TRENDS IN STATE CAPITALISM AND SHORT TERM GLOBAL RISKS

Prof. Aldo Musacchio Harvard Business School, Brandeis University and NBER

• Top firms in Fortune Global 500 in 2012

What do the firms in yellow have in common? 25 OUT OF THE LARGEST 100 FIRMS IN THE FORTUNE GLOBAL 500 ARE STATE-OWNED MULTINATIONALS (SOMNCs)

30

25 8

20 Government is a minority 15 shareholder Government is a majority 10 shareholder 17

5

0 SOMNCs among the TOP 100 firms Profitability of state-owned multinationals vs. private firms among the TOP 100 FORTUNE GLOBAL FIRMS, 2012

16 14 14

12

10

8 SOMNCs Private firms 6 5,7 3,44 4 3,19

2

0 Return on assets Operating margin

The REINVENTION of state capitalism means governments are still owners of a large number of SOEs (FIRMS with gov’t as majority owner—OECD)

Total equity value of US$ 1.4 trillion, of which 61% are minority stakes and rest are majority stakes

Source: Christiansen, H. “The size and composition of the SOE sector in OECD countries”, OECD Corporate Governance Working Papers, no 5, 2011. Resilience of SOEs in EM Number of SOEs Num. of firms in with majority control which the federal government has Federal State/local minority ownership Brazil 247 397 China 17,000 150,000 Egypt 57 59 India 217 837 404 Indonesia 142 21 Malaysia 52 28 Mexico 205 Poland 498 691 Russia 7,964 250 1,418 Singapore 20 South Africa 270 Thailand 60 Turkey 74 700 67 Vietnam 1,805 1,559 1,740 NEW VARIETIES OF STATE CAPITALISM (Musacchio and Lazzarini, 2014)

Leviathan as an Leviathan as a Leviathan as a minority Privately- entrepreneur majority investor investor owned (owner/manager) firms • Publicly traded • Partially privatized firms • Full state control and SOEs with (PPFs) ownership of SOEs, improved autonomy with limited autonomy • Minority stakes under and transparency and transparency state-owned holding • State-owned companies (SOHCs)

holding companies • Loans and equity from (SOHCs) state-owned and development banks • Sovereign wealth funds • Other state-controlled funds (e.g. pension funds, life insurance companies). LEVIATHAN AS A MAJORITY INVESTOR

• Large state-owned enterprises are listed in stock exchanges. • They bring in active investors as monitors (pension and mutual funds). • They also have professional management or at least higher- powered incentives (pay-for-performance) compared to traditional SOEs. • Improved corporate governance (external board members, more separation between ownership and control). • Financial transparency (audited financials reported quarterly/semi-annually). Large flagship SOEs now choose BIG 4 auditing firms. • Not all SOEs evolved into this model... Petrobras (Brazil) 1980 vs. 2012

Equity (1980) Total equity (2012) Government controlled Gov’t controls 51% of votes 100% of votes

Fed gov't (29%)

Fed gov't (85%) BNDES (18%)

State gov't Inst inv. (18%) (4%) Municipalities (2%) VC/PE funds (17%) Instit. Inv. (9%) Public (18%) Corporate governance in 30 NOCs Governance and ROA in NOCs with financial transparency Leviathan as a minority investor

• Governments now have a large proportion of their investment in firms through minority positions (w/ or w/o golden shares) • Gov’t outsourcing management and monitoring of managers to private parties • Minority investments can help firms overcome capital constraints • This “model” of state capitalism is not well understood! State-Owned Holding Co’s and SWFs

Governments use new vehicles to manage SOEs, often with professional managers & some degree of autonomy: • Holding co’s/pyramids centralized or by sector (depending on complexity of industry) • Development banks are also used as holding co’s in Korea/Brazil • Sovereign wealth funds also act as SOHCs in Qatar, Malaysia, Singapore, UAE, etc…

Figure 2 The Organization of SOHCs in , 2009

Government of Dubai Ruler of Dubai Government Mohammed bin Rashid

DIFC & Civil Investment Corp of Dubai Dubai Holding Aviation Dept SOHC (ICD) SOHC SOHC GREs Wholly owned by Dubai govt Wholly owned by Dubai govt Wholly owned by ruler

Nakheel Emaar Dubai International Capital Real estate developer Real estate developer Wholly owned by Dubai World 32% owned by ICD, 68% listed Sovereign Wealth Fund

DP World Emirates Group Property subsidiaries (3) Port operator Airline, travel, other Tatweer Sama Dubai Dubai Properties Financial subsidiaries

Sovereign wealth fund (12) TECOM Investments, NBD, Dubai Islamic SOHC - telecom

Other subsidiaries (6) Other subsidiaries (15) Jumeriah Group, hotels & resorts Drydock World, EZ World, ENOC, DUBAL, DUCAB, , Dubai Jeema Mineral Water, MCC, , Limitless Galadari, etc. Dubai Group Fin. services

Source: Adapted from Morgan Stanley Report, Deutsche Bank Report, ThompsonOne, and SWF Institute. We thank Andrew Goodman for putting together this figure.

