GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION: Synthesis and Cross-cutting Findings of SOE Governance Reviews of Six Countries ii CONTENTS Abbreviations and Acronyms ........................................................................................................................................................................... iv Acknowledgements ............................................................................................................................................................................................... vi I. Executive Summary and Recommendations ............................................................................................................................ 1 II. Introduction ................................................................................................................................................................................................... 6 III. The SOE Landscape ................................................................................................................................................................................. 9 IV. The Legal and Regulatory Framework for Corporate Governance in SOEs .......................................................... 19 V. State Ownership Arrangements ....................................................................................................................................................... 22 VI. Performance Management Frameworks .................................................................................................................................... 29 VII. Board Structures and Functioning .................................................................................................................................................. 32 VIII. Financial Reporting, Accountability, Control and Transparency .................................................................................. 38 IX. Procurement Policies and Practices .............................................................................................................................................. 43 X. SOE Policies and Practices related to Climate Change Actions and Reporting ................................................. 45 Annex 1: Methodological Framework and Approach ....................................................................................................................... 49 Image References ................................................................................................................................................................................................... 51 Boxes Box 1: Advantages and Disadvantages of State-Owned Holding Companies .................................................................. 24 Box 2: Current Frameworks and Standards for Climate-Related Reporting ....................................................................... 47 Box 3: OECD Guidelines on Corporate Governance of SOEs ....................................................................................................... 49 Figures Figure 1: Number of Domestic SOEs by Sector Type ....................................................................................................................... 16 Figure 2: Domestic SOEs: Unconsolidated Revenues by Sector ............................................................................................... 16 Figure 3: Indirect SOEs by Region (%) ....................................................................................................................................................... 17 Figure 4: Direct vs. Indirect Ownership of SOEs ................................................................................................................................. 17 Figure 5: SOE Shareholding in MENA (%) ............................................................................................................................................... 17 Figure 6: Corporatized vs. Uncorporatized SOEs in MENA ........................................................................................................... 17 iii GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION ACRONYMS ACRONYM MEANING AMOC Alexandria Mineral Oils Company ANGSPE National Agency for Strategic Management of State Participation and Performance Monitoring of State-owned Enterprises (Morocco) BOS Businesses of the State BSIC Business Sector Information Center CDSB Climate Disclosure Standards Board CEO Chief Executive Officer CPSD Country Private Sector Diagnostic EAS Egyptian Accounting Standards EBRD European Bank for Reconstruction and Development ERSAP Economic Reform and Structural Adjustment Program ESG Environmental, Social and Governance GDP Gross Domestic Product GIMC Government Investment Management Company (Jordan) GREs Government-related Entities GRI Global Reporting Initiative IAASB International Auditing and Assurance Standards Board ICT Information and Communication Technologies IFAC International Federation of Accountants IFI International Financial Institution IFRS International Financial Recording Standard IIRC International Integrated Reporting Council IMF International Monetary Fund ISA International Standards on Auditing iSOEF Integrated State-Owned Enterprises Framework iv ACRONYMS ACRONYM MEANING KPI Key Performance Indicator LLC Limited Liability Company MENA Middle East and Northern Africa MOA Military-owned Authorities MOF Military of Finance MOT Ministry of Transportation MPBS Ministry of Public Business Sector NEPCO National Electric Power Company NIB National Investment Bank NSPO National Service Projects Organization OECD Organisation of Economic Co-operation and Development OIA Oman Investment Authority PBS Public Business Sector PFM Public Financial Management PPP Public-Private Partnership PSO Public Service Obligation RBC Responsible Business Conduct SASB Sustainability Accounting Standards Board SEPE Executive Secretariat for Public Enterprises (Djibouti) SME Small and Medium Enterprises SOB State-Owned Bank SOE State-Owned Enterprise SOHC State-Owned Holding Company SOP State Ownership Policy TCFD Taskforce on Climate-related Financial Disclosure WBG World Bank Group v GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION ACKNOWLEDGEMENTS The report was prepared by James Colvin (Senior State-owned Enterprise [SOE] Governance Consultant) and Peter Ladegaard (Senior Public Sector Specialist, World Bank). The report draws on six case studies of SOE Governance in Djibouti, Egypt, Jordan, Oman, Morocco and Tunisia. The report was prepared as part of the Modernizing SOE Governance in the Middle East and North Africa (MENA) Project (P177105). The report’s Landscape Section benefited from contributions from Francis Ralambotsiferana Ratsimbazafy (Economist, World Bank) and Mariem Malouche (Senior Economist, World Bank). The team is grateful for peer review guidance from Mark Eugene Ahern, Lead Country Economist, Georgiana Pop, Senior Economist, and Michel Ragnvald Mallberg, Senior Public Sector Specialist (all of the World Bank Group). Oversight of this task was provided by Jens Kromann Kristensen, Practice Manager, Governance, World Bank, MENA. vi I. Executive Summary and Recommendations 1 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION This report is part of a World Bank review of state- Management Company, GIMC) provides a strong basis owned enterprise (SOE) governance practices in the to undertake further governance reform. In Morocco, Middle East and North Africa (MENA) region. The the establishment and operationalization of the SOE focus on governance is motivated by research pointing ownership agency, the National Agency for Strategic to good governance as an important precondition for Management of State Participations and Performance successful and sustainable SOE reform. This report Monitoring of State-owned Enterprises (ANGSPE), as summarizes findings of six SOE governance reviews well amendments to the regulatory framework and of Djibouti, Egypt, Jordan, Morocco, Oman, and Tunisia, the privatization regime, demonstrate the continued while also drawing on other regional studies. attention to optimizing the country’s SOE portfolio. The six country reports, as well as this cross-cutting However, these efforts often fall short of expectations report, concentrate on the core dimensions of due to a lack of political will, political economy issues, corporate governance of SOEs as identified in the as well as pressures from a complex web of interests. Organization for Economic Co-operation and Despite reforms, financial weaknesses, subsidies, Development (OECD) Guidelines for Corporate overemployment, fiscal risks, and corruption persist. Governance of SOEs, and the World Bank’s Integrated The absence of “know-how” has rarely been the SOE Framework (iSOEF). These include: (i) the legal and primary impediment. Reform efforts are more likely to regulatory framework for corporate governance; (ii) state founder on political economy issues, opposition from ownership arrangements; (iii) performance management entrenched interests, and a lack of strong political frameworks; (iv) Board structures and functioning; support. In some ways, this is understandable because (v) financial reporting, accountability, control, and decision-making regarding SOEs is highly politicized. transparency; (vi) procurement policies and practices; They are used to generate employment, subsidize and (vii) climate change reporting practices. The report the population, and thereby win political support. Yet, also provides an overview of the “SOE landscape” in at the same time, realizing that failures have real and terms of the size, composition, employment, subsidies, significant repercussions, policy makers continue to and financial risks of the SOE sectors. look for solutions to make SOEs more accountable and competitive. What appears clear is that addressing Several MENA countries have initiated significant political economy issues which have, heretofore, SOE governance reforms. Over the last two decades, represented the major roadblock to reform, will be several MENA countries have improved their ownership essential for any significant future progress. Any projects practices by building stronger oversight bodies, holding designed to reform SOE governance should, as a boards more accountable, strengthening monitoring, consequence, include a political economy component, tightening financial controls, corporatizing and, in as well as a plan for how political economy issues can some cases, privatizing SOEs. In Oman, almost all either assist or impede reform. SOEs have been brought under the control of the Oman Investment Authority, which is in the midst of The SOE landscape in the MENA region comprehensive and ambitious governance reforms across the entire portfolio. In Djibouti, the government Despite periods of privatization, public enterprises in has initiated many reforms to increase transparency the MENA region remain deeply woven into the fabric and improve governance practices. In Egypt, the of society. Their success in economic terms, as well 2022 State Ownership Policy — the first in the region as in a broader social sense, can be seen as crucial to — demonstrate the country’s commitment to a more the ongoing development of the region. The rise of efficient and transparent SOE sector, including the SOEs in MENA can largely be traced to the 1950s and growing involvement of the private sector. In Jordan, 1960s, when governments viewed state ownership and the corporatization of all SOEs under the Company economic planning as means to achieve social justice, Law and the consolidation under the ownership economic equality, and development. The SOE sector of a holding company (Government Investment continues to carry a relatively greater weight in MENA 2 I. EXECUTIVE SUMMARY AND RECOMMENDATIONS than in the OECD area, and their number is growing. to be composed of civil servants who are generally When including subsidiaries and firms in which SOEs not well trained to run businesses. As such, they are have ownership, the degree of state ownership in some unable to take independent decisions. Furthermore, countries may be far greater than has been previously they are obligated to implement instructions from recognized. Consequently, the economic impact political superiors. of SOEs may be greater than had been recognized, including the budgetary and fiscal risks to the state. Recommendations: Debt and financial support to SOEs are often ➡ Review and adapt legal frameworks for SOEs to significant. Countries may provide explicit subsidies and good international practice standards. transfers or inject equity to support, bail out, restructure, ➡ Adopt simple, clear, and uniform definitions of lower debt or resolve arrears. Thus, the multiplicity of “SOEs” within the framework. ways in which SOEs may receive support makes it ➡ Develop and disclose clear rationales and principles difficult to ascertain the full costs of state ownership. for state ownership in accord with international Public Service Obligations (PSOs) are common and practice, and develop a policy to divest when often unfunded, which exacerbates the poor financial appropriate. performance of many SOEs. The relative importance ➡ Clarify the roles of owners, boards, and management. of SOEs in MENA and their role in delivering non- ➡ Ensure the effective separation between the state’s commercial services and benefits (such as employment) role as owner, policy maker and regulator. means that analyzing and understanding the political ➡ Enforce corporate governance codes for SOEs, as economy of further reforms will be critical to success. well as strong governance disclosures. Despite their different stages of development, there State ownership arrangements is considerable consistency across the six country case studies with respect to many challenges and Explicit rationales that justify state ownership based the actions that need to be taken. The main findings on disclosed criteria are rare. Most MENA countries and recommendations that emanate from the country do not subject the state’s portfolio of SOEs to a regular reports follow. evaluation or systematically consider the justifications for continued state ownership. Rationales for state Legal and regulatory frameworks ownership should be more broadly implemented for SOE governance throughout MENA in order to stem potentially uncontrolled expansion of the sector and reduce There is a broad need to address the improvement and state ownership where it is not needed. Only very few implementation of legal and regulatory frameworks for countries in the MENA region have a clearly identifiable SOE ownership. Ownership arrangements are generally “ownership policy” that defines the objectives of the fragmented with line ministries typically playing the state as an owner, as well as the institutions and means main role in directing SOEs. It is also common for the by which the state achieves its objectives. ownership and regulatory responsibilities of the state to be combined. However, there are encouraging Recommendations: examples of the professionalization of ownership arrangements and evidence of greater centralization. ➡ Establish a central ownership or coordinating Although circumstances vary from country to country, agency for SOE oversight and SOE reform. in general, it is common for the state and political actors ➡ Develop and publish an SOE ownership policy. to be involved in operational decision-making in the ➡ Conduct monitoring and aggregate reporting on SOEs. Throughout the region, it is common for boards the SOE sector. 3 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Performance management frameworks Financial reporting, accountability, control, and transparency The oversight of SOEs tends to be fragmented, and aggregate reporting is rare. It is common for a The quality of disclosure by SOEs is generally poor, variety of independent institutions to monitor SOEs. and too many SOEs do not disclose anything apart However, there is often no single body able to provide from basic company information. The minimum a comprehensive or exhaustive view of the SOE sector. standards of disclosure for larger SOEs should be Aggregate reporting concerning the state’s SOE portfolio equivalent to those of listed firms, including the use from a shareholder perspective is largely absent. Thus, of International Financial Recording Standards (IFRSs). a core challenge in assessing SOE performance is to The disclosure of the PSOs of the SOEs and their disentangle the multiple objectives of different state costs, which is considered a good practice, is generally institutions and stakeholders in SOEs. not done. In addition, the audits of annual financial reports are not generally conducted using International Recommendations: Standards on Auditing (ISA), thereby making the annual financial reports of many SOEs unreliable. The frequent ➡ Define clear mandates for SOEs, including financial qualified opinions in the audit reports of many SOEs targets, capital structure objectives, capital are a key concern. They suggest the need for a more allocation, and risk tolerance levels. proactive approach to addressing the accounting issues ➡ Require SOEs to submit multi-year strategic plans that give rise to these qualifications. Even though SOEs to their respective boards. are subject to numerous controls, there is concern ➡ Promote the signing of performance contracts regarding the effectiveness of control systems. Multiple containing key performance indicators. instances and layers of control in the public sector can ➡ Clearly define and create a funding framework obfuscate responsibility and reduce accountability. for PSOs. Throughout the MENA region, a review of the control environment of SOEs could help to improve their Board structures and functioning operational efficiency, reporting, accountability, and risk management. Boards throughout the region can benefit from reform. Board member nomination processes are not Recommendations: generally formalized or transparent. As such, they do not necessarily yield the candidates best suited for board ➡ Strengthen SOE transparency and disclosure. posts. The composition of boards in MENA tends to be ➡ Consider the establishment of an independent skewed heavily toward high-level public sector profiles. oversight authority of statutory auditors. Also, many boards do not fulfill the duties and roles generally expected of them in accordance with good Procurement policies and practices practices. Another common problem is the limited autonomy afforded to boards. The independence of National procurement rules in MENA generally the SOE boards is recognized as an important goal, apply to all SOEs. However, there is no formal but it remains elusive. consideration of the rationale for using public rules or distinctions based on whether SOEs compete with Recommendations: the private sector. ➡ Introduce a structured, merit-based process for Recommendation: reviewing nominations for board positions. ➡ Enhance board composition and functioning. ➡ In some cases, governments would benefit from ➡ Strengthen the role of board audit committees. separate procurement regulations for SOEs. 4 I. EXECUTIVE SUMMARY AND RECOMMENDATIONS SOE policies and practices related to What’s next? climate change actions and reporting A new regional framework for SOE reform? Most Environmental, Social and Governance (ESG) is an MENA countries are committed to SOE reform. emerging theme that has not yet been fully integrated However, despite years of efforts, there is still into the operations of SOEs, or in the deliberations significant scope for improvement in terms of of SOE boards. Although ESG reporting is now performance, governance frameworks, competitive commonplace in listed companies on the world’s largest neutrality, and financial risks. Thus, the World Bank exchanges, SOEs in MENA rarely report on climate risks. is in the process of developing the MENA SOE Compact in support of continued SOE reform. The Recommendations: Compact proposes a new, regional approach to help national authorities identify, encourage, and ➡ Establish rules for mandatory climate reporting monitor SOE reform, as well as to develop technical (through corporate governance codes and/ solutions based on the best international and or listing rules) based on an internationally regional practices. The Compact will allow countries recognized climate reporting framework. throughout the region to share their experiences, ➡ Allow a transitional period of 2-3 years before understand what practices work best in MENA, and requiring mandatory compliance. create support and momentum for reform. The ➡ Encourage voluntary compliance during the Compact process will identify common challenges phase-in period. and assist participating countries in identifying ➡ Ensure independent oversight of the reporting needs, while also enabling the World Bank to requirements (for instance, through the financial respond quickly and effectively with technical and auditing framework). financial assistance as requested. 