Efforts by the OECD under the MAGIC database to identify the percentages of shares held directly or indirectly by one or several government entities in manufacturing companies (Annex A) suggest that companies, notably in China, can have complex government ownership structures. Unravelling the different layers of government investments within firms can, therefore, be at times a difficult exercise, requiring collecting information that are not always easily accessible. By the same token, consistent knowledge across different jurisdictions as to the scale and extent of government ownership in firms remain limited. This is compounded by the fact that, as suggested earlier, control of a company by the government can occur through different channels than ownership.
Some of the PTAs disciplining SEs include transparency obligations to address this knowledge gap. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was signed in March 2018 and entered into force in December 20181 was, in its original form,2 the first PTA to include a more extensive list of transparency obligations in relation to SEs. Prior to the entry into force of the CPTPP, only a few PTAs had introduced limited transparency requirements with respect to SEs. The United States-Singapore FTA and the United States-Australia FTA, for instance, which entered into force in January 2004 and January 2005, respectively, contain an obligation on each Party to make available public information concerning SEs at the request of the other Party.3 It is notable that Singapore is subject to an even broader notification obligation.4
Since 2018, more elaborate transparency provisions geared towards the relationship between the government and its SEs have become more common within PTAs. Their presence is directly tied to the emergence of SE disciplines in these agreements. This is notably the case of agreements concluded by Australia, the European Union, the United Kingdom, and the United States. Transparency obligations under these different PTAs present important similarities, notably when one Party has entered into several agreements with SE disciplines. Table 3 provides an overview of the various transparency obligations contained in the different PTAs, the context in which the information must be provided (i.e. mandatory notification or mandatory response following a request for information), as well as the knowledge gap that each provision aims to address.
Although the transparency provisions across the different PTAs with SE disciplines are converging, differences remain. Only a few PTAs impose an obligation on the Parties to the agreement to provide a list of their SEs after the entry into force of the agreement, as well as an annual update. This obligation mainly appears in the CPTPP, as well as in some PTAs signed by the United States, Australia, and the United Kingdom. Such mandatory notification is nonetheless particularly relevant to deal with cases where the presence of complex ownership structures masks the pervasiveness of government ownership in one Party. This allows Parties to the agreement to have at the outset a better grasp of the true extent of government ownership within a Party’s economy and to know ex ante which enterprises are state-owned or controlled and whose relationships with the government and practices may require specific scrutiny. The reach and effectiveness of this obligation, however, depends on the definition of SEs contained in the different PTAs. Indeed, a definition that would exclude SEs that are not principally engaged in commercial activities or SEs that are de facto controlled by the government would narrow considerably the scope of this transparency provision.5
By contrast to the above mandatory notification, which only appears in a few PTAs, most of the PTAs disciplining SEs signed after 2018 include a mechanism permitting each Party to request specific information in writing to the other Party regarding its SEs (Table 3). More specifically, such right to request information may permit to address the following transparency issues: (i) opaque ownership structures and/or organisational and managerial structures of companies masking the true extent of government ownership and control; (ii) absence of easily accessible or publicly available financial information of certain entities owned or controlled by the government, including of third-party audits, impeding any measurement of these companies’ market shares, their financial health, as well as the volume of subsidies they receive; and (iii) intertwined with the last point, difficulties obtaining information on the subsidies and other regulatory advantages SEs benefit from, especially in instances where the company is either not listed on a stock exchange, does no longer publish its annual reports, or whose subsidy reporting has deteriorated.
As mentioned above, complex government ownership structures involving various governmental entities at the horizontal level as direct shareholders and at the vertical level as indirect shareholders can obscure the extent to which a government owns a company. The various types of government ownership structures described above, notably Types 2, 3, and 4, require collecting information on the identity of the various entities owning or holding the shares or votes, the percentage they cumulatively own or held, as well as the ownership structure of these entities in instances where they are ultimately owned by a government entity through one or several layers of ownership (Types 3 and 4). Such an exercise may at times prove particularly difficult,6 if not impossible in the absence of publicly available information. In this context, PTAs granting to Parties to the agreement a right to request information on the percentages of shares or votes cumulatively owned or held in the entity by the Party, its SEs, or designated monopolies, as well as the right attached to such shares or votes, contribute to addressing this knowledge gap, especially in economies where state ownership and investment is pervasive and disseminated across various entities.
While measuring the true extent of government ownership can be a complex exercise, appreciating the degree of government control over companies necessitates additional evidence, which is not always publicly available, particularly as concerns the organisational and management structure of the entity. The right of a Party to a PTA to request information on this issue7 will contribute to shedding light on instances where the government, despite being a minority shareholder, retains control over the company in question.8 Elements going beyond government ownership that indicate government control can be difficult to find from public sources. Companies’ annual reports traditionally include information on the identity of the members of the board of directors and other equivalent management body and potentially, their ties with the government.9 By contrast, other information, such as the government role in personnel appointment, dismissal, and compensation, as well as the necessity for companies to report to the government on their activities and business operations, can stem from informal rules and practices, thereby masking the ability of the government to exercise control over the companies. It is not clear, however, to what extent Parties to a PTA will act in good faith in providing information on government practices which do not reflect good corporate governance and which may even contradict their own company laws.10
Beyond opaque participation of the government in companies through ownership and control, the absence of publicly available financial information of companies owned or controlled by the government can hinder knowledge on their financial health, as well as the subsidies they receive. Evidence from the OECD MAGIC database indeed shows that there are five main instances in which detailed financial information are either not publicly available or imperfect.
First, there are important companies active in the manufacturing sector that are not subject to an obligation to publish annual reports because e.g. they are not yet listed and have not issued bond prospectuses.11
Second, some listed companies are subsidiaries of bigger non-listed parent groups (LIN, 2017[16]): while the financials of the subsidiary are publicly available, there is no public information on the financial situation of the parent company and the subsidies they receive.12
Third, financial statements for certain large manufacturing enterprises based in China and Russia are no longer available, making it impossible for the OECD Secretariat to provide subsidy estimates for these companies. in the last or more recent years (Annex K).
Fourth, the degree of granularity and detail of the information disclosed in the financial statements of certain companies, notably Chinese-based, have deteriorated in recent years (Annex K).
Last but not least, in the presence of conglomerates active across several industrial sectors, it may prove more difficult to obtain detailed information on the financial health of sector-specific subsidiaries and the subsidies they receive (Annex K).Against this background, the right of a Party to a PTA to solicit access to the financial information of an entity established in the territory of another Party, including annual financial reports and third-party audits, as well as any policy or programme adopted or maintained by the Party providing non-commercial assistance13 could contribute to remedying this knowledge gap.
In sum, empirical evidence from the OECD MAGIC database and, more broadly, from the OECD work on industrial subsidies show that these transparency provisions may prove particularly relevant. Although included in a few PTAs only, an obligation requiring Parties to a PTA to publish on an annual basis a list of their SEs permits to gain a crucial better grasp of the extent of government ownership within a Party’s economy. However, it bears mentioning that the list-approach may be difficult to enforce in jurisdictions where government ownership is particularly pervasive. In addition, the right to request ad hoc information on specific issues related to government ownership and control, as well as subsidies and other regulatory advantages potentially received by SEs allows government to obtain detailed information in relation to a specific entity. The relevance of such obligations are, however, crucially dependent upon Parties’ willingness to comply with such obligations and respond in good faith.