The well known and the richest companies owned by government are oil companies. Among world’s largest oil companies, measured by their reserves, 13 of them 1 are owned and operated by governments and they
control more than 75 percent of global oil reserves and oil production. At the same time, private multinational oil companies hold just three percent of the global oil reservesand produce just ten percent of the total oil production (Bremmer, 2009).
1 some of those companies are Saudi Arabia's Saudi Aramco, the National Iranian Oil Company, Petróleos de Venezuela, S.A., Russia's
In some countries, usually developing, governments realize their political interests through privately owned national champions. These companies have private equity, but gain competitive advantage on the base of preferences given by government in form of favorable credits, contracts or subsidies, not on the base of increasing productivity and efficiency. Positive aspect of fostering national champions is that they can be considered as special joint venture, combined of state resources and the most valuable knowledge and experience of the best multinational companies and their management. There are couple of examples in the China’s automobile industry and electronic industry, where China’s national champions took over the global car maker Volvo and giant of electronic industry Siemens. Although national champions are private companies and a lot of them, especially in emerging markets are listed on the Fortune Global 500, they are in more favorable position compared to other private companies as their competitors. On the Fortune Global 500 list, according to revenues in billions of US$, there are a lot of Chinese government companies, such as Sinopec group (4th place), China National Petroleum (5.), State Grid (7.), Industrial and Commercial bank of China (29.), China Construction Bank (50.), Agricultural Bank of China (64.), Bank of China (70.), China Mobile Communication (71.), China State Construction Engineering (80.), China National Offshore Oil (93.), China Railway Construction (100.), China Railway Group (102.) and other state owned companies. There are also a couple of Russian state companies on the Fortune Global 500 list, such as Gazprom (21.), Rosneft Oil (99.), Sberbank (228.). 2
Besides the remarkable financial results of these companies and their importance for the national economy and financial market, it has to be noticed that those results are mainly achieved due to the government support and those companies are used as an instrument of manifesting power of political establishment and realizing political interests. According to McKinsey, in 2013 there were 8000 companies worldwide whose revenue exceed US$ 1 billion, and 75 % of those companies came from developed countries. McKinsey forecasts that by 2025, there will be additional 7000 companies with revenue above US$ 1 billion and 70 percent of those companies will come from emerging markets, with dominant position of China’s companies.3
Regarding this forecast and development of state capitalism in the last twenty years, similar trend can be expected in the next decade, which means a considerable number of companies from the emerging economies, have revenues above billion of US$ and are owned by state and governed by professional management. Empirical evidence from China suggests that SOEs are more successful in the realization of infrastructure projects, such as railways and airports, than in the boosting of innovation. There are also negative effects of favoring private champions and SOEs that are reflected in the repression of private sector and decreased productivity and efficiency, whereby costs of subsidies and credits given to the national champions and SOEs, are transferred to the final consumers through higher prices of goods and services. Regardless evidence of using SOEs as a tool of ruling political party, different forms of direct state intervention in economy has been existed since the ancient societies, and were especially popular in the 20th century in conditions of Great depression and other global financial crisis. It indicates that SOEs are not exclusively related to developing or emerging economies. The role of government and its interference in the economic sectors was particularly necessary after The Second World War and reconstruction processes throughout the Europe, Japan and other countries destroyed by the War. SOEs as a manifestation of visible hand of government are usually founded in energy sector (oil, gas, electricity, coal), telecommunication and mass media, railway, air transport, financial and banking sector. Ten years ago according to the OECD data, SOEs in France and Italy had the biggest asset value and total equity vale compared to SOEs in other OECD countries. According to the number of SOEs employees as a percentage of total employment, France was at the fourth and Italy was at the ninth place. French government has 85 % of shares in EDF (energy company), Japan has 50 % of shares in Japan Tobacco, Germany has 32 % of shares in Deutsche Telekom. Total value of SOEs in OECD countries is nearly US$ 2 trillion, with the workforce of 6 million people. 4
Governments of some countries use direct state intervention as an instrument of realization developing strategies and goals in order to boost development of some sectors, industries, regions or national economy as a whole. Through SOEs government realizes some measures of fiscal policy and supports achieving of socio-economic goals such as decreasing rate of unemployment, especially of population under thirty. Having in mind importance of SOEs for national economies and their influence on the global market, even more OECD countries are interested in reforms and professionalization of SOEs board of directors. It requires higher level of autonomy and competence of members of boards in SOEs and less political influence reflected in the political representatives in boards. There are also some countries without state representatives in SOEs boards, such as Norway, Denmark and Netherland. Number of state representatives in the SOE's board depends on the ownership model (sector, dual, centralized) that is applied in a country. System of fees and incentives has to be properly set for the members of SOEs boards similar to remuneration systems in private companies. In many OECD countries there is a trend of revision of
2 http://money.cnn.com/magazines/fortune/global500/index.html
3 http://www.smartplanet.com/blog/bulletin/half-of-fortune-500-companies-will-soon-come-from-emerging-countries/ 4 The Economist, January 2012, Something old, something new - A brief history of state capitalism
fees and incentives of SOEs boards' members in order to harmonize their incentives with same items in private sector. Members of SOEs boards should also be focused on creating and increasing value of SOEs, such as they are members of board in some company with private equity. It is hard to expect that these principles of corporate governance that have already been implemented in SOEs in OECD members countries, will be soon applied in the governance of SOE's in China, Russia, Brasil and other emerging economies.
Regardless obvious state support and unequal treatment of SOEs and enterprises with private equity in terms of availability and price of financial sources as well as other business conditions, return on equity (ROE), productivity, efficiency, cost control, innovative activities of SOEs are still below the same performance measures of private sector's enterprises. In the period 2001-2009 in China average return on equity of SOEs was only 1.47 percent, a several times less than ROE in private sector. Some older studies indicate that the higher state participation in the equity is, the lower productivity is. There are also some exceptions such as China Mobile and China National Petroleum Corporation that achieve excellent financial and business results, although Chinese government has majority ownership in these enterprises. 5
3. STATE INTERVENTION IN THE BUSINESS OF INSURANCE COMPANIES AND