State-owned enterprises (SOEs) are a major contributor to UAE GDP and employment.
Not being regulated, listed or reliant on markets for capital, some of these SOEs presume that there is no need to have a robust corporate governance structure. This presumption may delay their voluntary, but crucially important, steps to solidify corporate governance with possible negative implications for their longevity and the growth of the economy in general.
According to the Organization for Economic Cooperation and Development (OECD), good corporate governance in unlisted companies, such as SOEs, can greatly enhance business productivity, economic growth and job creation.
There are many reasons why countries decide to have SOEs. Here, SOEs such as Abu Dhabi National Oil Company (Adnoc), Abu Dhabi Water and Electricity Authority (Adwea) and Etisalat are prominent forces in strategic sectors of the economy where the Government wants to play a key role.
In addition, the Government has launched enterprises such as Masdar in the renewables sector, which is critical to the sustainability of the country. This sector is currently not economically attractive to private companies, who mainly look for profit maximisation when choosing projects.
When it comes to the long-term success of the country, the Government is a patient investor. It couples commercial objectives with social objectives that do not pay return on investment in the short-term, but they ensure the country's longevity, especially in meeting the ever-increasing energy demand.
SOEs such as Emirates Aluminium and Emirates Steel are major forces behind the Government's steps to diversify the economy away from hydrocarbons. They take advantage of the readily available cheap feedstock and energy.
All are considered giant national champions and major contributors to the country's manufacturing sector, which accounts for about 16 per cent of UAE GDP.
The SOEs are important sources of the country's economic output and employment, their contribution reaches up to 80 per cent. They employ up to 80 per cent of the country's workforce and contribute up to 80 percent of the country's GDP, according to some estimates.
Their success and sustainability translate into the success and sustainability of the country. A number of studies indicate that a minor enhancement in SOEs efficiency of about 5 per cent could release financial resources up to 5 per cent of the country's GDP, especially when the country's economy is dominated by SOEs.
On the other hand, if they are poorly governed and run, they can unnecessarily increase the costs to the Government and take resources away from other priorities.
According to the IMF, about 92 per cent of Abu Dhabi's total debt maturing last year and this and beyond comes from its SOEs - Dubai's SOE debt accounts for about 60 per cent of its total. The two emirates represent 90 per cent of the UAE economy (Abu Dhabi 60 per cent and Dubai 30 per cent). If SOEs in both emirates do not do well, the whole economy will be in peril.
The IMF mentions corporate governance as a major factor, among others, that contributed to this high debt level. Hence, SOEs' corporate governance is critically important not only to their own sustainability, but more importantly to the sustainability of the country's economy.
As part of its Article IV consultation with its members, the IMF recommends that UAE decision-makers stop funneling money into non-viable SOEs. Essentially, the IMF states that non-viable SOEs cause a huge haemorrhage of public funds, diverting money from other profitable investment opportunities.
There is evidence that the UAE Government is going to put more and stricter conditions on when and how it funds SOEs and their projects, especially now that there are mountains of debt being accumulated by some that are poorly governed.
During periods of low oil prices, the state cannot afford to continuously bail out non-viable SOEs. It is implementing a wide range of projects in a wide range of sectors. All these projects are vying for funds. Hence, the option of tapping into stock markets becomes strong, but it requires solid corporate governance, among other factors, to have a competitive interest rate.
The state no longer gives SOEs a free reign to do whatever they wish. The lessons of the recent financial crisis are still fresh. The state's projects are increasing in number and scope, and all of them are demanding attention and capital. As the state's purse gets tighter and divided among a larger number of projects, SOEs must have the ability to raise money without (or only partially) resorting to the state.
Raising money means that they have to go to capital markets or private creditors, both of which demand higher interest rates, especially when the risk is high.
Corporate governance aspects such as transparency and accountability play a major role in determining the level of risk. Recently some SOEs such as DP World have decided to be listed on stock markets. DP World raised about US$5 billion when it listed 20 per cent of its shares on the Nasdaq Dubai Stock Exchange. In 2011, the company dual-listed on the London Stock Exchange.
Many factors could push a privately owned company to let go of some control and list on stock markets; one major factor is raising funds.
Many studies consider corporate governance among the major reasons why certain countries develop and achieve extraordinary economic growth. Norway is one such country, whose corporate governance is of the highest standards.
Abu Dhabi, in its Economic Vision 2030, explicitly uses Norway as a model to follow. Norway is in many aspects similar to Abu Dhabi. Both are endowed with natural resources and both are grappling with the challenge of making best use of hydrocarbon revenues.
Corporate governance in SOEs is becoming increasingly the focus of the decision-makers of the country. This is why many SOEs have started to proactively take initiatives to improve their corporate governance.
Ebrahim Hashem is a senior adviser in business strategy and corporate governance at an Abu Dhabi-based company. Contact him via twitter @EbrahimHashem
UAE state-owned concerns must show the way forward
The likes of Adnoc and Awea are prominent forces in the UAE economy. But the Government cannot continue funneling money into entities that are not viable.
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