participation in different markets through an economic lens, abstracting from the political and social preferences of individual policy makers. This also allows to provide guidance on the different alternatives and tailored solutions for SOE reform beyond ownership transformation and which can be strongly related to the type of sectors where these companies operate.<sup>11</sup> The proposed taxonomy is also critical to allow for cross-country comparison of the SOE footprint. Political economy and social objectives vary from country to country, and, as such, it is impossible to objectively justify the presence of the state in the market on the basis of those objectives. However, since economic market failures are uniquely identified based on the characteristics of the markets in which goods and services are produced and the technologies used, the proposed taxonomy allows analysts to compare SOEs’ presence in the economy across countries according to a homogeneous classification system. This taxonomy is already feeding into the Businesses of the State Database of the World Bank Group which is described in a companion paper to this work (Dall’Olio et al., 2022).

The remainder of this paper is organized as follows. Section II provides a review of the economic literature on SOEs and market failures. Section III provides the conceptual framework according to which economic sectors are classified. Section IV analyzes the economic sectors, disaggregated to the level of the NACE four-digit classification, and classifies each of them into the three proposed categories. Section V presents a data driven exercise to validate the taxonomy classification. Section VI concludes.

# II. Literature Review: SOE Participation and Market Failures

A systematic and comprehensive classification of the rationale for SOE presence in various economic sectors could usefully inform the analysis of SOEs from a policy perspective. As important is to have a harmonized definition on SOEs to allow cross-country comparison, it is relevant to have a unified conceptual framework to classify economic sectors based on the rationale for government presence in the provision of goods and services to inform assessments of SOEs, guide reform efforts in individual countries, and facilitate cross-country analysis of SOE presence in the economy.<sup>12</sup> Although several examples of sectoral analysis of SOEs can be found in the literature and efforts are being made by specific countries to provide a framework for analyzing the rationale behind SOE presence in various sectors of the economy,<sup>13</sup> a globally accepted approach guided by the economic literature has been missing. As a result, most SOE analysis remains either restricted to specific sectors (i.e., a number of studies cover universally accepted sectors in which SOEs are present across countries such as electricity and water

> 11 Sanchez-Navarro, Goodwin, & Kikeri (2021) present a full description of the different alternatives for reform building on this taxonomy is presented in the CPSD SOE Knowledge note indicating the different menu of options of reform. For instance, it proposes management arrangements and concessions can be more suitable for natural monopoly sectors, whereas divestiture may be more suitable for large SOEs in competitive sectors that could be served by (or in competition with) the private sector.

> 12 A caveat of previous academic literature and policy-related workstreams is the lack of a uniform definition of SOEs across countries and between economic activities, which hinders cross-country comparisons and analyses of SOE performance. To resolve this lack of harmonization, Dall’Olio et. al. (2022) building on the International Monetary Fund’s Government Finance Statistics Manual (2014) proposes a corporation as an SOE based on the government’s share of control for a corporation as well as the corporation’s role in the market. That is, an entity is considered a StateOwned Enterprise if it satisfies the following conditions:

> i. It is controlled by government units or by other public corporations, as proxied by a level of direct or indirect (i.e., through subsidiaries) participation of above 10% at each of the level;

> ii. It is recognized by law as a legal entity separate from its owners; iii. It can generate profit or other financial gain for its owners; iv. It is set up for the purposes of engaging in market production (i.e., it provides goods and/or services in exchange of a price).

> 13 For example, in the case of Peru, the Constitution in its article 60 of constitution establishes: “The government recognizes economic pluralism. The national economy is based on the coexistence of several forms of ownership and enterprise. Authorized solely by an express law, the government may subsidiarily engage in business activities. directly or indirectly, for reasons of overriding public interest or manifest national benefit. Business activity receives the same legal treatment, whether public or private.”

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