Mixed-mission capital weakens discipline.

State capitalism alters incentives in ways that can quietly undermine performance. When governments provide open-ended financial support, the pressure to survive and adapt weakens. Accountability becomes less clear, decision-making slows, struggling businesses are allowed to persist, and long-term returns often deteriorate.

Denmark illustrates the risks. The government has committed to backstopping Ørsted’s DKK 60 billion ($9.4 billion) rights issue, contributing approximately DKK 30 billion to preserve its 50.1 percent controlling stake. It also remains a significant shareholder in SAS, the national airline, holding 26 percent following its recent restructuring. Neither company has delivered the performance one would expect in a fully market-disciplined environment. This is what happens when governments replace market constraints with political discretion.

That said, state capital can play a vital role, particularly in times of stress, but only if deployed with clear boundaries and strong governance. Public funding should be priced to reflect the risk being taken. The reasons for intervention must be fully transparent, and every commitment should include defined conditions for eventual withdrawal or reduction of state ownership. Funding decisions should be made by an independent body rather than the same political actors who sponsor the support. Follow-on financing must be contingent on meeting specific, measurable goals, such as managing cash burn, improving unit economics, and delivering against a clear operational plan. If those targets are missed, the government should reduce its exposure and publicly explain its rationale. Silent bailouts erode credibility. When strategic or policy objectives require continued involvement despite poor financial performance, those goals should be tracked and disclosed separately from commercial outcomes. Mixing the two only confuses investors and undermines trust!

Ørsted’s dramatic decline, from a $90 billion clean energy leader to a heavily diluted issuer reliant on state rescue, should be a wake-up call. Governments do have a legitimate role in capital markets, especially in sectors tied to long-term societal goals but when public capital is deployed without strict conditions and transparent oversight, it risks doing more harm than good.

More here: Reuters &  Financial Times