Appendix 2: Crown company or SOE?

The Crown has made extensive use of the company as an organisational form since the passage of the State-owned Enterprises Act 1986. Such companies fall into two major groups - SOEs and Crown owned companies which are Crown entities (here referred to as "CrOCs"). CrOCs are the second most significant category of Crown entity after the statutory corporation.

SOEs and CrOCs share many features in common - some CrOCs represent an attempt to apply the SOE model to entities which do not have unambiguous commercial objectives, or which for other reasons are not SOEs. Both involve incorporating companies under the Companies Act.

SOEs are established under the State-Owned Enterprises Act 1986. They are not Crown entities. Aside from the legislation under which they are established, the basic differences between SOEs and CrOCs are ones of purpose and objective:

• SOEs have unambiguous commercial objectives, whereas CrOCs tend to mix commercial and non-commercial objectives (although there are exceptions to this);
• the Crown's ownership objectives in SOEs are relatively straightforward - being to maximise the return to the shareholders over time. CrOCs, on the other hand, generally are owned to further other policy objectives and the profit objective may be secondary;
• the Crown does not usually have a particular purchase interest in SOEs, but often does in CrOCs (although it may be handled indirectly);
• SOEs tend to sell into contestable markets (although at least one is a monopoly) - with CrOCs this may not be the case where the Crown is the dominant purchaser; and
• because of the previous considerations, Ministers may face fewer incentives to involve themselves in the day to day business of SOEs.

This means that SOEs have a clearer commercial focus than CrOCs, and, all other things being equal, are likely to perform better as commercial organisations. All parties concerned in an SOE - shareholding Ministers, the board, management, staff, customers, creditors and Parliament -- should have a clear understanding of its objectives, as set out in the State-Owned Enterprises Act. This will not be the same for CrOCs, or at least not true to the same extent. These considerations clearly indicate that, in general, an SOE is the preferable form for Government owned commercial enterprises. If an organisation is to have clear commercial objectives, operate in a contestable market and the government does not have a particular purchase interest in it, it should be an SOE.