5 II. Introduction 6 II. INTRODUCTION This report is part of a World Bank review of state- (EBRD) highlight the predominance of corporate owned enterprise (SOE) governance practices in governance issues in explaining SOE performance.1 SOE the Middle East and North Africa (MENA) countries. reforms in countries with relatively good governance Responding to the scarcity of data concerning SOE and anti-corruption practices are significantly more governance practices in the MENA region, in late successful than in other countries. Furthermore, in 2021, the World Bank initiated a project to review SOE countries with good governance arrangements, the governance practices in the region. The purpose of the productivity gap between private firms and SOEs shrinks project is to develop and disseminate knowledge about considerably. Given the limited appetite among most SOE governance in order to promote continued SOE MENA governments for significant privatization of their reforms. The focus of the report is SOE governance; SOE portfolios, SOE governance will remain a key lever however, to reap the full dividends from a SOE of reform. reform program, governments need to embrace a comprehensive approach that examines the full set Better data about SOE practices can inform of policies that apply to the SOEs. This includes not improvements in SOE governance and performance. only governance, but also fiscal reforms, competition It is possible to draw general conclusions about SOE policy, and environmental policy, as well as reforms of performance and challenges in MENA. However, the individual SOEs. Recognizing this, the World Bank has current governance structures and transparency and developed a broader reform program, the MENA SOE accountability practices are characterized by a scarcity of Compact, which brings together these various reform data and limited, structured information. As seen in other strands into the development of a comprehensive policy domains, country comparisons and illustrations of roadmap for reform. This project is expected to be regional good practices may be able to spur peer-to-peer formally launched in late 2023. learning and help better inform policy options. The high participation of the state in the economy in This report summarizes the findings of six the MENA region has the potential to inhibit economic governance reviews of SOEs in Djibouti, Egypt, dynamism and growth. The SOEs are a key element Jordan, Morocco, Oman, and Tunisia. By taking of MENA’s social contract and economic development stock of the findings from these six country studies, strategy. Yet, the SOEs, combined with an uneven the intent is to inform ongoing policy dialogues, as regulatory and policy environment, can: (i) limit private well as to feed into the peer-based reform program investment; (ii) direct capital toward low-productivity envisioned by the MENA SOE Compact. It should activities; and (iii) exacerbate the misallocation of be recognized that MENA is diverse in its economic resources, which ultimately slow growth and inhibit structures, public sector administration, and SOE job creation. governance practices. Each country is distinct, and the descriptions in this note may not apply to all This particular focus of this report is on governance. It individual countries — even if they are generally is motivated by research pointing to good governance representative of the region. as an important precondition for successful and sustainable SOE reform. Recent studies by the World The methodological framework for the country Bank, the International Monetary Fund (IMF) and the reviews is based on the Organisation for Economic Co- European Bank for Reconstruction and Development operation and Development (OECD) Guidelines on the 1 IMF, “Fiscal Monitor Report – April 2020, Chapter 3. (Washington, DC: IMF, 2020). World Bank Group, “State Your Business! An Evaluation of World Bank Group Support to the Reform of State-Owned Enterprises.” (Washington, DC: World Bank Group, Independent Evaluation Group, 2020). EBRD, “Transition Report 2020-2021” (London: European Bank for Reconstruction and Development, 2020). 7 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Corporate Governance of State-owned Enterprises In particular, the Note’s Landscape chapter draws on (OECD Guidelines) and the World Bank’s Integrated data and contributions from the World Bank’s Global SOE Framework (iSOEF). This note also draws on other Businesses of the State (BOS) database. The structure of reports concerning SOE ownership in MENA published this note follows that of the individual country reviews. by the IMF, the OECD, and the World Bank Group. This As such, it seeks to capture and synthesize the major, information is used to provide the reader with more high-level themes. A more extensive discussion of the general insights into SOE governance in the region. methodological framework is included in Annex 1. 8 III. The SOE Landscape 9 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION SOEs as a part of the societal fabric SOEs, they continue to play an outsized role in most MENA countries. Public enterprises in the MENA region remain deeply woven into the fabric of society. A strong statist legacy What constitutes a SOE is not uniformly agreed across is visible throughout the region, which the OECD in jurisdictions in MENA; in fact, within jurisdictions, 2013 referred to as a form of “state capitalism” in different definitions can be used in various contexts. which government and the public and private sectors Harmonization of what constitutes a SOE, at least are deeply intertwined.2 SOEs have traditionally been internally, is a relatively easy step. In fact, harmonization used as a motor for industrial development, the facilitates policy consistency. For the purposes of this provision of key goods and services, the generation of report, the definition used is the one adopted by the employment and a variety of other objectives, some OECD: “A SOE is a commercial enterprise that is more purely commercial and others social in nature. They than 50% owned or controlled by a government.” have also been important contributors to social stability. However, it should be noted that the World Bank’s An alternative perspective maintains that SOEs have Business of the State data cited later in this report is also been a source of corruption, mismanagement, based on a more expansive definition: “The ownership and stagnation, thus posing significant burdens on threshold used to determine whether an enterprise is state budgets. Nonetheless, their success, not only a “business of the state” is set at 10% ownership by a in economic terms but also in a broader social sense, majority state-owned entity.” This means that that data can be seen as crucial for the ongoing development potentially shows a far more extensive SOE sector than of the MENA region. would be measured using the OECD definition. The development of a large SOE sector in many MENA Defining and identifying the number of SOEs countries can be traced to the 1950s and 1960s. Some of the key determinants were: (i) a desire for The SOE sector carries relatively greater weight in state building in the large number of MENA countries MENA than in the OECD area.3 According to OECD that achieved independence during that time; (ii) the and IMF calculations, the average number of SOEs concomitant rise of Arab socialism during a time when in an OECD country is approximately 50. Although governments viewed state ownership and economic comparable statistics are hard to come by, most planning as a means to achieving social justice, countries in MENA will easily exceed this figure — and economic equality, and development; (iii) a desire to even more so when SOEs are counted on a per capita control the exploitation of natural resources, particularly basis.4 According to official reports, Djibouti had 84 oil and gas, that were developed in the middle of the SOEs in 2020; Egypt had 381; Morocco had 269 public 20th century; and (iv) the use of SOEs to pursue national enterprise and 44 Limited Liability Companies (LLCs); and strategic objectives using the new-found wealth Oman had 170 entities; and Tunisia had 110 entities. generated by oil and gas development. The result was Jordan is the outlier. with only 18 fully or majority owned that many countries went from having very few SOEs in SOEs. However, SOEs are still dominant in Jordan; the 1950s to having an economy dominated by SOEs in according to an IMF report, the total unconsolidated the 1970s. Despite periodic efforts to divest or privatize assets of SOEs represented around 20 percent of gross 2 OECD. “State-Owned Enterprises in the Middle East and North Africa: Engines of Development and Competitiveness?” (Paris: OECD Publishing, 2013). http://dx.doi.org/10.1787/9789264202979-en 3 Caution is advised when making comparisons because countries include entities in their definition of a SOE that would not necessarily follow the widely accepted definitions of the OECD or the IMF. For example, in Morocco, there are a variety of government-related entities including “state enterprises”, “public subsidiaries”, and “mixed corporations”. in Djibouti, 38 of the 84 government-related entities are in the health and social welfare sector. These entities would likely not be considered SOEs using the OECD definition. 4 World Bank. “Middle East and North Africa, Governance Reforms of State-Owned Enterprises (SOEs), Lessons from four case studies (Egypt, Iraq, Morocco and Tunisia).” (Washington, DC: World Bank, 2015). 10 III. THE SOE LANDSCAPE domestic product (GDP) in Jordan as of 2019.5 In each to a “rationale for state ownership”.9 Alongside a clear case, the number of SOEs should be considered with rationale for ownership, there should be a sound caution because many countries do not maintain governance framework for oversight. Among the comprehensive databases. In addition, there is often countries reviewed, Djibouti went from eight SOEs no official definition of what an SOE is. In Egypt, for at the time of its independence in 1977 to 84 at the example, the Ministry of Finance reports a total of 381 time of this writing. It added 26 enterprises in the port SOEs.6 However, many military SOEs and other civilian sector alone in the last 10 years. In Egypt, enterprises enterprises are not included.7 Using a definition consistent owned by the military play a significant role in many with the OECD’s SOE definition that includes a criterion sectors, including manufacturing, agriculture, and of control (irrespective of percentage ownership), the construction —and their role is expanding. Although SOE Governance Review of Egypt identifies 442 entities NSPO was established in 1979, a third of its 32 affiliated operating under different legal forms. companies were established after 2015, suggesting an expansion of NSPO economic activity in recent years, It is noteworthy that, despite years of privatization and spread across 14 industry groups.¹⁰ Morocco exhibited efforts to streamline the public sector, the number strong growth in the past 10 years, and Tunisia added six of SOEs in some MENA countries is growing. This public enterprises to the state portfolio between 2017 growth is significant because it contrasts with a fairly and 2020. Some progress was made in restructuring constant number of SOEs globally.8 Countries have and privatization in the 1990s. However, SOEs continue the prerogative to establish new SOEs to meet their to expand across sectors and different regulatory legitimate objectives. However, good practice suggests frameworks. In both Jordan and Morocco, there have that the establishment of new SOEs should be subject been privatization efforts through the 1990s and 2000s, 5 IMF (2021). 6 As a requirement of a 2016 IMF program, the Ministry of Finance prepared and disclosed on its website reports concerning Egypt’s SOE portfolio. They comprise: (a) an overview of specific business sectors; (b) a list of enterprises in each sector and type of ownership (for example, wholly or majority-owned); and (c) information concerning individual companies, including summarized standalone balance sheets and income statements, board composition, and external auditors. These reports include different categories of SOEs based on what entity directly owns the majority of share capital as follows: (1) First level or Primary SOEs: directly owned by the state treasury. Enterprises such as National Bank of Egypt (Egypt’s largest commercial bank) and Arab Contractors (one of the largest construction companies) fall under this category, as well as most of the Law 203 holding companies. (2) Second level SOEs: entities owned by first level entities. This category includes the Law 203 subsidiary companies, as well as enterprises owned by Economic Authorities. (3) Third level: Joint enterprises, majority owned by a second-level entity. An example of this category is the Alexandria Mineral Oils Company (AMOC). The majority of AMOC shares (listed on the Egyptian Stock Exchange) are owned by Alexandria Oil (a wholly owned subsidiary of an Economic Authority controlled by Ministry of Petroleum). 7 For example, this would include the subsidiaries of the National Service Projects Organization (NSPO) and the Arab Organization for Industrialization (AOI). The National Authority of Military Production (an organization that is very similar to an Economic Authority) owns several enterprises that are not included in the portfolio reports of the Ministry of Finance. Also excluded from the reports are other large SOEs, such as the new administrative capital company, which is also controlled by the military. No financial information is currently publicly available about these organizations or subsidiaries. Furthermore, other civilian enterprises, such as the National Investment Bank and its subsidiaries as well as some enterprises controlled by the Ministry of Finance, are not included in the Ministry’s portfolio report. 8 OECD. “The Size and Sectoral Distribution of State-Owned Enterprises.” (Paris: OECD Publishing, 2017). http://dx.doi. org/10.1787/9789264280663-en 9 Rationales for state ownership are described in detail in the OECD Guidelines (2105), Chapter I. They provide guidance about when the state should be involved in the ownership of productive assets and when it should divest itself of such assets. Summarized, the rationales for establishing or maintaining state enterprise ownership typically include one or more of the following: (1) the delivery of public goods or services where state ownership is deemed more efficient or reliable than contracting out to private operators; (2) the operation of natural monopolies where market regulation is deemed infeasible or inefficient; and (3) support for broader economic and strategic goals in the national interest, such as maintaining certain sectors under national ownership, or shoring up failing companies of systemic importance. ¹⁰ International Finance Corporation. “Creating Markets in Egypt. Realizing the full potential of a productive private sector.” (Washington, DC: 2020) 11 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION which have limited the number of SOEs, if not their it would be useful to gather aggregate data about the importance to the economy. Similarly in Oman, there number, type and size of SOEs in the MENA region is currently an active program of divesting shares in based on this consistent definition. SOEs, although often this is for non-controlling stakes. Thus, it will not actively reduce the number of SOEs. Employment in SOEs The reported number of SOEs includes entities that The level of employment generated by SOEs varies, operate under a variety of different legal forms, although some estimates suggest that SOEs provide meaning that they may not be entirely comparable. less than 4 percent of total employment in MENA.12 The countries covered in this report apply a variety of This is broadly in line with OECD countries. It also different concepts and definitions to discuss what can reflects the fact that many SOEs are infrastructure be termed, more broadly, government-related entities. based, with high levels of economic importance These entities can, depending upon the country, be part despite relatively low levels of employment.13 The of the public administration, municipal enterprises, or MENA SOEs are frequently overstaffed because they provide public services such as hospitals. They can have have been used to stabilize and grow employment, as different legal forms including statutory enterprises, well as a means to reward political support. Though corporatized entities, or autonomous entities within the statistics are dated and do not correspond directly the public administration. Even within a single country, to SOEs, the IMF estimated that the MENA region the categorization can be made difficult by definitions had the highest central government wage bill in the that are unclear or applied inconsistently. A 2015 world. It is close to 10 percent of GDP, as opposed report by the World Bank notes that “The term SOE to just over 5 percent globally.14 In Egypt, so-called refers to neither a unified legal regime nor a uniform Economic Authorities represent 6 percent of public reality”.11 This lack of clarity makes it difficult to define sector employment, and incorporated SOEs employ the appropriate benchmarks for good practice and an additional 12 percent as of 2022.15 According to the to develop targeted recommendations. If there is no Morocco SOE Governance Review, SOE employment common definition of SOE, it can create challenges in represents 4 percent of total employment. In Jordan, terms of establishing and maintaining an overview of SOE employment represents less than 1 percent of the “SOE portfolio”, and subsequently in designating total employment.16 Excess employment is one of different strategic priorities to different kinds of the key factors that weighs on SOE performance public enterprises. The OECD adheres to a relatively throughout MENA. It is also one of the most politically strict definition of a SOE. It defines SOEs as basically sensitive issues to address. Reliable and comparable corporatized commercial enterprises that are controlled data concerning employment and the employment (either through ownership or other means) by the state. impact of SOEs is often difficult to find in MENA. This definition enjoys wide consensus among most Consequently, it would be beneficial for countries to experts and across countries. Thus, at a regional level, consider improving their data sources. 