Arab Public Sectors, The New Battlefield

 By Dag Detter and Steffen Hertog  

The streets and squares might be the more visible battlegrounds of the Middle East’s current revolutions. However, it is in the public sector where much of the unrest began.

It was, for example, the striking textile workers of the state-owned Misr Spinning and Weaving textile plant in Mahalla as-Kubra in Egypt who gave the April 6 Youth Movement its name and original impetus in April 2008. It was the late-January resignation of Ahmed Ezz, the steel magnate and chief manipulator of the November 2010 elections, that signaled the first cracks in Hosni Mubarak’s regime, highlighting the negative role of the crony capitalists around his son, Gamal, who enriched themselves through skewed privatization deals. Ezz’s resignation was followed in February by his arrest and that of a number of billionaire ministers close to Gamal, who were alleged to have misappropriated state assets. The regime fell soon afterward.

Mismanaged public sectors have been a pivotal, but scarcely discussed cause of the uneven growth and corruption that have allowed the revolutionary fervor in the region to spread.

Examples of underperforming and corrupt state-owned enterprises across the region abound: Egypt’s textile mills in Mahalla al-Kubra employ a full 24,000 workers and have been run by a dishonest, 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 the sector at below 50 percent capacity utilization. In Syria, more than 250 state-run businesses provide hundreds of thousands of jobs, but more than 95 percent have ended up in the red for many years.

Even in the economically liberal Gulf monarchies, 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 large unlisted Gulf state-owned enterprises. Financial 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 crises as a chance for political and social renewal – for righting past wrongs and negotiating a new social contract. The upheavals do indeed provide opportunities for reform that are otherwise inconceivable during the quotidian grind of normal politics, whether in democratic or authoritarian settings. While much has been said about the new political dispensations that might emerge from the revolutions in Tunisia, Egypt and beyond, less thought has been given to the forms of economic governance the Arab spring might produce.

Within the Organization for Economic Cooperation and Development, a consensus has emerged that transparent and centralized ownership with a clear commercial objective is the most sensible way to manage state-owned enterprises. Centralization 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. For instance, during its pioneering reforms during the late 1990s, Sweden managed to transform its portfolio of state assets and outperformed the local stock market for more than a year.

Several other countries have created National Wealth Funds. Temasek, the National Wealth Fund in Singapore, is the leading international example of success. Bahrain has taken a similar step in the shape of its Mumtalakat holding structure, which was created to consolidate the state’s disparate public holdings in 2006. In that context, the Bahraini government’s recent politicization of the public sector – through a purge of politically active employees in a number of companies – has been all the more regrettable.

In the wake of social revolutions and upheaval, the risk of populism and renewed patronage policies is considerable. However, the political renewal in the Middle East and North Africa can also provide an opening to reshape old social contracts. Old-school patronage through state-owned enterprises 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 such patronage 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 current economic situation in the Middle East and North Africa requires extraordinary measures. Governments responsible for the ownership of commercial assets share the same challenges. None can ever be an ideal owner, yet all are obligated to run state-owned enterprises professionally and do so in the interests of all citizens, however unpopular that may be in some quarters, whether inside the government or out.

In this sense, a regional reform program for state-owned enterprises is a financial and social enterprise with global relevance.

-This commentary was published in The Daily Star on 20/06/2011
-Dag Detter is in independent adviser 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 wrote this commentary for THE DAILY STAR.