Public policy objectives of state‑owned enterprises

4. Market-consistent financing and compensation

The way public policy objectives (PPOs) are financed and public service obligations (PSOs) compensated has important implications for market outcomes, competitive neutrality and the financial sustainability of SOEs. While PPOs are generally expected to be pursued under commercial considerations and financed through SOEs’ own commercial activities, some PPOs linked to broader public-interest or strategic objectives may also involve targeted public support or investment. In these cases, financing arrangements should remain consistent with market-based principles, including expectations regarding sustainable rates of return comparable to those obtained by competing private enterprises operating under similar conditions where relevant.

PSOs, by contrast, may require explicit compensation arrangements where they cannot be fulfilled on a commercial basis alone. The SOE Guidelines therefore emphasise the importance of transparent financing, appropriate cost attribution and accounting separation to avoid cross-subsidisation between non-commercial and commercial activities. Where PSO compensation is provided, arrangements should remain proportionate and designed to avoid competitive advantages or disadvantages. Maintaining accounting separation and disclosure of the net costs and funding of PSOs ensures that compensation mechanisms (Guideline III.C) remain transparent and appropriately calibrated.

4.1. Funding and financing of PPOs and compensation of PSOs

In practice, jurisdictions use a range of PPO financing and PSO compensation arrangements depending on the nature of the PPO or PSO, the sector concerned and the applicable legal framework.

4.1.1. Funding and financing of PPOs

Although several jurisdictions employ targeted financing arrangements to support SOEs in pursuing PPOs linked to the public interest or long‑term national priorities, a comprehensive framework outlining the conditionalities and follow‑up of such financing is often lacking. Common financing mechanisms include direct budgetary appropriations and capital injections, as well as company‑specific legislation for SOEs entrusted with special societal mandates, often accompanied by earmarked state funding. For instance, in Colombia, funding may be allocated pursuant to Decree 1017 of 2020, which regulates financial support for SOEs fulfilling strategic public functions. In Germany, Section 23 of the Federal Budget Code provides that non‑federal agencies and bodies may receive funding to accomplish specific PPOs when the state’s interest in fulfilling these objectives cannot be satisfied without such allocations. These mechanisms differ depending on policy objectives, financial structures, sectors of operation, and the legal frameworks governing individual SOEs. In some cases, financing is subject to parliamentary or other forms of approval. In Costa Rica, any commercial assistance provided to public enterprises must be approved by the Legislative Assembly to ensure alignment with PPOs.

PPOs are generally expected to be financed through the SOE’s own commercial revenues, yet most jurisdictions report that strategic interests often override commercial considerations. For example, in Lithuania, while funding is generally not granted for the pursuit of PPOs, capital injections or dividend exemptions might be granted on an exceptional basis if PPOs are linked to national security. Likewise, in Czechia, certain PPOs may receive financial support and these can be granted to strategic companies. In Colombia, the energy company Ecopetrol may receive support for initiatives that support energy security and strategic projects.

A range of practices can be observed across countries to ensure that state financing to SOEs is provided on a market-consistent basis. In EU jurisdictions, state aid rules require the state to operate as per the “Market Economy Investor Principle.” Methodologies such as the Capital Asset Pricing Model (CAPM) or Weighted Average Cost of Capital (WACC) are used to calculate the cost of capital and set a minimum expected rate-of-return on equity. Such mechanisms also exist in non-EU jurisdictions. For instance, in Australia, SOEs are expected to make a commercial return on all Commonwealth-funded equity. In Colombia, while there is no set minimum rate-of-return, SOEs are required to assess the costs of capital before requesting or receiving capital injections from the state, and strategic SOEs (such as Ecopetrol) operate with more specific financial targets and guidelines based on their commercial nature. In Costa Rica, financing policies and guidelines have been introduced to ensure market-consistent costs of financing from the state, which can be verified and adjusted further to internal control mechanisms and regular audits. In Korea, SOEs are required to undergo a preliminary feasibility study before obtaining approval from the MOEF for new investment projects and capital injections.

While PPO financing relies on broader ownership or strategic financing arrangements, PSO compensation frameworks are formalised and linked to identifiable public service costs.

