State-owned enterprises

What are state-owned enterprises?

State-owned enterprises (SOEs) are wholly or majority government-owned companies that engage in extractive activities on behalf of the state.

In many resource-rich countries, SOEs play an important role in exploiting natural resources and managing the extractive sector. They can generate significant revenue for the state, enable a government to exercise greater control over the sector, help improve local technologies and skills or manage exposure to energy transition risks.

In 2012, the IMF reported that “some 80 percent of world petroleum reserves are controlled by state companies and 15 of the 20 largest oil companies are state-owned”. While SOEs are less dominant in the mining sector, they still play an important role in some countries.

Why is SOE transparency important?

The way that state participation and SOEs are governed has considerable implications for public finances and the economy. Although some SOEs have made significant contributions to development and revenue generation, others have struggled with poor governance and corruption. Lack of transparency about how much the state receives from the sale of its oil and gas can create a distorted picture of government revenues from the extractive sector.

Early findings from EITI reporting and Validation have shown that although financial transactions related to state-owned companies have become more transparent, there is still a demand for improvement of transparency standards around SOE governance. As SOEs have increasingly corporatised their operations, fiscal transparency has become central to their ability to raise funds, develop new partnerships and improve their accountability to their primary shareholders in government and to citizens as the ultimate beneficiaries.  

Key benefits of SOE transparency

Benefits for citizens

  • Transparency can reduce avenues for corruption to ensure that revenues generated by SOEs are managed in the interest of citizens.

  • Transparency can shed light on public expenditures SOEs make on behalf of the state, e.g. social services, public infrastructure, fuel subsidies and national debt servicing.

  • Reporting on the environmental, social and governance performance of SOEs not only helps ensure that SOEs can access capital on better terms on behalf of state shareholders, but also enables citizens to scrutinise this information.

Benefits for SOEs

  • Transparency can improve access to capital.

  • Transparency can promote public-private partnerships and facilitate ease of doing business.

  • Reporting on revenues and quasi-fiscal expenditures can enhance SOE’s status as national champions and help build trust at home. 

  • Transparency can enhance efficiency of SOEs so as to increase revenues.

Benefits for governments

  • Transparency can enhance SOE efficiency of SOEs so as to increase the government’s share of dividends.

  • Transparency can help to clarify the rules governing the financial relationship between SOEs and the government.

  • Data on SOE revenues and quasi-fiscal expenditures support decision-making in the energy transition.

 

We have learned many lessons from our work on commodity trading transparency with the EITI and contributed to the global efforts to improve first trade transparency. Timely and systematic disclosures of data required by the EITI will be a key tool for demonstrating the accountability of our financial management and improving relations with stakeholders.
Mele Kolo Kyari, Group Managing Director, NNPC

SOE transparency in action

Afghanistan

SOEs are important players in Afghanistan’s extractive sector, accounting for nearly two thirds of government extractive revenues between 2008 and 2017. Two SOEs – Afghan Gas Enterprise and North Coal Enterprise – are central to government’s plans to improve revenue generation from the sector.

In 2019, Afghanistan took a major step forward in auditing the two SOEs for the first time. This exercise highlighted gaps in the SOEs’ record-keeping and financial management, and was a necessary step in the government’s plans to corporatise the enterprises. Moving forward, the government will need to ensure auditing becomes regular practice, drawing on EITI support to follow-up on findings.

Nigeria

Nigeria’s national oil company – the Nigerian National Petroleum Corporation (NNPC) – plays a vital role in Nigeria’s economy. In 2020, NNPC became an EITI supporting company in line with its commitment to greater transparency and accountability. Subsequently, the corporation published its group-level audited financial statement and the audited accounts of its subsidiaries, for the first time in the group’s 43-year history.

The disclosure presents key information on the corporation’s financial health. The statement shows that NNPC reduced its loss by 99.7% – from N803 billion in 2018 to N1.7 billion in 2019 – thanks to a significant increase in profits from its subsidiaries between 2018 and 2019. 

  • 60 +
    SOEs participate in EITI reporting
  • 25 +
    SOEs are represented on EITI multi-stakeholder groups
  • 20 +
    countries fully disclose transactions from and to state-owned enterprises

EITI’s role in SOE transparency

While the World Bank, OECD and others have developed guidance and standards on SOE governance, the EITI Standard exclusively addresses governance considerations relevant to SOEs operating in the extractive sector.  

The 2019 EITI Standard includes requirements that relate directly to SOEs (detailed below) and monitors their adherence through Validation. In addition to these requirements, many other aspects of the EITI Standard are relevant to SOEs in the extractive sector.   

  • SOEs take part in multi-stakeholder groups in their country of operation.

  • Where SOEs are license holders or are responsible for establishing the licensing process and awarding and registering licenses, requirements relating the publication of information on license awards and on maintaining public registries of license holders are relevant.

  • SOEs holding production contracts or entering into production contracts on behalf of the state are required to disclose these contracts in terms of the contract transparency requirements of the EITI Standard.

  • Where SOEs engage in production, production data is included in transparency commitments under the EITI Standard.

  • Disclosure of revenues paid or collected by SOEs in the form of taxes, royalties, non-budgetary payments and sub-national payments is required in terms of the EITI Standard. Revenues and payments made for the transportation of goods by or on behalf of SOEs is also made public in accordance with the EITI Standard.

  • Publication of social and environmental payments by SOEs is required in accordance with the EITI Standard.

Where SOEs are EITI supporting companies, they also commit to the Expectations for EITI supporting companies.  

Through these disclosures, applied to over 50 countries that have committed to the EITI Standard to date, EITI reporting has greatly improved the quantity and quality of publicly available information on SOEs.

Requirements for EITI implementing countries

Requirement 2.6, Requirement 4.5 and Requirement 6.2 of the EITI Standard outline disclosure requirements related to SOEs operating in the oil, gas and mining sector.

According to these requirements, implementing countries should explain the role of SOEs in the oil, gas and mining sector, as well as the rules that govern the financial relationship between the government and SOEs. This should include the level of ownership that the government has in SOEs, subsidiaries and joint ventures.

Implementing countries should also disclose transactions related to SOEs, as well as quasi-fiscal expenditures that are undertaken by SOEs. Furthermore, SOEs are expected to disclose their audited financial statements.

Helpful resources for implementation

The SOE Transparency Network

A global forum for state-owned enterprises to share experiences, provide expertise and champion transparency practices.

SOEs interested in joining the network should contact the EITI International Secretariat at secretariat@eiti.org.