Corporate Governance and Performance of SOEs: Relevance for Iraq
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16 February – Project Working Group, Paris, France Thematic session II: State-Owned Enterprises (SOEs) and Investment Corporate Governance and Performance of SOEs: Relevance for Iraq – Alissa AMICO, Manager, Middle East and North Africa, Corporate Affairs Division, Directorate for Financial and Enterprise Affairs, OECD
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Corporate Governance and Performance of SOEs: Relevance for Iraq
- 1. Corporate Governance and Performance of SOEs: Relevance for Iraq Alissa Amico, Programme Manager, Middle East and North Africa Corporate Affairs Division, OECD 16 February, 2015
- 2. Guidelines on Governance of SOEs • OECD Guidelines on Corporate Governance of SOEs (2005) provide consensus based recommendations • Developed in extensive consultation with member and non member countries – OECD Working Party on State Ownership and Privatisation Practices • Accompany the OECD Principles on Corporate Governance and the Methodology • Address both the state as the owner and the companies’ boards and management • Apply to companies with state ownership, even if not controlling • A legal OECD instrument, aspiration rather than a minimum standard • Currently revised to clarify and provide better guidance
- 3. Priorities in the OECD Guidelines •Ensure a level playing field with the private sector •Reinforce the ownership function within the state administration •Provide equitable treatment of minority shareholders •Improve transparency of SOEs’ objectives and performance •Improve stakeholder relationship •Strengthen and empower SOE boards •New chapters on rationale for state ownership and on competition between SOEs and private companies •Revised guidelines to be released in 2015
- 4. Structure of the OECD Guidelines • Ratonales for state ownership • The state’s role as the owner • State-owned enterprises in the marketplace • Equitable treatment of shareholders and other investors • Stakeholder relations and responsible business • Transparency and disclosure • The responsibilities of the board of directors
- 5. OECD’s work on SOEs in the MENA region • MENA Taskforce on Corporate Governance of SOEs formed in 2008 • Annual roundtables in Paris, Rabat, Cairo, Kuwait, Istanbul to discuss challenges to the exercise of state ownership • Issue of governance and peformance of SOEs continues to be of interest for different reasons across the region • Taskforce supports projects of participating countries – Codes of CG of SOEs created with OECD support in Egypt, Morocco and Tunisia – Workshops to support restructuring and improving competitiveness – Assist in developing training materials (board guidebook for Mumtalakat) • It also works with large MENA SOEs: case studies on leading MENA SOEs (Oman Oil, Du, Ma’aden, etc.)
- 6. MENA state ownership at a glance • Variable number of SOEs across the MENA region – (200 in Tunisia, 150+ in Egypt, 350+ in Morocco), most important in Egypt, Algeria, Syria, Iraq, KSA and the UAE • Aggregate statistics on SOEs scarce but figures are telling – in Saudi Arabia, SOEs make up 50 % of non-oil economy • The extent of state ownership in the region is not declining: – Privatisation activity declining – SWFs play an important role as investors – New SOEs being established or their mandates broadened – Allegations of crony capitalism/fear of private monopolies • Operate in a range of sectors – industrial, services, hydrocarbons, etc • SOEs are charged with a number of commercial and non- commercial objectives
- 7. Ownership and regulation of SOEs • Fragmented ownership, no ownership entity or privatisation entity (except Jordan and Turkey) • Generally subject to the companies law if corporatised except Egypt (Public Business Sector Law) • Less stringent corporate governance rules since many operate as unlisted companies and/or statutory corporations • Separation of ownership and regulation is starting to take place but not in all sectors • Often exempt (explicitely or implicitely) from competition regulation • Strategic SOEs subject to custom governance and operational arrangements
- 8. Major SOE reforms in MENA • Privatisation wave of 1980-1980 (Egypt, Morocco, Tunisia) • Limited consolidation of ownership of SOEs (Mumtalakat in Bahrain, PIF in Saudi Arabia, MOF in Morocco) • Corporatisation of SOEs to ensure they operate as commercial companies • Listing of SOEs equity and debt (STC, Emaar Malls, Du) • Empowering state audit courts, anti-corruption commissions • Introducing sectoral regulators (i.e. telecommunications) • Contractualisation of SOE financial obligations (Morocco, Tunisia) • Giving major SOEs operational autonomy (Saudi Arabia) • Introducing guidelines on SOE relations with banks (Egypt, UAE) and corporate governance guidelines for SOEs
- 9. Challenges in reforming SOEs • National development models depend heavily on SOEs (Algeria, Iraq, UAE, etc.) • SOEs fulfill important socio-economic roles,can be politicised • Existing and new pressure on governments to use SOEs to address social problems • Conflicts of interest in governance of SOEs (political nominations, procurement, role of military, etc.) • Subsidies to SOEs hard to reduce but some examples (i.e. hydocarbon products in Egypt) • Overemployment by SOEs as an exension of the public sector • Privatisation of SOEs resisted by employees and the wider public