4.1.2. Compensation of PSOs

Countries increasingly emphasise proportionality in PSO compensation, ensuring compensation is neither excessive nor a source of under‑funding that weakens SOE financial sustainability. Ideally, compensation will be based on a methodology that considers costs incurred and revenues for the PSO. Across all surveyed EU jurisdictions, compensation of PSOs with state aid is subject to subsequent control of over-compensation. Non-EU, but also some EU jurisdictions, have also introduced methodologies based on tariffs of PSOs. These are often linked to legal frameworks limiting tariffs to meet affordability requirements for the wider public. For instance, in Costa Rica, there are guidelines for prices and rates for some services provided, which are also established and reviewed by a dedicated regulatory entity called the Public Services Regulatory Authority (ARESEP). In Lithuania, several costs calculation methods are provided by law, where prices are set without incorporating a profit margin or are capped at a level that excludes opportunity costs. Table 4.1 identifies common national practices on PSO compensation mechanisms with concrete examples of how they are implemented.

Table 4.1. Key themes across PSO compensation mechanisms

Element of mechanism	Explanation	Examples from country practices
Clear, formal methodology for calculating PSO costs	Written methodologies and sectoral rules that define eligible costs, allocation bases and calculation steps, often grounded in legislation or regulatory decisions.	Bulgaria: regulatory methodologies in energy; statutory revenues; sector ordinances Croatia: methodology for net costs and cost classification; sector specific methods for rail and airports Finland: methodology based on typical financial reports and analysis Iceland: authority validates PSO cost accounting and sets revenue and price policy Lithuania: legal guidelines on establishing obligations and pricing rules Romania: methodology embedded in public service contracts, with specified annexes Switzerland: postal market law provisions to prevent cross subsidisation; rail infrastructure funding framed in law
Prevention of over- and under-compensation	Including reasonable profit thresholds, caps, reconciliation mechanisms, and periodic settlements.	Croatia: annual settlement, verification of operations, reasonable profit, recovery of excess amounts Finland: direct cost compensation approach to avoid overcompensation and cross subsidisation Greece and Iceland: regulatory approval of price levels and cost systems supports control of excessive compensation Lithuania: prices exclude profit margin or are capped Romania: monthly and annual statements, ex post regularisation, verification of indicators Spain: caps, thresholds, clawback clauses, periodic reconciliation
Contract based clarity and performance monitoring	PSO contracts that specify cost calculation methods, performance indicators, reporting schedules and mechanisms for settlement or adjustment.	Croatia: PSO agreement for rail includes methodology consistent with Regulation 1370/2007; annual oversight Romania: metro services contract with detailed annexes on indicators, cost determination and monthly and annual reporting Spain: contracts and decrees include KPIs, reporting obligations, service benchmarks and audit triggers
Transparency and public reporting of support	Regular, auditable disclosures of compensation received, use of funds, and reconciliation to service performance.	Lithuania: audited PSO financial results reported separately Romania: regular monthly and annual submissions and verification Slovakia: calls for disclosure of state support, guarantees and risk sharing Spain: audited financial statements differentiate PSO income and expenditure; oversight by audit institutions
Use of reconciliation, adjustment and recovery mechanisms	Built in processes to adjust compensation for actual outcomes and recover excess payments.	Croatia: annual settlement and mandatory recovery of excessive compensation Romania: monthly regularisation and annual reconciliation tied to audited accounts

Source: OECD Survey on PPOs in SOEs.

Beyond compensation methodologies themselves, many jurisdictions also rely on accounting separation and reporting requirements to ensure that PSO-related activities do not distort competition or obscure the financial impact of public service delivery. Out of those SOEs tasked with the delivery of PSOs, keeping separate accounts for PSO-related activities is one method to ensure accurate cost-accounting. This aims to prevent cross-subsidisation from loss-making to profit-making activities due to opaque or incomplete information surrounding costs and revenues. It also ensures that funds directly feed into the financing of the PSO. In Italy, the legal framework in place addresses both SOEs as well as private companies that may be responsible for delivering a PSO. Article 8, paragraph 2-bis of Law no. 287 1990, establishes that any company that manages PSOs or operates under a monopoly regime and intends to carry out economic activities in different markets can do so only through separate companies. This is referred to as the principle of “corporate separation.” While this is not required in Colombia, accounting separation is recommended by the Directorate of SOEs. However, in practice, some Colombian SOEs may reportedly offset the losses from mandated PSOs with revenues generated from profitable activities. For instance, Ecopetrol may use revenues from commercial operations to support energy security projects aligned with public interest.

