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Evolution of SOE governance in the Gulf [Banker Middle East]
(Banker Middle East Via Acquire Media NewsEdge) STANDING OUT
Although the Gulf has seen its share of white elephants and failed investments, in comparison with the wider region and the developing world in general, the region stands out in having produced a number of profitable and, by most accounts, well-run public enterprises in a number of strategic industries.
Players like the Saudi Basic Industries Corporation (SABIC), Emirates Airlines, Dubal and Etisalat have managed to make their mark not only domestically, but also in international product and service markets, the OECD said in the report.
In line with OECD principles, successful Gulf SOEs are insulated from politics and operate with clear mandates. Lines of command are clear, and most of the successful public enterprises are protected from the kinds of bureaucratic interventions into operational management that have brought public sectors to their knees in other MENA countries.
The GCC SOE story shows that the absence of conventional corporate governance mechanisms does not preclude good SOE performance or political accountability while, conversely, the formal presence of such mechanisms does not guarantee good performance. "Sometimes informal politics and ingenuous incentive setting are as important as formal governance structures," the author wrote.
It is generally accepted that in the long run, all SOEs should be centrally owned, publicly listed, independently regulated and supervised by independent boards.
State-owned enterprises (SOEs) in the MENA region have historically been and remain significant in terms of their contribution to the economic value added, employment and provision of vital services, the Organisation for Economic and Co-operation and Development (OECD) said in a report recently.
In the MENA region, SOEs operate across a wide range of sectors in the region - in hydrocarbons, banking and construction, as well as network industries. And despite the privatisations carried out during the past 20 years, the role of the state in Arab economies has not declined and indeed in many ways has increased, the report reflected, noting the growth of oil and gas SOEs, sovereign wealth funds and infrastructure development projects, often carried out with the involvement of the state.
In the OECD corporate governance report, Steffen Hertog, lecturer in political science at the London School of Economics writes that the size and prominence of Gulf SOEs can be explained by the availability of large capital surpluses that have made it easier to establish and maintain public enterprise. "But there is also a genuinely different perception of public industries in the Gulf, many of which are seen as the best run national companies and the most attractive employers," he said.
In a poll that Ernst & Young conducted in 24 countries in 2010, 86 per cent of Saudis agreed that big industry should remain in Government hands - more than in any other country. Saudis also topped the list in agreeing that SOEs deliver better services and that SOE managers were better than their counterparts in the private sector (Ernst &Young, 2010)
"In the short- to medium term, however, much of this might not be politically feasible or, perhaps worse, could be implemented in a perfunctory way," said Hertog.
EVOLUTION OF SOE GOVERNANCE IN THE GULF
Gulf SOEs also increasingly seek corporate finance in international markets, not only through bank loans but also through the issuance of corporate bonds, which requires at least one-off disclosures even from unlisted companies. In fact, during the crisis of 2008-2009, SOEs were practically the only entities active on regional bond markets. Dubai SOEs in particular, which since 2008 have had less generous financial backing from their Government, have had to divulge important bits of previously unavailable corporate information to international investors, forcing SOEs to overcome their penchant for secrecy.
In several arguably more important ways, GCC SOEs continue to stand apart. "First, and most problematically, most of them are not subject to effective competition regulation. In some sectors - for example, aerospace or renewable energy - this is not yet an issue, as SOEs stand alone as large scale investors, while private sector interest in new ventures is muted at best," the author wrote.
In other sectors, like large scale tourism projects, heavy industry or aviation, SOEs started out as the only players in town but have now been joined by an active stratum of private investors inspired by the successes of public industry.
While the GCC experience of state- driven diversification cannot be easily reproduced wholesale in the MENA region, it provides valuable insights about institutional conditions of SOE success that go beyond formal corporate governance precepts.
The latter are important, but they often need to be supplemented with design principles and "tweaks" that take into account the local political context and institutional limitations. "The success of Gulf-based state- owned enterprises can, to an extent, be explained by their adherence to some good corporate governance practices, but also to highlight that the way these principles have been implemented is often quite different than in other jurisdictions," the author concludes.
MENA MARKETS
Corporate governance frameworks in the Middle East and North Africa have witnessed significant transformation over the last decade. Today, almost all countries in the region have a number of institutions charged with promoting
the corporate governance agenda through providing training to directors, conducting corporate governance studies and supporting other national initiatives in this area.
Over the past two decades, the landscape of the stock exchange industry all over the world has changed dramatically. In many developed and emerging markets, exchanges have demutualised, self-listed, or merged with domestic and foreign markets.
