State Owned Enterprises in the Global Economy and tgeir role in Development of Growth Strategy of mant Newly Industrialising Economies

1. Sushil Khanna
Indian Institute of Management Calcutta and
University of Washington Bothell

2.  Key player and Several Emerging Economies
 Brazil, China, India, South Africa,
Venezuela and Russia have large State-
Owned Enterprises(SOEs) controlling key
sectors
 Even Developed Economies in Europe like
France, Italy, Finland, Sweden have
substantially large SOEs that dominate
important industries and services
 In many economies like China, they play a
Strategic role and control significant assets
abroad

3.  20% of global investment
 5% of global employment
 50% of GDP in Middle East and North
Africa
 15% of GDP in Africa
 8% of GDP in Latin America
 6% of GDP in Asia

4. Kowalski et al. (2013)

5. Year No of SOEs
Employment
Share
Share by
Revenue
Share by
Assets
Share by
Profits
2005 49 18.40% 8.00% 8.90% 8.20%
2006 54 19.90% 8.80% 9.20% 9.90%
2007 55 19.70% 9.20% 8.80% 10.40%
2008 57 19.90% 10.30% 9.10% 12.00%
2009 69 23.60% 14.50% 15.70% 11.90%
2010 75 24.80% 15.30% 18.80% 9.35
2011 86 27.70% 17.80% 22.20% 16.95
2012 95 29.80% 19.60% 19.30% 22.25
2013 107 30.40% 22.00% 19.70% 23.15
2014 114 24.10% 23.00% 19.90%
Kwaitkowski, 2014-SOEs in Fortune 500

6. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Developed Countries
SOEs 23 19 19 17 21 21 17 16 16 16
private 444 436 432 427 410 404 389 376 360 352
Total 467 455 451 444 431 425 406 392 376 368
SOEs share % 4.9 4.2 4.2 3.8 4.9 4.9 4.2 4.1 4.3 4.3
Developing Countries
SOEs 26 35 36 40 48 54 69 79 91 98
private 7 10 13 16 21 21 25 29 32 34
Total 33 45 49 56 69 75 94 108 123 132
SOEs share
% 78.8 77.8 73.5 71.4 69.6 72 73.4 73.1 74 74.2
Kwaitkowski, 2014 - SOEs in Fortune 500

8.  In 2020 for the first time since Fortune
started publishing Global 500, the Chinese
firms have overtaken US firms
 Of the total SOEs in the Global 500 list
Chinese have 106, while Western European
countries have 13 (8 from France), India has 5
and rest of Asia 7
 Russia and Mexico have 5 SOEs in the list

9.  Many European and Asian SOEs have
investments abroad and are multinational
SOEs
 Chinese, Indian and Brazilian SOEs have been
engaged in resource seeking investments,
while Chinese have also been engaged in
technology related takeovers

10. UNCTAD / IMF

12.  IMF estimates that State-Owned Enterprise (SOE) assets
totalled US$ 45 trillion in 2018, close to 50% of the global
GDP, and calculated the debt of the largest SOEs to be
US$ 7.4 trillion.
 SOEs have a direct bearing on the global economy. The
most systemically important SOEs are the State-Owned
Multinational Enterprises (SOMNEs) since they are
focused on cross-border financing and business.
 https://blogs.imf.org/2020/05/07/state-owned-enterprises-in-the-time-of-covid-
19/

13. ◦ State-owned MNEs are dominant in few
industries, especially petroleum and banking.
◦ The 50 largest multinational SOEs are almost
exclusively in the two main industries, and
many are based in China, though they are
common in Europe and other countries

15. World Bank: 2017

16.  China has three large SOEs in Petroleum
 SINOPEC
 CNP (China national Petroleum)
 CNOOC
 All three are in Fortune 500 list. They have
grown large by acquiring assets abroad

17.  CNPC outbid Petronas, Unocal, and Amoco to win a
controlling interest in Uzen, Kazakhstan’s second
largest oilfield, with reserves of 1.5 billion barrels. In
this deal, CNPC paid an up-front bonus of $52 million
in addition to an immediate investment of $400
million.
 CNPC similarly outbid larger oil companies for two
marginal fields in Venezuela in June 1997. The
company acquired the Caracoles field for $241 million
and the Intercampo unit for $118 million.

