Some years ago when privatisation became the rage, many people predicted that state-owned firms would eventually be sold off. But that hasn’t happened. Even today, state-owned companies control the majority of resources and business. And they simply don’t make money
During the 1990s we saw a major change in the world’s economies. There was a major shift away from command economies and state-owned firms. Privatisation programmes, some successful, some less so, were the rage. Many firms that were sold off in those days have become quite successful, others, in the relentless creative destruction of capitalism, have gone out of business. What many people predicted was that the remaining state-owned firms would eventually be sold off. The reality has been quite different.
China is supposed to be the home of a billion capitalists. According to the National Bureau of Statistics, there are 40 million or so small and medium-size enterprises, which employ at least 75% of China’s workers. They produce 68% of industrial output, are responsible for 68% of China’s exports, 66% of the country’s patent applications and more than 80% of its new products; but they are definitely second class citizens.
State-owned companies probably make up all of the listed companies. Certainly the largest companies are. The 20 biggest stocks on China’s market include 12 state-owned financial firms and three state-owned energy companies. The financial firms alone make up 28% of the Shanghai Stock Exchange’s market capitalisation. Allowing private companies to list is contrary to the purpose of China’s stock market. State-owned companies anywhere are usually poorly managed. There is no incentive for profit and the managements are usually political hacks. So they often lose money. Allowing them to list gave them access to cheap capital.
Private companies in China are regarded with suspicion. During the recent slowdown, Chinese state-owned banks were required to make massive loans as part of a stimulus package. But this wall of money never went near smaller private businesses. Most went to large state-owned firms or local governments. Less than 10% was allocated to smaller firms.
China is hardly alone in the dominance of state-owned firms. Indonesia’s state-owned enterprises make up 40% of the country’s gross domestic product (GDP). Vietnam has the same concentration. According to official figures, the leading state-owned enterprises (SOEs) make up nearly 40% of the GDP.
In Brazil, the two largest companies, oil giant Petrobras and mining company Vale, are both majority-owned by the state and make up 26% of the market capitalisation of the Bovespa. Two large state-owned banks dominate Brazil’s finances. Banco do Brazil is the country’s biggest financial firm, with a fifth of total assets. The National Bank for Economic and Social Development (BNDES) accounts for 40% of the lending.
Despite mass privatisations in the 1990s, the Russian state still owns large sectors of the economy. Federal and regional governments control about 40% of the stock market capitalisation. These include various sectors: banking 64% of the market capitalisation, oil and gas 47%, and utilities 37%. In addition to the partially state-owned listed companies, the Russian state has full control of 19.2% of the manufacturing industry, 15.3% of the fuel production, 11.6% of the metallurgy and 25.7% of the chemical industries.
In India 246 enterprises are owned by the state. They employed almost 1.6 million people in 2008. There are more than 40 public enterprises already listed on India’s stock markets and these account for 37% of sales.
State-owned companies are not just small local companies. The largest corporations anywhere are in emerging markets. The 13 largest energy companies in the world, measured by the reserves they control, are now owned and operated by governments. Collectively, multinational oil companies produce just 10% of the world’s oil and gas reserves. State-owned companies now control more than 75% of all crude oil production.
Governments in emerging markets are not content with just owning the corporations; they feel that they should invest national wealth as well. Rather than returning the wealth to their population, either directly or through improvements in infrastructure, they created Sovereign Wealth Funds. With the exception of the Alaska Permanent Fund and the Norway Government pension fund, these funds are all in emerging markets. Most of them invest oil money, but the notable exception is China and Singapore. Together they control almost $2.5 trillion. They may make up only 2% of the world’s $165 trillion worth of listed securities, but the power is concentrated in a few hands. The funds in emerging markets are neither transparent nor accountable.
The main issue with state-owned enterprises is simply that they don’t make money. There are five incentives and disincentives that require managers of private companies to make a profit and none apply to state-owned enterprises. It is also unlikely that these things will go away as many people hoped. They exist because politicians want them to exist, and politicians never like to give up power unless forced to. Besides gorging on taxpayer dollars, the size of these companies and the lack of restrictions on their operations distort the rest of the markets and that impacts everyone.
(The second part of this commentary will be published next week. The writer is president of Emerging Market Strategies and can be contacted at email@example.com or firstname.lastname@example.org.)
A steep hike in petrol prices and announcement of the core inflation numbers for April will weigh on the market
The domestic market is likely to open in the negative on weak global cues and the steep hike in petrol prices announced by government-owned retail oil companies, effective midnight of Saturday. Besides, headline inflation numbers for April will be out by noon today, which will give further direction to the market.
On the global front, Wall Street closed lower on Friday on mixed earnings guidance from companies and higher consumer inflation for April. Markets in Asia were mostly lower in early trade on Monday following a weak close of the US markets on Friday and lingering debt issues being faced by countries in the Euro zone. The SGX Nifty was 60.50 points lower at 5,520.50 against the close of 5,581 on Friday.