11 World Bank. “Middle East and North Africa, Governance Reforms of State-Owned Enterprises (SOEs), Lessons from four case studies (Egypt, Iraq, Morocco and Tunisia).” (Washington, DC: 2015). 12 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019 (Washington, DC: IMF, 2021). 13 OECD. The Size and Sectoral Distribution of State-Owned Enterprises. Paris: OECD Publishing, 2017), p 25. http://dx.doi. org/10.1787/9789264280663-en 14 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019 (Washington, DC: IMF, 2021). 15 CAPMAS, Annual Bulletin of Employees Statistics in Public/Public Business Sector 2022 - March Edition; and Ministry of Finance press release, October 2022. 16 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.”, DP/2021/019 (Washington, DC: IMF, 2021). 12 III. THE SOE LANDSCAPE SOEs as a percentage of GDP Profitability and financial sustainability The contribution of SOEs to GDP varies considerably, MENA SOEs have suffered from the challenges as does SOE debt and the amount of state transfers commonly associated with state ownership. These to SOEs. Current data collection methods do not include poor financial performance which, in turn, leads always allow for a valid comparison of SOE macro data to strained state budgets and contingent risks. SOEs across countries since methodologies and methods are often associated with: (i) bloated and bureaucratic vary considerably. However, the overall picture shows human resources; (ii) inadequate services and products a significant participation of government-related for the consumer; (iii) poor maintenance; (iv) a lack entities in economies throughout the region. In Egypt, of public transparency and accountability; and (v) Economic Authorities and SOEs had assets representing vulnerability to mismanagement, nepotism, conflicts 135 percent of GDP at the end of June 2019 (according of interest and corruption. These problems are not to the Ministry of Finance [MOF] data). In Morocco, the unique to MENA. Indeed, they are seen, to varying portfolio of public enterprises was reported to have degrees, in many jurisdictions. However, the MENA annual revenues equivalent to 22 percent of GDP. region as a whole lags in terms of good practice in In Jordan, the total unconsolidated assets of SOEs implementing the policies and procedures that can be represented around 20 percent of GDP as of 2019,17 used to attenuate the problems typically associated In Tunisia, as of 2014, SOEs accounted for 9.5 percent with state ownership. of GDP and 15.7% of fixed capital at the national level.18 SOE debt is equal to more than 1/3 of GDP.¹⁹ In some In aggregate terms, many SOEs in MENA are cases, individual enterprises or industries can represent reporting losses that weigh heavily on state budgets. a significant percentage of GDP, thereby presenting In Morocco, profits fell considerably in 2020 due to the significant potential risks for the state. In Oman, the pandemic, with strategic SOEs registering a decline in IMF in its 2022 country report20 noted that as of end- operating income and net profits of 82 percent and 2021, Oman’s economy remains dependent on the 194 percent, respectively. IMF data covering Tunisia’s state-controlled hydrocarbon industry, representing 30 largest SOEs shows that two-thirds were loss- about 35 percent of GDP, 75 percent of total fiscal making in 2019, with rapidly declining capital. Half revenues, and 58 percent of the total exports of goods. were considered insolvent.22 Moreover, three of the Djibouti Telecom’s total revenues have been reported largest SOEs in Tunisia had negative equity equivalent to represent almost 7 percent of the country’s GDP.21 to almost 5 percent of GDP.23 The same report ¹⁷ IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.”, DP/2021/019 (Washington, DC: IMF, 2021). 18 IMF. State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges, DP/2021/019. (Washington, DC: IMF, 2021), p. 17. 19 Ministère de l’économie, des finances et de l’appui à l’investissement Ministry of Finance. “Rapport sur Les entreprises publiques.” 2023. 20 IMF. “Oman Staff Report for the 2022 Article IV Consultation.” (Washington, DC: IMF, 2022), Accessed from Imf.org on 14 February 2023. 21 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019. (citing WB 2018). (Washington, DC: IMF, 2021), p. 11. 22 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019. (Washington, DC: IMF, 2021), p. 13. 23 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019. (Washington, DC: IMF, 2021). 13 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION suggests that 107 SOEs in Egypt reported losses for PSOs allows for non-commercial objectives to be the fiscal year ending 2019. The IMF cites the example integrated into the SOEs’ profit-making objective. It of four MENA countries (Egypt, Iraq, Morocco, and also helps with SOE management, while supporting Tunisia) with SOEs having amassed sizeable annual better fiscal management as the true cost of policies losses, with the share of total losses ranging between cannot be hidden in the SOE balance sheets. Often 0.6 percent and 6 percent of GDP annually.24 Losses the disbursement of funding is dependent on the at single large companies can also have an outsized health of the state’s coffers. As such, it may or may effect. For example, according to a published report by not be forthcoming, depending upon the political the Jordan Audit Bureau and the annual statements of exigencies of the moment. The absence of full and the largest Jordanian SOE, the National Electric Power fair compensation for the costs of PSOs is one of the Company, had accumulated total commercial debt of central causes of the poor performance of many SOEs, Jordanian Dinar (JOD) 3.12 billion (approximately US$ particularly public utilities whose pricing is politically 4.4 billion), representing around 9.6 percent of GDP as sensitive. Even where proper or full funding is not of end-2022. According to NEPCO’s annual report, its provided, this should not prevent proper identification debt surpasses the limit of 75 percent of paid-in capital, and costing of PSOs. At the least, this can allow for which would necessitate the liquidation of the subject more transparent acknowledgement of the true fiscal firm under the Jordanian companies’ law,²⁵ unless the risks and costs of the PSOs, as well as the detrimental general assembly decides in an extraordinary meeting impact on SOE profitability. to increase the Company’s capital. Several factors play a role in NEPCO’s current financial situation, including A new view regarding the weight the sector structure, exogenous shocks, energy policy of SOEs in MENA economies decisions (which are made outside of NEPCO), tariff setting policies, and the need for enhanced corporate Data from the World Bank’s Equitable Growth, governance models, among others. It should be Finance and Institutions (EFI) Global Businesses of noted that NEPCO is currently implementing a the State (BOS) database suggests that the degree corporate governance action plan. In addition, the of state ownership of enterprises in the economy of Government of Jordan’s Energy Program has set up some MENA countries may be greater than has been clear commitments towards improved corporate recognized in the past.26 The BOS is a World Bank governance within NEPCO. Group initiative to develop a global database of SOEs. For the MENA region, it currently includes information A significant challenge for SOEs is achieving fair about Egypt, Jordan, Lebanon, Morocco, and Tunisia, compensation for the public service obligations with additional economies being added.27 The BOS (PSOs) that they are expected to deliver. This is a provides insights into the degree of state ownership. common problem for SOEs in many jurisdictions. It also raises questions regarding whether pervasive A core challenge in assessing SOE performance is state ownership is in a country’s economic and social to disentangle commercial and non-commercial interests. In total, 1,962 firms with state participation objectives. Properly identifying, costing and funding in commercial activities have been initially identified 24 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019. (Washington, DC: IMF, 2021), p. 8. 25 NEPCO (2020) and Audit Bureau (2021). 26 The information from the BOS presented in this report is preliminary and subject to change. All values are generally for 2019. However, when information was not available for 2019 in terms of sector of operation, revenues, employment, or profits, the database employs data reported as of 2018 or 2017 as the best proxy. The financial information was deflated to report prices as of 2019 using the World Bank Group GDP deflators. 27 Data for Djibouti and Oman are in progress, and are thus not included in the following graphics. 14 III. THE SOE LANDSCAPE (subject to validation from governments) in the four the cereals, aviation, electricity, and gas sectors), the countries which are covered by the BOS as well as costs incurred by Tunisian firms with state participation in this report — including 1,045 SOEs in Egypt, 229 in continue to escalate. Jordan, 372 in Morocco, and 286 in Tunisia. These figures portray a higher figure for state ownership than Competition with the private sector and other studies conducted at the time of this writing. The questionable rationales for state ownership reason is, in part, because the ownership threshold used to determine whether an enterprise is a “business of The vast majority of SOEs among the surveyed the state” is set at 10 percent ownership by a majority countries are active in competitive sectors. More state-owned entity.28 than 65 percent of the SOEs in MENA operate fully in sectors that could be served by the private sector (for The economic impact of SOEs may be far greater example, the manufacturing of textiles). At the country than had been recognized in the past, as may be the level, 66 percent of SOEs are in competitive sectors in budgetary and fiscal risks to the state. Based on the Morocco, 72 percent in Egypt, 67 percent in Jordan, information available, as a proportion of GDP (figure 1), and 41 percent in Tunisia (figure 1). The SOEs in the the revenues of firms with state participation account competitive sectors can also account for more than for almost half of GDP in Egypt (47 percent), 39 percent half of SOE revenues in two MENA countries including: in Jordan, 14 percent in Morocco, and around a third Egypt (61 percent) and Morocco (51 percent). In other in Tunisia (35 percent).29 Over 50 percent of firms in MENA countries, the revenue share of the competitive Tunisia, for which profit/loss data are available, are loss- sectors is smaller, for example, with around 28 percent making, along with 30 percent in Egypt and Jordan and in Tunisia (figure 2). Furthermore, compared to OECD 20 percent in Morocco. In 2019 alone, the losses of the countries, the state is present in a wider variety of 30 loss-making firms with state participation in Tunisia sectors in MENA. For example, the World Bank Group amounted to 2 percent of GDP. Although the Tunisian (WBG)-OECD Product Market Regulation data shows state has tried to improve the productivity and efficiency that an average MENA state is present in 18 commercial of the five firms by setting performance targets (in sectors compared to nine in the OECD. 28 The 10 percent threshold was chosen by the BOS initiators based on the rationale that control cannot be measured ex ante. Also, even with minor participation, the state can outvote other shareholders (as in the case of holding the plurality of shares or possibly golden shares). However, the state can exercise disproportionate influence through informal interactions with the firm. Differences in the levels of state ownership compared to countries outside of the MENA region may not be as pronounced if the 10 percent were applied more widely in statistical studies. Thus, the ultimate threshold for being considered an SOE according to the OECD and other definitions is not based on percentage ownership, but rather on control which can be exercised with a plurality of shares. A common methodological approach would yield more comparable data. The advantage of the BOS database is that it reveals the full extent of the state’s footprint in the economy, including subsidiary entities of centrally held SOEs. Therefore, it provides a more complete assessment of fiscal implications and state participation in markets. 29 Source: World Bank Global BOS database. It should be noted, however, that this figure may be higher, given that unconsolidated revenue data for the SOEs captured in the database is incomplete (48 percent of SOEs captured for Egypt have revenues data; 55 percent for Jordan; 39 percent for Morocco; and 26 percent for Tunisia). 15 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Figure 1: Number of Domestic SOEs by Sector Type Figure 2: Domestic SOEs: Unconsolidated Revenues by Sector 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Egypt, Arab Jordan Morocco Tunisia Egypt, Arab Jordan Morocco Tunisia Rep. Rep. Competitive Natural Monopoly Competitive Natural Monopoly Partially Contestable Missing Partially Contestable Missing Source: The World Bank Global BOS database. Source: The World Bank Global BOS database. Note: Sector classification is available for 98 percent of BOSs identified in Note: Revenue data is available for 48 percent of SOEs identified in Egypt, Egypt, 96 percent in Jordan, 82 percent in Morocco, and 65 percent in Tunisia. 49 percent in Morocco (almost 20 percent of these are consolidated values), and 26 percent in Tunisia (11 percent consolidated). Subsidiaries and indirect Indirect holdings and large conglomerate groups are ownership of enterprises common in MENA, with around 74 percent of SOEs in MENA being indirectly owned by the government Many SOEs have subsidiaries whose governance through subsidiaries (figure 3). By comparison, that is practices and ownership structures limit public more than double the proportion of indirect ownership accountability. Studies of SOE governance and in Europe and Central Asia (30 percent) and in Latin performance tend to focus on the performance and America (34 percent). In Egypt and Jordan, that figure governance practices of parent SOEs and larger SOEs reaches at or over 80 percent, whereas in Morocco and controlled at the central level of the state. Far less Tunisia it is around 40 percent (figure 4). In Oman, most attention has been spent studying the governance and of the 170 SOEs have been placed as subsidiaries to performance of SOE subsidiaries. Subsidiaries are highly an industry level holding company, with those holding diverse in purpose, with some being operating units companies then also owned by the central holding of a larger enterprise and others completely distinct company, namely, the Oman Investment Authority. This and sometimes unrelated entities. Consequently, no can lead to long chains of agents, with concomitant one governance practice fits all. Common challenges costs in both governance and competition. To illustrate, in subsidiary governance relate to whether the parent in Morocco, the Cash Deposit and Management entity can properly exercise the level of control (Caisse de Depot et Gestion) alone has more than 127 appropriate to the nature of the business. Another subsidiaries operating across multiple sectors. Indeed, challenge is excessive governance arrangements, it operates beyond the financial sector to include which can add inefficiencies and pointless structures. telecommunications, hotels, and forestry companies. In addition, countries may experience problems when Such links can also connect entire value chains. the creation of subsidiaries is at the discretion of the In Egypt, for instance, the Cotton Holding Group is parent, which may in turn lead to uncontrolled growth related to more than 40 upstream and downstream of the SOE sector. Many MENA SOEs have numerous companies, controlling fiber and yarn inputs, as well subsidiaries that merit further study. Depending on the as apparel manufacturing. Although such integration quality of monitoring arrangements, indirect ownership may be justified based on competitive factors, it may structures can hinder monitoring and transparency, the limit the access of private enterprise to certain sectors effective management of businesses, the exercise of — and increase the risk of anticompetitive practices. For ownership rights, as well as the capacity to conduct example, an SOE in apparel manufacturing may benefit SOE reform. from lower input prices than private competitors. 16 III. THE SOE LANDSCAPE Despite the large number of SOEs that are indirectly Such a company would operate under company law held by the state through subsidiaries of direct holdings, so that its governance and treatment under the law is the vast majority of SOEs in Egypt, Morocco and Tunisia effectively identical to that of a private sector enterprise. have government stakes of over 50 percent (figure 5). To illustrate the problem, in Djibouti, virtually all SOEs are established by their own individual law, thus requiring State ownership in the MENA region may take place legislative action for each individual SOE to achieve according to several different legal structures. In sector-wide reform. This appears to be a complicated and this context, such structures could benefit from time-consuming process. However, standardized legal rationalization. Although it is not uncommon for SOEs forms greatly facilitate any potential reforms. The BOS to be established as statutory enterprises (established by database shows that, on average in the MENA region, their own law) or as parts of the state administration, it is only 50 percent of SOEs are corporatized, although it generally recommended that SOEs have a standard legal should be noted that in Jordan corporatization is almost form (such as a joint-stock or limited liability company). universal (as it is in Oman) (figure 6). Figure 3: Indirect SOEs by Region (%) Figure 4: Direct vs. Indirect Ownership of SOEs 80% 100% 60% 80% 60% 40% 40% 20% 20% 0% 0% Egypt, Arab Jordan Morocco Tunisia Middle East & North Africa East Asia & Pacific South Asia Sub-Saharan Africa Latin America & Caribbean Europe & Central Asia Rep. Missing Indirect ownership (through a state holding company and/or subsidiaries) Directly owned (no second level shareholder) Source: The World Bank Global BOS database. Note: The overall data coverage for government shareholding amounts is 100 percent in Egypt; 97 percent in Jordan; 100 percent in Morocco; and 92 percent in Tunisia. These numbers only include SOEs for which shareholding data is available. Figure 5: SOE Shareholding in MENA (%) Figure 6: Corporatized vs. Uncorporatized SOEs in MENA 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% Egypt, Arab Jordan Morocco Tunisia 0% Rep. Egypt, Arab Jordan Morocco Tunisia 100% government ownership 50-99% government ownership Rep. 25-49% government ownership 10-24% government ownership Missing Corporatized Non-Corporatized Missing Source: The World Bank Global BOS database. Source: The World Bank Global BOS database. Note: The overall data coverage for government shareholding amounts is Note: Data concerning legal form is available for 35 percent of all BOSs 100 percent in Egypt; 97 percent in Jordan; 100 percent in Morocco; and 92 identified in Egypt; 95 percent in Jordan; 55 percent in Morocco; and 70 percent in Tunisia. These numbers only include SOEs for which shareholding percent of SOEs identified in Tunisia. data is available. 