- 10. Fiscal consequences of SOEs • Wide variance in the performance of MENA SOEs and their contribution to the economy • Many SOEs generate weak or negative revenues (i.e. Electricité Du Liban) • Non-commercial activities often weaken SOE books; compensation often ad hoc • Managers might not have incentives to ensure profitability • Multiple channels for SOE subsidisation (cheap loans, feedstock, sovereign backing, debt to other SOEs, etc.) • Real cost of SOEs to the public not featured in company books or national figures • Net financial flows to SOEs estimated to be substantial • Dubai crisis exposed risks of reliance on SOE driven growth
- 11. • Establish coordinated or centralised ownership arrangements to improve efficiency of ownership • Establish benchmarks for performance of SOEs • Improve the independence of SOE boards • Review regs and the CG code to see how it is applied • Conduct a review and costing of SOEs’ social objectives • Deal with unperforming SOEs, redundant employees • Review accounting and audit standards for SOEs • Reinforce powers of competition, state audit, and anti corruption authorities • Start with the largest or most “damaging” SOEs (“too big to fail”) Regional priorities going forward
- 12. • SOEs part and parcel of the economic history of Iraq • High impact on the economy: 180 SOEs, 630,000 employees • Common challenges with other MENA countries • Lack of coordination in ownership and regulation • Overemployment of SOEs a burden on efficiency • Weak and politicised boards of directors • Higher than average corruption in SOEs • Reliance on SOEs for delivery of social objectives • SOEs negatively impacting level playing field • Restructuring of SOEs requires institutional capacity • OECD Taskforce and Working Party can provide resources Relevance for Iraq
- 13. • Corporatisation to create SOEs important, as is separation of regulation and ownership • Analyse and seek to reduce subsidies to SOEs a priority for government budget (contractualisation) • Address overemployment challenges (i.e. Turkey model) • Improve the operation of boards (by setting CG standards and giving operational autonomy to SOEs) • Introduce risk management for SOEs (at least large co) • Consider charging large and leading SOEs with developing companies in the value chain • Facilitate investment in SOEs (challenging other than through market exit) Improving efficiency of Iraqi SOEs
- 14. Relevant publications • Transparency and Accountability Guide, 2010 • Boards of Directors of State-Owned Enterprises: An Overview of National Practices, 2013 • Privatisation in the 21st Century: Report on Good Practices, 2009 • SOEs in the Middle East and North Africa: Engines of Development and Competitiveness?(also in Arabic), 2013 • Towards New Arrangements for State Ownership in the Middle East and North Africa (also in Arabic), 2012 • Competitive Neutrality: Maintaining a level playing field between public and private business, May 2012 • The size and sectoral distribution of SOEs in OECD and partner countries, 2014 • Financing State-Owned Enterprises, 2014
- 15. Thank you. Comments, questions? Alissa Amico Project Manager, MENA Corporate Affairs Division alissa.amico@oecd.org +33 1 45 24 83 05
Notes de l'éditeur
- Present myself, structure of the presentation
- Often mirrored in national cg codes – stocktaking of national cg codes 33 codes globally
- Taskforce composition. Iraq participants in the Taskforce
- Recent developments 486 firms nationalised in Tunisia remain largely under state control as there has been no decision on how/when to divest of these stakes some privatisation transactions “unwinded”
- SOEs fulfill important socio-economic roles in almost all MENA countries, across sectors. Privatization has run its course. Egypt and Morocco historically largest privatisers in the region. Privatisation a dirty word now. Existing and new pressure on governments to use SOEs to address social problems. SOEs compete with private sector firms .Competition between SOEs and private companies has implications for private sector development. Egypt Competition review. Variable performance of SOEs charged with non-commercial objectives. Come back to this point later. Ultimate question is whether SOEs are the right and the most cost optimal way to deliver certain services or can they be delivered at a lower cost through a different arrangement? Dubai World events have highlighted risks of state-driven development. On 26 November 2009, Dubai World proposed to delay repayment of its debt, which raised the risk of the largest government default since the Argentine debt restructuring in 2001. at the same type, New type of « strategic » SOE particularly in Gulf such as Emirates Airlines, will come back to that point later. New social pact in some countries of the region. Greater demands on transparency. Tunisian anti corruption commission report. What is development and personal enrichment needs to be clearly differentiated. Often forced to overemploy in order to absorb