The image of a typical state-owned enterprise (SOE) in the Middle East and North Africa (MENA) is something akin to an elephant: cumbersome to maneuver and slow to adapt. This image reflects the history of SOEs in the region, established across a variety of sectors to produce everything from socks to electricity, to provide jobs to the unemployed and to furnish the society with subsidized staples. While images tend to stick, the reality appears to be gradually changing, at least in some countries of the region. Some fully or partially state-controlled enterprises in the region, particularly in the Gulf, are quite successful and this is not limited to the hydrocarbons or monopolistic sectors.
What is interesting is that across the Arab world, governments are starting to pay special attention to the operation and governance of SOEs with a view to improve their productivity and competitiveness. Interest in corporate governance of SOEs peaked following the Dubai World debt debacle, which placed the question of SOE governance and ownership squarely on the policy agenda by raising the basic question of what is and what is not a state-owned enterprise. This question is subject to an ongoing debate, and the commonly used term “government-related entities” reflects the state of confusion.
A closer look
A more granular understanding of the nature and the extent of state ownership in the region is fundamental to improving the performance and governance of SOEs. Although exact statistics are unavailable even on the national level in most MENA countries, SOEs are estimated to account for as much as 50 percent of gross domestic product in some countries of the region, and for about 30 percent of total employment.
Outside the Gulf Cooperation Council, in countries such as Algeria, Syria, Iraq and Egypt, SOEs are present across the spectrum of economic activity, including in banking, telecommunications and transportation. In the Gulf, sovereign wealth funds (SWFs), which have large stakes in both state-owned and private companies, have further raised the importance of state-ownership in the region. SWFs are estimated to have ownership stakes in more than 130 companies in the Gulf alone, and their growing domestic investment orientation is only bound to increase this estimate. In addition, state-owned institutional investors such as insurance and pension funds are also important actors, further amplifying the importance of state ownership in the region.
Considering the MENA region as a whole, 32 of the top 100 largest listed companies have the state as their shareholder; this corresponds to almost half of the total market capitalization of these companies. In addition, the number of non-listed SOEs by far exceeds the number of listed companies. Some of these companies (i.e. Saudi Aramco, Oman Oil) are indeed the largest in the region. These facts make it clear that the importance of state-owned enterprises in the region is not going to decline anytime soon, and in fact, the opposite may be true.
Feeble corporate governance
And yet, apart from isolated success stories, SOE governance arrangements lag behind those of private sector companies in the region. In many countries, commercially-oriented activities continue to be performed directly by ministries, keen to avoid converting them to the corporate form. In most countries and sectors, with the exception of telecommunications, ownership and regulation functions have not been separated, with the result being that significant conflicts of interest remain. A number of commercial SOEs are not subject to corporate legislation, instead adopting special legal regimes that effectively politicize their governance and exempt them from competition and bankruptcy frameworks.
These arrangements are mirrored in board level governance and consequently in the performance of these companies. Apart from the examples of a few successful SOEs, the legacy of most government-operated companies is one of low profitability, productivity and competitiveness. State-owned banks, for example, have non-performing loans sometimes exceeding 20 percent of outstanding debt, owing to the practice of non-arm’s length lending to industrial SOEs. It is also no secret that Egyptian spinning and weaving and Syrian food production SOEs have by and large been loss-making.
SOE boards in the region continue to be dominated by political appointees who may not necessarily possess the necessary background and time to dedicate to their duties. The length of board appointments and their accumulation are more often than not unregulated. Board members in some SOEs in the region have been exercising their functions for more than 20 years. Such practices are also a consequence of the fact that SOEs — with the exception of those whose debt or equity have been listed — are generally not subject to corporate governance codes. In the United Arab Emirates, even listed SOEs have been exempted from the applicable code.
Hints of reformation
That said, policymakers all over the region are showing a growing appetite for introducing corporate governance guidelines specific to this sector, recognizing the particular role of the state as a shareholder. Following Egypt’s introduction of corporate governance guidelines for SOEs in 2006, Morocco and the United Arab Emirates released similar guidelines last year. The Moroccan code in particular applies on a “comply-or-explain” basis and began implementation earlier this year. The success of these experiences is important as they are being observed with great interest by policymakers and stakeholders all over the region.
The Taskforce on Corporate Governance of SOEs, composed of policymakers and experts from across the region for which the OECD serves as a secretariat, is a unique forum for MENA countries to share their experiences with SOE governance reform.
Of course, country specific priorities for SOE sector reform vary as do the sources of resistance against such measures. For instance, privatization of SOEs has for a long time been viewed with suspicion in the region and recent allegations of corruption in this process in Egypt and elsewhere in the region may have effectively banned the word “privatization” from the vocabulary of politicians for some time. More generally, restructuring of SOE sectors has been fraught with concerns about how to address the rationalization of employment in loss-making enterprises, which is indeed a formidable challenge.
In the face of these concerns, policymakers from across the region have adopted original solutions to SOE sector reform. In Jordan, the Executive Privatization Agency worked with local religious authorities to address the concerns of citizens during sermons about the quality of services provided by privatized companies. The Turkish Privatization Agency introduced a program to compensate employees of SOEs negatively affected by privatisation plans. Programs like this and other measures to address employment-related concerns in SOE restructuring programs, are proving to be of great interest in the region.
Beyond privatisation-related challenges, it is clear that more effort is needed to establish clear frameworks for SOE ownership across the region and to define specific objectives for individual SOEs. These enterprises, especially considering their strategic and economic importance, should not be left for individual ministries to run as their fiefdoms. More effort is also needed to replicate successful policy reforms and ownership experiences, which is a key objective of the MENA SOE Taskforce. In this regard, Morocco’s recent experience in introducing a corporate governance code for SOEs and empowering its state audit institution to review the governance of SOEs may be of interest to other countries in the region.
The sharing of experience among MENA countries and beyond has the potential to transform at least some SOEs from elephants to gazelles, able to rapidly react to market realities and in the long term, perhaps even outperform their private sector competitors.
ALISSA AMICO is manager for the Middle East and North Africa, Corporate Affairs Division, at the Organization for Economic Cooperation and Development (OECD). The opinions expressed herein do not reflect the official position of the OECD or its member countries