Consistent with the rationale for state ownership, the legal, regulatory and policy framework for SOEs should ensure a level playing field and fair competition in the marketplace when SOEs engage in economic activities.
When SOEs engage in economic activities it is commonly agreed that those activities must be carried out without any undue advantages or disadvantages relative to other SOEs or private enterprises. There is less consensus about how a level playing field is to be obtained in practice – particularly where SOEs fulfil non-trivial public policy objectives. In addition to specific challenges such as ensuring legal, administrative, tax, debt and regulatory neutrality come some more overarching issues, including identifying the cost of public service obligations and, where feasible, separation of economic from non-economic activities. Neutrality should be ensured in line with the OECD Recommendation on Competitive Neutrality. Another challenge is the evolving internationalisation of SOEs and their participation in markets and value chains, which requires further solutions to prevent and mitigate possible distortions of the playing field, such as those caused by discriminatory activities of SOEs.
III.A. There should be a clear separation between the state’s ownership function and other state functions that may influence the market conditions for state-owned enterprises, particularly with regard to market regulation and policy making.
When the state plays a role of policy maker, market regulator and owner of SOEs with economic activities, the state becomes at the same time a major market player and an arbitrator. This can create conflicts of interest that are neither in the interest of the enterprise, the state nor the public. Complete and transparent separation of responsibilities for policy making, ownership and market regulation is a fundamental prerequisite for creating a level playing field for SOEs and private companies and for avoiding distortion of competition. It is also essential for averting undue influence by the state, and therefore also a key recommendation of the OECD Guidelines on Anti-Corruption and Integrity in State-Owned Enterprises, which should be fully implemented by adherents. This would include ensuring that any government functions that are responsible for policy making, regulating the market or relevant industry are separate from government functions that have ownership responsibilities over SOEs in the relevant industry. Another important case is when SOEs are used as delivery vehicles for specific public policy objectives, such as the advancement of sustainable development, the pursuit of macro-stabilisation or economic growth objectives. In such cases, the lack of separation between the ownership and policy formulation functions is problematic for a number of reasons highlighted throughout the Guidelines, and it can easily result in goals confusion and conflicts of interest between branches of the state. A separation of public policy and ownership need not prevent necessary co-ordination between the relevant bodies. It will enhance the identification of the state as an owner and will favour transparency in defining objectives, monitoring performance, and ensuring policy coherence particular as it relates to sustainability.
In order to prevent conflicts of interest, it is also necessary to separate clearly and transparently the ownership function from any entities within the state administration which might be clients or main suppliers to SOEs. Legal as well as non-legal barriers to fair procurement should be removed. In implementing effective separation between the different state roles with regard to SOEs, both perceived and real conflicts of interest should be taken into account.
III.B. Stakeholders and other interested parties, including competitors, should have access to efficient redress through unbiased legal, mediation or arbitration processes when they consider that their rights have been violated. SOEs’ legal form should allow SOEs to initiate insolvency procedures and for creditors to press their claims.
SOEs as well as the state as a shareholder should not be protected from challenge via the courts in case they are accused of infringing the law or disrespecting contractual obligations. Stakeholders, and other interested parties including competitors should have access to efficient redress, and be able to challenge SOEs and the state as an owner in courts or tribunals, or, if mutually agreed, alternative dispute resolution mechanisms (e.g. arbitration, mediation) and be treated fairly and equitably in such cases by the legal and judicial system. They should be able to do so without having to fear an adverse reaction from the state powers exercising ownership over the SOE that is subject to the dispute. SOEs should also be subject to bankruptcy and insolvency rules equivalent to those for comparable competing private enterprises.
III.C. Where SOEs carry out public service obligations, they should be transparently and specifically identified, allowing for an accurate attribution of costs and revenue.
Where SOEs carry out public service obligations, it is particularly important to fully disclose all public service obligations, their reasoning, scope and related compensation or advantages. A structural or accounting separation of those activities should facilitate the process of identifying, costing and funding public service obligations accurately and transparently.
In particular:
III.C.1. High standards of transparency and disclosure regarding their costs and revenue must be maintained.
Public service obligations should be transparently and specifically identified and disclosed. Ideally, accounting, functional or corporate separation should be introduced so that the different activities can be accounted for separately. However, it must be recognised that depending on individual SOEs’ production factors, including technology, capital equipment and human capital, structural separation is not always feasible and, where feasible, is sometimes not economically efficient. The benefits and costs of structural separation should be carefully balanced against the benefits and costs of behavioural measures.