excess labour force not able to find employment in the private sector. Full extent of employment in the SOE cannot be established slide) due to lack of reliable statistics but figures on overall public sector emloyment telling (next slide). In Kuwait 76 percent of the national labour force in the public sector, 90 of Emirati nationals in the public sector. In Saudi Arabia, the salary and benefits bill for the entire public sector is more than double that of the private sector. IMF estimates that the the MENA region has the highest central government bill in the world, at close to 10% of the GDP whereas 5% globally. This reflects both the size of the public sector and the fact that public sector wages on average 30% higher than private sector wages, whereas globally private 20% higher than public. This is especially so in the Gulf. Ultimately, the problem is not the size of the public sector or SOE sector in terms of employment, but in terms of its efficiency and here the story is variable. Emirates employs 40,000 for 200 planes whereas Kuwait Airways employs about 5000 for 10 planes. Even in NOCs the efficiency of employment is variable (Sonatrach vs Aramco) The issue is that SOE employment is an inefficient way of income redistribution, subject to political manipulation. That said, transitioning to fairer ways to provide social security or create private sector employment is challenging. In addition, privatisation is often contested especially in sectors where employees cannot be relocated or retrained. Some positive examples of this undertaken by the Turkish Privatisation Administration. During the privatisation process started in 2000, the Tukish privatisation administration provided labour redeployment services, on the job training, temp community involvement, etc;
- Against the background of weak supervision, constrained management and public service and employment obligations, it is no surprise that many MENA SOEs generate weak or negative revenues. The imposition of non commercial objectives and price controls make profits hard to attain while soft budget constrains can reduce managerial incentives to aim for profitability in the first place. Case studies and data points to the fact that SOE losses and costs to government are higher in the MENA region than in other region. SOEs are a fiscal drain in Algeria, Tunisia and also in Turkey (until 1990) while in Morocco relatively neutral in terms of the budget. SOE debt in Morocco 13-18 percent of the gDP in 2006-2008. That said, there is a great variance in SOE perfomance. Turkish SOEs produce aggregate profits though receiving some state support, small deficits in Jordan and Morocco but serious deficits in Algeria and Syria. Real cost that SOEs impose on government budgets are not obvious and not featured in co books or govt budgets. Several channels for SOE subsidisation exist – cheap loans, feedstock and other inputs – provision of cheap kerosine to Kuwait Air and Saudi Airlines, sovereign banking - Dubai, cheap debt from SOE banks, debt to other SOEs – Bahrain’s Gulf Air owned 173 million USD to the national oil co by summer 2012 etc.). Net financial flows to SOEs subsantial – show slide but again real cost unknown but substantial. Dubai crisis explosed limits of state support to SOEs. Was not clear what was and was not an SOE and what therefore would be « saved ». For example, Fitch estimates that continuing budget support to SOEs average 10 % of GDP of Abu Dhabi in 2009-2011 whereas it was not close to the same situation as Dubai. Now all local SOEs have to ask for explicit sovereign guarantee to issue debt. In March 2012, UAE SOEs debt stood at 185 billion USD of over 50 percent of the country’s GDP despite it being seen as home to many successful SOEs. Sometimes, a single company can explode the government budget. Electricite du Liban. Systematic determination of the total value of SOE inputs and subsides. Social pact relies on provision of basic goods and services at subsidised prices Petroleum products subject to heavy subsidisation, in both oil importing and exporting countries Price controls on goods/services produced by SOEs Direct transfers and a number of “softer”, often ad-hoc means of subsidisation employed Level playing field in some sectors negatively affected Contractualisation of SOE obligations to ensure adequate compensation and predictability useful
- Multiple options for organising ownership of SOEs 1997 law should be reviewed – profit distribution (board approving board remuneration). 9 board members in each company of which 2 independent, reserve board members, chairman and gm role united by law! Investment profiles in companies need to be prepared by an investment bank or at the minimum by a specialised unit Encouraging SOEs to apply for loans from state banks? Plans to foster investment in SOEs have to be realistic Definition of SOEs important – ministries are not SOEs. Federal and municipal SOEs. 177 SOEs UN count. First introducing restructuring units, then agency for corporatisation 37% of the 633,000 workers of SOEs redundant
- Profitability of SOEs often variable and needs analysis to understand viability, needs for recapitalisation, etc. Asset valuation dept in the min of finance