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Nov 18, 2013 (3 years and 10 months ago)

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The developmental role of public
enterprise in the GCC

Steffen Hertog

London School of Economics

2

Conventional wisdom on state
-
owned
enterprises (SOEs)


Post Washington Consensus:


state is allowed to play a role in
development, but


state ownership of productive assets is
still seen as negative


global trend of SOE privatization


Rentier

states perceived as having
particularly weak administrative
structures and public sectors


Algerian, Indonesian, Iranian, Venezuelan,
Mexican etc. precedents of bad SOE
management

3

SOE overall balances before transfers (% of GDP)


4

Should
rentier

state public sectors
keep their hands off the economy?


The recent return of SOEs


Chinese, Indian SOEs emerging as global
players


Venezuelan, Iranian SOEs playing prominent
role in economic diplomacy


A new breed of profit
-
oriented, internationally
active SOEs has emerged in the GCC


A challenge to both general theories of
development and “resource curse” theories

6

Gulf SOEs are doing very well:

Profit margins of select GCC SOEs


7

Energy
-
related SOEs


8

GCC commonalities (and differences from
“traditional” SOEs in oil exporters)


Management is structured along conventional
corporate lines, not subject to civil service
regulations


Regulatory privileges (NOC model): separate charters,
hiring rules and salary structures, budgetary autonomy


Profits as their main (though not only) operating goal


Leadership is judiciously picked by ruling families


Chairmen of SOEs are often from the ruling family,


CEOs are usually commoners.


Highly
-
paid foreign experts often play an important
role in management


although less so in more populous Saudi Arabia than in the
smaller sheikhdoms.


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Commonalities II


SOE managers often enjoy special access to the
ruling elites,


Able to bypass the often sluggish national bureaucracy
on matters of regulation and infrastructure.


Different from the developing country SOEs of
the 1960s and 1970s, the new breed of SOEs is
outward
-
oriented



exporting goods and services regionally and, in many
cases, globally


High level of operational (though not always
strategic) autonomy

Different from the rest of the state in most of these
regards


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The model: Saudi Aramco


“Grandfathered” US managerial structures
through consensual nationalization


Muscling out more “traditional” NOC
Petromin


High operational and budgetary autonomy


Attractive salaries, independent recruitment; KSA’s
most coveted employer


lean workforce: 56,000 staff in 2011, vs. more
than
100,000 in
Algeria’s
Sonatrach


Corporate strategy developed by Aramco rather than
MoPM


Management recruited & chosen internally


High technical capacity in OPEC NOC comparison


No need for joint ventures, different from less capable
NOCs (ironically in more nationalist countries)


International board membership


Outward
-
oriented and diversifying


11

Oil company efficiency metrics

Source: Eller/Hartley/Medlock 2011.

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Oil company efficiency metrics

Source: Eller/Hartley/Medlock 2011.

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Some good news


Of
the
largest 30
Arab listed
companies,
25 are
located in the
GCC

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The not so good news for the private
sector


How many of these have the government
as
shareholder?

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The not so good news for the private
sector


Of the 25, 9 have
local governments as majority
shareholder, while 12 have minority government
shareholdings


Only 4 are private


12
of the 25 companies were originally set up by the
government or as daughters of state
-
owned
companies.


There
are few purely privately held blue chip
corporates in the
Gulf


The largest public companies are all state
-
related


Particularly the ones which have developed new
sectors


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SOEs in heavy industry


Roots going back to 1970s oil boom, when private
sector reluctant to move into world
-
scale industrial
investment


Saudi Basic Industries Corporation (SABIC), set up in 1976, is
the regional leader


Muscled out
Petromin
, a more “traditional” SOE founded in 60s


Industries Qatar, established in 2003, has followed the SABIC
model


In 2006, Abu Dhabi established ADBIC, inspired by SABIC in
more than name, which plans to invest 6.5 billion $ to build a
plastics factory and expanding an existing steel plant.


Further heavy industry SOEs:


ALBA in Bahrain


EMAL in the UAE


All have high operational autonomy, are commercially
structured, separate from rest of public sector


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State
-
driven diversification in export
-
oriented industries


The share of the GCC in total
global ethylene capacity is
to
increase from 7% in 2002 to 15% in 2012


Share in global aluminium production to increase from 7% in
2010 to 10% in 2015


In
2010, Saudi listed companies derived 57 billion USD,
42.5% of their total revenues, from sales and investments
abroad


In this, the petrochemicals sector accounted for 47 billion USD


SABIC in turn accounted for 41 billion of the latter

16.0%

11.8%

72.2%

Export revenues of listed Saudi
companies in 2010 (%)

non-petrochemicals
non-SABIC
petrochemicals
SABIC
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SOE
-
driven diversification in other
sectors


Telecoms


Etisalat
,
Qtel
, STC etc. all streamlined and expanding
abroad


Airlines


Emirates, Etihad, Qatar Airways


at least Emirates has
been consistently profitable


Logistics


JAFZA, DP World


integrated into larger national cluster
strategy in Dubai also involving SOEs in tourism, real
estate, aviation etc.


