copy the linklink copied!2. Legal and regulatory framework for the state ownership function (Chapter I and Chapter II of the SOE Guidelines)
According to the OECD Guidelines on Corporate Governance of State-Owned Enterprises, the state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner. This chapter provides an overview of various country efforts on improving the legal regulatory framework for the exercise of the state ownership function through adoption of the co-ordinating agency model and/or other requirements of the law. Insofar as these changes have introduced greater transparency regarding the rationales for state ownership and improved coordination of state ownership practices across the public administration, around two thirds of the reviewed countries have brought national practices closer to the standards of the SOE Guidelines during the review period. However, in several other countries, ownership of SOEs is still exercised on an ad-hoc basis by individual ministries rather than on a whole-of-government basis.
copy the linklink copied!Main trends
Around two thirds of the reviewed countries have seen changes in the last five years in the overall objectives and governance of state ownership. They have made efforts to improve the legal regulatory framework for the exercise of the state ownership function through adoption of the co-ordinating agency model and/or other requirements of the law. Insofar as these changes have introduced greater transparency regarding the rationales for state ownership and improved coordination of state ownership practices across the public administration, they have brought national practices closer to the standards of the SOE Guidelines.
At the same time, there is still a strong continued decentralisation of state ownership portfolios in some countries. Mostly, these countries have yet to develop an explicit, whole-of-government ownership policy clearly outlining the rationales for state ownership. Such departures from the “ownership centralisation” standard of the SOE Guidelines have been mitigated in several countries through the recent introduction of policy documents (e.g. on board nomination practices, internal controls, etc.) establishing corporate governance requirements or standards applicable to all SOEs. In this respect, Argentina and Chile have issued corporate governance guidelines on a comply-or-explain basis. However, the Argentinian government has not yet articulated the rationales for state ownership nor an ownership policy. Also, except for listed companies, there is no proper establishment of commercial and/or sectorial objectives in the country.
In several economies, such as Argentina, Brazil, Chile and Costa Rica, the set of laws that concerns the legal form of SOEs and provides the framework for the governance and operation of SOEs remains complex. For instance, many SOEs in those countries have been established by statutory laws with differing requirements, while some of their subsidiaries have a varying, corporatised legal form. Reforms to streamline this complex set of laws should be a priority for the concerned countries.
In response to questions about the rationale for state ownership a number of countries invoked recent privatisation experience, citing privatisation as evidence that a rationale for ownership was no longer present. For example, in Israel, Italy and Japan there have been no significant changes in the rationales for state ownership, but in accordance with the government’s existing privatisation policies and their stronger focus on commercial orientation of SOEs, some important sales of shares by the government have taken place in the past five years, which are elaborated below. The Norwegian government has also indicated in the latest 2014 white paper a clear intention for strengthening private ownership in the country and reducing direct state ownership over time. In the government’s view, private ownership should be the main rule in Norwegian business and industry and direct state ownership should be accompanied by a special justification. Austria, Poland and the Slovak Republic have made it clear in their new legislations and policy documents that they do not intend to undertake further full-scale privatisation in the future.
Some countries have moved towards a more decentralised state ownership model. Both Poland and the Slovak Republic terminated the existence of their state ownership entities. In 2017, Poland liquidated the Ministry of Treasury, which previously had exercised most ownership. In 2015, the Slovak Republic terminated the existence of the National Property Fund, which had exercised state ownership rights in 33 out of 92 SOEs at central government level and used to be the biggest ownership entity in the country. In Poland, the previous tasks of the Ministry of Treasury have now been divided among several ministries with a co-ordinating role for the Prime Minister. Similarly, in Hungary, more than 100 companies have been moved from state holding company MNV Zrt. to other ownership exercising entities. The ownership exercisers are now mostly ministries and ministers without portfolio. It is not clear whether the ministers without portfolio oversees SOEs at arms-length considering its close links to the political powers.
However, the development of several key ownership policy documents coordinated at the level of the Prime Minister in Poland also suggests a significant effort to make ownership practices consistent in the context of a decentralised system, which would be considered in line with the SOE Guidelines. Also, as for the Slovak Republic, it remains to be seen whether the Ministry of Economy acting as successor of the now defunct National Property Fund and new Act on Strategic Enterprises will help mobilise institutional efforts to enhance the co-ordination function of state ownership. The reviewed countries’ material changes in the state ownership function with respect to disclosure requirements and board nomination practices are elaborated in the sections 6 and 7 respectively.
Israel, Italy and Japan have undertaken some important sales of government shares in line with their privatisation policies, which have consequently influenced the overall state ownership frameworks in all three countries.
In the past three decades the majority of SOEs in Israel were privatised. In the past 5 years, major developments in this regard were the privatisation of the Israel Military Industries (IMI), which was completed in 2018, and the commencement of partial privatisation processes of the Israel Postal Company and the Israel Port Companies. In 2014 the government passed a resolution regarding a multiyear plan for privatisation of SOEs, mainly through the public offerings of minority interests in the companies.
In Italy, during the last 5 years, several SOEs were divested by Initial Public Offerings (IPOs) and specific decrees were issued in order to maintain a relevant supervision of the public tasks managed by these companies.
