7. Semi-Private: State-Controlled Enterprises

Social Triangle
Example Posters: Basic
Example Posters: Advanced

[7] Market-State

At the market-state interface, we find public organizations that are (partly or wholly) government-owned or sponsored, with a for-profit orientation and aimed at producing private goods. Most partly state-owned companies that are also quoted on the stock exchange (and attract private capital) fall into this category.

Agency Challenges

  • Exit options enjoyed by citizens (as the Ultimate Beneficiary Owners behind the state) are far weaker than those available to shareholders (in non-democratic societies, the voice option is virtually non-existent);
  • The lack of a clear consensus on which objectives the government should pursue (and on the means to accomplish these objectives) hinders the development of effective mechanisms of accountability;
  • The absence of a ‘market check’ on managerial agency costs;
  • Implicit state guarantees undermine the threat of bankruptcy as a source of managerial discipline;
  • The pursuit of social welfare objectives favours citizens, but not shareholders;
  • The appropriation of disproportionate financial benefits by the state (which favours citizens, but not shareholders);
  • The award of subsidies to SOEs, which favours shareholders, but not necessarily citizens;
  • Allocation of responsibilities and oversight/enforcement of duties may not be adequately separated, which may not be in the public interest (enforceability of the rule of law by the public).

Typical Strengths

  • Deep pockets of state (financial access and continuity);
  • Insider in local networks;
  • Easier to make longer-term planning and thus increase strategic position within a sector;
  • Too big to fail;
  • Big influence on national policies, regulatory capture;
  • Stable /secure job environment for employees.

Typical Weaknesses

  • Bureaucracy / loss in efficiency;
  • Suspicion of political agenda (industrial politics), especially in case of developing foreign activities;
  • Single shareholder influence (risk of bias in decision-making due to lack of sufficient checks and balances);
  • Lack of flexibility;
  • Risk aversion;
  • Target of political and ideological battles;
  • Pressure for corruption (if foreign influence is a focal point), rent-seeking behaviour by politicians, other non-pecuniary private benefits.
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