Real estate and tourism


Emaar
,
Barwa

etc. (
Emaar

profitable throughout Dubai
crash!)

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How impressive is it really?


Local monopolies (de jure or de facto)


Sovereign financing or credit guarantees (de jure or de
facto)


Feedstock advantages


Not clear how profitable SABIC, Alba etc. would be with higher
gas prices


Land banks for tourism companies


Captive local customers for telecoms companies


Landing rights, infrastructure support, lower salaries and tax
-
free status for national airlines


Yet: other hydrocarbons exporters had the same
advantages, but failed to build profitable SOEs


SOEs’ strategic importance might lie in building national
infrastructure, industrial expertise and planning capacity,
and
demonstrating feasibility of new sectors
, rather than
profitability per se

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Why does it happen?


Local use of oil surpluses without directly distributing
them


“commanding heights” remain in government control


SOEs as trailblazers for new sectors in which private actors
initially reluctant to invest


Redistribution of wealth through IPOs (“popular
capitalism”)


Different from bureaucratic jobs, does not create long
-
term
fiscal obligations


SOEs provide a non
-
oil, non
-
tax fiscal basis? (Dubai esp.)


Dubai (and to some extent Saudi Arabia) setting the pace
for the others


national prestige and copycat SOEs


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Why does it work?


What’s different from other
rentier

states?


Most GCC governments are autonomous in how they use
new incremental hydrocarbons income


Pro
-
capitalist, non
-
populist economic ideology



Allows clear SOE mandate, clear internal accountability to
limited set of senior principals (without necessarily applying
conventional “good governance” standards)


Kuwait, the one GCC government without successful
SOEs, is not politically autonomous


too many principals with a claim to set SOE objectives,
including parliament and public sector unions


Other
rentier

states have pursued populist or
nationalist public sector strategies


SOEs as tools of social engineering (building “new middle
class”), mass employment, politically targeted pricing and
subsidies


PEMEX, PDVSA,
Sonatrach



All these things also happen in the GCC, but largely outside
of SOE sector!

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SOE successes and failures in rentier states


non
-
populist

autonomous

SOEs
attempted

successful
SOEs

BAHRAIN

yes

yes

Y

Y

KUWAIT

yes

no

Y

N

OMAN

yes

yes

Y

Y

QATAR

yes

yes

Y

Y

SAUDI ARABIA

yes

yes

Y

Y

UAE

yes

yes

Y

Y

ALGERIA

no

yes

Y

N

BRUNEI

yes

yes

Y

N

EGYPT

no

yes

Y

N

INDONESIA

yes

yes

Y

N

IRAN

no

no

Y

N

LIBYA

no

yes

Y

N

NIGERIA

yes

no

Y

N

SURINAME

yes

yes

Y

Y

VENEZUELA

no

yes

Y

N


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The future of SOE
-
driven diversification


Different from the private sector, SOEs made it through the regional
financial crisis in fairly good shape


But: danger of overstretch and mission creep


Is
Mubadala

doing too much (semiconductors, gas, renewable energy,
aerospace manufacturing, real estate,…?)


Should Saudi Aramco really build universities, operate industrial cities,
invest in renewables, SME financing and venture technology, (build
soccer stadiums)…?


As companies move downstream and into non
-
hydrocarbon areas,
direct cost advantages become less important and organisational,
skills and innovation capacities more important


SABIC’s acquisition of GE Plastics

The jury is still out


Some think SOEs are good at replicating technology, less good at
innovation


What we know is that the local private sector is unwilling and possibly
unable to engage in strategic long
-
term investment in new sectors


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The future of SOE
-
driven diversification:
diffusion

to the private sector at large?


The history of enclave development
in the GCC is
reminiscent of the
East Asian “developmental state”:


national
development
led by small
teams of elite technocrats


targeted
technology
acquisition from abroad


export promotion and targeted protectionist measures


Building of world
-
class, high
-
priority support infrastructure


SOEs also historically important in Taiwan, Singapore and (to some
extent) South Korea, though by now often privatized


Yet diffusion of technology and skills to business at large has not
happened to the same extent as in Asia


Private sector follows, but cautiously


often too easy to make short
-
term profits using cheap
labor

and other cheap inputs


General regulatory and skills environment often too weak for
technology diffusion


National talent pool limited and sometimes siphoned off by
unproductive bureaucracy

Onus of diversification into new areas to remain on public sector?