Also, the country has seen some material changes in the financial and non-financial objectives of individual SOEs. In order to limit the State owner’s involvement in commercial activities of SOEs, which could potentially cause a market bias, the government indicated new rules in a Consolidated Act on Public Participated Companies (Legislative Decree no. 175 – issued on August 2016) in order to prevent public administration from establishing new companies whose purpose is to produce goods and services, which are not strictly necessary for the pursuit of their shareholders’ institutional mandate. The same Act also aims at restricting the public administration from financing SOEs which have reported losses in previous years).
In Japan, while there have been no significant changes in rationales for state ownership in the past five years, in accordance with the government’s privatisation policy, several important sales of shares by the government took place in the same period. From 2014 to 2016, 5.8% of issued stocks of the Japan Telegraph and Telephone Corporation (NTT) were sold for JPN 657 billion leaving the government to hold one third of the company’s shares, which is a minimum holding requirement by law. In 2013, 16.7% of issued stocks of JT were sold for JPN 976 billion, leaving the government to hold one third of shares, which is a minimum holding requirement by law. From 2015 to 2017, 43.1% of stocks issued by Japan Post Holdings were sold for JPN 2.83 trillion. In 2016, Kyushu Railway Company (JR Kyushu) was listed on stock exchanges, and 100% of issued stocks were sold for JPN 416 billion, which eventually led to full privatisation of JR Kyushu.
Source: Questionnaire responses from national governments.
copy the linklink copied!National developments
Changes to the state ownership function
State-owned enterprises in Argentina are in general governed in a decentralised manner by their sectoral ministries without a proper SOE performance management system in place. While the government has not yet articulated rationale for state ownership nor an overall ownership policy, the objectives of most enterprises are nonetheless specified in their respective statues or creation laws. Two SOEs have been recently created by a presidential decree, “Contenidos Públicos SE” and “Corredores Viales SA” (Public Contents State-Society and Road Corridors Company).
At the same time, Argentinian SOEs have been going through important reforms since the change in government in 2015. The SOE reform has been facilitated by a strong political will for the reform, introduction of some degree of a co-ordinating function through the Chief of the Cabinet of Ministers (Jefatura de Gabinete de Ministros– JGM) and promoting international co-operation including undertaking an OECD Review of the SOE sector in Argentina. As part of the reform efforts, the government has developed the Good Governance Guidelines1, a comply-or-explain guide for good governance of SOEs in 2018.
In Austria, a new law entered into force on 1 January 2019, replacing the state holding company, Austrian Federal and Industrial Holdings (ÖBIB), with a new organisation called Austrian Holdings AG (ÖBAG). The purpose of the reform is to actively exercise Austria’s ownership responsibilities, regain its strong representation on the supervisory boards of the partially state-owned companies and give ÖBAG a degree of flexibility to effectively cope with developments at owner level. The conversion of ÖBAG was decided at the General Meeting of Shareholders, and the Finance Minister appointed a 9-member Supervisory Board. The new structure should enhance the autonomy of the holding company, but whether or not the government will in practice exercise control over the company’s board should be monitored. The Austrian government at the time of publication of this report has stakes in companies including the oil company ÖMV, Austrian Post and Telekom Austria. Both the government and ÖBAG have made it clear that they have no plans to sell them for now and that privatisation is not their objective.
In Brazil, a major headway regarding ownership policy during the review period is the enactment of the Decree No. 8945/2016 in the year 2016, which led to an establishment of State Responsibility Law No. 13303/2016 in the same year. Reflecting some elements of the SOE Guidelines and good governance practices laid down in the Brazilian market law, the new Law established new corporate governance rules for SOEs owned and controlled by the federal government. The Law has requirements on transparency, accountability, risk management and internal control practices including having a Statutory Audit Committee as an auxiliary body of the Board of Directors.
The Law is applicable to all companies that are under the supervision of the Secretariat of Coordination and Governance of State-Owned Enterprises DEST (or SEST in Portuguese) attached to the Ministry of Planning, Development and Management, as well to SOEs held at the provincial or municipal level. Under these, there is Federal Law 6,404 (dated 15 December 1976) which governs all listed and unlisted companies in the country. In addition, the government issued the Decree 9,589, dated 29 November 2018, stipulating procedures and criteria applicable to liquidation process of SOEs controlled directly by the federal government. Under the Corporation Law, all state-owned joint stock companies are considered to be commercial entities regardless of their corporate purposes.
The enhanced legal regulatory framework for SOEs has introduced some degree of separation of ownership and regulatory functions through the DEST’s role in co-ordinating ownership policies and expectations, taking over some of those responsibilities from the individual line ministries. As of now, the state ownership functions are mostly shared between the DEST, the Ministry of Finance and the line ministries. As such, it can be said that Brazil follows a hybrid ownership model of which regulatory arrangements can be described as something between co-ordinated and decentralised. In 2016, the Ministry of Transparency (CGU) and the Ministry of Planning issued an instruction aimed at enhancing internal controls and risk management of public entities including SOEs.
