GCC state-owned enterprises successful business models
Sabic, Aramco and Emirates airlines are all successful state-owned entities (SOEs) from the GCC region with outstanding contribution to the local economy. SOE structures achieve a wide variety of objectives — protection of national interests, restriction of foreign ownership, augment the private sector and fill in the gaps left by them. The entities that we mentioned earlier have been champions of the local economy in their own right and are commercially profitable ventures.
What makes them so successful?
Style of management
Higher independence in the decision making process with very little bureaucratic involvement is often a key factor that determines the performance of the SOEs. Saudi Aramco and Sabic are two state-owned entities that follow a style of management that is largely seen as nimble, transparent, highly efficient and having a large degree of operational freedom.
Sabic follows a recruitment system that is based on merit which itself is stark contrast to what is followed in rest of Saudi Arabia. 85 per cent of Sabic’s Saudi-based employees are Saudi nationals, and its workforce relative to its sales volume is considerably smaller than that of its international rivals which stands as a testimony to its efficiency.
Saudi Aramco, one of the crown jewels of the Saudi economy, has enjoyed high degree of operational autonomy ever since its nationalisation in the 1970s. Its transition from a private enterprise to a government owned one was gradual, well thought out process and was completed through a series of strategic share-buying. This legacy of Aramco has helped retain much of the managerial structure and operational habits of its professional past.
Emirates has enjoyed significant managerial autonomy and a clear commercial mandate. As a result the company has been consistently profitable since its creation in 1985, most recently generating annual net profits of $364 million in the first half of 2016-17. Despite the tough operating environment, the company has been able to maintain healthy gross margin and EBITDA margin over the last few years. Emirates airlines success has been replicated by others in the region
Multi-stakeholder benefit approach
Emirates airlines is a prime-example of how market-oriented and a stakeholder benefitting approach has transformed the local economy. Such an approach has made Emirates a stand-out performer in the region and one of the very few examples of the “network effects”, a phenomenon whereby a product or service gains additional value as more people use it, has been captured by the company.
Another example is that of Sabic. Sabic’s agreement to sell its feedstock to local companies lead to the creation and development of the entire Saudi plastics sector. Sabic feedstock has also allowed a large and wholly private Saudi plastics industry to emerge, with more than 800 companies and series of JVs in the sector.
Market-oriented approach and outward acquisitions
These three entities have a common clear market-oriented mandate and inorganic acquisition strategy.
While oil prices are internationally determined, Saudi Aramco does have some pricing power, owing to its size, and could offer discounts and charge premiums as per the requirements of the market. It has also been involved in a series of acquisitions in the US and elsewhere. In 2016, it acquired Novomer’s polyol business and associated technologies aimed at improving its downstream offerings and more recently it acquired the largest oil refinery in the US, Port Author, for a sum of $2.2 billion.
Sabic has managed to stay profitable with its EBITDA margin remaining consistently above 30 per cent in the past fifteen years even while the revenues dropped recently. Sabic has pursued a global expansion strategy since 2002, acquiring aging European assets such as the Dutch DSM Petrochemicals (€2.2 billion in 2002) and the UK’s Huntsman Petrochemicals ($700 million in 2006). In 2007, Sabic moved downstream with its $11.6 billion acquisition of GE Plastics which it later sold in 2016. More recently it acquired Netherlands based Fibre Reinforced Thermoplastics. Tie-ups with other regional carriers has helped Emirates to a large extent, its partnership with Qantas and Jet Blue has brought more tourists to the country. Emirates’ bilateral codeshare agreement with Jet Blue, helps passengers to connect to over 60 cities served by JetBlue in the US.
Conclusion
The corporate SOE model in the GCC region is lightly governed and has minimal oversight from the government. Other examples of successful stories in the region include Bahrain’s Alba, Dubai’s Dubal and Abu Dhabi’s General Holding company. The success of these SOEs in the GCC region shows that while natural and capital endowments such as funding from the state, loan guarantees and cheap energy might be necessary for successful industries, they are by no means a pre-condition for success. Core conditions for success of SOEs include formal and informal governance structures, stakeholder oriented approach and clear commercial mandate.
Finally, while large scale government ownership is beneficial for enterprises that help to further social outcomes, provide physical infrastructure, and ensure stability of jobs; going ahead, SOE’s should avoid competing unfairly in markets and wean itself for greater participation by private sector for efficient delivery of goods and services. With oil prices being lower, GCC governments could divest their ownership stake and accelerate privatisation programme. Marmore’s GCC Institutional Investor series elaborates on these aspects and provides full coverage of the SOEs in the region.