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But what to do when business starts
competing with SOEs?


Challenge of moving from leader to competitor


SABIC vs. local private heavy industry


who regulates
competition, feedstock access etc.?


Governance, level playing field etc. become more important
as private sector matures and follows SOEs


Partial IPOs as means to improve public accountability and
transparency?


GCC is weak in regulating SOE vs
.

private competition across
the board (with the potential exception of telecoms)


UAE SOEs are even explicitly excluded from competition laws


Aviation as the next battle?


Same time, private sector under political pressure as not
contributing much to national employment (or taxes)


Share of Saudi nationals’ private wages in Saudi GDP is 3%
(vs. 40
-
50% in advanced countries)!


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Spillovers

within the public sector?


There has been some transfer of expertise and business models
from large SOEs to the public sector at large


E.g. migration of Aramco technocrats to government


But islands of efficiency also take pressure off the rest of the system
by addressing high
-
priority needs


Again, Aramco’s role in building infrastructure, education institutions
etc.


SOEs will resist integration with the rest of the system, as their links
to it are tenuous, sometimes antagonistic


And playing too wide a public policy role might undermine their
autonomy, also from public scrutiny (Aramco,
Mubadala
?)


Highly skilled nationals will continue to be oriented to “pockets of
efficiency”, hence being unavailable to the rest of the state


Existing institutions have proven very difficult to change


The luxury to build a new institution for each new problem however
cannot last forever, and the Saudi economy is too large to be
operated from a few elite enclaves providing limited jobs


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Takeaway lines


Gulf SOEs essential in early phase of diversification


Remain essential in developing new sectors


Role less clearly defined, or regulated, in areas where
private sector has followed


More conventional SOE governance formulas might come
into play then
(OECD etc
.)


competitive
neutrality,


transparency
on
subsidies and sovereign backing


clear definition and pricing of
non
-
commercial
tasks


Privatization once a sector is established…?


Private sector will need to further step up its contribution
to local job creation (and state budget?) to develop the
same legitimacy as development leader that Gulf SOEs have
acquired

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Thanks!

(and some relevant publications)


Saudi Aramco as a national development agent

(NOREF)


Petromin
: the slow death of statist oil
development in Saudi Arabia

(Business History)


Defying the resource curse: explaining successful
state
-
owned enterprises in
rentier

states

(World
Politics)


(with A.
Amico
)
State
-
owned enterprises in the
Middle East and North Africa
(OECD)



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Spare slides


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Clusters and industrial strategy


Targeted state support and coordination of different
SOEs, particularly in Dubai:


Provision of state lands


Feedstock for petrochemicals


Access to national infrastructure for logistics companies


Fuel provision for airlines and transport companies


Listing of SOE shares and bonds on new, quasi
-
corporate
stock markets


Training of national manpower


Close coordination of governance matters (e
-
government,
social security reform e.g.)


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Actors and sectors: real estate


traditionally a sector in which Gulf governments have
invested heavily, but contracted out the
implementation of projects to private players.


In recent years, new state
-
created and at least partly
state
-
owned large corporations have entered the
sector with their own projects.


Dubai’s
Emaar


Nakheel

(though with some hiccups)


Qatar’s
Diar



Ras

Al
-
Khaima’s

RAK Properties.


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Actors and sectors: logistics and transport


Again, Dubai has set the pace of regional development, with
Dubai World
’s various daughter companies exporting logistics
services worldwide


Emirates
as new brand of state
-
owned airline (consistently
profitable since mid
-
80s), imitated by


Abu Dhabi’s Etihad


Qatar Airways,


Oman Air


Ras

Al
-
Khaimah
, which has started its own airline.


More recently, Dubai has ventured into aviation technology
with its 2006
Dubai Aerospace
venture, closely followed by
Abu Dhabi’s
Mubadala


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Actors and sectors: telecoms


Turning a profit in only partially liberalized home
markets is not difficult, but:


the UAE’s
Etisalat
,


Qatar’s
Qtel
, and


Bahrain’s
Batelco



have also been successful on foreign markets in the
Middle East region and beyond.


Saudi Arabia’s STC and Oman’s
Omantel

have
invested in Asian markets (though with mixed
success in the STC case)


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Actors and sectors: banking


New SOEs reversing a trend of gradual
denationalization


In January, Dubai Holding launched the new Noor
Islamic Bank with a capital of 1 billion $.


The Saudi government is in the process of setting up
a new bank (“
Inma
”) which is scheduled to raise 2.8
billion $ in an IPO in April.


Kuwait setting up a new Islamic bank (“
Jaber

bank”),
76% of the shares of which are supposed to be
distributed to Kuwaiti citizens.


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