In Chile, Public Enterprises System (Sistema de Empresas Públicas, SEP) which is a main ownership entity of the government, has made efforts to enhance soft-law regulations such as the Corporate Governance Guidelines (hereinafter the ‘SEP Code’) by adding new chapters on procurement, relations with audit entities, crisis management, and responsible business conduct. The SEP Code, first drafted in 2008 includes corporate governance rules and a set of ethics. To strengthen reporting systems to monitor and assess SOE performance and compliance with governance standards, the state ownership entity has also specified additional indicators in the new Chapters of the SEP Code. In mid-2018, the SEP Council approved a regulation for the appointment of board members in SEP SOEs.
In the course of its OECD accession review process, Costa Rica created the ownership entity Presidential Advisory Unit (PAU) in 2018. The Council of Government’s Secretary has been appointed as the Head of the PAU and the unit received three additional analysts, with an intent to add additional staff in the coming years. The PAU has developed and issued an ownership policy entitled Protocol of Understanding of the Relations between the State and the Enterprises under its Property on 13 October 2019. The Protocol also contains a discussion of the rationale for state ownership and expresses Costa Rica’s commitment to improving the direction of SOEs governed by the Executive Branch and seeks to implement the principles and guidelines of good corporate governance adopted by the international community, with particular reference to the G20 and the OECD. The PAU has issued an aggregate report on SOEs with financial and non-financial information on SOE performance and governance practices; nominations policy; a website to manage board nominations; and legal requirements for compliance with IFRS.
Additional legal and regulatory changes include a law to remove the Minister of Energy and Environment from the Board of the state-owned petroleum refinery company RECOPE; submission of a draft law to Congress to remove the Minister of Agriculture from the board of the institution that supervises the national liquor production company FANAL; a decree on boards’ roles and responsibilities; and a decree on transparency of SOEs.
In the Czech Republic, while there were no changes in the institutional arrangements for the exercise of the state ownership function during the review period, the government has made some important changes to the legal regulatory framework for governing SOEs. Ownership policies are determined (state enterprises are regulated) through legislation, in particular by the Act No. 77/1997 Coll. on SOEs (State Enterprise Act), which has been regularly updated. The last amendment was made by the Act No. 253/2016, Coll., which became effective as of 1 January 2017. The amendment refined the definition of a state enterprise as a legal entity as well as a state organisation that carries out business with state property in its own name and under its own responsibility. The amendment also defines competences and responsibilities of directors and members of supervisory boards of SOEs and their relationships with the Founder's Ministries.
Over 2015-2017 the Government Anti-Corruption Strategy focused on formulating a state ownership policy around a related Action Plan for Fighting Corruption. According to this Strategy, the Ministry of Finance prepared a draft of the state ownership policy for the government in 2017.
Estonia hasn’t developed an explicit ownership policy document. State specific requirements on managing and controlling SOEs are stipulated mainly in the State Assets Act and other regulations related to auditing and public procurement. During the recent years, Estonia has compiled two reports about ownership policy– the green book for detecting problems concerning SOE ownership policy and the white book providing potential solutions. Following one of the proposed solutions, the Nomination Committee for SOE supervisory board members was established. The State Budget Act was amended to include a net debt regulation that is applicable to SOEs belonging to the central government sector. Such regulation has been put in place to meet the Maastricht criteria of EURO zone. Additional change has been reflected in the Auditing Act to improve the independence requirements of audit committee members from SOEs and from the controlling owner.
In Finland, the ownership policy is determined through cabinet decision in the beginning of each electoral term, which is four years. The current ownership policy paper was published on 13 May 2016, but will be updated in the end of 2019 by the new cabinet following general election in May 2019.
In France, in line with the SOE Guidelines, the government formalised for the first time in 2014 an investment principle for the State as a shareholder. The State Shareholder Guidelines were published in 2014 to clarify the role of the State shareholder with four key objectives, including: (i) to ensure that the government has a controlling interest in companies of strategic public interest operating in critical areas for France’s sovereignty; (ii) to guarantee the existence of resilient corporations so that they can fulfil the country’s basic needs; (iii) to support corporate growth and consolidation, especially in sectors and industries that are important for French and European economic growth and, (iv) to bail out companies on an ad-hoc basis and in compliance with EU regulations in cases involving systemic risk.
Given the growing economic challenges and considering that intervention of the state shareholder remains indispensable to the national economy, the French government concluded that it is necessary to be more selective with respect to shareholding and change this principle. The government has also noted that there are public equity investors (Bpifrance) that follow complementary investment doctrines. As such, in 2018, the government further clarified its role as a shareholder and now plans to shift the focus of the portfolio of the government shareholding agency (APE: Agence des Participations de l’Etat) to the following three priority areas.
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Strategic companies that contribute to the sovereignty of France (i.e. defence and nuclear)
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Companies participating in public/national/local service missions for which the State does not have sufficient non-shareholder levers to protect public interests
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Interventions in companies when there is a systemic risk
The main development in recent years affecting the State shareholder is introduction of Ordinance No. 2014-948 dated 20 August 2014 relating to the governance and capital transactions of companies with public participation. The Ordinance enhances a legal regulatory framework applicable to the State shareholder since it has taken into account the evolution of good governance practices by bringing those companies with public participation closer to the common law of companies (See Box 2.2.).
