# 1. Introduction

**State-owned enterprises (SOEs) play an important role in many economies** . In several emerging and developing economies, they are significant  or the only market player(s) in some sectors, providing essential public services, such as utilities (e.g., electricity, gas, and water), transportation (by road, air, rail, and water), and telecommunications (fixed line, mobile services, and postal services). In  economic crises, they can also serve as buffers, limiting employment layoffs, sustaining workers’ wages, and keeping the economies afloat.

**Romania is not an exception and has the largest number of SOEs in the European Union (EU), with over 1,400 centrally and locally owned SOEs** (Sakha and Jin 2022; World Bank 2020). Of these, about 80 percent are owned by local or municipal governments, with the rest owned by the central government. Together, they generated about 8 percent of the total output of non-financial corporations, employed about 4 percent of the total workforce in 2017,<sup>5</sup> and were  beneficiaries of government subsidies and transfers totaling about 0.7 percent of GDP (Sakha and Jin 2022; World Bank 2020). Within the last decade, the state’s footprint has increased, with several new SOEs being created: for instance, the Bucharest city government alone set up around 22 new SOEs in several sectors with no clear economic rationale, such as taxi services, travel arrangements, and advertising (World Bank 2020).

**Notwithstanding various waves of state divestiture, the significant SOE footprint, combined with a lack of competitively neutral policies, has been obstructing market functioning** .  The reach of Romanian SOEs goes beyond the typical network sectors and encompasses activities without a clear economic rationale for their presence, such as manufacturing, accommodation, and food service activities. Like in many countries, Romanian SOEs do not always operate under the same rules and conditions as privately-owned enterprises (POEs) (World Bank 2020; Iootty, Pop and Pena, 2021; OECD 2023). The advantages and privileges they enjoy can create an unequal footing with POEs, thus distorting key market outcomes and limiting the efficiency  of resource allocation across firms and sectors.

**Romanian SOEs tend to perform worse than their private peers** . They are less profitable and generate lower revenues per employee than their private peers. Besides, they were found to have high wage premia, which weighs on their financial bottom line (IMF 2019). The prevalence of SOEs in the Romanian economy, their inefficiencies,  notably in key sectors like energy and transport that provide essential inputs to other sectors, coupled with their lower profitability and higher wage premium, have been identified as imposing a significant burden on public finances and economic growth (EC 2015; World Bank 2018). Historically, SOEs had higher debt levels, including through overdue payments to suppliers (Marrez 2015). Weak governance of SOEs and state aid support to dwindling industries with significant SOE presence (e.g., railways), among others, have induced resource misallocation towards less productive firms, such as SOEs, thus dampening aggregate productivity gains (World Bank 2018).

**This papers sheds additional light on the performance of Romanian SOEs in the recent years (including the early COVID-19 period) and their effects on markets** . The paper addresses several questions relating to SOE presence in markets. For that the paper uses the Romanian firm-level data from the Ministry of Finance covering enterprises of all sizes (hereafter referred to as MoF firm-level data) for the period 2011-2020, combined with the new World Bank Businesses of the State (BOS) database that

> 5 According to the World Bank Businesses of the State database, SOEs with at least 10% state ownership accounted for  3.6% of the formal employment as of 2019 in Romania. Section 3, “Data Sources”, of this paper describes the World Bank Businesses of the State database.

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