Why state ownership of enterprises will not go away

Some years ago when privatisation became the rage, many people predicted that state-owned firms would eventually be sold off. But that hasn’t happened. Even today, state-owned companies control the majority of resources and business. And they simply don’t make money

During the 1990s we saw a major change in the world’s economies. There was a major shift away from command economies and state-owned firms. Privatisation programmes, some successful, some less so, were the rage. Many firms that were sold off in those days have become quite successful, others, in the relentless creative destruction of capitalism, have gone out of business. What many people predicted was that the remaining state-owned firms would eventually be sold off. The reality has been quite different.

China is supposed to be the home of a billion capitalists. According to the National Bureau of Statistics, there are 40 million or so small and medium-size enterprises, which employ at least 75% of China’s workers. They produce 68% of industrial output, are responsible for 68% of China’s exports, 66% of the country’s patent applications and more than 80% of its new products; but they are definitely second class citizens.

State-owned companies probably make up all of the listed companies. Certainly the largest companies are. The 20 biggest stocks on China’s market include 12 state-owned financial firms and three state-owned energy companies. The financial firms alone make up 28% of the Shanghai Stock Exchange’s market capitalisation. Allowing private companies to list is contrary to the purpose of China’s stock market. State-owned companies anywhere are usually poorly managed. There is no incentive for profit and the managements are usually political hacks. So they often lose money. Allowing them to list gave them access to cheap capital.

Private companies in China are regarded with suspicion. During the recent slowdown, Chinese state-owned banks were required to make massive loans as part of a stimulus package. But this wall of money never went near smaller private businesses. Most went to large state-owned firms or local governments. Less than 10% was allocated to smaller firms.
China is hardly alone in the dominance of state-owned firms. Indonesia’s state-owned enterprises make up 40% of the country’s gross domestic product (GDP). Vietnam has the same concentration. According to official figures, the leading state-owned enterprises (SOEs) make up nearly 40% of the GDP.

In Brazil, the two largest companies, oil giant Petrobras and mining company Vale, are both majority-owned by the state and make up 26% of the market capitalisation of the Bovespa. Two large state-owned banks dominate Brazil’s finances. Banco do Brazil is the country’s biggest financial firm, with a fifth of total assets. The National Bank for Economic and Social Development (BNDES) accounts for 40% of the lending.

Despite mass privatisations in the 1990s, the Russian state still owns large sectors of the economy. Federal and regional governments control about 40% of the stock market capitalisation. These include various sectors: banking 64% of the market capitalisation, oil and gas 47%, and utilities 37%. In addition to the partially state-owned listed companies, the Russian state has full control of 19.2% of the manufacturing industry, 15.3% of the fuel production, 11.6% of the metallurgy and 25.7% of the chemical industries.
In India 246 enterprises are owned by the state. They employed almost 1.6 million people in 2008. There are more than 40 public enterprises already listed on India’s stock markets and these account for 37% of sales.

State-owned companies are not just small local companies. The largest corporations anywhere are in emerging markets. The 13 largest energy companies in the world, measured by the reserves they control, are now owned and operated by governments. Collectively, multinational oil companies produce just 10% of the world’s oil and gas reserves. State-owned companies now control more than 75% of all crude oil production.

Governments in emerging markets are not content with just owning the corporations; they feel that they should invest national wealth as well. Rather than returning the wealth to their population, either directly or through improvements in infrastructure, they created Sovereign Wealth Funds. With the exception of the Alaska Permanent Fund and the Norway Government pension fund, these funds are all in emerging markets. Most of them invest oil money, but the notable exception is China and Singapore. Together they control almost $2.5 trillion. They may make up only 2% of the world’s $165 trillion worth of listed securities, but the power is concentrated in a few hands. The funds in emerging markets are neither transparent nor accountable.

The main issue with state-owned enterprises is simply that they don’t make money. There are five incentives and disincentives that require managers of private companies to make a profit and none apply to state-owned enterprises. It is also unlikely that these things will go away as many people hoped. They exist because politicians want them to exist, and politicians never like to give up power unless forced to. Besides gorging on taxpayer dollars, the size of these companies and the lack of restrictions on their operations distort the rest of the markets and that impacts everyone.

