The WB sector taxonomy serves to overcome these limitations.<sup>13</sup> It builds on the industrial organization literature to classify the economic activities (Table 3) into competitive, natural monopolies, and partially contestable sectors based on the market failures, technology and intrinsec economic characteristics (e.g., externalities, public goods, etc.).

|_Table3. Sector taxonomy to differentiate by th_|_e degree of contestability of sectors and rationale for state ownership._|
|---|---|
|**Sector type**|**Definition**|
|**Competitive Sectors**|Economic activities with little to no entry barriers that are commercially<br>viable for multiple firms to operate. Inherent market features, such as<br>cost structure, technology, or demand characteristics, make entry into<br>these sectors largely unproblematic. Some examples are the<br>manufacturing of food and beverages, textiles and apparel, wholesale,<br>and retail trade. In these sectors, the economic rationale for state<br>ownership is less clear as those sectors can be viable and efficiently<br>provided by the private sector.|
|**Partially contestable sectors**|Economic activities are characterized by some form of market power,<br>externalities, or other market failures that could be addressed -although<br>not uniquely- by state ownership. Some examples include the<br>production of electricity, extraction of natural gas, and air passenger<br>transportation services.|
|**Natural monopoly sectors**|Economic activities that exhibit high entry barriers, scale economies, or<br>sub-additivity cost structures (i.e., when a single firm can produce a<br>product at a lower cost than the combined cost of two or more firms<br>producing identical products), thus making them more efficient for just<br>one producer to operate. Some examples include water utilities, energy<br>transmission, and postalactivities withuniversalobligation.|

Source : (Dall'Olio, et al., 2022b) We implement the WB sector taxonomy to classify the economic activities using the NACE 4- digit code for the 16 European countries studied. In total, 95% of the firms in our sample operate in competitive sectors. Table 4 shows the distribution by sector type between BOSs and POEs by sector type. On average, 67% BOSs are found in competitive sectors for which the economic rationale for state ownership is less clear as can be often served by the private sector. The remaining 17% of BOSs are found in partially contestable sectors such as passenger transportation, and 16% in natural monopolies such as energy transmission.

_Table 4. Share of POEs and BOSs by sector type and year_

||2011|2012|2013|2014|2015|2016|2017|2018|2019|**2020**|
|---|---|---|---|---|---|---|---|---|---|---|
||||**PO**<br>|**Es**<br>|||||||
|**Competitive**|95.8%|95.7%|95.6%|95.6%|95.5%|95.7%|95.6%|95.7%|95.7%|95.7%|
|**Natural Monopoly**|0.8%|0.8%|0.8%|0.9%|1.0%|0.9%|0.8%|0.8%|0.7%|0.8%|
|**Partially Contestable**|3.5%|3.5%|3.6%<br>**BO**|3.6%<br>**Ss**|3.5%|3.4%|3.6%|3.6%|3.5%|3.6%|
|**Competitive**|68.1%|68.0%|67.9%|68.0%|68.4%|68.1%|67.5%|67.4%|67.6%|67.3%|
|**Natural Monopoly**|15.3%|15.4%|15.4%|15.6%|15.7%|16.1%|16.7%|16.7%|17.0%|17.1%|
|**Partially Contestable**|16.6%|16.6%|16.6%|16.4%|15.9%|15.8%|15.9%|15.9%|15.4%|15.6%|

Source: Author’s calculations for 16 ECA countries

> 13 This taxonomy offers a harmonized approach to differentiate by the type of sector where SOEs operate independently of the country or political and economic system. For more details see (Dall'Olio, et al. 2022). We used the main sector of operation of the firm using the NACE 4-digit classification and combine it with the sector taxonomy that follows the same sector disaggregation and classification.

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