How do governments align management incentives in SOEs? • China the CCP Central Organization Dept. controls promotions and creates levels/ranks for members (bonus on paper only) • In countries with sophisticated stock markets, executives of SOEs have pay-for-performance compensation schemes • In Gulf countries royal families run SOEs and SWF, but they also invest in SOEs (majority owned) and co-invest with SWFs… performance tied to family wealth

Outcomes of SOE reforms

• Little to no performance gap between SOEs and similar private firms • Improved legitimacy of large SOEs (perceived as efficient/professional) • Firms with minority government/SWF ownership considered solid investments (e.g., SWFs used as landmark investors in IPOs) • SOHCs and SWFs considered LT investors solving market failure in many countries (e.g., Brazil the investment fund BNDESPAR) No performance diff. bet. Hundreds of majority SOEs vs. similar private firms

SOE majority SOE majority .1 .06 .04 .05 .02 0 ROA 0 EBITA/Assets -.05 -.02 -.04 -.1 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

SOE majority SOE majority 1 .2 .1 .5 0 TFP 0 Tobin's q -.1 -.2 -.5 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

SOE majority .5 0 Labor productivity Labor -.5

2000 2002 2004 2006 2008 2010 2012 No performance diff. bet. Hundreds of minority SOEs vs. similar private firms

SOE minority SOE minority .04 .05 .02 0 0 ROA EBITA/Assets -.02 -.05 -.04 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

SOE minority SOE minority 1 .1 .5 0 TFP 0 Tobin's q -.1 -.5 -.2 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

SOE minority .4 .2 0 -.2 -.4 Labor productivity Labor -.6

2000 2002 2004 2006 2008 2010 2012 GLOBAL RISKS IN THE HORIZON

• IT was easy for countries to have a system of state capitalism when commodity prices were high (i.e., oil) and they were facing no binding budget constraint • PROBLEM NOW is how to sustain the model with a binding budget constraint • Can autonomy of SOEs and SWFs be preserved??? Bear scenarios: Big interest rate spikes and EM crises

VOLCKER SHOCK Binding budget constraints and state capitalism • When the cost of capital for governments goes up, the opportunity cost of having a SWF goes up • Are SWFs organized in a way that shields them from political intervention or from pro-cyclical policies? • The same has happened with state-owned enterprises that have been reformed, during severe recessions they cannot fire workers at will and their performance vs. similar private firms opens up a gap • The temptation of the government to intervene increases

SOE majority SOE minority .02 .02 .01 0 0 ROA ROA -.01 -.02 -.02 -.03 -.04 0 .2 .4 .6 .8 0 .2 .4 .6 .8 Propensity score Propensity score

SOE majority SOE minority .05 .02 0 .01 • Performance of 0 -.05 -.01 EBITA/Assets EBITA/Assets SOEs vs. Similar -.02 -.1 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 Propensity score Propensity score private firms

SOE majority SOE minority during a severe .1 .2 0 0 crisis (two years -.1 -.2 Tobin's q Tobin's Tobin's q Tobin's -.2 -.4 of negative -.3 -.6 0 .2 .4 .6 .8 0 .2 .4 .6 .8 Propensity score Propensity score growth)

SOE majority SOE minority

.1 .2 0 0 -.1 TFP TFP • Performance= -.2 -.2 -.3 -.4 ROA, EBIT/Assets, 0 .2 .4 .6 .8 0 .2 .4 .6 .8 Propensity score Propensity score Tobin’s Q, Productivity

SOE majority SOE minority and total factor .2 .1 .1 0 productivity 0 -.1 -.1 -.2 Labor productivity Labor Labor productivity Labor -.2 -.3 0 .2 .4 .6 .8 0 .2 .4 .6 .8 1 Propensity score Propensity score ATTs, BY YEAR: SOE MAJORITY SOE majority SOE majority .1 .06 .04 .05 .02 0 ROA 0 EBITA/Assets -.05 -.02 -.04 -.1 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

SOE majority SOE majority 1 .2 .1 .5 0 TFP 0 Tobin's q -.1 -.2 -.5 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

SOE majority .5 0 Labor productivity Labor -.5

2000 2002 2004 2006 2008 2010 2012 How to isolate SWFs from geo- economic events? • It will be an issue of legitimacy!!! • Governments have to feel it is illegitimate to tap those resources during tough times SWFs need to

• Get clear mandates & financial/operational autonomy • Introduce good corporate governance checks & balances and a certain level of transparency • Professionalize asset management + financial goals (meritocracy & isolation from politics/royal families) • Show returns on foreign investments meet mandates and are responsible (no luxury/flashy purchases) • Invest in infrastructure at home and highlight results • Clarify that it is important to have state-owned investment vehicles to solve market failure, by making good investments at home

In national oil companies, political isolation & more checks and balances leads to more legitimacy and political isolation Statoil Petrobras Pemex (Norway) (Brazil) (Mexico) CEOs/incentives Board (influenced by CEO selected by Board President of Mexico President of Brazil) Do CEOs usually change after No In 3 out of 7 elections Yes presidential elections CEO compensation has pay-for- Yes Yes No performance component Financials/transparency No, some investments need No, some investments Autonomous budget Yes gov't approval need gov't approval

Listed? Yes Yes No

Norwegian national Local pension funds, Black Bondholders & Ex-Im Main institutional investors insurance fund Rock Bank National Carbohydrates Norwegian Petroleum National Oil Agency (ANP), Commission (CNH in Directorate (NPD), reporting linked to the Ministry of Spanish), a decentralized Regulation to the Ministry of Petroleum Mines and Energy. agency linked to the and Energy, de facto However, influenced by the Ministry of Energy independent government (SENER)

Source: Adapted from Pargendler, Musacchio and Lazzarini (forthcoming). Compiled from the companies’ websites and from questionnaires sent to Pemex. Thank you! [email protected]