When public service obligations remain integrated with other economic activities they typically share costs, assets or liabilities. Ensuring a level playing field then requires a high level of transparency and disclosure regarding the cost structure. This point is further accentuated where SOEs are subject to government subsidies or other preferential treatment. A separation of costs and assets between accounts corresponding to public service obligations and (other) economic activities should be undertaken to avoid market-distorting cross-subsidisation between public service obligations and other types of activities.
III.C.2. Net costs related to carrying out public service obligations should be separately funded, proportionate and disclosed, ensuring that compensation is not used for cross-subsidisation.
In order to maintain a level playing field with private competitors, SOEs need to be adequately compensated for the carrying out of public service obligations, with measures taken to avoid both over compensation and under compensation. On the one hand, if SOEs are over compensated for their public service obligations, this can lead them to be less efficient and may also amount to an effective subsidy on their competitive activities, thus distorting the level playing field with private competitors. On the other hand, under compensation for public service obligations can jeopardise the viability of the enterprise and can put it at a disadvantage relative to competitors.
It is therefore important that any net costs related to the carrying out of public service obligations be clearly identified, disclosed and adequately compensated on the basis of specific legal provisions and/or through contractual mechanisms, such as management or service contracts. Related funding arrangements should also be disclosed. Compensation should be structured in a way that avoids market distortion. This is particularly the case if the enterprises concerned are pursuing public service obligations in addition to economic activities. It is important that compensation provided to SOEs be calibrated to the net costs of fulfilling well-defined public service obligations and not be used to offset any financial or operational inefficiencies. Compensation should never be used for financing SOEs’ economic activities other than public service obligations, including in other markets, or for cross-subsidisation of other SOEs or private companies. The funding and fulfilment of public service obligations should be monitored, evaluated through the overall performance monitoring system and periodically reviewed. Establishing or maintaining independent oversight by relevant state control bodies and monitoring should ensure that funding arrangements for public service obligations are calculated based on clear targets and objectives, proportionate, transparent and are based on efficiently incurred costs, including capital costs.
III.D. As a general rule, state-owned enterprises should not be used to subsidise or grant advantages to other commercial undertakings If SOEs are used to allocate support measures in line with their public policy objectives, care should be taken to ensure that: (i) support measures are consistent with applicable competition and trade rules; (ii) support measures and their funding are clearly defined and publicly disclosed; and (iii) support measures do not cause unfair disadvantages to other commercial undertakings.
SOEs should, as a general rule, not be used to subsidise commercial undertakings and should ensure that any such support measures are both transparent and consistent with trade and competition obligations.
However, public policy obligations may sometimes lead SOEs to allocate grants, loans or other advantages to other commercial undertakings. The decision on whether to assign such a role to SOEs should take into account similar considerations to those raised in Guideline I.A, namely maximising long-term value in an efficient and sustainable manner. Any such obligations should not result in unfair disadvantages that are without legal basis or disproportionate.
Examples of advantages that may cause concern include subsidies, such as favourable loans, loan guarantees, investment in capital or equity, as well as in-kind support or below-market prices such as for energy inputs, real estate, information technology, infrastructure or access to data and information resources. The provision of support via SOEs should be consistent with applicable rules. Where the support granted via SOEs to carry out public policy objectives is to ensure the provision of goods and services for which there is no commercial market or for which the private sector is unwilling to provide, concerns about the competitive landscape should normally not arise. When intervening in markets where competition actually or potentially exists, care must be taken to assess the impact on market efficiency and its economic costs. Consistent with the above, subsidies or advantages that are granted in relation to the attainment of public policy objectives should be disclosed, including by the SOEs concerned.
Care should be taken to ensure that any support measures are consistent with existent laws, regulations and international obligations. The allocation of grants, loans or other advantages to enterprises may be inconsistent with international rules for trade and investment, and may hinder competitive neutrality.
III.E. The state should not exempt SOEs, when engaging in economic activities, from the application and enforcement of laws, regulations and market-based mechanisms, and should ensure tax, debt and regulatory neutrality to prevent undue discrimination between SOEs and their competitors.
When SOEs engage in economic activities, exemptions, in law or in practice, from certain laws and regulations otherwise applicable to private sector companies (e.g. tax, administrative, competition and bankruptcy laws as well as zoning regulations and building codes), should be avoided.
SOEs and their private competitors should generally be treated equally, including under national treatment and market access rules. This includes the OECD Declaration on International Investment and Multinational Enterprises, the OECD Code of Liberalisation of Current Invisible Operations [OECD/LEGAL/0001] and the OECD Code of Liberalisation of Capital Movements [OECD/LEGAL/0002], where applicable.