(The second part of this commentary will be published next week. The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected].)



Shadi Katyal

6 years ago

The Indian govt PSU had been loosers from day one and if the state of govt doesnot make money its employees all are very waelthy. Look into employees of STC,MMTC,SAIL etc.Why would let the govt sell these as no one will buy a corporation showing losses.
Take case of Air India where niether the Govt nor the Unions want to sell it.Unions are more powerful than Govt.We saw what happened in recent strike. One passes the blame to other and yet nothing is done .
Take Hotels, where the MP and Ministers have parties but no one pays as it is owned by Govt.
Why would either the union or ministers or employees let the Govt sell it as they loose the perks.


6 years ago


Dear friends
You have to understand that the main aim of the Public sector companies is not to earn profit like private companies. They provide a much more stable economy with lots of opportunities for the general public.
Look at the companies like NTPC, they provide huge employment and also remain in profits every year.
Atleast, thanks to such companies, various commodities are available at cheaper rate.
The day you give all such crucial companies to private sector, the profits will increase but so will be the prices. Also, the employees will be mistreated and exploited.
The govt also has a major say in various economic policies and not like the capitalist US govt which completely acts on the behest of its companies and enters wars every year.

The need is to increase the efficiency of the public sector, not privatise them.
If you hand is having a disease, you wont chop it off, you will give it medicine and cure it.
This is what needs to be done with loss making public sector companies as well.


shadi katyal

In Reply to buzzz 6 years ago

One has to laugh when reading that goods are cheaper because of PSU.Are you aware that STC imports poor quality at higher prices and most of the money goes in pockets of employees.Being used to poor quality of goods but availbility might be the reason of such statment.
Kindly show us any PSU or any GOI offices which even know what productivity is.Take Air India as an example or any electric corp or even banks. We employee people in these PSU not for efficiency and production but to get votes.
Yes hand might have to cut off as it might have gangrene and that is the case of PSU.
Such excuse have no value.
Why is that we in India need 6 people where rest of the western world can produce qualtiy good by one.We lack working ethics and any kind of discipline and thus inefficiency and poor quality is our banner.
We go on strike and close roads etc at drop of a pin as there is no urge to work when you get paid anyhow.

Indian stocks to open in the negative: Monday Market Preview

A steep hike in petrol prices and announcement of the core inflation numbers for April will weigh on the market

The domestic market is likely to open in the negative on weak global cues and the steep hike in petrol prices announced by government-owned retail oil companies, effective midnight of Saturday. Besides, headline inflation numbers for April will be out by noon today, which will give further direction to the market.

On the global front, Wall Street closed lower on Friday on mixed earnings guidance from companies and higher consumer inflation for April. Markets in Asia were mostly lower in early trade on Monday following a weak close of the US markets on Friday and lingering debt issues being faced by countries in the Euro zone. The SGX Nifty was 60.50 points lower at 5,520.50 against the close of 5,581 on Friday.

It was a lacklustre week for the market despite positive domestic economic indicators.  The last two days displayed contrasting trends with the market witnessing a sharp fall on Thursday on global cues, whereas it recovered on Friday, cheering the electoral results in the four states and one Union Territory. The market ended flat on the first three trading days of the week, fluctuating between positive and negative. It ended with a sharp cut of around 1.4% on Thursday, but recovered its losses on Friday and closed over 1% higher. Over the week, the market was flat with a mixed bias, as the Sensex added 12 points, while the Nifty shed seven points.

As the market tries to shrug off the downtrend, Friday’s gains could lead to a short-term rally that could fizzle out at 5,620-5,700.

Markets across the world have been worried about high commodity prices, rising inflation, rising interest rates and a slowdown in consumer spending, together with the potential downward GDP growth forecasts, and the consensus is that this will determine the trend going ahead.

Markets in the US closed lower on Friday on mixed earnings guidance from corporates and a rise in consumer inflation in April. JP Morgan (down 2.13%), Bank of America (down 2.21%) and Citigroup (down 2.1%), were among laggards in the financial sector on Friday. Stocks began their downward move in mid-afternoon trade as the dollar strengthened against the euro.

In economic news, US consumer price index rose 0.4% in April, mainly due to rising food and energy costs, compared with a 0.5% gain in March, the Labor Department said.