17 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Debt and financial support explicit subsidies and transfers, or they may inject equity to support, bail out, restructure, lower debt and/or SOE indebtedness varies across countries. In Morocco, resolve arrears of SOEs. They may also provide direct the portfolio of strategic SOEs appears significantly, but loans and “on-lending” (whereby the state borrows not unreasonably, leveraged compared with private and then lends to the SOEs). In addition, the SOEs sector and sectoral benchmarks. However, according may benefit from inputs provided by other SOEs at to a February 2021 IMF Article IV report, the debt of below market prices. Such support can represent a Tunisia’s 30 largest SOEs was about 40 percent of GDP significant portion of state budgets. In Djibouti, the state in 2019, with 20 percent of GDP due to banks and found it necessary to reduce subsidies because of the suppliers, and the rest to social security funds, other financial burdens they imposed on the state. In Egypt, SOEs and the government. The Tunisian Ministry of state subsidies to SOEs represent approximately 1.3 Finance SOE Report (2022) indicated that, in 2020, percent of GDP.³³ Such subsidies do not include implicit the public debt of 50 SOEs (out of 111) to state banks subsidies through a reduced cost of capital, reduced represented 59.2 percent of total debt due to banks. dividends, implicit guarantees, or periodic bail outs. Similarly in Oman, the 2022 IMF Article IV Report found In Jordan, the subsidization of electricity and water that SOE debt stood at 41.8 percent of GDP in 2021, tariffs has resulted in significant losses accruing to the although risks are mitigated by considerable assets held electricity and water SOEs, thus creating significant fiscal by the Oman Investment Authority. In Egypt, many risks. In Morocco, fiscal risk is increasing due to budget Economic Authorities and corporatized SOEs are transfers to non-commercial SOEs. In Tunisia, direct highly indebted, while also benefiting from sovereign fiscal support exceeded 7 percent of GDP in 2019 to guarantees.30 Partial data covering Tunisia’s 30 largest compensate SOEs for below-market pricing.34 However, SOEs shows that their total debt was in excess of 20 a limited number of SOEs are sources of government percent of GDP in 2019.31 The above-mentioned IMF revenues, in particular in energy-exporting countries Tunisia country report suggests that the total debt of where they can contribute up to 20 percent of general the 50 major SOEs represented more than 38 percent government revenues.35 In Morocco, strategic SOEs of GDP in 2020. Furthermore, SOEs owed more than receive comparatively little in the way of government 5.5 percent of GDP in arrears to the state in 2020, transfers, and some profitable SOEs make regular whereas the state owed about 7.9 percent of GDP to dividend payments to government. Nevertheless, state SOEs. Cross arrears between SOEs were estimated at support to SOEs appears to reduce the fiscal space about 2.5 percent of GDP.32 In some cases, the debts of for other priority spending. The multiplicity of ways SOEs are explicitly guaranteed by the state, whereas in in which SOEs may receive support makes it difficult other cases there are implicit guarantees. In either case, to ascertain the full costs of state ownership. Overall, SOE debts can be the source of significant fiscal risks. then, MENA countries would benefit from enhanced data concerning the variety of state support provided MENA states provide financial support to SOEs to SOEs in order to better understand and manage their through a variety of means. Countries may provide associated impacts. 30 According to the published fiscal year (FY) 2023 fiscal statement by the MOF, outstanding sovereign guarantees to EAs and SOEs reached Egyptian Pound (EGP) 1.66 trillion in January 2022, representing 21 percent of GDP. This was mainly concentrated in the petroleum, electricity, and housing sectors. 31 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019. (Washington DC: IMF, 2021), p. 13. 32 IMF. “ State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019. (Washington, DC: IMF, 2021), p. 29. 33 Government of Egypt’s FY2022/23 budget. 34 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019. (Washington, DC: IMF, 2021), p. 24. 35 IMF. “State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges.” DP/2021/019. (Washington, DC: IMF, 2021), p 24. 18 IV. The Legal and Regulatory Framework for Corporate Governance of SOEs 19 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION The legal and regulatory framework the implementation of SOE reforms on a sector-wide basis and does not necessitate the changing of myriad A strong legal and regulatory framework sets the laws for each individual statutory enterprises; and (ii) foundation for the effective governance of SOEs. the uses of standard legal forms makes it easier to The OECD Guidelines for SOEs recommend that legal ensure that the laws and governance requirements and regulatory frameworks be designed to ensure a relating to companies apply equally to both private and level playing field for all market participants, regardless public entities. In all of the countries reviewed, the of their ownership. This includes creating transparent, term SOE (or similar) is not defined by law in a unified non-discriminatory, and market-oriented policies that manner. Also, SOEs are regulated by numerous legal encourage fair competition and efficient resource instruments. Even where SOEs are established under allocation. Where possible, SOE legal forms should the relevant company law, they can be subject to both be streamlined and aligned to the private sector. private sector rules (for example, listing rules) and public The guidelines emphasize the importance of clearly sector laws, for instance, those relating to employment, defining the role and objectives of SOEs, implementing budgeting, investment, and procurement. strong corporate governance practices, and avoiding interference from the state in day-to-day operations. In MENA, there is a broad cross-section of approaches Additionally, they call for robust accountability and regarding how SOEs are established. In Oman and disclosure mechanisms to foster transparency, and for Jordan, for instance, all entities are established under SOEs to be subject to the same laws, regulations, and the applicable company laws. However, in both oversight as their private sector counterparts. cases, there are a variety of legal forms available under the company law (for example, in Oman this ranges There are some distinct elements to the policy from public joint stock companies, private joint stock challenges facing governments in the MENA region companies to a simpler limited liability company when it comes to establishing strong legal and form). Each form has its own unique governance regulatory frameworks for SOEs. The first deals with and disclosure requirements. For reasons that are how SOEs are organized as companies; a second not entirely clear, SOEs in both Jordan and Oman are with how governance rules are applied to SOEs and established using these disparate forms rather than a enforced; and a third with how to ensure that there single unifying structure. The OECD recommends is a competitive neutrality between SOEs and the that SOEs adopt the same level of governance and private sector. This latter challenge requires consistent disclosure practices as publicly listed companies. policy across a range of factors including, for instance, Thus, it would make sense that all SOEs be ultimately procurement, the funding of public service obligations, established as public joint stock companies. and SOE employment practices. However, for the present discussion, the important elements are the In Egypt, the current legal framework defines mechanisms that ensure that policy and regulatory six categories of government-related entities. functions are separated from ownership functions Furthermore, the delineation between entities is often within the state and, as a corollary, that SOEs are blurry, and the governance of an entity may not fully subject to the same laws as those that applied to the correspond to its legal form. Statutory SOEs tend to private sector. borrow features from both the private and public sectors. However, even corporatized entities may be Legal forms of government-related entities subject to exceptions from company law, such as protection from insolvency. In Morocco, commercial There is a need to define and streamline the legal SOEs that fall under the supervision of the new state forms of SOEs. The OECD recommends that SOEs be ownership agency, the ANGSPE will, in the future, constituted under standard legal forms under company be transformed into limited liability companies. It is law, such as limited-liability or public limited companies. expected that their new legal status will provide greater The two main reasons for this are that: (i) it permits flexibility to manage human and financial resources, 20 IV. THE LEGAL AND REGULATORY FRAMEWORK FOR CORPORATE GOVERNANCE OF SOES improve autonomy and accountability, and encourage again, there is limited evidence of actual usage. The better disclosure and governance standards. Therefore, issue of implementation and, in particular, creating SOEs will no longer be subject to legal restrictions to incentives for reform (reducing disincentives) needs to restructure their workforce, set competitive wages, be considered carefully in any future reforms. or subject their staff regulations to state approval. In addition, the SOEs should also be able to raise debt Separation of the state’s more easily. Overall, standard legal forms promise to shareholder function from provide SOEs with greater agility and the capacity to its policy and regulatory functions react to challenging market conditions, as well as to better compete with the private sector. In MENA countries, it is common for the ownership and regulatory responsibilities of the state to Governance Codes be combined within line ministries. The OECD recommends that policy, regulatory and shareholder Although most jurisdictions have governance codes functions be separated to reduce the potential for that apply to SOEs, compliance is generally poor. One conflicting objectives within one body. In MENA, line country demonstrating progress on this issue is Oman, ministries frequently act simultaneously as owners, which (via the Oman Investment Authority, OIA) has policy makers, and regulators. They do so by exercising recently issued a corporate governance code for SOEs. key ownership functions, including the appointment Although there are some gaps in compliance, the OIA of the Chief Executive Officer (CEO); the drawing up is now tracking adherence to the code as part of its and approval of SOE budgets; the development and performance management framework for SOEs. In approval of SOE strategies; setting tariffs; and otherwise Jordan, there are different codes for listed companies devising regulations. Several countries have taken steps (issued by the Securities Commission) and unlisted to separate the ownership function from other state entities (issued by the Comptroller of Companies). functions. This includes Jordan and Oman (where Each of the codes has different requirements. From ownership is centralized in a holding company) and observation of SOE annual reports, it is clear that there is Morocco and Djibouti (which have taken steps to further limited compliance with either of the codes. In Djibouti, centralize ownership and coordination functions under a code for good governance of SOEs was passed in the new ownership agencies, the Agence nationale de 2016, but the code has still not been fully implemented. gestion stratégique des participations de l’État (ANGSPE) In Egypt, a corporate governance guideline was issued and the Secrétariat Exécutif en charge du Portefeuille in 2006, but the use of the guidelines appears to be de l’Etat (SEPE). In the jurisdictions without centralized limited. Egypt has made progress in its legal framework ownership, that is, Egypt and Tunisia, the challenges for SOEs under the Public Business Sector Act. appear particularly pertinent (although in Egypt’s case, However, here too, there is scope for improvement. the recently approved State Ownership Policy indicates Possible improvements could include a framework for that a stronger separation of ownership and regulatory the appointment of board members, further improved functions is necessary). More broadly, examples of disclosure practices, as well as requirements to account potentially conflicting functions can be found in for public service obligations. Morocco’s legal and several countries, where ministries are responsible for regulatory framework for SOEs is relatively robust, and a wide range of functions including: (i) the approval it has undergone significant improvements over the of performance agreements, annual business plans, last decade. A Code of Good Governance Practices for budgets, financial statements and wage levels; (ii) the Public Establishments and Enterprises was established deliberations of the board of directors; and (iii) the in 2012, and it is currently (mid-2023) in the process development of regulatory texts. Further efforts at of being updated. In Tunisia, Guidelines of Good distinguishing between the state’s key functions should Corporate Governance were issued in 2012. However, be considered as part of any future framework reform. 21 V. State Ownership Arrangements 22 V. STATE OWNERSHIP ARRANGEMENTS The OECD Guidelines on SOEs recommend line ministries do not generally take a shareholder organizing the state ownership function in a manner perspective on SOEs. They tend to take a view driven that promotes efficient, transparent, and accountable much more by the achievement of policy objectives. management of SOEs. The guidelines encourage the In Tunisia, where ownership is decentralized, a recent establishment of a centralized ownership entity or a study (Livre Blanc)36 reported that line ministries lack coordinating body, staffed by professionals with relevant the resources and operational skills to take financial and expertise, to oversee and administer state ownership. business decisions. Egypt currently has a hybrid state This entity should develop and communicate a clear ownership model combining centralized ownership ownership policy, outlining the state’s objectives for the for some companies (exercised through state-owned SOE portfolio, the ownership rationale, performance holding companies), and decentralized ownership in expectations, and governance principles. In addition, other cases. the guidelines emphasize the importance of continuous evaluation and monitoring of SOE performance, as The development of ownership arrangements is well as maintaining open channels of communication generally moving towards greater centralization, between the ownership entity and relevant stakeholders, and the use of the holding company model has been including the public and legislature. adopted in Oman and Jordan. Holding company structures are used with varying degrees of success Practices in the MENA region are evolving. In most throughout the world. There are advantages and countries, SOEs have historically been managed using disadvantages to this structure (see box 1). Looking a decentralized model. Thus, the political economy of at various models in other jurisdictions, Oman has reforming these arrangements (to a more centralized recently centralized almost all ownership through the model) can be challenging. Decentralized models, establishment of the overarching Holding Company, in themselves, act as a constraint on any additional the Oman Investment Authority. The OIA has been reforms (such as establishment of ownership policies), granted the mandate to develop all of the financial and which require coordinated ownership. MENA countries governance rules for the SOEs within their remit. To date, are making progress on this issue at different rates and they have established a Corporate Governance Code, a using different models. Procurement Code and investment rules. The entities themselves are housed within several industry-based Decentralized ownership arrangements holding companies that are themselves subsidiaries of the OIA. This structure is meant to: (i) streamline the Ownership arrangements are generally fragmented governance and ownership; (ii) allow for specialization with line ministries typically playing the main in oversight; and (iii) allow industry-specific modes of role in directing SOEs. Most MENA countries are ownership/oversight to be developed. In Jordan, a familiar with the recommendation of the OECD holding company structure has also been adopted, to establish centralized ownership arrangements but there is little visibility about how it performs its role. and, at a minimum, coordinating mechanisms to In fact, in both countries, greater transparency about help improve SOE oversight and governance. Yet, the role, functions and performance of the ownership the implementation of this recommendation has holding company would engender greater confidence been measured. The main oversight bodies are line in the merits of this structure. ministries, the Ministry of Budget, and the Ministry of Finance. These ministries focus heavily on monitoring The remaining countries are moving toward greater compliance with budgets, contractual obligations, and centralization. In Djibouti, a new body tasked with the political objectives of the government. However, overseeing the state’s portfolio at the central level should 36 Government of Tunisia (2018) : Livre Blanc – Rapport de synthèse sur la réforme des entreprises publiques en Tunisie. 