NASSAU, Bahamas, July 7, 2020

Deltec International Group today announces an update on the status of state-owned enterprises (SOEs). SOEs exist when governments deem them necessary for their respective economies or when companies owned by private shareholders cannot meet the demands of the public. Government control is typically maintained for one of three reasons:

1. There is a natural monopoly. Saudi Aramco, which has 76,000 employees and whose majority shareholder is the Kingdom of Saudi Arabia, is an SOE that was valued at $1.7 trillion on 11 Dec., 2019. Saudi Arabia holds 16.15% of the world’s oil reserves.
2. The SOE provides a vital utility to the public. South Africa’s Eskom provides electricity but is struggling to pay the interest on its $31 billion debt.
3. The SOE is a major employer. China National Petroleum Corporation employs 1.4 million people and is ranked fourth on Fortune’s Global 500.

Regardless of whether an SOE is a proven success or failure, it is generally assumed to be inefficient, mismanaged and/or corrupt due to the lack of an inherent need to generate an attractive return on equity (ie an explanation as to the benefits of investing in it). In 2005, the Organization for Economic Cooperation and Development (OECD) published guidelines for effective corporate governance; in 2019, they published further guidelines dedicated to fighting corruption and maintaining integrity. There are clear SOE success stories, such as Saudi Aramco, but the trend is to privatise, transferring all or partial ownership from the public to the private sector.

Governments worldwide earned $1.2 trillion from privatising over the five-year period between 2012 and 2016, an increase from the $1.1 trillion earned in the 10-year period between 1999 and 2008. In 2008, the first 25 members of the European Union earned over half of all privatisation revenues, while in 2016 they represented 14%. China alone recorded $148 billion in revenues for 2016. Looking further at the initial public offering (more on this below) market of the shares of private and public companies for 2019 and Q1 2020, we noted 1,350 deals collectively raising $226.5 billion. Some of these include:

Emerging economies (e.g. Saudi Arabia, China, Thailand) are taking over the privatisation wave, which began in earnest in the 1980s. Between 1990 and 2006, the New York Stock Exchange (NYSE) alone recorded 87 privatisations from 30 countries. Of these, 69% originated in similar emerging markets, with most in the following sectors: telecom, oil and gas, utilities, transportation and mining.

Privatisation, therefore, reflects the overall growth of an economy. It speaks to how often a government can trust a private company to manage a key facet of national growth and the public’s well-being. How educated or experienced are the managers? How active is the local stock market?

Because once in private hands, the virtue of the financial disclosures necessary for selling to retail investors on exchanges like the NYSE prompts managers and employees to work with much greater efficiency. If the disclosures are not attractive to investors, companies may fail. SOEs possess an implicit ‘bailout’ option, but private companies do not. We can see the end result by comparing the two largest developed economies against the two largest within Africa.

*Gross National Income

Source: The World Bank, United Nations Development Programme

So what role exactly does privatisation serve in the transformation of emerging to developed? What makes it necessary? Simply put, it creates a culture of integrity and motivation, eliminates bureaucracy, improves the fiscal budget or attracts foreign investors. Companies can have one of these reasons or, often, all four.

Integrity comes from employee and manager motivation. They feel their success is tied to the success of the company. A key case study is the UK’s Royal Mail, which during its privatisation, created an employee share program that enabled company employees to retain at least 10% ownership of the company.

The UK also views privatisation as a strong eliminator of bureaucracy, frequently reviewing all SOEs for the purpose of determining the viability of privatisation and reducing their fiscal deficit. Germany follows an official policy, clearly establishing in writing that an SOE shall be privatised if it cannot abide by good corporate governance and cannot adequately justify the need for government resources. The two leading economies of Europe by GDP both strongly prefer companies to be under the scrutiny of retail and institutional investors rather than the state.

For Africa, the solution is creating access to foreign investors, as is the case with developed economies. In other words, list capable SOEs in the world’s most active stock exchanges through initial public offerings (IPOs) or global depositary receipts (GDRs). An IPO is how it sounds – the first offering of a company’s shares to the investing public. A GDR is a bank certificate representing shares of a foreign company but traded locally like a domestic stock. American depositary receipts (ADRs) are GDRs designed for US stock exchanges.

There were 165 IPOs in the USA in 2019 versus nine across Africa’s entire economy. In Q1 2020, there were 235 IPOs worldwide despite COVID-19. With depositary receipts, the top 10 institutional investors held over $272 billion at the end of 2019 (according to Citibank). And China Pacific Insurance just recently launched GDRs listed on the Shanghai, Hong Kong and London exchanges simultaneously, which has much more of a “wow” effect when remembering that China is still technically a developing economy.

In fact, the Communist Party of China adopted a policy of privatisation in 1997 so as to divest the small SOEs racking up losses. By 2007, the number of SOEs fell by more than half to 116,000 from 1998’s 238,000. Not only did this alleviate the country’s fiscal budget, but those former SOEs received much greater flexibility to make decisions and stay afloat without fear of government intervention.

China’s rising Human Development Index reflects consistent improvements in life expectancy, access to education and standard of living (with a 2018 GNI per capita of 15,320 PPP against 1990’s 980). The 2018 index figure of 0.758 is steadily approaching 0.80, the threshold which describes much of Europe.

Going forward, China’s age-old slogan concerning SEOs of ‘Grasp the Large, Let Go of the Small’ serves as a model for the rest of the emerging economies, Africa included. For China’s remaining large SOEs, the government delineated between two categories: commercial or public service. The latter would receive preference for state resources, while those operating in competitive markets would be encouraged to perform like private businesses.

Within Africa, of particular importance is the nation of Angola, which is planning to sell 30% of Endiama EP’s shares to the investing public in 2022 – amid an overall plan to privatise 195 companies or assets by the same year. Endiama is the national diamond company of Angola, which is the seventh-largest diamond producer in the world.

This push mimics that of another country with colonial ties to Portugal: Brazil. In July 2019, the Brazilian government announced a plan to reduce the number of SOEs from 134 to 12. The reasoning by Economy Minister Paulo Guedes is clear: privatisation will remove inefficient fixed costs and attract foreign investment while improving the regulatory framework. As of April 30, 2020, Brazil already has 35 companies trading on the NYSE.

Both China, an established veteran of privatisation, and Brazil, a passionate underdog, provide models to follow for the untapped potential of Africa. The continent currently offers little in the way of privatisation, but that only adds to the excitement, for it is certain that rapid change is coming in the next two years. According to Jean Chalopin, chairman of Deltec International Group, ‘Privatisation plays a vital role for emerging countries. It is a positive sign of growth and stability and encourages innovation for SOEs. We have a dedicated team covering Africa and IPO experts to support privatisation.’

Contacts:

Sam Van

Head of Corporate Advisory, Deltec Investment Advisers Limited, Deltec International Group

[email protected]

Olivier Saen

Managing Director, Deltec Partners Limited, Deltec International Group

[email protected]