When SOEs benefit from undue advantages due to their state ownership (e.g. preferential treatment and regulatory insulation, soft budget constraints and access to explicit or implicit state guarantees and below-market financing) they may also be less reactive to market-based mechanisms (e.g. carbon pricing mechanisms or emissions trading schemes aimed at mitigating carbon emissions). The same is true when standards of responsible business conduct are not observed, which can also affect competition.
III.F. SOEs’ economic activities should face market consistent conditions including with regard to debt and equity finance.
Measures should be implemented to ensure that SOEs’ economic activities, including the purchase and sale of all goods and services, and conditions regarding access to, granting of and receiving debt and equity finance face market consistent conditions, irrespective of whether financing for an SOE’s economic activities comes from the state budget, other SOEs or the commercial marketplace.
In particular:
III.F.1. All business relations of SOEs, including with financial institutions, should be based on purely commercial grounds.
Creditors sometimes assume that there is an implicit state guarantee on SOEs’ debts. This situation has in many instances led to greater access to funding or artificially low funding costs disrupting the competitive landscape. Moreover, in those countries where state-owned financial institutions or state-owned institutional investors tend to be among the main creditors of SOEs involved in economic activities, there is great scope for conflicts of interest. Reliance on state-owned financial institutions and investors may shelter SOEs from a crucial source of market monitoring and pressure, thereby distorting their incentive structure and leading to excessive indebtedness, wasted resources and market distortions.
A clear distinction is necessary between the state’s and SOEs’ respective responsibilities in relation to creditors. Mechanisms should be developed to manage conflicts of interest and ensure that SOEs develop relations with state-owned banks, other financial institutions and institutional investors as well as other SOEs based on purely commercial grounds. State-owned banks should grant credit to SOEs on the same terms and conditions as for private companies. These mechanisms could also include limits on, and careful scrutiny of, SOEs’ board members sitting on the boards of state-owned banks.
Where the state extends guarantees to SOEs effectively to compensate for its inability to provide them with equity capital additional problems may arise. As a general principle, the state should not give an automatic guarantee in respect of SOE liabilities. Fair practices with regard to the disclosure and remuneration of state guarantees should also be developed and SOEs should be encouraged to seek financing from capital markets. With regard to commercial lenders, and to address the issue of implicit state guarantees, the state should make clear to all market participants its lack of backing of SOE-incurred debts or make transparent any measures it may extend necessitated by an emergency or crisis. It should also consider mechanisms of imposing compensatory payments to the national treasury from SOEs benefiting from lower funding costs than private companies in like circumstances.
An SOE’s relation to other business partners, including other SOEs, should be at arm’s length and based on commercial considerations and in no case amount to cross-subsidisation of other SOEs or private entities.
III.F.2. SOEs’ economic activities should not benefit from or provide any direct or indirect financial support, that confers an advantage over private competitors, such as preferential debt or equity financing, guarantees, lenient tax treatment or preferential trade credits.
To maintain a level playing field, SOEs should be subject to an equal or equivalent financing and tax treatment as private competitors in like circumstances. There should be no expectation that SOEs may benefit from their government-near status to run up tax arrears or be subject to lenient enforcement of tax rules.
SOEs should generally not benefit from “off market” funding arrangements from other SOEs or the state, such as trade credits or below-market equity infusions. Such arrangements, unless they are fully consistent with regular corporate practices, amount to preferential financing. The state should implement measures to ensure that inter-SOE transactions take place on purely commercial terms. The state should further pay attention to its ownership practices of state-owned financial institutions, which should not confer advantages inconsistent with market conditions. For example, state-owned financial institutions should not confer below-market lending or financing. Moreover, government equity infusions originating from state investment funds should not be provided or maintained under non-market conditions. Additional guidance regarding implicit or explicit guarantees are provided in Guideline III.F.1.
Ad hoc state support measures (e.g. in the form of below-market finance or equity) necessitated by an emergency or crisis should be aligned with the principle of competitive neutrality, whereby emergency support is transparent, targeted, time-limited, should not distort trade and competition, and is consistent with longer-term objectives. State owners should follow international best practices regarding emergency government support, and inter alia discuss, identify and/or propose less competitively distortive alternatives that still allow the policy maker to achieve the same goal. Ad hoc support measures should always provide for a transparent exit plan.
Competitive neutrality should be ensured in line with the OECD Recommendation on Competitive Neutrality.
III.F.3. SOEs’ economic activities should not receive or provide in-kind inputs such as goods, energy, water, real estate, data access, land or labour or arrangements (such as rights-of-way, or concessions) at prices or conditions more favourable than those available to privately owned competitors.
SOEs should not receive or provide any in-kind inputs such as real estate, goods or services, but also access to data and information resources, or infrastructure at prices or conditions more favourable than those available to privately-owned competitors operating at arm’s length in accordance with commercial considerations, except as compensation for the carrying out of public service obligations. SOEs and private sector companies should negotiate, and get access to, concessions on equal terms.
