State-owned enterprises tend to operate in areas of special concern to the government and their investments are seen as crucial for development. They may not be subject to a direct market test when allocating their resources and, in addition, they often draw on subsidies, loans or guarantees from government to finance their expenditure. Because of this their spending and especially their investment should face an evaluation as rigorous as that applied to direct government transactions.
Although the precise division between central and delegated responsibility for evaluation will vary from enterprise to enterprise, a few general rules apply. Central government agencies, in particular the planning and finance ministries, should ensure that the broad directions of the enterprise's investment fall within national planning parameters, that it carries out appropriate analyses and that managers are accountable for the resources they use. Detailed evaluation should be carried out within the enterprise itself by applying standard criteria for project appraisal and operational cost-effectiveness. However, these rules have been deviated from by governments and state-owned enterprises everywhere.
State owned enterprises compete among themselves or with private enterprises for banking credit in manufacturing, for example, and many services. These activities could be excluded from public sector planning, which would reduce demands on public managers, and financing in these cases would be independent of government subsidies, loans or guarantees. This would be particularly important for nations moving away from central planning. Since 1984, the profits of China' state-owned enterprises have been taxed instead of being remitted to the government budget, and the balance has been retained by the enterprises. These enterprises have increasingly financed their own investments from internal resources and bank loans rather than from government budgetary grants.