4.2. Impact on the level playing field

The design of PPO financing and PSO compensation mechanisms is closely linked with ensuring a level playing field, fiscal sustainability and public accountability. While transparent and proportionate compensation arrangements can support effective public policy delivery, poorly designed or opaque mechanisms may distort competition, obscure the true costs of public policy delivery, and create hidden subsidies or cross-subsidies which may impose structural disadvantages or advantages for SOEs competing with private firms operating in similar markets. Weak cost attribution and reporting frameworks may also reduce transparency regarding the use of public funds, complicate fiscal oversight and increase exposure to integrity or corruption risks. Clear identification, disclosure and accounting of costs are therefore important not only to preserve a level playing field but also to support accountability, informed policy evaluation and sound public financial management.

As highlighted in Section 1, the relationship between state ownership rationales and the assignment of PPOs and PSOs can at times blur the boundary between the state’s ownership and regulatory functions. In line with the SOE Guidelines, regulators should neither influence state ownership decisions nor play a role in determining shareholding policies. To safeguard a level playing field, PSOs carried out by SOEs should be clearly identified, publicly disclosed, and accounted for separately from other activities to ensure accurate and proportionate compensation. PSOs and their associated costs should also be transparently reported. These principles are consistent with the 2021 Recommendation of the Council on Competitive Neutrality and best practice examples identified in the OECD Competitive Neutrality Toolkit (OECD, 2021[11]; OECD, 2024[3]), displayed in Box 4.1.

From a competitive‑neutrality perspective, survey responses point to implementation gaps in several jurisdictions. Many countries do not distinguish, in governance or organisational terms, between SOEs that exclusively deliver non‑commercial PSOs and those that also engage in commercial activities. The lack of structural or functional separation complicates effective accounting separation.

Box 4.1. Preserving competitive neutrality when implementing PSOs

The OECD Competitive Neutrality Toolkit sets out the following best practices to ensure that the assignment and delivery of PSOs do not distort competition:

• PSOs should not be automatically assigned to the incumbent (whether private or publicly owned) providing the service

• Any PSO placed upon an enterprise should be identified in a transparent and specific manner

• When a PSO is placed upon an enterprise, measures should be taken to avoid both over-compensation and under-compensation, in order not to unduly advantage a competitor

• Compensation should be based on criteria that are objective, transparent and established in advance

• Accounting separation and reporting requirements should be established

• Independent oversight and monitoring should be established (or maintained).

Source: OECD (2024[3]), Competitive Neutrality Toolkit: Promoting a Level Playing Field, 10.1787/3247ba44-en.

In practice, challenges to competitive neutrality appear to exist in some jurisdictions, whereby PSOs are either insufficiently or not at all compensated (such as in Estonia and Switzerland), which come at a competitive disadvantage to SOEs potentially hindering their investment capabilities and overall competitiveness. In some jurisdictions, inadequate funding of PSOs may reportedly be due to insufficient itemisation of their costs, or to assumptions by the state owner that a company’s profitable operations fund the objectives or obligations arising from the PPO or PSO task (it should be noted that some countries also report that PPOs may require costing), thereby reducing the need for state funding (e.g. Colombia and Finland). Other jurisdictions report competitive disadvantages that may arise due to burdens imposed on SOEs subject to specific laws on their activities, incurring legal or operational costs that competitors do not carry (e.g. Iceland). Inadequate transparency regarding compensation methodologies may also make it difficult to assess the true fiscal exposure associated with PSOs or to distinguish public policy costs from commercial performance.

Competitive neutrality principles are particularly important to address the competitive advantages or disadvantages that SOEs with PPOs may face compared to private companies in like circumstances. In jurisdictions aligning with EU’s state aid framework, the design of such mechanisms should prevent market distortions. In some countries, competitive neutrality considerations are also embedded in the state ownership policy, such as in Norway, whereby the white paper states that “state ownership shall not give companies with a state ownership interest undue competitive advantages or disadvantages compared to companies without a state ownership interest” (Norwegian Ministry of Trade, Industry and Fisheries, 2023[10]).