23 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION help to gather information and provide centralized governance of SOEs; (e) monitoring SOE performance; oversight (although it had not begun operation at the time and (f) reporting on its own activities, among others. of this writing). Morocco stands out in the MENA region The ANGSPE was established in recognition of the as the only country with a central general government urgent need for budgetary reforms.37 In Tunisia, the coordination body exercising the state ownership role. establishment of a centralized and independent entity It recently established the state ownership agency has been envisaged in numerous reports, but no legal (ANGSPE) which, when fully operational, will have the and operational steps seem to have yet been taken. classic responsibilities of an ownership entity, including: All the individual SOE governance reports suggest that (a) developing the state shareholder policy; (b) current oversight and institutional arrangements do developing and implementing an ownership rationale, not generally allow for a coherent and coordinated as well as considering divestitures; (c) fulfilling the framework. Centralized ownership entities, though fiduciary duties of an owner; (d) professionalizing the recommended, are a relatively new concept. Thus, it Box 1: Advantages and Disadvantages of State-Owned Holding Companies Advantages: 1. Centralization: State-owned Holding Companies (SOHCs) can centralize the ownership function, enabling the state to manage its portfolio of SOEs more effectively and consistently. 2. Professionalization: By creating a specialized body, the SOHCs can attract professionals with relevant expertise, leading to better governance and management of SOEs. 3. Clearer separation of roles: The SOHCs help separate ownership and regulatory functions, reducing conflicts of interest and ensuring impartial oversight. 4. Economies of scale: The SOHCs can leverage economies of scale in areas such as procurement, financing, and shared services, leading to cost savings and operational efficiencies. 5. Improved performance monitoring: The SOHCs facilitate better performance monitoring and benchmarking by allowing for a more coordinated approach. Disadvantages: 1. Bureaucratic layer: The creation of a SOHC can add an additional layer of bureaucracy, potentially resulting in slower decision-making and reduced agility. 2. Political interference: The SOHCs can be susceptible to political interference, which may lead to suboptimal decisions and inefficiencies. 3. Complexity and opacity: The structure of the SOHCs can be complex, potentially reducing transparency and making it difficult for stakeholders to hold SOEs accountable. 4. Risk of monopoly power: Consolidating SOEs under a SOHC may create market concentration, which could lead to monopolistic behaviour and market distortions. 5. Legal and regulatory challenges: The establishment of a SOHC may require adjustments to existing legal and regulatory frameworks, which can be a complex and time-consuming process. Source: Authors. 37 Interestingly, plans are underway for the ANGSPE to have an advanced governance structure. According to its founding law, by 2026, it will take the form of a corporatized entity. It will have a board of directors chaired by the Minister of Economy and Finance with five state representatives and three independent directors. 24 V. STATE OWNERSHIP ARRANGEMENTS will take time to become accepted and operational. company, the National Electric Power Company Although centralized oversight would represent a (NEPCO), is informative. The managing director of significant change from current practice in some the company as well as the board of directors are countries, there could be significant benefits in making appointed by the Council of Ministers. According to this a priority for reform. In Egypt, although there is NEPCO’s 2022 annual report, the Board of NEPCO some evidence of further decentralization, the recently currently has five members, including the Chairman approved State Ownership Policy may provide impetus and the general secretaries of the Ministry of Finance, for a more centralized model. and Ministry of Energy and Mineral Resources. The Managing Director reports to the Board. The Cabinet of Political influence on SOEs Ministers appoints NEPCO’s Board of directors as well as its Managing Director. Given the sector structure, Although circumstances vary from country to gas supply interruption during 2011-2015, increasing country, in general, it is common for the state to cost of generation, and the tariff setting methodology be involved in the management decision-making by the regulator, NEPCO has accumulated significant process. There are two issues at hand here. The first is financial losses. ). In Djibouti, boards are dominated by micro-management, or the excessive involvement of public sector employees and, in some cases, ministers. the state in the management of the enterprise. Good In addition, they are generally highly politicized. The practice suggests that boards should be autonomous. goals of autonomy, responsibility and accountability They should have the capacity to direct and oversee can be achieved, in part, by enforcing clear decision- management in the achievement of their business making processes and thresholds (as recommended objectives, while also being accountable to owners above). These are supplemented by training of SOEs for the final outcomes. The second is political and government officials regarding the distinct roles interference, whereby decisions are taken based on of management versus boards and owners. Ultimately, political imperatives. Those imperatives may have however, the de-politicization of decision making nothing to do with the business goals of the enterprise depends on the political powers supporting the or even the achievement of public service obligations. autonomy and independence of boards, as well as the Although policy directions are a legitimate prerogative implementation of formal performance contracting. of the state, they should be channeled through boards. They should also be subject to formal decision- Rationales for state ownership making processes with boards exercising their legal duties under company law to act in the best interest Rationales for continued state ownership, as of the company. In MENA, interventions into the recommended by the OECD Guidelines, are management of SOEs and politicized decision making comparatively rare. It is considered good practice for are common. The establishment of clear and formal a country to define its rationale for state ownership. decision-making rights and thresholds (for owners, Ownership rationales are often included in ownership boards, and managers), as well as a defined process policies, as recommended by the OECD Guidelines for how to communicate policy objectives to the SOE (See Ownership Policy below). A rationale for state should be considered essential goals. ownership typically requires a number of conditions to be fulfilled for state ownership to be justified, Throughout the region, it is common for boards to including: (a) that the private sector cannot reasonably be composed of civil servants who are generally not be expected to fulfill the desired functions of the SOE encouraged to take independent decisions and who equally as effectively; (b) a market failure, such as a are obligated to implement instructions from their natural monopoly (common in network industries political superiors. In Jordan, the case of the electricity with high barriers to entry); (c) strategic sectors such 25 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION as defense; and (d) infant industries38 which, due to One of the techniques that is recommended to begin to their absence or newness, may require protection reshape the state’s ownership portfolio is to categorize for a limited period of time from stronger and more government-related entities (based on criteria, such as established competitors. The prevalence of statewide whether they operate in competitive sectors, financial multi-year planning frameworks in the region provides versus non-financial SOEs, size, budgetary impact, and a foundation for developing ownership policies. For other factors) in order to develop tailored strategies instance, in Oman, the Vision 2040 framework could based on a rational system of classification. provide the basis for developing an overarching SOE ownership philosophy tied to the country’s strategic Privatization should be considered as a potential objectives, as established through Vision 2040. The policy solution to many of the governance challenges OIA is working to integrate these strategic objectives SOEs face, subject to a jurisdiction having the into individual company objectives, but there is a need institutional capacity to manage the post-privatization to also do this at the portfolio level as well. regulatory environment. For instance, where SOEs are underperforming, or present significant fiscal risks, Reshaping the state’s ownership portfolio then privatization (or other divestment options, such as public-private partnerships [PPPs]) can sometimes Most MENA countries do not subject the state’s provide a framework for addressing these challenges. portfolio of SOEs to a regular evaluation or even When considering private sector options, it is important systematically consider the justifications for continued that the government understand the post-privatization state ownership of SOEs. Although state ownership is industry structure and requisite regulatory frameworks. justified under certain conditions, international good Any private provision of services / goods should involve practice suggests that the state evaluate its portfolio a genuine risk transfer to the private sector; this will of SOEs on a regular basis to decide whether there is in turn depend on: (i) the effectiveness of the sale still a need for continued state ownership of individual process in allocating risks; (ii) the institutional capacity enterprises. This process does not typically occur in of the government post-privatization to manage and MENA. Indeed, country reports suggest that many regulate the industry structure; (iii) the complexity of enterprises do not have a clear rationale for state the industry to which the sale relates. It follows that ownership. There are many examples of state ownership the validity of using private sector involvement as a where the private sector is generally considered better means of addressing SOE governance or performance suited to provide the needed products and services (for challenges will vary by jurisdiction and SOE. example, for hotels, construction, manufacturing and other sectors). The presence of the state in competitive Ownership policies sectors suggests that the degree of “competitive neutrality” or fair competition between the private and Few countries in the MENA region have a clearly public sectors warrants further examination. It also identifiable ownership policy. Best practices and suggests that MENA states should regularly evaluate OECD guidelines suggest that countries should develop their portfolios of government-related enterprises to and disclose their SOE ownership policy. They should assess if the need for continued state ownership persists. define the objectives of the state as an owner, as 38 It is commonly argued that infant industries require protection from international competitors until they are able to compete on their own. Views regarding the validity of infant industry protection differ. Arguments that are commonly proffered in favor are to protect a new enterprise until it can compete on equal grounds, promote national security and reduce reliance on production from abroad. However, infant industry protection may serve to encourage and perpetuate inefficient industries and reduce incentives to compete. Infant industry protection may also raise costs for consumers compared to the cost of imports. Furthermore, it is often difficult to roll back protections once they have been granted due to vested interests. Finally, infant industry protections have been provided by virtually all major economies at some point in their economic history to protect their domestic production. 26 V. STATE OWNERSHIP ARRANGEMENTS well as the institutions and means by which the state a good example for other countries in the region. One achieves its objectives. Beyond defining the goals of of the key recommendations for MENA countries is to state ownership and an ownership rationale, ownership have a unified ownership policy that defines the basic policies should describe the roles and responsibilities parameters of SOE governance and oversight. of the different institutions tasked with the ownership responsibilities of the state. An ownership policy Almost as important as the ownership policy serves as a crucial tool for governments, ensuring document is engaging in an open and transparent alignment with national priorities, promoting good process to define and establish the underlying tenets governance, and clarifying the state’s roles as both of the policy. These tenets would include, for instance, an owner and regulator. By providing a foundation for the overall state objectives of ownership and rationales performance management and fostering transparency for continued ownership of SOEs. A comprehensive and accountability, it enables stakeholders to effectively process would include not just government agencies monitor and evaluate SOEs. Furthermore, an ownership and SOEs, but wider society, including the public, the policy facilitates fair competition and a level playing legislature, minority shareholders, financing bodies, field with private enterprises; supports long-term value employees, and suppliers. Engaging stakeholders will creation through strategic planning and innovation; and promote transparency, trust, and accountability in enhances stakeholder engagement, ultimately fostering the ownership framework. It will also help to ensure trust in the government’s management of SOEs. that diverse perspectives are considered, leading to more informed and balanced policies. Furthermore, In practice, there is no single model for how to develop stakeholder engagement fosters a sense of ownership an ownership policy. Even if good practice suggests and commitment, enhancing the likelihood of successful that an ownership policy be in one single document, it policy implementation and long-term effectiveness. is not uncommon for various aspects to be regulated The process of preparing Egypt’s SOP followed these by different legal instruments. In many MENA countries, principles, including by inviting comments from the the elements of an ownership policy can be found in public, and by having several consultative – often public prime ministerial circulars, decrees, and other laws – meetings with stakeholders. which specify the financial control rights of the state over the SOEs. In Djibouti, for example, there is no single policy; rather, e elements can be found in various laws and decrees. The result of this fragmented approach is that it is sometimes unclear who has the responsibility for ownership activities, including monitoring and reporting. In Morocco, there is currently no standalone consolidated ownership policy, but the development of a State Ownership Policy (SOP) is an explicit mandate of the ownership agency, ANGSPE. Tunisia has no single ownership policy stating the rationales of state ownership or communicating the public policy objectives of SOEs. However, existing commitments in strategies and various parts of legislation provide a strong basis for issuing a consolidated document. Egypt’s SOP, approved by President Sisi in December 2022, represents the region’s first stand-alone and comprehensive SOP. If further operationalized — especially in terms of its corporate governance and market neutrality commitments — it provides a very promising framework for SOE reform in Egypt. It is also 27 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Aggregate reporting high-level data on the portfolio of companies, although at this stage it is mostly qualitative. In Egypt, the Aggregate reporting from a shareholder perspective, Business Sector Information Center (BSIC) has taken as recommended by the OECD Guidelines, appears important steps toward providing summary information to be rare, although good emerging practices can be on SOEs and making this information available online. identified. This type of reporting is usually done by a Furthermore, the Ministry of Finance’s issuance of centralized ownership entity (or an SOE coordinating aggregate reports on SOEs in 2018 and 2019 marked body). It is not surprising that aggregate reporting a significant improvement in transparency. Since 2019, is limited in MENA since few centralized ownership the Ministry of Finance in Tunisia has published an entities exist. Also, SOEs more typically report to a variety annual report on SOEs, which it annexes to its Budget of state institutions. In some cases, basic information Law. That report focuses on the fiscal impact of SOEs, about the extent of state ownership is not even but not on their overall performance or governance. available to the state as the owner. Fiscal authorities Throughout the region, aggregate reporting from a are, arguably, most advanced in their monitoring shareholder perspective could be developed further throughout the region because of the interest that to provide both the state and the public with the governments have in the impact of the SOEs on state information needed to hold SOEs and their governors budgets. Morocco’s Department of Public Enterprises more accountable for SOE performance. Aggregate and Privatization takes a broad approach in its annual reporting from a fiscal perspective should refer to the report. Several good and improving practices can be overall fiscal impact of SOEs (not just their impact observed regarding aggregate reporting on the SOE on the budget), including the impact on the state’s portfolio. In Oman, the OIA annual report is providing balance sheet. 