Ordinance No. 2014-948 has strengthened the role of the State both as a shareholder and as an administrator, with as much weight and authority as a reference shareholder under ordinary law. This ordinance has simplified the administrative rules applicable to the State shareholder and has reduced the number of applicable procedures or thresholds, in particular with regard to the rules applicable to capital transactions. Thanks to this modernisation of the governance framework of public enterprises, the State now exercises its role through the APE in governance bodies within the following standardised governance framework for SOEs:
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Clarification of the role of the administrators appointed or proposed by the State (only one representative of the State legal person generally resulting from the APE, possibility of proposing to the general assembly the appointment of a certain number of administrators according to the level of state ownership);
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Distinction between the State’s role as a shareholder and its other roles as a client or a regulator whose representative sits as a Government Commissioner;
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Possibility for the State to propose to the General Assembly directors from an extended pool (public or private), in order to benefit from their experience;
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Preservation of certain specificities of publicly-owned enterprises, in particular the representation of employees in governance bodies.
The Ordinance was ratified by the Law No. 2015-990 of 6 August 2015 for economic growth and equality of economic opportunities. The Law also reintroduced the mechanism known as "offers reserved for employees" when the State sells a stake held in a company whose shares are listed (Article 31-2 of Order No. 2014-948). Several new regulations applicable to all companies including SOEs particularly concern the activity of a State shareholder as the following:
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Law 2014-384 of 29 March 2014 generalises the double voting right in listed companies.
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Law No. 2016-1691 of 9 December 2016 on transparency and anti-corruption has notably modernised the approval system for remuneration of leaders of listed companies (Article 161) by putting in place a binding vote of shareholders in any joint stock company whose securities are admitted to trading on a regulated market.
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Law 2017-399 of 27 March 2017 on the duty of care of parent companies and ordering companies (Article L. 225-102-4 of the French Commercial Code) provides for the obligation for companies or French groups of a certain size, to establish and implement effectively a “plan of vigilance”.
Source: Questionnaire response from the French government.
In Germany, the ownership policy is mainly determined through legislation (Bundeshaushaltsordnung– “Federal Budget Code”). The policy was not reviewed within the relevant time period. Management of SOEs is defined by soft-law entitled “Principles of Good Corporate Governance for Indirect or Direct Holdings of the Federation”, which include (i) the Public Corporate Governance Code of the Federation, (ii) Guidance Notes on Good Corporate Governance of Corporations in which the Federation holds an equity share, and (iii) Appointment Guidelines. The Public Corporate Governance Code of the Federation is not applicable to any companies in which the Federation holds an equity share that are listed on a stock exchange and are thus subject to the German Corporate Governance Code (DCGK)2. The Principles have not been reviewed within the time period relevant for this paper but they are currently under review and are scheduled to be finalised by 2020.
In 2016 the German Federal Ministry of Finance implemented a “standardized monitoring system” (Standardisiertes Beteiligungsmonitoring, SBM) for state-owned SMEs upon request of the German Parliament (i.e. the Federal Finance Panel, “Bundesfinanzierungsgremium”). In 2017 the German Ministry of Finance further implemented a monitoring system designed specifically for the company group DB AG and its subsidiaries (DB AG monitoring). Both monitoring systems are designed to provide the government authorities responsible for federal holding management and Federal Finance Panel with an analysis and alert tool that shall inform about potential financial business risks and shall avoid unexpected burdens on the federal budget.
Standardized Monitoring System (SBM)
Currently, the SBM is conducted at the beginning of each year based on the companies’ financial statements for the previous fiscal year. The uniform calculation of financial ratios and description of each companies’ business situations in one standardised data sheet per SOE increases transparency and comparability within the portfolio of the federal holdings management. The SBM focusses specifically on companies that are engaged in economic or commercial activities. Thus, the following SOEs are currently not covered by the SBM:
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SOEs that receive government grants;
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SOEs within the financial sector that are monitored by the Federal Financial Supervisory Authority (BaFin);
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Companies listed on the stock exchange and rated by international agencies, e.g. Deutsche Post AG, Deutsche Telekom AG;
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Small SOEs with annual sales of less than EUR 5 million.
DB AG monitoring
A monitoring specifically designed for the state owned company Deutsche Bahn AG (German Railway, DB AG) has been implemented. The monitoring is conducted twice a year based on selected financial ratios and the DB AG Interim report (January through June), and the DB AG Integrated report (January through December), respectively. Similar to the SBM described above, the selected relevant company information is presented in one standardised data sheet. The data sheet is however adjusted to cover DB AG specific issues, e.g. the company’s foreign operations or capital expenditures.
Source: Questionnaire responses by German authorities.
In Greece, SOEs are governed by Law 3429/2005 (SOEs and Public Entities Law) and Law 2190/20 (General Corporate Law for Societe Anonymes (SA)). Law 4548/2018 constitutes an amendment to the General Corporate Law (Law 2190/20) which had previously represented the Greek legal framework for societes anonymes (SA). The degree of state supervision up until 2019 has been dependent on the share capital of the company (threshold of EUR 3 million). This has been abolished and replaced by the size and type of the SA. According to the new Law, a SA should be registered with a prior approval by the supervising authority, in case of a large undertaking of a public interest entity or an entity licensed by the Capital Market Committee. In line with the new Law, the financial statements for all SAs (including non-listed SOEs) should be prepared according to the Greek Accounting Standards which have adopted the International Accounting Standards (IFRS). However, the Law has not yet articulated a rationale for state ownership.