Recent years have witnessed the rise of transatlantic markets such as the likes of NYSE Euronext, and at least in Europe and North America, the rapid rise of alternative trading platforms, dark pools, and greater competition leading to increasing pressure on the traditional business model of exchanges. These trends have not for the most part been mirrored in the Middle East and North African markets.
In OECD's latest report, What role for MENA Stock Exchanges in Corporate Governance Commissioned by the Taskforce of MENA Stock Exchanges for Corporate Governance, which formed in 2011, it lists the developments affecting stock exchanges in the region, highlighting relevant examples of exchanges' contribution to better governance of listed companies and some ongoing challenges for exchanges and securities regulators. The paper will serve as a basis of a final report of the Taskforce, due to be published by the end of 2012.
A WINDOW OF OPPORTUNITY
In looking at the role of exchanges in corporate governance, it is important to keep in mind the diversity in corporate governance frameworks that have emerged worldwide.
While markets in the US have followed a model with numerous governance provisions being incorporated in the listing rules, effectively making them mandatory, most European markets have followed a comply-or-explain model, encouraged by recommendations of the European Commission.
Most exchanges in the MENA region find themselves slightly outside this continuum, considering that the majority of corporate governance codes in the region are voluntary.
Nonetheless, with the move towards comply-or-explain codes in a number of MENA countries, exchanges in the region face a window of opportunity to play a more active role in promoting good governance practices among existing and prospective issuers.
Even in markets where codes or guidelines are voluntary, exchanges could review and revise their listing standards as appropriate.
In addition, compliance with existing securities and company laws and regulations is an imperative regardless of the prevailing institutional framework and of the division of responsibilities between the stock exchange and the securities regulator.
An overwhelming number of responses to an OECD Questionnaire point to the willingness of exchanges to play a more active role in this area. Considering that the majority of stock exchanges in the region are state-owned, they are in principle well positioned to take an active role in terms of the regulatory, monitoring and enforcement functions.
At least in theory, it appears that the potential for conflicts of interest in the administration of the regulatory function of exchanges - most of which are operating as not- for-profit bodies - is rather minimal.
According to questionnaire responses received to date and featured in the report, most exchanges in the region, with the exception of NASDAQ Dubai, the Egyptian Exchange, and the Muscat Securities Market do not feature prescriptive corporate governance requirements in their listing requirements.
However, as regional exchanges compete for listings with international marketplaces such as the London Stock Exchange where some of the region's largest companies are listed, their interest is not in a regulatory race to the bottom. On the contrary, their interest is in a race to the top; at least as far as the top listing tiers are concerned. Thus, at least for a small, but arguably growing segment of MENA companies, tighter listing requirements do not appear as a deterrent in the listing decision.
The OECD is a unique forum where governments work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. ?BME
Thirty two of the top 100 listed companies in the MENA region are SOEs. A full 29 of these are based in the Gulf Cooperation Council (GCC).
STATE-OWNED ENTERPRISES AMONG 100 LARGEST LISTED MENA COMPANIES
Rank in Top 100____Sector_____Market Capitalisation ($m)
1 Saudi Basic Industries Corporation (KSA)_Petrochemicals70 799
3 Saudi Telecom Company (KSA_Telecoms 23 520
4 Etisalat (UAE) _Telecoms 23 188
6 Zain Group (Kuwait) _Telecoms 17 121
7 Industries Qatar (Qatar) _Conglomerate 16 413
10 Saudi Electricity Company (KSA) _Utilities13 555
12 Qatar National Bank _Financial services 12 770
13 Riyad Bank (KSA) _Financial services 11 280
16 Saudi Arabian Fertilizer Company _Petrochemicals 9 400
20 Etihad Etisalat Company (KSA) _Telecoms 8 587
Source: OECD
The success of Gulf-based state- owned enterprises can, to an extent, be explained by their adherence to some good corporate governance practices, but also to highlight that the way these principles have been implemented is often quite different than in other jurisdictions
As regional exchanges compete for listings with international marketplaces such as the London Stock Exchange where some of the region's largest companies are listed, their interest is not in a regulatory race to the bottom. On the contrary, their interest is in a race to the top.
OECD Reports available here http://www.oecd.org/daf/corporateaffairs/48897794.pdf and http://www.oecd-ilibrary.org/ docserver/download/fulltext/2612021e.pdf expires=1346571386&id=id&accname=guest&checksum=508D44929EC9DC91 C6B714F0B87299F3
(c) 2012 CPI Financial. All rights reserved. Provided by Syndigate.info an Albawaba.com company
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