28 VI. Performance Management Frameworks 29 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION The OECD Guidelines on SOEs recommend in the performance management arrangements. the implementation of effective performance Jordan has also established a Holding Company, the management frameworks to ensure that SOEs operate GIMC, to oversee the majority of SOEs in Jordan. efficiently and achieve their defined objectives. These Again, this entity would be well-placed to implement a frameworks should encompass clear performance comprehensive performance management framework. targets and indicators. They should also be aligned During the preparation of the SOE Governance Review with the ownership policy, taking into consideration of Jordan, it was unclear the extent to which the GIMC the specificities of each SOE. There should be regular was performing this function. monitoring and evaluation of SOE performance, with benchmarking against comparable private In the absence of an ownership entity, state sector companies or industry standards whenever institutions do not usually take a shareholder possible. Additionally, the frameworks should promote perspective concerning the performance of SOEs, transparency by mandating public disclosure of although ministries of finance often take a financial performance results, as well as fostering accountability view of the SOEs. In Egypt, most SOEs appear through SOE-level performance agreements. By to report to their respective line ministries about focusing on performance management, ownership operational and financial performance, as well as the entities can drive continuous improvement and value implementation of approved business plans containing creation within SOEs, while also minimizing the risk of specific performance indicators. In addition, SOEs market distortion, thus ensuring a level playing field for must report financial results to the Ministry of Finance. all market participants. A representative of the MOF is mandated to attend shareholders’ meetings for all holding companies. The It is common throughout the region for a variety focus of the ministry’s representative is typically limited of independent institutions to monitor SOEs, but to the issue of dividends and financial exposure, but not without one body able to provide a comprehensive to issues of strategy or performance. In Morocco, a new or exhaustive view of the SOE sector. As noted, many law introduces several potentially strong monitoring countries do not have a centralized “ownership entity” tools, but these are not systematically extended to as recommended by the OECD. However, of the six all SOEs. In Tunisia, a proliferation of organizations reviewed countries, Morocco has established a new exercise oversight in their specific area of interest. centralized ownership entity, the ANGSPE, and Jordan However, there is no single, comprehensive system and Oman have taken steps to centralize ownership for monitoring performance, although performance through a SOE Holding Company. The reforms in contracts are used for some state-owned banks and Oman, which involved the transfer of almost all SOEs SOEs. Throughout the region, ministries of finance to the Oman Investment Authority, provide an example will typically monitor budgetary impacts, and banking of how reform might proceed in the region. As a regulators will monitor the stability of state-owned holding company, the OIA is a centralized owner that banks. Overall, there is considerable scope for a more has already developed a performance management systematic approach to performance monitoring, framework, with benchmarks based on a balanced management, and goal setting throughout the region. scorecard approach. Their system is still evolving, with the challenge being to develop a streamlined, broad- A core challenge in assessing SOE performance is based, target-setting and benchmarking process that to disentangle the multiple objectives of different can apply across a very large and disparate group of state institutions and SOE stakeholders. Multiple and SOEs. As noted, Oman has chosen to structure its sometimes conflicting objectives make it difficult to 170 SOEs under a series of nine industry-themed, sub- hold SOE management and boards (and even the state holding companies in an attempt to make this process as an owner) accountable. Throughout the region, more manageable. This structure may create some the strategic objectives of SOEs, the performance competition concerns (particularly in industries where outcomes and specific key performance indicators SOEs dominate), but it will likely lead to some efficiencies (KPIs) are not generally set down formally or sufficiently 30 VI. PERFORMANCE MANAGEMENT FRAMEWORKS quantified. Several measures can be taken to clarify financial performance of SOEs should play a prominent and harmonize SOE objectives. In particular, it is role. Arguably, it should be at the forefront, given that important to have better accounting of the costs of financial performance is essential to the longer-term PSOs. This can help provide crucial insights into the sustainability of the enterprise. Such a focus can help costs and benefits of PSOs, and it should help enhance SOE management prioritize their efforts and support accountability regarding outcomes. The profitability and better fiscal management. 31 VII. Board Structures and Functioning 32 VII. BOARD STRUCTURES AND FUNCTIONING Creating effective functioning SOE boards is one instance, in Oman, the law requires all directors to be of the greatest challenges that jurisdictions face in non-executive. It also requires that directors serve a managing SOEs. Done correctly, it is also a reform with maximum of two three-year terms. The governance significant chances of achieving improved performance. code mandates strict requirements to qualify as In MENA, as in other regions, public servants and current independent, and it requires the establishment of an or former politicians can be overrepresented on SOE audit committee. In Egypt, the Public Business Sector boards. Often this practice reflects a form of patronage Law applies to SOEs explicitly under the scope of the or reward. However, it can also be an attempt to law and prescribes board practices. SOEs listed on minimize the agency costs associated with independent the Cairo Stock Exchange are subject to the Capital management. Governments, distrustful of managers, Market Law, which stipulates additional requirements may seek to appoint Board members that they feel in terms of board structure and functions beyond those will best implement their interests. Unfortunately, found in company law. Similarly in Jordan, there is a boards with excessive government representation code for unlisted companies that details the functioning tend to lack the full range of skills necessary to and structure of boards, as well as a separate, more effectively oversee complex commercial operations, prescriptive code issued by the Stock Exchange for with a concomitant adverse impact on commercial listed companies. In Tunisia, board functions and performance. A better approach, as advocated by the structures are set out in law, which assigns them a OECD Guidelines, is to appoint professional boards. mostly consultative role with key authorities devolved to They can then give them the necessary autonomy to supervisory authorities. Recent decrees have changed perform their role, as well as to control the agency board structures and roles by defining principles related costs through effective performance monitoring, strong to the selection, removal, and evaluation of board disclosure requirements, and effective ownership members. A major change from prior decrees is that the oversight. It follows that improving Board composition number of independent board members had originally and performance cannot be done in isolation. It also been set at a minimum of two, whereas it has now been requires that governments effectively reform their rolled back to cap the number of independent board ownership arrangements, disclosure requirements and members to a maximum of two. Overall, the different performance monitoring frameworks. types of board structures within countries could stand to be harmonized along with the legal forms of different Board structures types of enterprises to facilitate monitoring and reform (See legal forms above). SOEs may have a variety of board structures depending on their legal status, which can make it difficult to Board nominations uniformly implement good governance practices. In almost all cases, the relevant laws contain provisions Board member nomination processes are not generally regarding the minimum and/or maximum number of formally articulated or transparent, and they do not board members, as well as whether single or dual board necessarily yield the candidates best suited for board structures should be adopted. In Egypt, for example, posts. Decisions about board membership in most MENA the company law provides the legal framework for both countries tend to be made at the highest level of the state. public and private companies, including military-owned They may involve finance and line ministries. Although SOEs. It also prescribes, among other things, a single- the background of candidates is often considered, the tier board with a minimum of three board members. decision is generally determined based on political suitability. In most of the reviewed countries, the rules Laws, governance codes, and listing rules can go and procedures for nominating and appointing SOE board further than mandating the structure of the Board; members are not based on pre-established professional they can extend to mandating minimum non- criteria, and there is no formal selection process. Oman executive directors, term limits, independence is seeking to move toward a more structured nomination requirements, and board committee structures. For process, but it is not yet fully formed. 33 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION The absence of transparent and competitive SOE board composition. For example, (i) the Code of board nomination processes in MENA countries, Governance requires all directors to be non-executive; together with the limited presence of independent (ii) Ministers and Ministry leaders cannot be represented; board members (see independence below), and (iii) board nominations are being made using a significantly limits the ability of SOE boards to exercise skills matrix. In Morocco, the Supreme Audit Institution objective and independent judgement without carried out a comprehensive evaluation of its portfolio political interference. Some of the shortcomings in in 2016. It concluded that in a sample of SOEs, board SOE performance in MENA can be traced, at least to composition needed to improve. Consequently, there some extent, to board nomination processes that do is an awareness of the importance of an effective, not yield the best-suited candidates for board posts. It professional, and independent board as an essential is critical that an appropriate skills and competence mix part of building a well-governed, autonomous, and is achieved for members of boards and committees. financially sustainable SOE. Nevertheless, the boards Good practice suggests that a key focus of SOE reform of some strategic SOEs continue to be dominated by should be: (a) the transparency and quality of the board ministers and their representatives. In Egypt, board nomination process; (b) ensuring that nominations composition and board member backgrounds and are made based on competence and experience; and qualifications vary widely, with listed SOEs coming closer (c) ensuring that there is a clear distinction between to good practice. In Tunisia, boards are almost entirely management and board functions. composed of state representatives from ministries or public bodies, as well as former public official retirees. Board composition In 2018, the Livre Blanc report39 indicated that “SOEs boards lacked objectivity, specific qualifications and The composition of boards in MENA tends to be skewed competences required to fulfill their duties and that risks heavily toward high-level public sector profiles. The of conflicts of interest were obvious”. Recent changes preponderance of civil servants and political figures in law are a welcome improvement, but they maintain on SOE boards illustrates the primacy of the political the stronghold of supervisory authorities and the total agenda over the economic agenda — and even social lack of independence of SOEs boards. A commitment performance. Being a high-profile public officer remains to the de-politicization of boards and improved board a primary criterion for nominating SOE board members, composition would present a significant opportunity for with private sector experience, business skills and improvement throughout the MENA region. technical competency being secondary requirements. Many MENA countries acknowledge the benefits of Board duties and roles good board composition, merit-based nominations, apolitical boards, skills, and independence. However, Many MENA boards do not fulfill the duties and roles decisions related to board composition remain deeply generally expected of them in accordance with good political and are generally out of the control of the practice. Their work is still commonly associated with SOE. In Djibouti, boards often have ministers who retain the checking of compliance with sector-specific ultimate decision-making authority. To exacerbate policy objectives and the financial constraints set by matters, substitutes are often sent to replace ministers the state. Furthermore, the duty of board members is who, in the absence of the minister, are unable to make often understood to be directed to the state and not to decisions or propose any concrete actions. In Jordan, the SOE. Best practice suggests that boards exercise a ministerial representatives on Boards are standard, often variety of different roles, most important of which are: including both the Ministry of Finance and the relevant (a) guiding the management in setting the strategic line ministry. By contrast, Oman is making significant direction of the enterprise and developing strategic steps toward a structured, merit-based approach to plans; (b) agreeing to KPIs with the management and 39 Op. cit. 34 VII. BOARD STRUCTURES AND FUNCTIONING monitoring management’s performance against the monitoring systems and even overseas travel. KPIs; (c) selecting the CEO and engaging in succession Moreover, line ministries have the power to approve all planning; (d) monitoring the reporting and control board decisions before their enforcement. In Egypt, in environment, and ensuring that systems for control practice, SOE boards are rarely empowered to appoint and risk management are in place and functioning; or dismiss the CEO, which makes it difficult for boards and (e) reviewing and improving their own governance to fully exercise their function and take responsibility practices. At the same time, boards are expected to for SOE performance. Overall, such practices serve to respect the different roles and interests of boards, reduce the capacity of boards to fulfill their duties and management and owners. In practice, one of the responsibilities, as well as the ability of SOEs to operate greatest challenges for boards is to focus on strategic effectively in a competitive environment. Systems issues as opposed to the minutiae. This last challenge should be developed to simultaneously devolve is reported globally as a major challenge in both private authority and responsibility, while better holding boards and public companies. The extensive training of civil to account for outcomes. servants and SOE boards concerning the roles and duties of a modern board will be necessary to effect Nevertheless, there are some moves being made a longer-term change in governance practices. The in selected jurisdictions to improve the autonomy training of civil servants in good governance practices of Boards. In Oman, it is mandated that at least 2 is essential since a lack of knowledge of good practices directors must be independent. Board performance is in SOE governance is often a roadblock to reform. being assessed using a balanced scorecard approach, and members are being chosen for their skills. In Board autonomy and this context, a greater focus is being placed on the decision-making thresholds commercial performance of the SOE. In Morocco, efforts have been made to provide greater autonomy to A common problem in MENA countries is the limited both the boards and management of SOEs by reducing autonomy afforded to boards. The OECD Guidelines a priori approvals. In the past, in SOEs subject to a recommend giving boards decision-making autonomy priori control, ministries were authorized to give final while, at the same time, ensuring that boards remain approval to all budgets, staffing, organization charts, fully accountable to owners and the public. Often, the procurement policies, credit and borrowing decisions, decision-making authorities and autonomy of boards and the distribution of profits. and management are not observed due to a lack of formal decision-making authorities and thresholds. Independence Sometimes, thresholds are clear, but are set so low as to trivialize the work of the board. One of the classic Independence on SOE boards is recognized as an results of this is that boards disengage because they important goal, but it remains a challenge. Best are, in the end, unable to act independently or have any practice suggests that independent board members meaningful impact on the SOE. Throughout the region, and independence of mind are essential for a well- this is illustrated by the inability of boards to choose the functioning board. In practice, nominating a greater CEOs of SOEs. In Jordan, for instance, CEOs are often number of independent board members conflicts with appointed by the relevant Minister or, in the case of the often-traditional use of boards, which is to reward the NEPCO, by the Prime Minister. Similarly, in Tunisia, political allies and civil servants, and to exercise direct ministries are deeply involved in decision-making control by the state on important decisions relating to and activities that are normally reserved to boards investments and expenditures. Relying on independent and management. For example, Tunisian ministries thinkers to make decisions on the behalf of the state review all human capital and organizational decisions represents a major shift in mentality, as well as a such as: organizational charts, special staff statutes, change in the understanding of what constitutes good job classifications, compensation plans, conditions governance. However, change is possible. In Morocco, of appointment, recruitment programs, performance independent board members became mandatory under 35 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION successive amendments to the Company Law in 2020 about SOE boards, with the goal of improving the and 2021. This occurred even if, in practice, few SOEs quality of their deliberations. have appointed independent board members. Oman has similarly mandated a minimum of 2 independent Conflicts of interest directors on each board, and it has specified strict criteria for what constitutes an independent member. Systems for managing conflicts of interest are in In Tunisia, the independence of SOEs boards seems place in many countries, although there is no data to be not effective. Even though the SOE Corporate to demonstrate their efficacy or the extent to which Governance Code recommends that 25 percent of the transactions occur when parties have conflicts. members of SOE boards should be independent, few A conflict of interest occurs when an individual or have implemented this recommendation. Tunisian bank organization has multiple interests, one of which could boards are expected to have at least two independent corrupt their motivation in a transaction. Conflicts board members and limit themselves to one executive of interest commonly result from family interests, board member. Greater independence of SOE boards ownership in other companies, gifts from friends or could be recognized as a key contributor to better business partners, or multiple places of employment. performance and risk management. An example is using one’s official position to secure a contract for a private consulting company one owns Gender balance to obtain a job for a relative. SOEs are particularly vulnerable to abuse under conflict-of-interest Although gender balance is not considered to be conditions because of generally lower transparency as important a goal as in other countries, there is requirements, less stringent governance practices increasing recognition in some MENA countries of and their subjugation to political powers. Conflicts its potential benefits. Despite the relatively recent of interest are not generally prohibited and cannot revision of legislation governing board composition be avoided completely. What is essential, however, in Egyptian SOEs, gender balance was not explicitly is that any decision taken where a conflict of interest addressed. In Morocco, public debt issuers require exists should be taken at “arm’s length”. An arm’s that SOEs make disclosures about board diversity length transaction is a transaction in which parties act (independence and gender) in accordance with the independently and have no relationship to each other. Capital Market Authority’s disclosure rules. Integration State-owned banks can be particularly vulnerable to of independent board members and board diversity conflicts of interest since boards and executives often became mandatory under successive amendments make direct lending decisions. of the limited liability company Law in 2020 and 2021. By 2024, women should represent 30 percent Many MENA countries have procedures in place to of board seats, and committees should include at manage conflicts of interest, but their efficacy remains least a woman. By 2027, the proportion should reach to be demonstrated. In Djibouti, Decree 176 sets out 40 percent. Companies not complying with the new procedures that define how board members should act board composition rules face sanctions of nullity of in a situation of conflict of interest. In Oman, the Code board appointments and non-payment of directors’ of Governance sets out the process to be followed attendance fees. In Tunisia a decree from 2022 by board members in the case of a conflict, including stipulates board diversity requirements.