Disadvantages may arise due to SOEs being tasked with competing PPOs and PSOs. In Italy, Poste Italiane must deliver on digitalisation PPOs while maintaining service in disadvantaged territories (PSOs), often through higher-cost mobile offices, which reduces competitiveness relative to private operators. Slovakia’s Slovenské elektrárne may balance a trade-off between sustainability goals pushing towards greener energy, and national security priorities which may lead the government to maintain fossil-based or nuclear generation capacity to guarantee stable supply and protect strategic autonomy. In such instances, compensation may become more complex to calculate, and state owners and boards must consider trade-offs to accurately calculate the financial impact of delivering the PPO or PSO.

4.3. Oversight of PPO and PSO achievement

Effective oversight mechanisms are important to ensure that PPOs and PSOs remain aligned with their intended objectives and that financing or compensation arrangements remain appropriate over time. The SOE Guidelines, therefore, recommend ex-post evaluation and monitoring frameworks capable of assessing both policy outcomes and financial implications. Latvia applies a multi-step oversight framework informed by the achievement of key performance indicators linked to specific PPOs. At the end of each financial year, the management boards of SOEs must submit a report to the supervisory board explaining how strategic PPOs were implemented during the year. Based on the results of this monitoring, the letter of expectations, prepared by the shareholding ministry and approved by the supervisory board, is adjusted to reflect progress achieved in the previous year. Another coordination body further evaluates the consistency of medium-term goals with the letter of expectation, and the defined PPOs. France conducts ex‑post financial and performance audits by the Cour des comptes, including mandatory reporting to parliament on cost compensation and service delivery. Similarly, in the United Kingdom, PSOs are reviewed by independent regulators (e.g. Office of Rail and Road, Ofcom) and scrutinised ex‑post by parliamentary committees.

The role of supreme audit institutions (SAIs) is typically more specialised and can add a level of objectivity to the evaluation due to their implied distance to the state’s ownership and policy-making bodies. SAIs may perform audits on a systematic or ad hoc basis, and issue recommendations for observed irregularities which may or may not be binding. In Bulgaria, the National Audit Office specifically carries out audits of commercial SOEs with 50% or more state and/or municipal participation in the capital. In Czechia, the SAI evaluates the fulfilment of PPOs by SOEs exclusively with a primary focus on auditing financial management and the use of public funds. Germany’s SAI mainly has advisory powers and supports the federal government in its decisions.

Across surveyed jurisdictions, these practices demonstrate the importance of combining transparent financing arrangements with accounting separation, independent oversight and regular performance evaluation.

Key findings – Accounting separation and costing mechanisms

Where PPOs are undertaken by SOEs, financing arrangements should be designed to ensure market consistency, transparency and competitive neutrality. Compensation for PSOs should be based on sound, explicit and verifiable costing methodologies that identify the net cost of the obligation. Key findings showcase the following practices:

• Pursue PPOs under commercial considerations where possible. Countries with strong frameworks surrounding PPO governance evaluate whether they can be implemented under commercial principles to safeguard long‑term financial sustainability. Australia, for example, expects PPOs to earn commercial returns. Where a PPO requires public investment, financing should include market-consistent rate‑of‑return targets that are regularly monitored and reviewed.

• Ensure accounting separation between commercial and non‑commercial activities. Where robust frameworks for accounting separation exist, this is typically achieved by mandating corporate separation requirements, as is the case in Italy, or by taking a more activity-specific approach. This allows for the clear identification of the net costs and revenues associated with PSOs and reduces the risk of cross‑subsidisation. Enhanced transparency ensures that SOEs operate on a level playing field and accountably, while allowing for the identification of the financial impact of public service delivery.

• Strengthen objective ex‑post evaluation of PPOs and PSOs. Ideally, ex‑post evaluation is based on objective performance and cost assessments. The use of independent audits, review bodies, and parliamentary oversight, as seen in France and the United Kingdom, adds credibility to the scrutiny of PSO implementation and outcome achievement. Such evaluations support accountability, inform future policy design, and help ensure that compensation remains proportionate.