Wednesday, May 11, 2011

Arab Public Sector After Revolution

By Dag Detter and Steffen Hertog 
This commentary was published in The Jordan Times on 11/05/2011 

The streets and squares might be the visible battleground of the region’s revolutions, but it is in the public sector where much of this unrest fermented.

It was the striking textile workers of the state-owned Misr Spinning and Weaving textile plant in Mahalla Al Kubra in Egypt that gave the April 6 Youth Movement its name and original impetus in April 2008. It was the late January resignation of Ahmed Ezz, steel magnate and chief manipulator of the November 2010 elections, which signalled first cracks in the regime in which the crony capitalists around president Hosni Mubarak’s son Gamal, enriched through skewed privatisation deals, were losing support. Ezz’ resignation was followed in February 2011 by his arrest and that of a number of billionaire ministers close to Gamal, alleged to have misappropriated state assets. The regime fell soon afterwards.

Mismanaged public sectors have been a pivotal, but scarcely discussed cause of the uneven growth and corruption that have allowed the revolutionary fervour in the region to spread.
Examples of underperforming and corrupt state-owned enterprises (SOEs) across the region abound: Egypt’s textile mills in Mahalla Al Kubra employ a full 24,000 workers and were run by a corrupt, state-appointed senior management that refused to pay workers their bonuses and condoned widespread abuse on the shop floor.

In Algeria, the country’s elite has routinely used public industry as a tool of patronage and enrichment, while running it at below 50 per cent capacity utilisation. In Syria, more than 250 state-run businesses provide hundreds of thousands of jobs, but more than 95 per cent of them have been in the red for many years. Even in economically liberal Gulf countries, state ownership accounts for almost a third of all assets listed on local bourses, with a total value of $182 billion in September 2010 - and this does not account for the large unlisted Gulf SOEs. Loss-making albatrosses like Bahrain’s Gulf Air or Kuwait Airways weigh heavily on state budgets.

Reformers and revolutionaries in the Arab world look to the current crisis as a chance for political and social renewal, for righting past wrongs and negotiating a new social contract. Crises and revolutions do indeed provide opportunities for reform that are inconceivable in the quotidian grind of normal politics, both democratic and authoritarian.

While much has been said about the new political dispensations that might emerge from the revolutions in Tunisia, Egypt and beyond, less has been given to the forms of economic governance that the Arab spring might produce.

Within the Organisation for Economic Cooperation and Development (OECD), a consensus has emerged that transparent and centralised ownership function with a clear commercial objective is the most sensible way to manage SOEs. Centralisation enables not only the containment of inherent conflicts of interest between political and industrial imperatives, it also allows the introduction of professional corporate governance skills and independent boards of directors, preventing political interference in the day-to-day running of commercial operations.

A governance and ownership structure, or National Wealth Fund, can hold all relevant actors properly accountable for their success or their failure.

Professionally managed National Wealth Funds have created value for decades internationally, with a concept that has borrowed many features from the private equity approach.

Sweden managed to transform its portfolio of state assets and outperformed the local stock market for more than a year during its pioneering reforms in the late 1990s. Several countries have created National Wealth Funds with Temasek, the National Wealth Fund in Singapore, as the leading international example. Bahrain has taken a similar step in the shape of its Mumtalakat holding structure, created to consolidate the state’s disparate public holdings in 2006. The Bahraini government’s recent politicisation of the public sector - through a purge of politically active employees in a number of companies - is all the more regrettable.

In the wake of social revolutions and upheaval, the risk of populism and renewed patronage policies is considerable. The political renewal in MENA can also provide the chance to reshape the old social contract. Old-school patronage through SOEs has failed. At least in the more populous countries, it is too thin to tie people politically to the old order or to provide rewarding employment; at the same time, it opens the door for manipulation, undermines national competitiveness and compromises the fiscal balance.

The current revolutionary moment provides a window of opportunity that is too precious to be missed. The present economic situation in the region requires extraordinary measures. Governments responsible for the ownership of commercial assets share the same challenge. None can ever be an ideal owner, yet it should be incumbent on all to run SOEs professionally and do so in the interests of all citizens, however unpopular that may to be in some quarters, inside and outside of a government.

In this sense, a regional reform programme for its SOEs is both a financial and social enterprise with global relevance.

Dag Detter is an independent advisor and state asset specialist. He is the former president of the Swedish government holding company Stattum and the government director of state-owned enterprises. Steffen Hertog is a lecturer at the London School of Economics and the author of “Princes, Brokers and Bureaucrats: Oil and the State in Saudi Arabia”. They contributed this article to The Jordan Times.

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