State intervention is harmful, but sometimes necessary

Poland doesn't differ very much from Western Europe in terms of state ownership of enterprises and the degree of regulatory interference. The country is more ”statist” than the United States and Great Britain, but less than France or Germany.

The state may interfere in economic processes by directly exercising ownership supervision over the enterprises it considers of crucial importance from the point of view of its public policy, and also through the regulations it introduces. Analysts at DNB Bank Polska and PwC have examined the level of state intervention in the economies of Poland, Germany, France, Norway, the United Kingdom and the United States.

The analysts have focused on several sectors: pharma, retail trade, energy, telecommunications, automotive and financial services. Due to their specific nature, they have various levels of regulation and state ownership.

The energy industry

This is an industry in which state presence is particular, both in terms of ownership and regulation. It is dominated by large companies, often owned by the state or with significant state participation, although there are also hundreds of small companies – municipal heat and power plants, small power plants supplying energy to a single factory or to a handful of industrial plants. There are also the distributed renewable energy sources.

The state’s intervention in the energy sector seems understandable. It results from the imperfections of the market, as well as the specific nature of electricity trading, which cannot really be stored. The energy industry also generates considerable externalities that affect the general public (environmental pollution) and not specifically companies. The state is also seen as the guarantor of uninterrupted supply of power. It shapes, not always effectively, the energy policy. For example, through subsidies, tax breaks or investment support, it encourages investment in renewable energy and discourages investment in high-emission energy production.

The largest energy companies in the analyzed countries include the French Électricité de France (EdF) and Enedis as well as the German EnBW and Stadtwerke Köln Konzern. EdF and EnBW are energy producers, while Enedis and Stadtwerke Köln Konzern are involved in energy distribution. The state has significant stakes in all of them.

Examples of many countries show that the objectives set by the state, namely, providing power to the energy system, the security of supplies, efficiency, environmental protection, can be implemented by companies that are not owned by the state.

It is the appropriate regulation that is more important. The most stringent regulations that govern the energy market include those relating to the launch of business operations in the sector and admission of foreign entities to the local market.

In Poland, Germany and France, these regulations are more restrictive than in the Anglo-Saxon countries or in Norway. The energy industry is also heavily regulated at the level of the European Union, and the member states adapt the EU legislation. Regulatory errors can lead to catastrophic results, as exemplified by the California energy crisis in 2000, resulting from the release of prices on the wholesale market and the maintenance of rigid price caps on the retail market.

The energy sector exhibits the highest profitability rates in countries with the lowest levels of state ownership and with relatively little regulation – such as Norway, and above all, the United States.

The financial services industry

Despite the recent “renationalization” of some foreign banks in Poland, according to DNB and PwC, the share of banking assets controlled by the State Treasury is a mere 10 per cent. In Germany it reaches approx. 25 per cent and in Norway, 15-20 per cent. In France, banks were nationalized in 1982. In the following years, the process was reversed and banks were privatized. The French state controls special financial institutions such as the Caisse des Dépôts et Consignations and the Tresor Public, which accepts deposits, such as taxes, and is an element of the public administration. The state also has a stake in La Banque Postale and PSA Peugeot Citroën, and through it, also in the Banque PSA.

In Poland, the state controls, directly or through other companies, banks such as: PKO BP, Pekao S.A., Alior Bank, Bank Pocztowy and BOŚ Bank. The special-purpose bank BGK (Bank of National Economy) also belongs to the state. In the last 10 years, Polish banks have achieved better results than banks in other countries analyzed in the DNB and PwC report. This was mainly due to the fact that they had not been affected by the financial crisis, which forced authorities in the United States and the United Kingdom to take over several banks and to reprivatize them. The French and German banks also required recapitalization with public funds.

Financial services is a sector subjected to a greater number of regulations than any other sector. This is due to the international regulations drawn up by the Basel Committee on Banking Supervision. Meanwhile, the banking crisis resulted in the introduction of new regulations. In the United States, Trump’s administration is withdrawing from some of them, contained in the Dodd-Frank Act.

The telecommunications industry

Until recently, the telecom industry was seen as an example of a natural monopoly in which competition is very limited due to the enormous costs of establishing a transmission network. In the United States, it was as late as in 1984, when a company dominating the market, AT&T, was recognized as a monopoly and broken up into smaller enterprises.

The rapid progress of technology over the last 30 years has enabled the establishment of many national and international telecommunications companies, with limited participation of state funds.

The state is still a shareholder in the telecom companies in Germany (a minority stake in Deutsche Telekom) and France (Orange). This means that in these countries, the state still holds a market share of 29.8 and 23.9 per cent, respectively.

In Poland, the state-owned enterprise Exatel is the owner of ENERGO-TEL, a company holding an industrial security certificate and providing services to clients associated with the state defense and security. Through Exatel, the State Treasury controls over 1.6 per cent of the market. In Norway and the United States, the state does not hold any stakes in telecommunications companies, while in the United Kingdom its presence in the sector is marginal, with a total market share of 0.03 per cent.

