# VI. Conclusion

The taxonomy put forward in this paper provides a common ground on which to compare countries over time and in a more granular way than before. Countries that have deregulated, unbundled, and privatized their electricity sectors, for example, will only feature an SOE in the natural monopoly segments (transmission and distribution), and this can now be differentiated from a country that still has an SOE operating in every electricity subsector. Similarly, paired with data on SOEs, this taxonomy has the potential to provide valuable insights on the sectoral footprint of the state across different countries, as in the World Bank’s new Businesses of the State (BOS) database and provide guidance on the options for SOE reforms (World Bank, PSD Toolkit, forthcoming).<sup>3637</sup> Preliminary cross-country analysis (World Bank 2022, forthcoming) shows that the state’s footprint in competitive sectors is bigger than previously captured: on average across 80 economies covered in the BOS database, more than half of businesses with state ownership operate in fully competitive sectors.

There are important caveats to the taxonomy, however, which relies on the NACE Revision 2 and is therefore subject to the same shortcomings as any other industry classification or methodology based on industry classification. For example, the disaggregated sector classification of one specific SOE is not necessarily representative of the main economic activity in which that SOE is engaged, nor does the classification accurately capture multi-product SOEs that operate across sectors. SOEs may have changed their main business line entirely and may serve in multiple (related) sectors in different ways. These shortcomings are the same for public entities and private entities.

Perhaps more challenging is the fact that sector characteristics (and market failures) are not constant across countries, across markets of different sizes, or across countries and markets at different stages of development. Electricity generation, for example, may be a natural monopoly in a small economy, but when the economy grows, the sector may be able to profitably sustain more than one generator. Similarly, the economic rationale for state ownership in mobile telecommunications is stronger in countries with a wholesale access network because such a network is a natural monopoly.

Furthermore, the taxonomy may not capture differences in market features among some subsectors within sectors disaggregated to the four-digit level. For instance, the economic rationale for SOE presence is weaker in the generation of electricity from wind energy, but stronger in the generation of electricity from nuclear energy. To accommodate this reality, the taxonomy classifies sectors into the three categories in a generally conservative way—that is, it considers an economic activity to be a natural monopoly even when in some (more advanced or larger) economies it may already be competitive. As a result, the sector categorization is indicative only; the economic rationale for SOE presence may still vary among countries and should be analyzed in detail in the context of any country-level diagnostic.

Technological innovations that affect the fundamentals of certain sectors, including their cost structures and barriers to entry, represent another challenge to industry classification. New technologies may disrupt previous natural monopolies and make those sectors contestable, for example by lowering fixed costs. Innovations in the field of financial technology, for example, could potentially transform the market structure of traditional insurance markets through the analysis of real-time data on risk profiles, dynamic underwriting, and personalized premium setting (Ricci and Battaglia 2021). As a result, the categorization

> 36 EFI SOE Global Database Project, led by Andrea Dall’Olio (TTL), Tanja Goodwin (co-TTL), and Mariem Malouche (co-TTL).

> 37 The CPSD Knowledge note (Sanchez-Navarro, Goodwin, & Kikeri, 2021) and the forthcoming toolkit on state footprint and private sector development offer a good set of tools for practitioners on how to implement the findings of the global BOS database and the taxonomy of sectors to design SOE reforms including the sequence, prioritization of sectors, as well as the definition of the right instrument of reform (beyond privatization).

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