The developmental role of public enterprise in the GCC

2. The developmental role of public enterprise in the GCC Steffen Hertog London School of Economics

3. 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

4. SOE overall balances before transfers (% of GDP)

5. Should rentier state public sectors keep their hands off the economy?

6. 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

7. Gulf SOEs are doing very well:Profit margins of select GCC SOEs

8. Energy-related SOEs

9. 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.

10. 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

11. 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

12. Oil company efficiency metrics Source: Eller/Hartley/Medlock 2011.

13. Oil company efficiency metrics Source: Eller/Hartley/Medlock 2011.

14. Some good news • Of the largest 30 Arab listed companies, 25 are located in the GCC

15. The not so good news for the private sector • How many of these have the government as shareholder?

16. 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

17. 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

18. 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

19. 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!)

20. 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

21. 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

22. 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!

23. SOE successes and failures in rentier states

24. 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

25. The future of SOE-driven diversification: diffusionto 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?

26. 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)!

27. 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

28. 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

29. 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)

31. Spare slides

32. 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.)

33. 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.

34. 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

35. 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)

36. 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.