18.  Eximbank agreed to offer Sinopec a loan credit of $9.7
billion in January 2002 and a $14.6 billion loan to CNPC in
August 2003, to support their global expansion.

 The Industrial and Construction Bank of China (ICBC)
offered a long-term soft loan of $7 billion to China National
Offshore Oil Corporation (CNOOC) in support of its attempt
to acquire UNOCAL

19.  In Africa, SOEs are estimated to represent 15
per cent of the gross domestic product (GDP)
 In the Middle East and North Africa, they
make up more than 50 per cent of GDP.
 SOEs also play a significant role in the
economies of major emerging markets such
as Brazil, China, India, Indonesia and Russia

20. 50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Turnover / GDP
VA / GDP

21. 60%
50%
40%
30%
20%
10%
0%

22. 14%
12%
10%
8%
6%
4%
2%
0%

23.  China has several thousand SOEs, owned by
Central, Provincial and Local governments
and municipalities
 SOEs also provided schools, hospitals and
other social services to local communities;
fluid boundaries
 Financed by government

24.  From 1984, SOEs given financial autonomy.
 4 large banks established
 No budgetary support to SOEs, who will now
be financed by banks
 Responsibility System – Given more
autonomy if they turned up agreed taxes to
government
 (Some of these reforms undermined by
powerful local governments)

25.  China’s industrial growth surge facilitated by
market reforms, where new players played
leading role
 Increasing Role of non-SOEs, like TVEs and
other forms of collectively owned enterprises
 Entry of Foreign Owned or JV Enterprises
 Entry of Domestic Private Owned Enterprises
 Among all transition economies China is the
slowest in starting privatization
 Privatization started after almost twenty
years of reforms when private sector very
large

26.  1993-2001: Policy “Keeping Large and Letting
go of small”
 Sale to manager and privatisation of small units
 Restructuring of SOEs – contraction ends
 2008- present : Active Enlargement,
Globalisation, Asset Acquisition Abroad
 Banks and NPAs

27.  When the reform started in 1978 more than 4/5 of the
firms in China are state owned
◦ Most of the SOEs were regional ones controlled by city
governments
 Full privatization of SOEs did not start until the mid
1990s when the economy had a fairly high growth rate
◦ Partial privatization occurred earlier
 Chinese privatization is the largest scale privatization in
the world
◦ 92,493 initially state-owned firms had been privatized with total
assets of 11.4 trillion RMB (inferred from our sample)
◦ 62.8% of the SOEs and COEs were privatized by the end of 2004
◦ The total number of SOEs in China is reduced from 118,000 in
1995 to 27,000 in 2005 (NSB, 2006)
◦ In 2005, 17% of the firms in China are state owned (NSB, 2006)

28.  Privatization in China was initiated by city
governments when central government
discouraged privatization
◦ Later endorsed and promoted nationwide by the central
government
 Why should city governments privatize?
 Conflicting incentives of city governments weighing
privatization
◦ For privatization: benefits of abandoning fiscal burdens
◦ Against privatization: benefits of controlling firms
 Competing views on China’s privatization
◦ It was a disguised corruption to steal state assets
(systematic evidence?)
◦ It improved corporate governance and performance (biased
sample?