It was a lacklustre week for the market despite positive domestic economic indicators. The last two days displayed contrasting trends with the market witnessing a sharp fall on Thursday on global cues, whereas it recovered on Friday, cheering the electoral results in the four states and one Union Territory. The market ended flat on the first three trading days of the week, fluctuating between positive and negative. It ended with a sharp cut of around 1.4% on Thursday, but recovered its losses on Friday and closed over 1% higher. Over the week, the market was flat with a mixed bias, as the Sensex added 12 points, while the Nifty shed seven points.
As the market tries to shrug off the downtrend, Friday’s gains could lead to a short-term rally that could fizzle out at 5,620-5,700.
Markets across the world have been worried about high commodity prices, rising inflation, rising interest rates and a slowdown in consumer spending, together with the potential downward GDP growth forecasts, and the consensus is that this will determine the trend going ahead.
Markets in the US closed lower on Friday on mixed earnings guidance from corporates and a rise in consumer inflation in April. JP Morgan (down 2.13%), Bank of America (down 2.21%) and Citigroup (down 2.1%), were among laggards in the financial sector on Friday. Stocks began their downward move in mid-afternoon trade as the dollar strengthened against the euro.
In economic news, US consumer price index rose 0.4% in April, mainly due to rising food and energy costs, compared with a 0.5% gain in March, the Labor Department said.
The core CPI, which excludes volatile food and energy prices, rose 0.2% in April, up from a 0.1% gain in March. Gasoline prices rose 3.3% in April, which accounted for nearly half the rise in the overall CPI.
On the other hand, the Thomson Reuters/University of Michigan preliminary consumer sentiment index for May rose to 72.4 from 69.8 in April, beating analysts’ expectations for a rise to 70.
The Dow declined 100.17 points (0.79%) at 12,595.75. The S&P 500 Index shed 10.88 points (0.81%) at 1,337.77 and the Nasdaq fell 34.57 points (1.21%) at 2,828.47.
Taking a cue from the weak US markets on Friday, markets in Asia opened mostly lower on Monday. The sentiments were also weighed by concerns about the debt crisis in Greece and caution about the US debt ceiling. Meanwhile, despite the devastating earthquake and tsunami Japan’s core machinery orders unexpectedly rose 2.9% in March from the previous month.
The Hang Seng declined 0.87%, the Jakarta Composite fell 0.43%, the Nikkei 225 was down 0.63%, the Straits Times retreated by 0.84%, the Seoul Composite was down 0.60% and the Taiwan Weighted fell by 0.59%. On the other hand, the Shanghai Composite and the KLSE Composite gained 0.08% each in early trade on Monday.
Back home, a day after oil retailing companies hiked petrol rates by a steep Rs5 per litre, finance minister Pranab Mukherjee on Sunday said a ministerial panel will decide on raising diesel, LPG and kerosene prices later this week.
An Empowered Group of Ministers (EGoM) headed by the finance minister is likely to deliberate on oil ministry's demand for a minimum Rs4 a litre hike in diesel price and Rs25 per cylinder increase in LPG rates to partly bridge the gulf between domestic prices and their international cost. He, however, neither gave the date of the EGoM meeting nor the quantum of hike the panel may consider.
The increase in petrol price, which the oil firms had been holding since January even though crude oil had touched a two-and-a-half-year high, came a day after election results of five state assemblies were announced
New Delhi: In the biggest ever price increase of the fuel, state-owned oil companies today hiked petrol price by Rs5 per litre with effect from midnight Saturday, reports PTI.
The steep hike in petrol price is likely to be followed by a Rs4 per litre increase in diesel rates and Rs20Rs-25 per cylinder increase in domestic LPG price later this month.
Petrol in Delhi will cost Rs63.37 per litre at Indian Oil Corporation (IOC) outlets in the national capital from Sunday as against Rs58.37 a litre currently, an official said here.
Even after the hike, oil companies will continue to lose Rs5.50 per litre and another increase in price is on cards soon, he said.
Bharat Petroleum Corporation (BPCL) hiked price by Rs4.99 per litre and Hindustan Petroleum Corporation (HPCL) by Rs5.01 a litre.
Petrol at BPCL outlets currently cost Rs58.39 per litre and at HPCL pumps Rs58.38 a litre.
The increase in petrol price, which the oil firms had been holding since January even though crude oil had touched a two-and-a-half-year high, came a day after election results of five state assemblies were announced.
The government had in June last year freed petrol price from its control but oil companies continued to follow ‘informal’ advice from the oil ministry on rate revision.
The three firms had not raised prices since January in view of assembly elections in states like West Bengal, Tamil Nadu and Kerala.
“The hike needed to make domestic rates at par with international prices was Rs10.50 per litre but oil companies chose to hike rates by less than half of that,” the official said. “Another hike in petrol price is on cards soon,” he said.
This is the eighth hike in petrol price since the June 2010 decision. Petrol in Delhi cost Rs51.43 after the 26th June decision of the government deregulating its price.
The official said Saturday’s hike in petrol price was made necessary because of rising borrowing of oil companies who faced severe working capital shortage in view of losses incurred on fuel sales.
IOC has seen its borrowing rise by Rs15,000 crore in last 45 days as it loses Rs296 crore per day on fuel sales.
Besides petrol, it loses Rs18.19 per litre on diesel, Rs29.69 a litre on kerosene and Rs329.73 per 14.2-kg LPG cylinder.