⁴⁰ It suggests mandatory disclosure. Where ongoing conflicts that gender representation should not fall under 40 are unavoidable and significant, the code requires a percent. Overall, MENA countries should explore the director to resign. In Morocco, conflicts of interest are potential benefits of a further diversification of views viewed as one of the greatest challenges of ownership 40 Presidential Decree no. 2022-303 of March 29, 2022. 36 VII. BOARD STRUCTURES AND FUNCTIONING because state representatives can fulfill board mandates iterative process of board improvement. In Oman, board while simultaneously exercising board oversight. Such evaluations are required under the Code of Governance, situations have been addressed under an amended Law both individually and as a whole. These should be based on State Control, but conflict situations can still arise. In on pre-set KPIs. In Djibouti, board performance is not this respect, recommendations are being considered to evaluated. In Egypt, board evaluations do not appear require board members to complete annual conflict- to occur, and an external assessment of boards is of-interest statements and report any potential conflicts difficult due to limited publicly available information. of interest prior to each board meeting. In Tunisia, the In Morocco, board evaluations are sporadic, and weak Livre Blanc report of 2018 suggests that SOE boards are board practices persist. However, recent audit reports subject to obvious conflicts of interest, even though and other reviews have brought this issue to the attention board members must disclose in writing any direct or of policy makers. Most of the practices that need to be indirect interests they might have related to contracts improved in Morocco are related to board functioning or operations performed with the SOE. Thus, conflict- such as: (a) meetings held without the required quorum; of-interest requirements are in place, but compliance (b) chairing of meetings by an unauthorized member; (c) and enforcement practices are unclear. Throughout a lack of respect of the requirements for communicating MENA, there may be benefits to examining how to information to board members; (d) a lack of rules of better implement and enforce conflict-of-interest procedure and codes of conduct; (e) a lack of respect policies within SOEs. of the minimum number of meetings of specialized committees; and (f) the use of signed minutes without Board evaluations actually holding board meetings. Even if many MENA countries are generally aware of weaknesses in SOE Overall, the use of annual board and governance board practices, improvements could be encouraged evaluations to improve the quality of governance by rigorous annual benchmarking, as well as the practices is limited in MENA. Best practice suggests development of remedial annual action plans to close that boards engage in annual performance evaluations the gaps with good practice. that should, ideally, lead to remedial action plans and an 37 VIII. Financial Reporting, Accountability, Control, and Transparency 38 VIII. FINANCIAL REPORTING, ACCOUNTABILITY, CONTROL, AND TRANSPARENCY Timely, complete, and fair of the owner to develop sound policy and exposes disclosure of material matters countries to significant risks. Without good information, it becomes impossible to monitor the performance An often-heard complaint in the region is that the of the enterprise or its board, to set targets —or to quality of disclosure by SOEs is poor, and that many have a rational process for allocating the resources large SOEs do not disclose anything but basic company necessary to achieve goals. Better disclosure practices information. Much of the thrust of good practice are considered a key avenue of reform and central to recommendations, such as the OECD Guidelines, is holding the SOE to account. Minimum standards of to promote accountability through transparency and disclosure for larger SOEs should be equivalent to disclosure. Good information is equally important that of listed firms (that is, the annual financial reports for investors, banks, citizens, and the state. Indeed, prepared under the IFRS and audited according to the it is considered essential to incentivize performance, International Standards on Auditing [ISA]). The SOEs accountability, and effective governance. Yet, in should also make non-financial disclosures covering many MENA countries, SOE affairs are shrouded in governance, environmental impacts, risk management confidentiality with limited accountability to the state and other issues that are now considered standard for and the public. SOE performance can be so politically listed companies. Special approaches will need to be sensitive that there are strong disincentives to making developed for smaller SOEs. their true condition public. Furthermore, reports are often made available only to line ministries and other The use of International Financial state bodies, but they are not disclosed to the public. Reporting Standards (IFRS) Generally, across the region, listed SOEs are the main entities likely to publicly release their financial statements, The use of IFRS within the region can be strengthened. as this is often a requirement of the listing rules. In Best practice suggests that SOEs produce their Oman, select SOEs do publicly release their financial annual financial reports by using generally accepted statements, but it is more the exception than the rule. accounting standards, and that SOE disclosures be at The OIA has made efforts to provide more information least equivalent to those of good practice for private about its portfolio of SOEs in its Annual Report. However, companies. It has been shown globally that the use of to date, that information has been high level and largely national alternatives to the IFRS can obscure the true qualitative. Similarly, in Jordan, there is only piecemeal financial condition (and risks) of SOEs, as well as the public disclosure. In Egypt, recent legal changes have capacity of the state and other stakeholders to make strengthened the reporting requirements for some informed decisions. In both Jordan and Oman, the SOEs, but disclosure practices for non-listed SOEs IFRS is mandatory and apparently well implemented, remain inadequate. Likewise, in Tunisia, transparency although the absence of public disclosure of financial and information disclosure is limited, thus reducing statements in both jurisdictions makes this difficult to accountability and performance monitoring. verify. In Djibouti, there is no requirement to use IFRS, and different SOEs are subject to different accounting Timeliness in the release of financial statements is standards and disclosure practices. In Egypt, some SOEs also a problem in MENA. For example, Djibouti faces adhere to the Egyptian Accounting Standards (EAS), serious challenges in the quality and timeliness of whereas SOEs subject to special laws follow the legacy reporting. The delay in closing annual accounts can of the Unified Accounting System. This prevents a true range from three to five years, thus making annual comparison of financial performance with international reports effectively useless as decision-making tools. benchmarks, and even within the country. In practice, The reason for such delays is often a reticence to be unlisted non-financial SOEs do not make their financial open about the financial condition of SOEs. It is not statements publicly available. Recent legal changes have unusual for the financial information necessary to make strengthened reporting requirements for some SOEs, informed decisions to be unavailable--even for the state. but disclosure practices for non-listed SOEs remain An absence of good information reduces the capacity inadequate. In Morocco, the majority of SOEs prepare 39 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION financial statements under Moroccan standards, which to develop systems that permit an accurate costing of seek to approximate the IFRS, but do not fully comply PSOs. This would contribute to a better assessment of with them. In Tunisia, SOEs are required to apply Tunisian their costs and benefits. accounting principles, which are not fully aligned with the IFRS. Even where the IFRS are the standard, auditors’ Conducting of the independent opinions are often qualified (negative), thus indicating external audit using International that the implementation of the IFRS is inadequate (see Standards on Auditing (ISA) independent external audit below). Qualified opinions41 concerning the financial reports of SOEs mean that The audits of annual financial reports are not uniformly they are potentially unsuitable for decision making. The conducted using the International Standards on IFRS accounting standards are widely considered to be Auditing, making the annual financial reports of many one of the most important contributors to good SOE SOEs unreliable. The information provided in annual governance. Therefore, they should play a prominent financial reports should not be considered reliable role in any reform agenda. The IFRS is a good practice unless it is audited by an independent external auditor. for listed and economically significant SOEs. However, it Independent external auditors are, in turn, expected may be too demanding for smaller ones. For these, the to conduct their audits in accord with International “IFRS for small and medium enterprises {SMEs)” may be Standards on Auditing of the International Auditing and more suitable, as it is reasonably demanding, but less Assurance Standards Board (IAASB). In both Jordan and complex than the full IFRS. Oman, International Auditing Standards have been adopted, although the quality of the audits and the Disclosure of PSOs and their costs timeliness is difficult to verify because most reports are not publicly disclosed. In Egypt, SOEs are required The disclosure of the PSOs of the SOEs and their costs to have an independent audit, but the quality and is not generally done. It should be noted that, although scope of annual financial reports can be improved. In the costing and disclosure of PSOs is recommended Morocco, the annual financial reports of most strategic by the OECD, it is still comparatively rare even in OECD SOEs are audited by firms affiliated with global audit firm countries. The purpose of PSO costing is to understand networks. The qualified opinions in the audit reports what the cost of the public commitments are in order of a majority of SOEs are a key concern. They suggest to better track the performance of SOEs in delivering the need for a more proactive approach in solving the PSOs, as well as in understanding and compensating problems that give rise to these qualifications. In the them for the true costs of such commitments. Explicit absence of an independent external audit conducted accounting for the cost of non-commercial mandates using the IAASB standards, the value of any type of of SOEs would improve the transparency of budgetary report issued by an enterprise is diminished and is processes and potentially improve the targeting of potentially made unreliable. Audit practices, including subsidies. A minimum level of disclosure of PSO costs the governance of the audit and the audit profession, may be expected when SOEs fully apply the IFRS should be reviewed in MENA countries with a view reporting standards. However, SOEs are, arguably, to providing better quality assurances to the users of under an obligation to provide a fuller, more detailed financial and other reports. Efforts should also be made insight into the activities they undertake on behalf of the to follow up on qualified audit opinions to ensure that public interest. It is recommended that all SOEs begin they do not persist. 41 The independent external auditor can issue four types of opinions: (1) An unqualified opinion, often called a clean opinion, is the determination that the report is free of any misrepresentation; (2) A qualified opinion is issued when a company’s financial records have not been maintained in accordance with the IFRS, but no misrepresentations are identified; (3) An adverse opinion indicates that the financial reports do not conform to the IFRS and, in addition, have been grossly misrepresented; and (4) A disclaimer of opinion occurs when the auditor is unable to complete their audit report due to the absence of reliable financial records. 40 VIII. FINANCIAL REPORTING, ACCOUNTABILITY, CONTROL, AND TRANSPARENCY would benefit from ensuring that independent audits State audits of the annual financial reports of SOEs are conducted by an independent external auditor in accordance with In most countries, SOEs are subject to audits and the relevant professional standard. They should also be inspections by numerous state bodies, but these should overseen by skilled and informed boards of directors not be considered substitutes for an independent that protect the auditor’s independence. external audit of the SOE’s annual financial report. Despite the great number of inspections and audits that Systems for reporting, control, SOEs may be subject to, the OECD Guidelines suggest and risk management that the auditing standards and practices of SOEs be the same as for listed companies. The Guidelines also note Even though SOEs are subject to numerous inspections, that a regular annual audit of annual financial reports there is concern regarding their effectiveness. The is needed, similar to those performed in the private control mechanisms to which SOEs are subject are sector. In MENA, SOEs may not be obliged to have copious, but often complex and bureaucratic. They such an independent audit. State audits generally differ are focused on form rather than substance. Perhaps significantly from private audits in that they tend to have somewhat counter-intuitively, the numerous controls more of the character of an “inspection” as opposed to to which SOEs are subjected (which generally exceed establishing a true and fair view of the financial reports those of private enterprises) do not appear to result in of the enterprise. Furthermore, state inspections are a reduced incidence of mismanagement, inappropriate not generally done on an annual basis. Indeed, some risk taking, and/or corruption than in the private SOEs go for years between inspections. The variety of sector. Multiple instances and layers of control in the audits to which SOEs are subjected is illustrated by the public sector can obfuscate responsibility and reduce case of Djibouti. External audits may be conducted accountability. In fact, SOEs are widely considered to be by private firms, the General State Inspectorate, the riskier and more vulnerable to control anomalies than General Inspectorate of Finance, the Court of Auditors, their private sector counterparts. Thus, internal control the Directorate of Public Accounting, the Directorate systems are reported to be improving in some MENA of Portfolio and Audit, as well as sectoral auditors. countries. In Morocco, the control environment in SOEs Additional bodies can demand further information appears to have improved significantly over the last 10 from SOEs, such as statistics bodies or departments years. All strategic SOEs now have systems for internal for tracking public debt. In some cases, it was reported control and an internal audit function. Throughout the that multiple institutions were present simultaneously MENA region, a review of the control environment of in an SOE. However, on other occasions, SOEs were SOEs could help to improve their operational efficiency, only checked every five to ten years. MENA countries reporting, accountability, and risk management. 41 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Audit committees of well-governed, properly staffed, and empowered audit committees can be considered an important step Audit committees, which are considered crucial toward better controlling risks and generating better to ensuring a high-quality reporting and control and more reliable information. environment for SOEs, are not widely active in the region. Although the OECD Guidelines do not Anti-corruption programs suggest that audit committees be mandatory, they are, nevertheless, widely considered an essential part of A criticism often levied against SOEs in MENA (as good governance. Ideally, audit committees should be in other jurisdictions) is that SOEs are particularly staffed fully by independent board members who are vulnerable to corrupt practices. Corruption within considered “financially literate”. In many jurisdictions SOEs may imply a lack of adequate oversight, or in the region, there are soft law requirements for audit possibly misconduct within the public sector at large. committees in the relevant corporate governance The cost of the mistrust in the public sector that code. For instance, in Jordan, the code mandates can be created through corrupt hiring, procurement the establishment of both an audit committee and a and/or sales practices can be significant. Indeed, it remuneration committee. In Oman, the requirement can have a wide-ranging impact on the quality of for an audit committee is also contained in the relevant services provided by SOEs, as well as the financial code. While these are useful requirements, as noted demands that these companies make on the public elsewhere, compliance with governance codes in purse. Interest in the propriety of SOE practices MENA are not broad based nor publicly reported. has grown in recent years as part of the general As such, it is difficult to know how widespread the debate concerning public transparency and anti- use of audit committees is when mandated by corruption bodies are becoming more widespread corporate governance rules. In Djibouti, no board in the region. Their core responsibility consisted of sub-committees are required under law, except for the coordinating with the then Governance Minister at banking sector. Audit committees are, however, making the Presidency of Government, providing follow- inroads into SOEs in some countries. In Morocco, the up of reporting on corruption cases, and ensuring introduction of mandatory audit committees in SOEs access to information. In general, MENA countries is considered necessary for the establishment and can benefit from strengthening their anti-corruption operation of reliable information systems. In 2020, 61 practices by benchmarking themselves against the percent of SOEs had established an audit committee, newly approved OECD Guidelines on Anti-Corruption as had 97 percent of commercial SOEs and 49 percent and Integrity in State-Owned Enterprises or another of “public establishments”.42 Overall, the establishment relevant standard.43 42 DEPP (2021). Authors- insert full reference. Bilan de Gouvernance des EEP au titre de la période 2018-2020, Direction des Entreprises Publiques et de la Privatisation, 2021. 