Two centuries ago, Adam Smith claimed that capitalism would be promoted through the presence of competing actors who would optimize economic resource allocation “as if by an invisible hand.” This valuable ability of unbridled markets could not be matched by a central government, warned Ludwig von Mises in the 1920s, and in the 1950s, Friedrich von Hayek claimed that less government intervention results in more efficient allocation of resources. And yet today the state not only promotes risk taking and entrepreneurship through regulation, but is also the owner of a range of corporate assets.
A recent survey by the Organisation for Economic Co-Operation and Development (OECD) of 34 governments found them holding a total of 2,111 state-owned enterprises (SOEs), valued at $2 trillion and employing approximately 6 million people. Of the 10 largest listed companies globally, half include a state as a major shareholder. The state as a “capitalist” in its own right plays a significant role in emerging economies such as China, India and Russia, but also across the Middle East and North Africa (MENA), despite wide differences in the national incomes, sectoral distribution and the nature of strategic assets.
High level of state ownership is characteristic of nearly all Arab countries, oil-exporting and importing, in economies as diverse as Saudi Arabia, Syria, the United Arab Emirates (UAE) and Egypt. While significant state ownership is not unique to the MENA region, the complex structures of ownership, including an absence of centralized or coordinated ownership entities and multiple sovereign investors are more region specific. In the UAE for instance, state ownership is exercised through multiple investment vehicles, including the Investment Corporation of Dubai, the Emirates Investment Authority and Mubadala, as well as through state-owned banks such as Abu Dhabi Commercial Bank (ADCB) and National Bank of Abu Dhabi (NBAD).
A close look at the role and impact of state ownership in the region reveals that the state is not always – as is commonly assumed – an inefficient owner. The popular perception of the state as an “inept capitalist” collides with reality in some countries and sectors. Some governments in the region have harnessed SOEs for infrastructure development, delivery of public services and even research and development, while others continue to face challenges restructuring SOEs, resolving to subsidize their activities. The success of state ownership in the Arab world has been highly uneven.
While many Algerian, Tunisian and Egyptian SOEs are unprofitable, the same cannot be said of all Moroccan, Emirati or Saudi state-owned firms. For instance, Saudi SOEs such as Ma’aden and SABIC have grown to be large and successful multinational enterprises, while undertaking social mandates on behalf of the state. These successes and failures are important since they underscore the ability of state capitalism to succeed in some contexts and fail in others. They merit particular reflection at the time that the social contract in the region is being reconsidered.
There are few standard “recipes for SOE success” but in a few sectors such as telecom, state-owned incumbents have generally performed well despite intensive competition. For instance, Saudi Telecom competes with Mobily, which is owned by the Emirati state-owned Etisalat. Both enterprises are listed on the Saudi Stock Exchange, Tadawul, and are subject to the same corporate and governance regulations as private companies. Likewise, partially state-owned Batelco in Bahrain competes with Zain, Viva and other service providers. The telecom sector is indeed a success story in most countries of the region, in large part owing to the establishment of sectoral regulators which have been instrumental in fostering a level of competition higher than in other sectors.
Getting state ownership right is also important because investments by the state or state-controlled entities are in fact on the rise across the region.The most visible investors in the MENA region – sovereign wealth funds – have made some eye-catching acquisitions globally, however they are not the largest sovereign investors domestically. Instead, state-owned pension funds, insurance companies and banks are sizeable investors in listed companies. In Saudi Arabia for instance, state-controlled investors hold stakes in almost half of the listed companies.
In advance of the opening of the Saudi stock market to foreign investors (slated for the first half of 2015), the two major sovereign vehicles, the Public Investment Fund and the General Organisation for Social Insurance, are reported to be investing in the market, including in new IPOs. Privatization transactions are also not necessarily transferring all ownership to private hands either. The listing of the National Commercial Bank (NCB) in Saudi Arabia in November 2014 saw the allocation of 40 percent of the shares to Public Pensions Agency. The NCB IPO, the second largest IPO globally in 2014 after the Chinese e-commerce company Alibaba, is in fact a rare example of state divestment in the region.
While it may be tempting to suggest that pressure on government budgets in the Gulf driven by recent declines in oil price might bring privatization back on the agenda, there are currently no signs of this. Oman, the only country that announced privatization plans in 2014, appears to have delayed the decision, instead preferring to project a budget deficit in 2015. The desire to keep the “crown jewels” (which extend beyond the hydrocarbon SOEs) as well as less profitable SOEs is not isolated to the Gulf countries.
Privatization across the MENA region has actually ground to a halt. To some extent, it fell a victim to allegations of crony capitalism especially in countries such as Egypt and Tunisia, and this is a separate issue worthy of further scrutiny. The slowdown in privatization activity is also a consequence of the lack of interest to divest of “crown jewels.” Less strategic assets were already privatised in the 1980s and 1990s, especially in Egypt, Morocco and Tunisia – the largest recipients of privatization revenues in the region.
In Egypt for instance, recent governments have not spoken much of restructuring of SOEs, preferring instead to adjust subsidies on natural gas and bread. In Tunisia, stakes in 486 companies nationalized after the fall of the former president Zine El Abidine Ben Ali’s regime are not, at least for now, being privatized. Aside from this, there is an urgent need to improve the performance of state shareholdings in Tunisia, which currently include 200 SOEs. Of those, 10 percent are now on the verge of bankruptcy and 50 percent are in a perilous financial situation.
