We argue potential performance gaps between BOSs and POEs depend on the degree of contestability in the sector. We expect BOS performance to be closer to that of private peers in competitive sectors as those firms might be subject to higher entry and competition from private providers and are less likely to fulfill public service obligations in such activities.<sup>14</sup> On the contrary, we expect higher differentials in natural monopoly activities that are usually linked to public service obligations (PSOs) such as water, sewage, electricity transmission, and postal services. In partially contestable sectors, important externalities might also require BOSs to fulfill a public mandate such as ensuring connectivity (cargo and passenger) services. In other words, we argue the likelihood of BOSs having a PSO that justifies a potential performance differential is lower for those operating in competitive sectors. We explore this in more detail in the next section.

Finally, we differentiate by the level of state participation and degree of separation between the BOS firm and the government. In our sample, 58% of the BOSs are fully owned by the state (100%), but we also observe majority-owned entities that account for 16% of the BOS, as well as minority state shareholdings (Table 5). Minority shareholdings account for about a quarter of the BOS firms in our sample segmented by minority participation (13%) and blocking minority (14%). In our sample, we also observe firms that are directly owned by the government vis-à-vis those owned through another firm or chain of firms (i.e., indirectly owned) and to what degree they can be linked to the state.<sup>15</sup> _Table 5. Degree of state ownership – WB BOS database_

|**Degree of State**<br>**participation**|**Definition**|
|---|---|
|Minority|Firms in which the state holds 10-24.9% of the stakes|
|Blocking minority|Firms in which the state holds 25-49.9% of the stakes|
|Majority ownership|Firms in which the state holds 50-99.9% of the stakes|
|Full ownership|Firms in which the state holds 100% of the stakes|
|Direct|Firms directly owned by a Public Authority (national or subnational), which holds at<br>least 10% participation.|
|Indirect|Firms participated by the government through another firm or chain of firms owned<br>by the State where it holds at least 10% participation.|

Source: Author’s elaboration based on World Bank (BOS) database and (Dall'Olio, et al., 2022).

# **5. EMPIRICAL METHODOLOGY**

This paper explores two main econometric exercises. First, it estimates the conditional correlation of the state participation and the performance differentials between BOSs and POEs. For this purpose, we analyze the role of state ownership on firm performance through the following specification: Where, Yi denotes the performance indicator for the firm i using several performance measurements to have a comprehensive overview of the soundness of BOSs vis-à-vis POEs. First, we assess the operational performance in terms of productivity, followed by the financial performance measured by indicators of profitability, liquidity, and returns on investment. Thus,

> 14 Alternative government interventions in the form of regulation can be suitable in these sectors to achieve public objectives.

> 15 This is denoted as the layer of ownership. For instance, a firm linked to the state through another BOS has 2 layers or degree of connection to the state.

10