Revolutions provide a catalyst for change

Mismanaged public sector companies played a big role in sparking the Arab revolutions. Now the region needs to reform them, argue Dan Detter and Steffen Hertog

The striking textile workers of Misr Spinning and Weaving in 2008 provided an impetus to reforms in Egypt. Asmaa Waguih / AP Photo

The streets and squares might be the visible battleground of the Middle East's revolutions, but much of the unrest fermented in the public sector.

It was the striking textile workers of the state-owned Misr Spinning and Weaving plant in Mahalla el 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 elections last November, that signalled the first cracks in the regime in which the crony capitalists around Gamal Mubarak, enriched through skewed privatisation deals, were losing support.

Mr Ezz's resignation was followed in February by his arrest and that of a number of billionaire ministers close to Gamal Mubarak over allegations they misappropriated state assets. The regime of Gamal Mubarak's father, Hosni, 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) abound: Egypt's textile mills in Mahalla el Kubra employ 24,000 workers and have been run by a corrupt, state-appointed senior management that refused to pay workers their bonuses and condoned widespread abuse.

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 ended up in the red for many years.

Even in economically liberal Gulf monarchies, state ownership accounts for almost a third of all assets listed on local bourses, with a total value of US$182 billion (Dh668.49bn) last September - and this does not account for the large unlisted Gulf SOEs.

Loss-making albatrosses such as Bahrain's Gulf Air or Kuwait Airways weigh heavily on state budgets.

Crises and revolutions provide opportunities for reform that are inconceivable in the daily grind of normal politics.

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 that the Arab Spring might produce.

Within the Organisation for Economic Co-operation and Development, 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; 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 parties properly accountable. 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 in Singapore 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. All across the region, the cries for new public jobs and subsidies are growing louder. This is dangerous.

But political renewal in the region also offers a chance to reshape the old social contract. Old-school patronage through SOEs is doomed to fail: 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 it opens the door for manipulation, undermines national competitiveness and compromises the fiscal balance.

The current revolutionary moment provides a window of opportunity. The economic situation 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 in the interests of all citizens, however unpopular that may to be in some quarters.

Dag Detter is an independent adviser and state asset specialist. He is the former president of the Stattum, the Swedish government holding company, 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