Sucheta Dalal :Why state ownership of enterprises will not go away
Sucheta Dalal

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Why state ownership of enterprises will not go away  

May 16, 2011

Some years ago when privatisation became the rage, many people predicted that state-owned firms would eventually be sold off. But that hasn’t happened. Even today, state-owned companies control the majority of resources and business. And they simply don’t make money

 

William Gamble

During the 1990s we saw a major change in the world’s economies. There was a major shift away from command economies and state-owned firms. Privatisation programmes, some successful, some less so, were the rage. Many firms that were sold off in those days have become quite successful, others, in the relentless creative destruction of capitalism, have gone out of business. What many people predicted was that the remaining state-owned firms would eventually be sold off. The reality has been quite different.


China is supposed to be the home of a billion capitalists. According to the National Bureau of Statistics, there are 40 million or so small and medium-size enterprises, which employ at least 75% of China’s workers. They produce 68% of industrial output, are responsible for 68% of China’s exports, 66% of the country’s patent applications and more than 80%
of its new products; but they are definitely second class citizens.


State-owned companies probably make up all of the listed companies. Certainly the largest companies are. The 20 biggest stocks on China’s market include 12 state-owned financial firms and three state-owned energy companies. The financial firms alone make up 28% of the Shanghai Stock Exchange’s market capitalisation. Allowing private companies to list is contrary to the purpose of China’s stock market. State-owned companies anywhere are usually poorly managed. There is no incentive for profit and the managements are usually political hacks. So they often lose money. Allowing them to list gave them access to cheap capital.


Private companies in China are regarded with suspicion. During the recent slowdown, Chinese state-owned banks were required to make massive loans as part of a stimulus package. But this wall of money never went near smaller private businesses. Most went to large state-owned firms or local governments. Less than 10% was allocated to smaller firms.
 
China is hardly alone in the dominance of state-owned firms. Indonesia’s state-owned enterprises make up 40% of the country’s gross domestic product (GDP). Vietnam has the same concentration. According to official figures, the leading state-owned enterprises (SOEs) make up nearly 40% of the GDP.


In Brazil, the two largest companies, oil giant Petrobras and mining company Vale, are both majority-owned by the state and make up 26% of the market capitalisation of the Bovespa. Two large state-owned banks dominate Brazil’s finances. Banco do Brazil is the country’s biggest financial firm, with a fifth of total assets. The National Bank for Economic and Social Development (BNDES) accounts for 40% of the lending.


Despite mass privatisations in the 1990s, the Russian state still owns large sectors of the economy. Federal and regional governments control about 40% of the stock market capitalisation. These include various sectors: banking 64% of the market capitalisation, oil and gas 47%, and utilities 37%. In addition to the partially state-owned listed companies, the Russian state has full control of 19.2% of the manufacturing industry, 15.3% of the fuel production, 11.6% of the metallurgy and 25.7% of the chemical industries. 
 
In India 246 enterprises are owned by the state. They employed almost 1.6 million people in 2008. There are more than 40 public enterprises already listed on India’s stock markets and these account for 37% of sales.


State-owned companies are not just small local companies. The largest corporations anywhere are in emerging markets. The 13 largest energy companies in the world, measured by the reserves they control, are now owned and operated by governments. Collectively, multinational oil companies produce just 10% of the world’s oil and gas reserves. State-owned companies now control more than 75% of all crude oil production.


Governments in emerging markets are not content with just owning the corporations; they feel that they should invest national wealth as well. Rather than returning the wealth to their population, either directly or through improvements in infrastructure, they created Sovereign Wealth Funds. With the exception of the Alaska Permanent Fund and the Norway Government pension fund, these funds are all in emerging markets. Most of them invest oil money, but the notable exception is China and Singapore. Together they control almost $2.5 trillion. They may make up only 2% of the world’s $165 trillion worth of listed securities, but the power is concentrated in a few hands. The funds in emerging markets are neither transparent nor accountable.


The main issue with state-owned enterprises is simply that they don’t make money. There are five incentives and disincentives that require managers of private companies to make a profit and none apply to state-owned enterprises. It is also unlikely that these things will go away as many people hoped. They exist because politicians want them to exist, and politicians never like to give up power unless forced to. Besides gorging on taxpayer dollars, the size of these companies and the lack of restrictions on their operations distort the rest of the markets and that impacts everyone.


(The second part of this commentary will be published next week. The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected].)


-- Sucheta Dalal