If state ownership is so complex, why do Arab governments hold on to SOEs so dearly?
Some SOEs such as Emirates National Oil Company (ENOC) or Saudi Aramco are strategically important companies and a major source of fiscal revenues. Others such as Al Omrane in Morocco or Électricité du Liban in Lebanon are charged with important social objectives such as provision of subsidised housing in the case of the former and electricity in the case of the latter. Even in wealthier Gulf states, SOEs perform extra-commercial functions on behalf of the state by building stadiums, training companies in their value chain and developing rural areas. Across the region, whether in Iraq, Tunisia or Kuwait, SOEs are resistant to re-structuring due to employment obligations or other entrenched interests.
MENA SOEs generally do not live in a world of perfect competition and in many instances are subsidized – often in an ad hoc manner – which does not facilitate budgetary stability or transparency. A number of countries such as the UAE explicitly exclude SOEs from the remit of the Competition Law which would normally facilitate competition between SOEs and private firms. In Egypt, launching investigations against SOEs is difficult and actual cases investigated by the Competition Authority are rare. In addition, competition authorities in the MENA region are not empowered to ensure the presence of a level playing field between SOEs and their private competitors.
Corporate governance regulations that apply to private companies are not generally extended to SOEs. Only three countries in the region (Morocco, Tunisia and Egypt) have introduced specific regulations, outlining how these companies shall be governed. On the other hand, all MENA countries (except for Iraq) have a corporate governance code or guidelines for listed companies, which generally also apply to listed SOEs, as well as specific regulations for banks and small and medium-sized enterprises (SMEs). To bridge this gap, some MENA SOEs have established company-specific governance norms.
Better corporate governance of SOEs has contributed to professionalizing SOE boards and management, reducing conflicts of interest and ultimately making these companies operate with an eye on the bottom line. But this is not the whole story. So how have some state-backed firms emerged as trailblazing international brands, while others stagnate? Sectoral and company-specific characteristics, the presence of a competitive landscape and a level of autonomous managerial decision-making are often evoked.
Conventional factors such as lack of good governance, lack of competition and lack of professional management are useful in explaining why “the glass is half empty.” Whereas, the opposite conditions only partially explain – and do not guarantee – a glass full. That is because the success of some MENA SOEs to an extent belies conventional management and governance mantra. A number of successful state-backed companies operate with relatively opaque governance structures, do not report to the public, are not subject to competitive pressures and are charged with social objectives.
The first type of such successful entities, due to their strategic nature, have been handed operational autonomy, allowing them to effectively “privatize” their management even if their ownership remains in the hands of the state. As noted in a recent report by the Natural Resource Governance Institute, Saudi Aramco – although not transparent on all accounts – stands out as a rare example of a national state-owned oil company that remains well performing from a technical and economic point of view.
The second category of performing MENA SOEs is effective for almost exactly the opposite reason. While they are not granted full autonomy, they are integrated in a system where the state leverages sectoral synergies among state-controlled entities to foster national economic competitiveness. Perhaps the best example of such an economic ecosystem is Dubai, where SOEs have been used as a motor of diversification and are present in a number of sectors, including construction, hospitality, transport, banking and telecommunications.
A number of Dubai’s SOEs such as Emirates Airlines and Etisalat have in recent years emerged as internationally recognized brands. Some, but not all of these companies compete, and in a number of cases against other state-owned firms (Emirates against Fly Dubai or Etisalat against Du). Not all these firms have faced private sector or international competition, which will be a key litmus test for their ongoing profitability and sustainability.
A number of lessons can be drawn from the experiment of “state-driven capitalism” we have been witnessing in the Arab world. First, good governance arrangements can be approximated through structures of local character. For instance, while Gulf states have not set up ownership entities, the nature of centralised decision-making ensures a degree of coordination. Ownership and privatization entities would help to introduce additional technical skills to the exercise of government ownership and to centralize operational decisions, while higher-level political decisions are made by the Cabinet or the Majlis.
Second, state-driven capitalism in the region seems to demonstrate that the state can be a successful entrepreneur and that large state-controlled companies can, in some cases, foster private sector development in their value chains. It also highlights that the state can successfully co-invest with private investors as is the case of SABIC, the largest listed company in the region. Instead of entirely privatizing ownership, entrusting oversight of SOEs to commercially minded sovereign funds has generally proved useful, as highlighted by the experience of Bahrain’s sovereign wealth fund, Mumtalakat.
Third, and most importantly, SOE-driven economic diversification and growth strategies call for rigorous risk management by governments. This was highlighted by the restructuring of a number of large SOEs in Dubai, following the global financial crisis and the adjustment of real estate prices in the emirate in 2009. While Dubai has succeeded in halving its debt levels since then, the lesson that can be drawn from this episode is that risk management is required to address excessive indebtedness of SOEs and large exposures of local investors to SOE debt. Based on the experience from the MENA region, it seems that the state can indeed in specific circumstances serve an “invisible hand,” but then shall – as a any good entrepreneur – take on systemic economic risks associated with “too big to fail” state ownership.
Alissa Amico is the project manager of the Middle East and North Africa work at the Corporate Affairs Division, the Organisation for Economic Co-Operation and Development (OECD). The opinions expressed and arguments employed herein are those of the author and do not represent the official views of the OECD or the governments of OECD member countries. Further publications on state ownership in the Middle East are available here: www.oecd.org/daf/ca/mena-corporate-governance.htm.