In 2014 the government established the “Privatisation & Equity Management Unit” within the Ministry of Finance, a state ownership entity which is responsible for monitoring the compliance of SOEs with the legal framework for SOEs (Law 3429/2005), exercising voting rights for all SOEs under the form of S.A., appointing the board of directors in collaboration with line ministries and monitoring the internal auditor function in large SOEs. In 2016, the state established the SA Hellenic Corporation of Assets and Participation (HCAP), a holding company aiming at grouping and managing a wide range of Greek State owned assets and participations was established with a mandate to own and manage a great number of assets belonging to the Greek State. Inter alia, the new Law got rid of a Public Holdings Company (EDIS), transferred the State’s shares in the 17 SOEs directly to HCAP and increased the maximum number of members of HCAP’s Board of Directors, from seven to nine. The HCAP is subject to all relevant legislations for SA and additionally the Ministry of Finance has mandated it and its affiliated companies with its strategic objectives. A management information system has been established within SOEs to monitor their performance.
In Hungary, until May 2018, the state holding company MNV Zrt. was entitled to exercise the ownership rights over all state assets based on the 2007 Act CVI. which defines major rules on how SOEs should be managed or controlled. With the Decree No. 1/2018 (VI. 25.) NVTNM on designation of the institutions that are responsible for exercising state ownership rights in SOEs, more than 100 companies have been moved from MNV Zrt. to other ownership exercising entities. The ownership exercisers are mostly ministries and ministers without portfolio.
The Government Decree 94/2018. (V. 22.), which came into force under the new administration, further defines the new exercisers of the state ownership rights for all SOEs and has established the position of the Minister without portfolio responsible for managing national assets. It declares the responsibilities of the Minister without portfolio, who is responsible for supervision of national assets, regulation of the management of national assets, national utilities, national financial services, post service, and supervision of gambling organisations. However, it is not clear whether the Minister without portfolio oversees SOEs at arms-length considering its close links to the political powers.
In Iceland, the current ownership policy was introduced in 2012. The new Icelandic law on Public Finance, Act No. 123/2015 was approved by the Parliament in December 2015. Article no. 44 of the Law provides for the government to publish ownership policies for its majority owned enterprises. A specific ownership policy for financial enterprises managed by the Icelandic State Financial Investments was first released in 2009 and updated in 2017 and the Ministry is currently in the process of updating its ownership policy for all other SOEs, as well as specific objectives for individual enterprises.
The new Act provides for the Minister of Finance and Economic Affairs to formulate an ownership policy for all SOEs. The general ownership policy shall set out a rationale or objectives of the central government with respect to such ownership, roles of different government offices, as well as the governance principles that SOEs should adhere to, including the division of responsibilities and accountability mechanisms between the owner, the boards and management. The Act also provides that the Minister may adopt a special ownership policy for certain individual enterprises if their unique circumstances require a more detailed policy or owner objectives than provided by the general policy.
The Minister of Finance and Economic Affairs or, in specific circumstances, the line minister concerned or the government entity representing the State’s ownership interest in the enterprise, shall monitor the compliance of SOEs with the ownership policy. Where the central government is not the only owner of the enterprise, the members of the enterprise’s board of directors elected to represent the central government shall take account of the main considerations set out in the ownership policy adopted for the field of activities or the enterprise concerned. The Minister of Finance and Economic Affairs makes nominations to the boards of directors of enterprises in which the central government holds an ownership interest, based on ability, education and experience. The Minister establishes rules on general and objective conditions for the selection of members to such boards and makes these public as part of the ownership policy.
Korea has an explicit ownership policy for SOEs which is determined by legislation and government decree in the form of the Act on the Management of Public Institutions enacted in 2007. The ownership entity—the Ministry of Economy and Finance and other responsible ministries are required to regularly review and revise its ownership policy. While the ownership policy has been to some extent subject to political orientation of each administration, main pillars of the Act on the Management of Public Institutions– such as performance evaluation and disclosure– have been steady. There have been a total of 18 amendments of the Act between 2007 and May 2019.
Latvia has a predominantly decentralised ownership structure, with line ministries in most cases exercising ownership, but has taken steps towards centralisation by establishing a coordinating agency and has continuously made efforts in improving the legal regulatory framework for the state ownership policy through implementation of the co-ordinating agency model and other requirements of the law in the review period.
State ownership policy in the country is determined by the State Administration Structure Law, Law on Governance of Capital Share of a Public Person and Capital Companies (hereafter– Law on Governance of Shares) and three subordinate regulations issued during the 2015-2016 period by the Cabinet of Ministers. The Law on Governance of Shares was approved by the Parliament (Saeima) in 2014, replacing a previous law. It was subject to amendments three times in 2015, 2016 and 2018.
