government intervention through direct provision in cases where large negative externalities exist stems from the fact that a non-profit-maximizing agent such as an SOE may be better placed to minimize the risks stemming from these harmful externalities than a private economic agent, which might undertake higher risks to pursue profits without internalizing the negative consequences of those risks.

# IV. Classification of Disaggregated Economic Activities

This taxonomy uses an internationally recognized classification scheme to categorize disaggregated economic activities into the three categories described above (natural monopoly, partially contestable, or competitive). Since the objective of the proposed taxonomy is to allow for an exhaustive, granular classification and thus support cross-country comparisons, the taxonomy leverages the NACE Revision 2, an internationally validated classification of economic activities. For the purposes of this paper, we refer to the NACE sections as “industries,” to the divisions as “sectors,” and to the classes as “disaggregated sectors.” Of the 615 disaggregated sectors at the four-digit level, 52 activities are excluded from the taxonomy (Table 1). Some industries are excluded altogether (such as Public Administration and Defense, Education, Human Health and Social Work, Activities of Households as Employers, and Activities of Extraterritorial Organizations). In addition, some disaggregated sectors in Finance and Insurance (2 activities), Arts, Entertainment, and Recreation (8 activities), and Other Services (6 activities) are not considered. Some of these sectors either provide public goods of strategic interest that cannot be sold commercially (Public Sector, Defense, and International Organizations), or the entities that provide these services are either not capable of generating profits or their purpose is not market production (Other Services). The rationale for their exclusion is that the entities providing such goods and services do not satisfy the definition of an SOE adopted by the paper. For industries in Health and Education, and some disaggregated sectors under Arts, Entertainment and Recreation, the operating models differ so much across countries that crosscountry comparisons are of little use and risk distorting those cross-country comparisons, as for example one could end up contrasting a “public good” approach for some countries, in which services are provided at zero or symbolic costs, with a “private,” profit-maximizing modality.<sup>26</sup> This is in line with recent work on SOEs (Szarzec, Dombi, and Matuszak, 2021), in which the education, health and public administration are excluded from the analysis of the effect of SOEs on economic growth, on the premise that companies in these sectors cannot always be privatized.

_Table 1. NACE Revision 2 –Aggregate Industry Classification_

|**Code**|**Aggregate Industry**|**No. of**<br>**Disaggrega**<br>**ted Sectors**|**No. of**<br>**Disaggregated**<br>**Sectors Included**|**Rationale for Sector Exclusion**|
|---|---|---|---|---|
|A|Agriculture, Forestry, and Fishing|39|39||
|B|Mining and Quarrying|15|15||
|C|Manufacturing|230|230||
|D|Electricity, Gas, Steam, and Air<br>Conditioning|8|8||
|E|Water Supply and Sewerage|9|9||
|F|Construction|22|22||
|G|Wholesale and Retail Trade|91|91||
|H|Transportation and Storage|23|23||

> 26 For example, health provision in Europe versus the United States.

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