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The developmental role of public
enterprise in the GCC
Steffen Hertog
London School of Economics
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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
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SOE overall balances before transfers (% of GDP)
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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
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Gulf SOEs are doing very well:
Profit margins of select GCC SOEs
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Energy-related SOEs
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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
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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 exportoriented 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
Export revenues of listed Saudi
companies in 2010 (%)
72.2%
16.0%
non-petrochemicals
11.8%
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 taxfree 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
BAHRAIN
KUWAIT
OMAN
QATAR
SAUDI ARABIA
UAE
ALGERIA
BRUNEI
EGYPT
INDONESIA
IRAN
LIBYA
NIGERIA
SURINAME
VENEZUELA
nonpopulist
yes
yes
yes
yes
yes
yes
no
yes
no
yes
no
no
yes
yes
no
autonomous
yes
no
yes
yes
yes
yes
yes
yes
yes
yes
no
yes
no
yes
yes
SOEs
attempted
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
successful
SOEs
Y
N
Y
Y
Y
Y
N
N
N
N
N
N
N
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 shortterm 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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