International Agreements and Development

Policy
State Owned Enterprises and State Capitalism

Manuel ‘Butch’ F. Montes

University of the Philippines

Econ 198 2nd Semester, SY

2020-21
Major Concepts

•State-Owned Enterprises (SOEs)

• What are SOEs
• Role played in development
•Competitive Neutrality
•Obligations in the TPP
•“Non-Commercial Assistance”

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New Discourse on State-Owned Enterprises

•1980s: SOEs inefficiency and social costs

• Governments advised get rid of SOEs for their own good
•Now: SOEs as threat to competition and
international commerce
• Unfair advantage to countries with SOEs
• To introduce international disciplines on using SOEs
•New thinking: SOEs introduce competitive
distortions

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What is a state-owned enterprise?

• SOEs ≡ state-related enterprises

• In Singapore
• “Government-linked Companies” (GLC)
• Government Statutory Boards
• Housing and Development Board
• Economic Development Board
• Public Utilities Board
• By percentage of ownership,
• Including special shares with veto power over certain
decisions
• Government-mandated monopolies
• Private or public companies that provide services or manage
government assets

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Historical and Development Reliance on SOEs

•In US and Europe, governments operated large

utilities and enterprises long before the advent of
socialist governments
•After World War II, European governments relied on
SOEs (coal, iron, steel) during postwar
reconstruction
•(Newly independent former colonies relied heavily
on SOEs, given scarcity of capital and capitalists)
•Beginning in 1970s, SOEs fell into disrepute in the
West → process of privatization
• Privatization associated with its own pitfalls,
including losses in essential goods and services
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Historical and Development Role of SOEs

•1980s: SOEs blemishes on ideal model of private

economy from considerations of EFFICIENCY
associated with defective GOVERNANCE
• Inefficiency from politically driven corporate decisions
• Plus, yet again, corruption

•But Inefficiency not just a matter of governance:

•There are structural (“inescapable”) features
inherent in many SOEs such as economies of scale,
natural monopolies
• From landlines to digital telephony
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Why did/do SOEs exist ?

•Source of political employment

•Source of political campaign funding
•Protectionism + Nationalism (“national carrier”)

•Process of Privatization 1980s

•Then a process of Re-nationalization especially at
subnational SOEs
• Private provision higher cost to consumers and public
sector
• Eg. water services in city of Paris
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Filling Hole in Economic Space (the development ‘excuse’)

1. Scale of long-term capital required in needed new

products and services in order to introduce new
economic activities
• National Power Corporation, Phil National Railway, mail
and telecommunications, domestic air service
2. Risks of new ventures in needed services and
products too large for private entities for reasons
of technology and absence of complementary
economic activities
3. Private appropriation of benefits from new
economic limits widespread availability desired
• National Steel Corporation (Iligan)

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OECD’s Competitive Neutrality

•In advanced countries, public sector 30-45% of GDP,

while in developing countries, about 20%
• Developing countries have more limited fiscal resources
• Analysis: Developing country inability to develop being
blamed on too much SOE participation (revolutionaries)
• In developed countries, state and municipal sectors are
also a larger part of their GDP
•Reform needed in developed countries
•But 2012, OECD ministers requested the standard in
their engagement with emerging economies
•Not yet required practice in OECD members
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TPP Chapter on SOEs and Designated Monopolies

•TPP Chapter

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TPP – Definition of SOE

•TPP Ch. 17

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TPP Disciplines on SOEs and designated monopolies

1. Ensure the entity acts in accordance with

commercial considerations;
2. Non-discrimination in Purchases and Sales;
3. Prohibition Against Anti-Competitive Practices;
4. Transparency/Notification Requirements; and
5. Non-Commercial Assistance Remedy

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1. Acts in accordance with commercial considerations

•commercial considerations means price, quality,

availability, marketability, transportation, and other
terms and conditions of purchase or sale, or other
factors that would normally be taken into account in
the commercial decisions of a privately owned
enterprise in the relevant business or industry;

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2. Non-discrimination in Purchases and Sales

•SOEs and designated monopolies must provide

national treatment and most favoured supplier
treatment to enterprises of any TPP country.
•This applies even if that enterprise is based in a
non-TPP country as there is no requirement that it
applies only to companies geographically located in
a TPP country as well as TPP enterprises based
domestically (once these are covered investment)

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3. Prohibition Against Anti-Competitive Practices;

•Party must implement Competition Policy

•For example, in the US-Singapore FTA, no
exemption for SOEs

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4. Transparency/Notification Requirements

•Provide information on the SOEs that they have as

well as the information on how the state party
influences their governance through information on
any government appointees, share ownership
(including special shares), immunities as well as any
non-commercial assistance.
•In Singapore-US FTA, annual report on above
information on SOEs by Singapore required

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5. Non-commercial assistance remedy

•Examples of prohibited non-commercial support by

governments to SOEs
• equity injections
• liabilities forgiveness and
• better than market rate loans.
•Two kinds of injuries that require remedy in TPP
• Those that cause adverse effects on interests of other
TPP countries
• Those cause injury to a domestic industry of another
TPP country for SOEs which have like goods produced
and sold by that other Party’s domestic industry

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Adverse effects on interests or domestic industries

•Examples of these
• Displacing domestically produced goods as evidenced by
significant changes in market share
• Price undercutting, price suppression
• Displacing like services

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Enforcement – Dispute Settlement, including ISDS

•Adequate enforceability is ensured under TPP, as

breaches of any provision in Chapter 17 can be
brought before a domestic court, ISDS or the
dispute settlement mechanism of TPP.

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TPP Disciplines on SOEs

•TPP Ch. 17

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RCEP and USMCA

•RCEP has no SOE chapter, USMCA has chapter 22

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 Policy Issues

Costs, Intl. Prices, Competition

Supply International
Capacity Environment

Investment: Intl. Treaty Obligations

Private and Public
Participation in intl.
Efficiency: through rule setting and
Competition, standards
Technology,
Regulation

Economic
Policy
(Unilateral)
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