The rationale of state ownership is defined in the State Administration Structure Law. Latest amendments of this law concerning the rationale of state ownership were approved by the Parliament in October 2015. Previously, the law included six criteria as preconditions for state ownership but after the amendments the number of criteria was reduced to three– market failure, strategic goods and services that are important for state development and security.
With the adoption of the Law on Governance of Shares and Capital Companies on 1 January 2015, the Cabinet of Ministers has reassessed the ownership of each SOE and approved the general strategic objective of each SOE. As such, most SOEs now have formally approved strategic objectives (including public policy objectives) as part of their business strategies. Reasons for the updates of strategies and financial and non-financial objectives of individual SOEs are mostly changes in a market situation and/or strategic political orientations of the Government. An EU-financed research project was also recently undertaken on possible categorisation of SOEs depending on characteristics of their activities and financial models. There is an ongoing policy discussion on this issue.
The Law on Governance of Shares and Capital Companies introduced role of Coordination Institution – for which the CSCC was appointed by the decision of Cabinet of Ministers on 12 May 2015. As such, from 1 June 2015, the CSCC is responsible for coordination of corporate governance of SOEs. This makes Latvian ownership model halfway between centralised and decentralised.
The State Social Insurance Agency (SSIA) also has transferred to SOE – “Privatization Agency” (PA) – the state shares in 29 companies by July 2015, which according to the decision of the Cabinet of Ministers were planned to be sold. The transfer of capital shares to the PA by 1 July 2015 was provided for by the Transitional Provisions in the Law on Governance of Shares. The remaining state shares supervised by SSIA in five companies was transferred to the PA separately by the decision (regulation) of Cabinet of Ministers on 21 October 2015 and were planned to be sold.
A number of new regulations of Cabinet of Ministers were adopted during 2015 and in the first half of 2016 which guide the operations and procedures of CSCC, shareholders, line ministries; the Ministry of Finance and the Cabinet of Ministers regarding such issues as annual evaluation of SOEs’ operational and financial results; prediction and determination of the dividend pay-out by SOEs; regulations regarding the nomination of candidates for the board and the council in SOEs; regulations on the number of the board and council; maximum remuneration levels in SOEs and regulations regarding alienation of state shares by the Privatization Agency. The shareholder reports the results of SOEs to the CSCC, which in turn prepares the annual aggregated report on SOEs. It is then presented to the Cabinet of Ministers and the Parliament (Saeima).
While Latvia may have legislated the separation of ownership and regulatory functions within individual line ministries, SOEs are still not operating under an ownership structure where an ownership agency is empowered to be responsible for setting and monitoring shareholder expectations in all SOEs and line ministries have no part in state ownership functions.
In Lithuania, the ownership policy is determined in the Ownership Guidelines (approved by the Government Resolution number 665 “On the Approval of the Procedure for the Implementation of the State’s Property and Non-Property Rights at State-Owned Enterprises”, 2012). The main purpose(s) of state ownership is specified in the ownership policy. The main principles related to ownership have remained the same during the relevant period. The Ownership Guidelines outline the rights and responsibilities of all state ownership entities regarding the implementation of SOE governance arrangements and define how SOEs should be managed or controlled. The latest material amendment on the Ownership Guidelines passed on 20 June 2018. After this amendment SOEs were no longer classified into groups according to their objectives for the state and the rate-of-return on equity is applied to all SOEs engaged in substantial commercial activity.
During the last 5 years the State has re-arranged mechanisms for setting financial and non-financial objectives to improve performance of SOEs. First of all, the State shifted from single ROE target for all commercial (or partly commercial) SOEs to individual ROE targets for commercial activities of each SOE. Since 2017 the State also rearranged dividend pay-out policy, which is now closely linked with ROE of SOEs. According to national legislation, each SOE is obliged to pay percentage amount of distributable profit as dividends to the State each year. SOE with higher ROE is allowed to pay lesser percentage of distributable profits as dividends to the State. Rationale behind is to encourage SOEs to pursue higher return ratios and invest into more profitable projects.
Finally, since the year 2017 the State made amendments in the law and introduced a target setting tool called ‘Letter of Expectations’. Through this tool each ownership ministry is required to draft Letter of Expectations for each controlled SOE where it sets broad financial and non-financial expectations for SOE. Considering the large number of SOE managers, government plans to centralize the management of SOEs through reorganisation, restructuring, liquidation or privatisation by 2023, reducing the number of state ownership entities from 14 to 8. Implementing reform priorities is crucial as SOEs continue to play a key role in undertaking large energy and transportation infrastructure projects. Government also needs to develop a comprehensive plan for developing a pool of SOE specialists.
The Netherlands has changed the national lottery and Holland Casino from a foundation to a corporation. All SOEs in the country are now corporate entities. As for board nomination practices, the new policy takes diversity in board composition more into account although not binding. There have been changes in the maximum in variable pay and secondary benefits (i.e. severance pay) regarding remuneration policies for SOE boards.
New Zealand has an explicit ownership policy through State Owned Enterprises Act 1986 3 with additional ownership monitoring guidance issued by the Treasury, established in July 2012 and entitled the Owners Expectation Manual.4 In 2018 the Manual added slightly more stringent guidelines in two areas: (i) where SOEs make significant capital investment decisions, including lowering the threshold for SOEs requiring shareholder approval; and (ii) new guidance on board of directors performance evaluations, including the requirement for 3 yearly, independent board evaluations.
