companies operations in Mexico. For the next 50 years PEMEX functioned reasonably well, exploiting older oil reserves discoveries in the 30s and 40s. But by 1990, the enterprise began to encounter difficulties. Production declined over the next quarter century, not because of a lack of petroleum endowments, but because of the inability of PEMEX to discover and develop new deposits. As production of oil declined, losses rose. Losses from operations grew steadily from 2005-2013.

As a result, the Mexican government announced in 2014 a major restructuring of the company.

These outcomes are not inevitable. We should not think that private sector firms are inherently superior to SOE ^s . There are capable people in both. The problem is not generally a people problem.

The central problem with SOE ^s are two fold. First is most, nearly all, of them never face a market test . A money-losing, inefficient, private firm will eventually go belly-up like Lehman Brothers in 2008. Some however are rescued by government like Bear Sterns or General Motors. SOE ^s do not face this market test. If the government rescue is successful they may remain in operation and return to profitability.

It is not necessarily true that managers in SOE ^s are generally incompetent and those in private firms are generally competent. The second principal reason for inefficiency and losses in SOE ^s is the incentive structure faced by managers.

A private firm faces an incentive structure that says – central costs and grow revenues, or go broke.

An SOE faces a much more complex and often inconsistent incentive structure

1. It must often produce goods prescribed by the government, at prices prescribed by government.
2. It must often employ extra workers far beyond the production needs of the firm, often for political reasons.
3. It is often required to undertake social obligations such as housing for employees, construction of buildings for politicians and the like.