29. Year
Ltd.
Liability
Corp.
Dom.
PVT
Wholly
Forgn.
Partly
Forgn.
Share-
holdng
Mixed
State-
owned
2004 44 20.8 11.1 4.5 7.3 9.3 3
2007 36.9 23.6 18.3 5.2 5.2 7.8 3.1
2010 38 24.3 21.1 3.3 3.3 6.7 3.4

30.  Since 1956 Industrial Leap for SOEs
 SOEs invest and dominate key sectors
Control Commanding heights of economy
◦ energy, petroleum, minerals, atomic energy
◦ metals, (steel, aluminum, copper etc)
◦ capital goods, heavy engineering
 Private sector to focus on consumer goods,
intermediates (cement etc)

31.  Make India Self Reliant (import
substitution)
 Build Infrastructure
 Generate Surpluses for Further
Investment
 Prevent Concentration of Economic
Power
 Develop Backward Regions

32.  Public sector main investor and site of capital
accumulation
 Till 1990, accounted for 50 per cent of
investment in the economy
 Household sector provides 70 per cent of
savings and 30-36 per cent of investment
 Private Corporate sector marginal had low
savings (10-15 per cent) and accounted for
15-20 of national investment.
 SOEs come to dominate several sectors of
industry

33.  New Industrial Policy opens up all sectors to
private and FDI investment(except defence &
atomic energy)
 Sick SOEs to be referred to BIFR and
budgetary support to be withdrawn
 Special support to lay off workers (about
450,000 laid off)
 Disinvest minority shared to stock market
investors while retaining majority control
 Promise of Greater Autonomy

34.  Clamour for complete privatisation by
advisors, chambers of commerce & World
Bank
 Mobilisation by SOE workers and other
constituents
 SOE managers demand greater autonomy in
setting prices, choosing investment areas and
reduced interference by controlling ministries

35.  Though SOEs accounted for substantial
investment and dominated all key sectors
(petroleum, power generation, mining, steel and
aluminium, heavy engineering, capital goods
etc) , only a small number
 At the Federal level they were less than 240
enterprises, (another 60 private sector
failed/closed enterprises nationalized in 1970s)
 State/Provincial governments had another 300
units, but much smaller in asset size

36.  The centrist Congress government
believed in reforms and autonomy to
managers in SOEs, and listed several
enterprises on the stock market.
 The right wing BJP government (1998-
2004) attempted large scale
privatisation, but managed to sell
about a dozen firms, before it was
defeated in elections

39.  ROA doubles by 2005
 Total profits & Dividends up by 4 times
 Retained profits up by 8 times
 Largest single investor group in industry and
services
 Their share of GFCF is higher at 10 per cent of
GDP (comparable to entire private corp sector)

40.  Even if SOEs have done better their historical
past, how do they measure up against private
corporate sector?
 Is their return on capital comparable ?

41.  To Compare Return on capital Employed, we
use PROWESS data base and select all private
and SOEs with income / revenue over Rs. 1bn.
(Rs. 100 crores)
 Separate analysis for manufacturing and non-
financial services
 We aggregated the profit after tax and capital
employed to calculate the average return on
return on capital employed and return on
assets for the public and private sectors in the
service and manufacturing industry.

42. 0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Manufacturing
PVT ROCE SOE ROCE

43. -4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Services
PVT ROCE SOE ROCE

44.  Governance in state-owned enterprises stem
from insufficient market incentives and
disciplines
 The Principal has several competing
objectives, which change with changing
power coalitions
◦ State monitoring is diffused and at many levels
◦ Bureaucrats lack incentive to monitor SOEs since
they do not gain from it

45.  SOEs can provide efficient, reliable and
affordable critical products and services in key
sectors
◦ E.g. power generation; water supply, transport, oil and
gas and hospitals.
 They enable expensive and expansive
investments that are often beyond the private
sector’s capacity.
 Thus, well-run SOEs can contribute to health,
welfare, education and infrastructure
improvements, poverty reduction and inclusive
economic growth

46.  Charged with making commercial driven
decisions, when they are made responsible for
delivering products or services models that are
inherently not commercial or profit oriented,
creates tensions and problems.
◦ E.g. raising utility rates may make sense from an
economic perspective but doing so could create
additional hardships for the poor / farmers
◦ Or consider the case of an SOE that operates in the
red. To continue providing needed services – say
clean water or cheap diagnostic services – the
company may require additional financing from the
state.
◦ But propping up the SOE could constrain an already
tight national budget, meaning fewer resources