Norway updated its rationales for state ownership during the review period. The Norwegian government reviewed and revised its ownership policy in the 2014 White Paper (Report to the Storting No. 27 on Diverse and value-creating ownership). According to the 2014 white paper, all companies in which the state has direct ownership are categorised into four different categories based on the state’s rationale and objective with respect to its ownership5. At the same time, certain SOEs have changed category following the white paper. The main change, compared to the previous policy, relates to how the government views the purpose of the state’s ownership. The government states in the 2014 white paper that it wants to strengthen private ownership in the country and reduce direct state ownership over time. In the government’s view, private ownership should be the main rule in Norwegian business and industry, and direct state ownership should be accompanied by a special justification. While the government’s overall policy on how the state intends to exercise its ownership did not change substantially in the 2014 white paper, progress on more generally accepted corporate governance principles in recent years has led to a further development of the state’s ownership role.
The Norwegian government’s ownership policy is explicitly expressed through white papers that are presented to (but not subject to approval by) the Norwegian Parliament (Stortinget). A new white paper on ownership policy is normally published following a parliamentary election approximately every four years. The purpose of a white paper on ownership policy is to express the government's overall objectives of state ownership and specifically for each individual company in which the state has a shareholding. Furthermore, the paper states how the government intends to exercise its ownership. Since 2006, the state's portfolio of companies has been categorised into four categories based on the state's rationale and objectives for state ownership. The current white paper on ownership policy (Report to the Storting (White Paper) no. 27 (2013-2014) Diverse and value-creating ownership) was published in 2014.
In practice, the state's direct ownership is exercised by the government through different ministries. Ownership of the majority of companies with commercial objectives (with some notable exceptions) is managed by the Ownership Department of the Ministry of Trade, Industry and Fisheries, and ownership interests in companies with sectoral-policy objectives are exercised by the ministries responsible for the respective sectors. While there have been no changes to this institutional arrangement as such, some SOEs have been transferred from one ministry to another (mainly due to a change in categorisation, i.e. the governments rationale for owning the company, and further consolidation of ownership of commercial companies under the national ownership entity).
Sources : Questionnaire responses from Norwegian authorities.
In Poland, the government led a fundamental change in the model of corporate governance for SOEs by liquidating the Ministry of Treasury in 2017 based on the conclusions that ownership transformation was no longer necessary and that privatisation or the disposal of individual parts of state property was not a primary purpose of supervision. This means a new approach towards the management of the State Treasury, including redefining of the role and meaning of companies with State Treasury shareholding. According to the government, while privatisation will not be a priority for management of state-owned entities, the entities with a small State Treasury shareholding or under liquidation will continue to be privatised. The government has also recognised that the existing regulations were no longer in line with market expectations and has required organisational changes. In particular, the government found that a significant number of companies with minority shareholdings, often of significant importance to the state’s economy were beyond the real impact of the regulations. Reflecting these changes in government intentions and objectives, the new Law on State Property Management was established in 2016. The management policy of each company defines its own development goals in accordance with the law and general guidelines of the Prime Minister.
In accordance with the provisions of the new Act on the management of state-owned property and in order to co-ordinate the exercise of the powers vested in the State Treasury in companies, the Prime Minister may determine the rules of ownership supervision and good practices followed by the State Treasury as a shareholder, in particular in the field of corporate social responsibility, dividend policy, sponsorship, and remuneration formation.
In this context, the Prime Minister has approved the following documents:
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Principles of corporate governance over companies with the participation of the State Treasury;
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Directions of ownership policy in the field of disposal of shares owned by the State Treasury;
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Guidelines for selecting and cooperating with an audit firm examining the company's annual financial statements; and
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Guidance for companies with the State Treasury participation preparing financial statements for 2017 and for 2018.
Both relevant legal acts and other documents are to change according to the needs (there are no specific deadlines).
Sources: Questionnaire responses from national authority.
The 2017 liquidation of the Ministry of Treasury, which previously had exercised most ownership, could be seen as a move towards decentralisation of the state ownership function. However, the development of several ownership policy documents coordinated at the level of the Prime Minister also suggests a substantial effort to harmonise ownership practices in the context of a decentralised system, which would be considered in line with the SOE Guidelines. The previous tasks of the Ministry of Treasury were divided among several ministries with a co-ordinating role for the Prime Minister. The Prime Minister’s co-ordinating role is specified in several corporate governance policy documents applicable to SOEs. The main legal act regulating the principles of the ownership supervision over SOEs is the 2016 Act on the Management of State Property. The Act states that “the Prime Minister may determine the rules of ownership supervision and good practices followed by the State Treasury as a shareholder, in particular in the field of corporate social responsibility, dividend policy, sponsorship and remuneration formation”.