The industry is not as heavily regulated as the energy sector, but more than retail trade. Restrictions on market concentration have been set out in the EU directives. In Norway and the United States, there are no such restrictions. The commencement of business operations requires a notification and registration at an appropriate public office in the case of all analyzed markets. The supply of services provided by means of the GSM and LTE technologies requires companies to obtain a permission for the use of appropriate frequencies, which are allocated in various ways, usually through auctions.

In the United States, there are no restrictions concerning tariffs for the services. In France, Germany and Norway, the relevant regulatory authorities accept tariff proposals, while in Poland and in the United Kingdom telecoms provide information on tariffs to the regulatory authority, which may question their level.

The automotive industry

The nature of the industry determines a small degree of regulation and a little of state ownership. However, in France, the state holds stakes in as many as 30 per cent of the local enterprises and in large corporations, such as PSA Automobiles, Renault SAS and Automobiles Peugeot, which translates into a market share of 19.9 per cent.

In Germany, the state holds stakes in Volkswagen and Audi, which means that the state has a total share of 8.4 per cent in the market. In Norway, there is only one automotive company and the state has no holdings in it. In Great Britain, the state has marginal stakes in several companies, but its market share is close to zero. In Poland, the state’s market share is 0.07 per cent.

In the United States this share is zero. While General Motors and Chrysler were taken over by the state in 2009, following their bankruptcy, they were later restructured and privatized. Similar operations were carried out in the financial sector. The United States is characterized by the relatively lowest levels of state interference in the economy, but at the same time, in crisis situations the state intervened faster and to a greater extent than in the European countries.

The United States is also a country with a relatively high degree of regulation of the automotive industry. This applies in particular to the introduction of new products to the market, where special homologation is required (the European approval is not recognized) and car sales are carried out through licensed dealerships.

In Poland, the degree of regulation of the industry is the smallest among the surveyed countries, which is due to the lack of subsidies or tax exemptions for electric cars.

The pharmaceutical industry

In most countries the pharma sector is in the hands of private entrepreneurs. In Poland, the state’s participation in this industry is relatively large and amounts to 7.8 per cent, but this is due to the fact that the State Treasury holds an 86 per cent stake in Polfa Tarchomin. It is the only enterprise with state as a shareholder in this industry.

In Great Britain and France, the state is directly or indirectly present in, respectively, 18.4 and 10.6 per cent of entities in the pharma industry, but their share in production is below 1 per cent.

In the United States, Germany and Norway, the state doesn’t hold stakes in the pharmaceutical companies, but the level of regulation is quite high, covering such issues as concentration restrictions, prohibition of product advertising, procedures for the introduction of new medicines, price restrictions. The lowest level of regulation is in the United States, although that country has the most stringent regulations concerning the introduction of new products on the market. The Norwegian market is the most regulated.

The United States also has the highest drug prices, while the prices in Norway are the lowest, which may indicate that the existing restrictions on prices and the freedom of advertising are effective. On the other hand, the United States is definitely leading in terms of innovation in the pharmaceutical industry. So there is always a trade-off.

Retail trade

The state’s share in this sector is very low. In Poland, the state has a stake in the fuel industry, and because gas stations are increasing the sales of various goods, they are considered as a part of the retail trade. The largest number of retailers with state participation is found in France and in the United Kingdom, yet the stakes held by the state in these companies are small. In Norway, the state owns the company Aktieselskapet Vinmonopolet, which has a monopoly on the sale of alcoholic beverages. In the Unites States, there is no state ownership in trade.

This industry is also characterized by a low degree of regulation, although the report of DNB and PwC does not account for many regulations (the authors considered them less important), such as the limitation of working hours (prohibition of trade on Sunday and holidays in some countries) or constraints on advertising. All the analyzed countries have regulations regarding concentration; however, there are no restrictions concerning the participation of foreign capital in the trade sector. There are no special tax exemptions or subsidies. American companies are by far the most profitable, but Polish trade companies had the highest sales and employment growth figures in the years 2007-2017, which is due to the fact that the country is still an emerging market.

The state’s impact

In terms of regulation, the highest degree of government intervention in the activities of various sectors of the economy is observed in France and Germany, and to a lesser extent in Poland, followed by Norway, the United Kingdom and the United States The level of regulation has a limited impact on the performance of the industries.

State ownership – usually taking the form of the state holding minority stakes – has a negative impact on the companies’ performance. In many cases, state ownership is not justified, as state interest is already protected by the regulations. Regulations in a given country should be consistent with those existing in other countries. If they deviate too much from those in other countries, they are detrimental for the economy.

Regulations are often characterized by inertia. Once they are introduced, it is very difficult to remove them, not because they are necessary, but because any changes would undermine group interests and require overcoming bureaucratic resistance.

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