43 OECD. “Guidelines on Anti-corruption and Integrity in State-Owned Enterprises.” (Paris: OECD, 2019). www.oecd.org/corporate/ Anti-Corruption-Integrity-Guidelines-for-SOEs.htm 42 IX. Procurement Policies and Practices 43 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Procurement Nevertheless, there are significant challenges in implementing procurement rules in SOEs. Sometimes, Some MENA countries have reviewed their this is because the independence of SOEs can make procurement procedures. However, SOEs remain enforcement of rules difficult. For example, although prone to risks arising from inefficient or insufficiently Jordanian procurement regulations and guidelines are transparent and structured procurement practices. comprehensive, the applicability to majority- and minority- There is limited comparative international literature owned SOEs is not clear, nor is the extent to which about procurement practices among SOEs, and it is these requirements are enforced in SOEs. In Djibouti, difficult to define a single best approach. However, the a legal framework is in place, and laws seek to emulate essential question that needs to be addressed is what international good practice. Exemptions to standard the rationale is for requiring public sector procurement procurement rules may occur when a procurement is rules to apply to SOEs given that some studies suggest labelled urgent or when the procurement cannot be done that public sector procurement is inefficient compared domestically. Other ways of avoiding formal procurement to the private sector. The question hinges on whether include cutting procurements into smaller bits so that they the additional costs of public procurement rules are do not trigger thresholds. The system is often criticized justified based on the achievement of the state’s goals, for politicization and clientelism, and numerous high-level as well as the state’s special obligation of accountability scandals have occurred. In Egypt, SOEs are not subject to to the public. Approaches vary internationally from a standard procurement framework, and the transparency requiring public procurement rules for all SOEs, to of bids and awards are a concern. Although they control providing more flexible rules for SOEs in competition large budgets that involve major procurement activities, with the private sector, to having no SOE- specific each SOE sets its own procurement regulations/bylaws. procurement rules at all.44 Also, there is no independent and transparent mechanism to handle complaints. In Morocco, SOEs account for a Although formal data is scarce, procurement rules large share of public procurement. SOEs must abide by in MENA generally apply to all SOEs, albeit with no public procurement practices which contain a number of formal consideration of the rationale for using public exemptions. Some improvement was achieved in reducing rules or distinctions based on whether or not SOEs payments to suppliers, in part, to ex ante controls. Tunisia compete with the private sector. In this regard, Oman has a national public procurement framework that applies offers a potential way forward. With the consolidation to SOEs. It contains exceptions, as in other countries. of SOEs under the ownership of the OIA, the OIA has The public procurement framework was reformed to been able to develop a specific procurement framework introduce a comprehensive e-procurement system as of to apply to all SOEs. The framework seeks to balance 2019. TUNEPS, the online public procurement system the need for government accountability (principally in Tunisia, includes state-owned enterprises A similar through reporting), while also affording individual SOEs e-procurement portal has been in operation in Morocco greater flexibility in their commercial procurement. since 2014. 44 The World Bank Group’s recent report Jobs Undone: Reshaping the Role of Governments toward Markets and Workers in the Middle East and North Africa (2022), identified a series of preferences in public procurement in eight MENA countries (including Egypt, Jordan, Kuwait, Morocco, Saudi Arabia, Tunisia, the United Arab Emirates, and the West Bank and Gaza). These are related to exclusions and exemptions for SOEs, including an explicit access discrimination in favor of local companies and an explicit requirement for local component 44 X. SOE Policies and Practices regarding Climate Change Actions and Reporting 45 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Consideration of ESG issues of environmental laws, climate-related issues have not found their way into SOE boards in a significant As governments, shareholders and the public manner. In Morocco, an overview of public debt issuers become increasingly focused on climate risks, there publishing ESG reports shows that, with few exceptions, is growing pressure for all companies, including SOEs, climate is not yet perceived as a material risk. Similarly, in to provide comprehensive disclosures concerning Tunisia, a recent examination of the last publicly available climate-related risks and climate change actions. annual reports of SOEs and state-owned banks did not This trend is explicitly recognized in the OECD SOE find any mention of climate-related risks. Not effectively Guidelines: Principle V states that SOEs should report addressing these risks and mainstreaming them into on their environmental, social, and governance (ESG) risk management frameworks will increasingly present performance in a transparent and comprehensive fundamental challenges to many of the more emission- manner. This principle encourages SOEs to adopt intensive industries. internationally recognized sustainability reporting frameworks and to disclose information about ESG Climate change reporting – Which standard? issues that is relevant to their business activities. Overall, the disclosure of ESG performance is still As an emerging area of reform, there are several key nascent in MENA. Therefore, companies could benefit global climate-related reporting standards that aim to from guidance regarding how to conduct better ESG improve transparency and consistency in disclosing disclosures. Given the overriding interest that countries climate-related risks and opportunities. A summary of have in climate change and ESG issues, the reporting the key standards is detailed below. All of these standards and management of ESG issues merits further study. aim to provide investors, stakeholders, and the public with reliable and comparable information to support However, throughout the MENA region, ESG is an informed decision-making on climate-related issues. emerging theme that has not yet been fully integrated Early adopters have often used the Global Reporting into the operations of SOEs or the deliberations of Initiative (GRI), and there are examples in MENA of this SOE boards. Although improved climate reporting standard being adopted (box 2). For instance, the Oman is a useful step, the more fundamental issue is how Oil Company, OQ, and the Oman Telecommunications SOEs and their owner governments will drive climate- Company, Omantel, have voluntarily reported on ESG related changes in their business operations. This is a using the GRI methodology for the last 5 years. For critically important issue in the MENA region, where regulators, it is important when choosing a standard that SOEs are involved in many emission-intensive industries is likely to have a high level of international acceptance. (including petro-chemicals, transport, power generation, In this context, the World Bank has prepared a Toolkit and manufacturing). Increasingly, the climate change for Regulators and Shareholders concerning the impacts of business operations are becoming significant Management of Climate-Related Disclosures.45 When strategic and fiscal risks, as well as environmental risks. ranked according to their international acceptance, the However, sustainability is not yet fully embedded in the extent of climate reporting, and the level of government strategic planning or risk management frameworks of involvement, the Taskforce on Climate-related Financial SOEs. For example, in Djibouti, climate change is not Disclosure recommendations were selected and in the forefront. Despite the creation of a ministry in adopted as the basis for developing the toolkit. charge of environment and the passage of a number 45 World Bank. Management and Disclosure of Climate Related Financial Impacts for State-Owned Enterprises -A Toolkit for Shareholders and Regulators (Washington, DC: World Bank, 2021). https://doi.org/10.1596/37962 46 X. SOE POLICIES AND PRACTICES REGARDING CLIMATE CHANGE ACTIONS AND REPORTING Box 2: Current Frameworks and Standards for Climate-Related Reporting Global Reporting Initiative (GRI). The GRI Standards focus on the governance, economic, environmental, and social impacts of a company, including its contributions toward sustainable development — whether positive or negative. Users of the GRI Standards identify issues that are of primary importance to their stakeholders. Thus, reports will vary by organization. Sustainability Accounting Standards Board (SASB). The SASB, established in 2011, focus on reporting to the United States Securities and Exchange Commission. It has taken an industry-based approach based on a 10-sector classification system. The SASB’s industry-specific standards identify the subset of sustainability- related risks and opportunities most likely to affect a company’s financial condition (for example, its balance sheet), operating performance (for example, its income statement) and/or risk profile (for example, its market valuation and cost of capital). In November 2020, the SASB and IIRC announced their intention to merge and form a Value Reporting Foundation. Climate Disclosure Standards Board (CDSB). The CDSB is an international consortium of business and environmental non-governmental organizations (NGOs) committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital. International Integrated Reporting Council (IIRC). The IIRC is a global coalition of parties focused on the adoption of integrated thinking and reporting on an international basis. It is used as a means to improve communications about value creation, advance the evolution of corporate reporting, and make a lasting contribution to financial stability and sustainable development. The IIRC primarily positions itself as a global advocate, knowledge generator, and convener. Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was created by the Financial Stability Board to improve and increase the reporting of climate-related information. The TCFD has issued recommendations for more effective climate disclosures to enable better decision-making about climate- related risks to organizations. The recommendations have now become the gold standard for reporting on climate-related risk. As such, it will allow companies issuing public debt or equity to incorporate climate- related risks in their risk management and strategic planning, including sector-specific guidance. Using corporate governance codes order to ensure competitive neutrality. In addition, it and listing rules to drive change is expected that the scope and quality of information provided to the state and the public concerning SOEs Although ESG reporting is now commonplace in the should be of at least the same quality as that provided listed companies on the world’s largest exchanges, the to any normal shareholder of a privately listed company. listed SOEs in MENA are only now beginning to report The World Bank Toolkit on SOE Climate Reporting from on climate risks. It is worth noting that climate change 2022 notes that the process of implementing effective is listed among the top 10 priorities of the review of the and rigorous climate-related disclosures takes time, OECD/G20 Corporate Governance Principles that was and that “Regulators should therefore require SOEs to launched following public consultations in late 2022. begin the process as soon as possible, recognizing that The reasoning is that the disclosure expectations of it may take two to three years before full management private and public companies should be equivalent in integration and disclosure can be achieved. Regulators 47 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION should consider a two-year lead time for the first and the environment. It recommended that banks and mandatory Climate-Related Financial Disclosure financial institutions disclose physical, transitional and reports. During this time, SOEs should immediately litigation risks,, as well as the environmental impact of adopt voluntary disclosure of those processes and their portfolio (according to the Taskforce on Climate- policies and data that are available.” related Financial Disclosure [TCFD] recommendations). However, it is not yet mandatory. The Moroccan Office It follows that listing rules and/or corporate governance Chérifien des Phosphates (OCP) is the sole company that codes can be the long-term mechanism to drive better reports on climate change under the TCFD framework. climate-related disclosures. There are examples that this In Jordan, the Jordan Securities Commission issued is already occurring in the region, although compliance instructions on company disclosures in 2019, mandating is still lagging. Morocco’s Capital Market Authority disclosure obligations for environmental protection and published guidelines for ESG reporting in 2018 before corporate social responsibility for companies listed on introducing mandatory ESG reporting in annual financial the Amman Stock Exchange. Despite this, the Jordan reports for all companies issuing public debt (as of 2019). SOE case study prepared as part of this report could not Consequently, all listed SOEs report on environmental find examples of listed SOEs that specifically disclosed criteria, as required by the regulator. In addition, the climate risks. Finally, Oman is in the process of developing Moroccan Central Bank, Bank Al Maghrib, released a climate disclosure requirements for listed companies, and directive in March 2021, which included a financial risk it does have some excellent examples (OQ and Omantel) management framework related to climate change of companies adopting voluntary disclosures. 48 ANNEX 1: METHODOLOGICAL FRAMEWORK AND APPROACH Annex 1: Methodological Framework and Approach The normative and conceptual framework for this report frameworks for SOEs; (ii) state oversight and ownership is based on the OECD’s 2015 Guidelines for Corporate arrangements; (iii) performance monitoring; (iv) boards Governance of State-Owned Enterprises (box 3). It is of directors; (v) transparency and disclosure; and (vi) complemented by the World Bank’s Toolkit on Corporate procurement practices of SOEs. In addition, and reflecting Governance from 2014, as well as its 2019 Integrated developments since the issuance of the OECD 2015 SOE Framework (iSOEF). The specific focus areas of the Guidelines, this report also explores the climate change report mirror those of the above-mentioned frameworks. reporting practices of SOEs. This particular focus area is The focus of these frameworks is also reflected in the informed by recent conceptual and normative work by organization of the report, which is structured along the World Bank’s SOE Global Solution Group (an internal the following dimensions: (i) the legal and regulatory World Bank network of SOE experts.) Box 3: OECD Guidelines on Corporate Governance of SOEs The OECD Guidelines on Corporate Governance of State-Owned Enterprises are recommendations to governments regarding how to ensure that SOEs operate efficiently, transparently and in an accountable manner. First developed in 2005, the guidelines were updated in 2015. They are now widely regarded as capturing the best advice to countries on how to manage their responsibilities toward state-owned enterprises. The main tenets are as follows: 1. The state should disclose the rationales for state ownership to the general public, who are the ultimate owners of SOEs. The purpose of state ownership should be to maximize value for society. 2. The state as an owner should be professional, transparent, and accountable. 3. SOEs should compete on a level playing field with private companies. 4. State ownership and regulatory functions should be separate to avoid conflicting objectives. 5. Minority shareholders should receive equitable treatment and have equal access to corporate information. 6. SOEs should respect stakeholders’ rights and implement high standards of responsible business conduct. 7. SOEs should be subject to the same high standards of accounting, auditing, and disclosure as listed companies. 8. SOE boards of directors should have the mandate, autonomy, and independence to set enterprisestrategy and oversee management, absent of political interference. Each of these main recommendations are supported by additional guidance and more detailed recommendations. Source: Adapted from OECD (OECD Guidelines on Corporate Governance of State-Owned Enterprises. (Paris : OECD, 2015). http://dx.doi.org/10.1787/9789264244160-en. 49 GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE MENA REGION Reflecting the normative OECD and World Bank (2012), South Asia (2015) and Europe and Central Asia frameworks, there are only a limited number of (ECA) (2020), as well as related studies of MENA by the unambiguous and quantifiable benchmarks for SOE OECD (2013) and the World Bank (2015). governance. Consequently, the analytical approach of the reports is, to a large extent, qualitative and Data collection is primarily based on desk research context specific. and expert interviews. The scope of inquiry under each of the above-mentioned governance dimensions The report also leverages methodological and practical was based on the Integrated SOE Framework experiences from similar studies in other regions. The corporate governance guideline and questionnaires. structure of and practical execution of the report has The project used the iSOEF’s Corporate Governance benefited from experiences with similar World Bank Questionnaire as a framework for data collection by regional studies in Latin America and the Caribbean (LAC) local teams and consultants. 50 IMAGE REFERENCES Image References Coverpage: Sean Pavone, yelantsevv, Fahroni, rui vale sousa / Shutterstock Page ii: byvalet / Shutterstock Page vi: Heidi Kaden / Unsplash Page 1: Matyas Rehak / Shutterstock Page 6: Milton Louiz / Shutterstock Page 9: Andie Kolbeck / Unsplash Page 15: THINK A / Shutterstock Page 19: Olga Vasilyeva / Shutterstock Page 22: MAGNIFIER / Shutterstock Page 27: hxdbzxy / Shutterstock Page 29: Jackson David / Unsplash Page 32: Graficam Ahmed Saeed / Shutterstock Page 38: 3rdtimeluckystudio / Shutterstock Page 41: create jobs 51 / Shutterstock Page 43: Seqoya / Shutterstock Page 45: Morocko / Shutterstock 51