Economic Research Forum (ERF)

Corporate ownership and performance in the United Arab Emirates

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While state ownership of companies is widely thought to lead to inefficiencies, in the United Arab Emirates, it has proved to be a pillar of good corporate performance. This column describes the country’s experience over the period 2008-16, evaluating the performance of listed companies and banks, and comparing indicators across privately owned companies and those in which the government holds majority stakes.

In a nutshell

State ownership helps corporate performance by listed companies and banks in the UAE: the advantages include improved management, support and accountability.

Ownership structure, structural reforms and improved regulations should lead the process to achieve greater diversification for oil-rich countries like the UAE as they adjust to the new normal of the oil price.

It is essential to find the best formula of private/public partnership and corporate ownership to aid the reform agenda for further diversification and sustainable growth.

In the past two decades, there has been growing interest in the relationship between the ownership structure of companies and their performance. In particular, there has been much debate about the effect of government ownership on corporate performance.

On one side of the debate, state ownership is seen as bringing a ‘helping hand’: here the view is that the higher the proportion of state ownership in a company, the more capital subsidy will be provided by the government. On the other side of the debate, state ownership is seen as bringing a ‘grabbing hand’: here the view is that the government will extract more of a company’s profit as a result of its ownership to the benefit of politicians and bureaucrats.

In the context of the United Arab Emirates (UAE), state-owned enterprises are a major contributor to GDP and employment. According to a 2014 study by the Abu Dhabi Company for Onshore Oil Operations, they account for around 80% of GDP and employment.

There are many reasons why the country has decided to have state-owned enterprises. Those like Etisalat, a telecommunications operator, are prominent forces in strategic sectors of the economy where the government wants to play a key role.

When it comes to the long-term success of the country, the government is a patient investor that does not look for quick wins. Instead, the government usually couples commercial objectives with social objectives that do not pay returns on investment in the short term, but they ensure the country’s sustainable development, especially in meeting the ever-increasing energy demand. State-owned enterprises such as Emirates Aluminum and Emirates Steel are major forces behind the UAE government’s steps to diversify the economy away from hydrocarbons.

State ownership of listed companies in the UAE

As publicly owned shareholders increase, state-owned enterprises have better insider information about the company that is not widely available. Since the state usually holds shares over long periods of time, it has the authority to engage in extensive and continuous information gathering that matter for the company’s operations, thus further reducing information problems and improving corporate performance.

Evidence from listed companies on the Dubai Financial Market and the Abu Dhabi Stock Exchange confirms the positive effects of government ownership on most indicators of performance, as measured by return on assets, profits earned and price-to-book value. Consistently better performance indicators have reduced the need for financing by companies the higher the share of government in ownership.

The evidence shows that, in the case of the UAE, corporate performance indicators are influenced positively in a controlled system managed by state ownership. Performance is further strengthened by access to capital, which decreases debt levels and the associated cost of debt service to optimal levels.

State-owned banks in the UAE

It appears that government ownership also plays an important role in supporting better performance of listed banks. Better access to inside information, more resources and credibility give the state-owned banks an advantage when dealing with counterparties, either to mobilise sources of financing or to expand their market base.

In addition, state ownership matters as it has increased confidence in the stability of banks, enabling them to enjoy higher ratings and access to finance, compared with other banks where government ownership does not constitute a dominant share.

Policy implications

At the macro level, it is important to evaluate the optimal ownership structure in order to judge the prospects of growing economic activity, and solidifying indicators of performance by resorting to restructuring of existing corporations, if necessary. This assessment is important for the UAE economy, which has surpassed its regional comparators in terms of economic diversification and positioned itself on the path towards further diversification to celebrate the last barrel of oil.

At the core of growing non-energy sectors is establishing the right structure of corporate ownership to achieve the best performance. The results attest that the role of government ownership has improved companies’ performance, having access to sufficient capital, with less need for borrowing. Across banks, government ownership has built confidence in the stability of the banks, enabling them to enjoy good ratings to enlarge the pool of funding for their intermediation and credit support for the non-energy sector of the economy.

The way forward

State ownership helps corporate performance in the UAE: the advantages include improved management, support and accountability, which are reflected positively in key performance indicators. Future research should complement this evidence by evaluating the impact of government ownership on productivity and contributions of the corporate sector, including banks, to the macro economy.

The results will shed further light on the UAE’s experience and inform economic management in similar economies of the MENA region, particularly resource-rich countries.

Ownership structure, structural reforms and improved regulations should lead the process to achieve greater diversification for oil-rich countries like the UAE as they adjust to the new normal of the oil price. It is essential to find the best formula of private/public partnership and corporate ownership to aid the reform agenda for further diversification and sustainable growth.

The views expressed here are those of the authors and should not be interpreted as those of the Central Bank of the United Arab Emirates.

 

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