The core CPI, which excludes volatile food and energy prices, rose 0.2% in April, up from a 0.1% gain in March. Gasoline prices rose 3.3% in April, which accounted for nearly half the rise in the overall CPI.

On the other hand, the Thomson Reuters/University of Michigan preliminary consumer sentiment index for May rose to 72.4 from 69.8 in April, beating analysts’ expectations for a rise to 70.

The Dow declined 100.17 points (0.79%) at 12,595.75. The S&P 500 Index shed 10.88 points (0.81%) at 1,337.77 and the Nasdaq fell 34.57 points (1.21%) at 2,828.47.

Taking a cue from the weak US markets on Friday, markets in Asia opened mostly lower on Monday. The sentiments were also weighed by concerns about the debt crisis in Greece and caution about the US debt ceiling. Meanwhile, despite the devastating earthquake and tsunami Japan’s core machinery orders unexpectedly rose 2.9% in March from the previous month.

The Hang Seng declined 0.87%, the Jakarta Composite fell 0.43%, the Nikkei 225 was down 0.63%, the Straits Times retreated by 0.84%, the Seoul Composite was down 0.60% and the Taiwan Weighted fell by 0.59%. On the other hand, the Shanghai Composite and the KLSE Composite gained 0.08% each in early trade on Monday.

Back home, a day after oil retailing companies hiked petrol rates by a steep Rs5 per litre, finance minister Pranab Mukherjee on Sunday said a ministerial panel will decide on raising diesel, LPG and kerosene prices later this week.

An Empowered Group of Ministers (EGoM) headed by the finance minister is likely to deliberate on oil ministry's demand for a minimum Rs4 a litre hike in diesel price and Rs25 per cylinder increase in LPG rates to partly bridge the gulf between domestic prices and their international cost. He, however, neither gave the date of the EGoM meeting nor the quantum of hike the panel may consider.


Oil companies hike petrol price by Rs5 per litre

The increase in petrol price, which the oil firms had been holding since January even though crude oil had touched a two-and-a-half-year high, came a day after election results of five state assemblies were announced

New Delhi: In the biggest ever price increase of the fuel, state-owned oil companies today hiked petrol price by Rs5 per litre with effect from midnight Saturday, reports PTI.

The steep hike in petrol price is likely to be followed by a Rs4 per litre increase in diesel rates and Rs20Rs-25 per cylinder increase in domestic LPG price later this month.

Petrol in Delhi will cost Rs63.37 per litre at Indian Oil Corporation (IOC) outlets in the national capital from Sunday as against Rs58.37 a litre currently, an official said here.

Even after the hike, oil companies will continue to lose Rs5.50 per litre and another increase in price is on cards soon, he said.

Bharat Petroleum Corporation (BPCL) hiked price by Rs4.99 per litre and Hindustan Petroleum Corporation (HPCL) by Rs5.01 a litre.

Petrol at BPCL outlets currently cost Rs58.39 per litre and at HPCL pumps Rs58.38 a litre.

The increase in petrol price, which the oil firms had been holding since January even though crude oil had touched a two-and-a-half-year high, came a day after election results of five state assemblies were announced.

The government had in June last year freed petrol price from its control but oil companies continued to follow ‘informal’ advice from the oil ministry on rate revision.

The three firms had not raised prices since January in view of assembly elections in states like West Bengal, Tamil Nadu and Kerala.

“The hike needed to make domestic rates at par with international prices was Rs10.50 per litre but oil companies chose to hike rates by less than half of that,” the official said. “Another hike in petrol price is on cards soon,” he said.

This is the eighth hike in petrol price since the June 2010 decision. Petrol in Delhi cost Rs51.43 after the 26th June decision of the government deregulating its price.

The official said Saturday’s hike in petrol price was made necessary because of rising borrowing of oil companies who faced severe working capital shortage in view of losses incurred on fuel sales.

IOC has seen its borrowing rise by Rs15,000 crore in last 45 days as it loses Rs296 crore per day on fuel sales.

Besides petrol, it loses Rs18.19 per litre on diesel, Rs29.69 a litre on kerosene and Rs329.73 per 14.2-kg LPG cylinder.


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