According to the Program Manifesto of the Government of Slovak Republic over 2012-2016, the country terminated the existence of the National Property Fund on 15 December 2015, a move that could be seen as further contributing to decentralisation of the state ownership function. The Fund was previously in charge of implementing privatisation projects and had exercised state ownership rights in 33 out of 92 SOEs at the central government level, being the biggest ownership entity in the country. Ownership rights of those 33 SOEs have been shifted to sectoral ministries, most of them to the Ministry of Economy. The Program Manifesto sets out a plan to prepare a new version of the Act on Strategic Enterprises and also includes a ban on privatisation of the state's strategic assets. According to the Constitution of the Slovak Republic (Article 113), a new government administration is required to submit its Program Manifesto to the National Council of the Slovak Republic within 30 days of its appointment by the President. Only when the National Parliament adopts the Program Manifesto and grants its confidence to the government will the new government be able to start exercising its powers. It remains to be seen whether the Ministry of Economy and the new Act on Strategic Enterprises will efficiently mobilise institutional efforts to harmonise and mobilise ownership practices.
In Sweden, state ownership is reviewed and revised whenever required. Since 2017, the ownership policy is adopted by the shareholders’ meeting of the majority-owned SOEs, which implies that the policy is legally binding. In accordance with its current ownership policy, the government has further undertaken centralisation in the past five years. A specialised ownership unit is responsible for managing 40 out of 46 SOEs. Seven SOEs were added in 2015. With an increasing number of SOEs, efficient management is even more essential.
In Switzerland, the basis for specific legislation for ownership governance is conceived in the “Corporate Governance Report” (2006) and condensed in 37 guidelines by the Federal Council (executive government authority). It is determined by the Decree of the Federal Council and has been acknowledged by the competent parliamentary committees (without enactment by the Parliament). The provisions for parliamentary oversight are enshrined in the Art. 28 of the Federal Act of the Federal Assembly. Since the ownership policy is conceived as a long-term instrument, reviews are not undertaken on a regular basis. Yet amendments are possible if needed. In Mid-2018 the Federal Council mandated the Finance Ministry (together with two line ministries) to have Corporate Governance practices (federal level) reviewed by external experts and published publicly. Despite the experts’ overall positive review of the ownership model operation, the experts have made 14 recommendations and the implementation process is still ongoing. There are further developments of the existing legislations and guidelines including the new 2016 edition of the “Model Law for statutory entities with services in state monopolies” and the “Model Law for statutory entities with tasks for economic and safety supervision”.
Firstly, the Federal Council decided in January 2018 to sell Alcosuisse AG, a former profit centre of the Swiss Alcohol Board (SAB), to a private company.
Secondly, on 1 January 2018, a new law came into force to transform an extra-parliamentary Commission for Technology and Innovation into an independent statutory entity called “Innosuisse” so that it is compliant with the corporate governance guiding principles of the Confederation (e.g. the Federal Council sets strategic objectives). Previously, there was no clear distinction between strategic and executive/operative tasks and furthermore the setup had lacked independent supervision.
Thirdly, in order to ensure equal rights for all railway companies to use the Swiss railway network, the Swiss Train paths Ltd. is in the process of preparing timetables for the use of the network, co-ordinating the resolution of conflicts between applicants and optimising the application processes. The Swiss Train path Ltd is a not-for-profit company limited by shares. All four shareholders– among them railway companies such as SBB– have the same minority shareholding and the same voting rights. In order to further reduce potential discrimination, the Parliament decided to establish an independent statutory entity called the “train path allocation service (service d’attribution des sillons)”. In September 2018, the Parliament adopted the Federal Act on the Organization of Railway Infrastructure. The law is expected to enter into force in 2020.
Sources: Questionnaire responses from the government of Switzerland; the Federal Council, the portal of the Swiss government https://www.admin.ch/gov/en/start/documentation/media-releases.msg-id-69703.html, https://www.admin.ch/opc/fr/federal-gazette/2018/6097.pdf, https://www.bav.admin.ch/bav/fr/home/themes-a-z/reforme-des-chemins-de-fer/organisation-infrastructure-ferroviaire-obi.html.
The United Kingdom does not have an overarching or singular approach to determining the objectives of state ownership. The key consideration with regard to ongoing government ownership is the balance between public service/policy and achieving value for the taxpayer. Decisions on assets are taken on a case-by-case basis by the sponsoring department. HM Treasury, as part of its role overseeing public finances, keeps public ownership of assets under regular review. UK Government Investments (UKGI), a government company owned by HM Treasury, performs the shareholder function for a number of SOEs and government owned assets. As of April 2019, UKGI performs this function for a portfolio of approximately 17 entities. The legal forms of incorporation of SOEs in the UK are varied. These include non-departmental public bodies, executive agencies, trading funds, and statutory corporations (entities established by legislation which take the form of limited companies wholly owned by the government).
References
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Notes
← 1. http://servicios.infoleg.gob.ar/infolegInternet/anexos/305000-309999/306769/norma.htm
← 2. An English translation of the DCGK is also available online : www.dcgk.de//files/dcgk/usercontent/en/download/code/170214_Code.pdf
← 3. www.legislation.govt.nz/act/public/1986/0124/latest/whole.html#DLM98050
← 4. https://treasury.govt.nz/sites/default/files/2015-09/comu-oem12.pdf
← 5. The companies have been categorized into four categories since 2006.
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