III.F.4. SOEs’ economic activities should be required to earn sustainable rates of return that are comparable to those obtained by competing private enterprises operating under similar conditions, except with respect to the carrying out of public service obligations.
SOEs’ economic activities should be expected to earn rates of return (RoR) comparable, in the long run, to those of competing companies under similar conditions. This does not imply that RoR should necessarily be identical for SOEs and private companies.
RoR need to be considered over a long time span and factor in the whole life cycle of products, given that even among private companies operating in highly competitive environments RoR can differ considerably in the short- and medium-term and private companies increasingly voluntarily and often even by obligation factor in these costs as well. Moreover, when engaging in economic activities, any equity financing provided by the state budget should be subject to a required minimum expected RoR that is consistent with private sector companies in like circumstances. A number of governments allow lower RoR to compensate for balance sheet anomalies such as temporary needs for high capital spending. This is not uncommon in other parts of the corporate sector and, if carefully calibrated, this does not imply a departure from practices consistent with maintaining a level playing field. Conversely, some governments may lower RoR requirements to compensate SOEs for such public service obligations that they are charged with. This should only be pursued if lowering RoR requirements is directly linked to the attainment of the public service obligations. The return target should be a reflection of the risk profile and capital structure of the SOE, in line with Guideline I.A.
III.G. When SOEs engage in public procurement, whether as bidder or procurer, the procedures involved should be open, competitive, based on fair and objective selection criteria, promote supplier diversity and be safeguarded by appropriate standards of integrity and transparency, ensuring that SOEs and their potential suppliers or competitors are not subject to undue advantages or disadvantages.
The participation of SOEs in public procurement processes has been an area of concern for governments committed to a level playing field. Legislation should provide for bidding regimes that in principle are fair, open and transparent, in line with the OECD Recommendation on Public Procurement [OECD/LEGAL/0411]. Whether or not such rules are limited to procurement by the general government or are also extended to procurement by SOEs differs between countries; either way it is important that SOEs are transparent about the rules and frameworks under which they engage in procurement. When SOEs engage in public procurement, whether as bidder or procurer, the procedures involved should be transparent, competitive and based on fair and objective selection criteria, promote supplier diversity and be safeguarded by appropriate standards of integrity. Generally, the activities of SOEs can be divided into two parts: activities that are for commercial sale or resale; and activities to fulfil a governmental purpose. In cases where an SOE is fulfilling a governmental purpose, or to the extent that a particular activity allows an SOE to fulfil such a purpose, the SOE should adopt government procurement procedures in line with best practices. Monopolies administered by SOEs should follow the same procurement rules applicable to the general government sector. SOEs as procurers should be encouraged to use open tenders, but be allowed a margin of appreciation on the right procurement method for their commercial activities if they compete with private sector companies in their market segment to ensure they are not subject to undue disadvantage. The use of digital technologies, such as e-procurement, may be encouraged to enhance transparency and integrity.
III.H. When SOEs' economic activities affect trade, investment or competition they should conduct all business, other than carrying out public service obligations, in accordance with commercial considerations. They should conduct all business according to responsible business conduct and high standards of integrity.
This Guideline focuses specifically on the actions or activities of SOEs themselves in the context of business conduct. A growing number of SOEs economic activities affect or could affect trade, investment or competition. States should pay attention to their SOEs’ impact on trade, investment or competition and should avoid any market distortions, especially when state owners grant a favourable domestic market position to their SOEs which the latter can lever into a competitive advantage in other related markets.
Due to SOEs’ important roles for most national economies and operations in sectors that provide essential services in the public interest, such as transportation, public utilities and finance, the concentration of SOEs in these sectors can have direct implications on the competitive landscape. First, state intervention in these sectors, especially industrial sectors, plays a significant upstream and downstream role in international value chains. Second, a high degree of cross-border trade and investment takes place in most of these sectors. Third, SOEs in the network industries often operate as vertically integrated structures with monopolies in parts of their value chains. This means they can have an impact on the entry conditions of potential competitors across a number of commercial activities.
At the same time, further nuance is necessary with regard to public service obligations. As an exception to the general rule, the requirement of commercial considerations should not apply when an SOE is carrying out public service obligations. When carrying out public service obligations, SOEs should not discriminate in their purchases, and may only discriminate in their sales if it is necessary based on the nature of the public service obligations. For a discussion on public procurement, refer to Guideline III.G and the OECD Recommendation on Public Procurement. All economic and non-economic activities should be conducted in line with relevant OECD standards bearing on integrity and responsible business conduct.