The case for SOEs in Africa’s capital markets development

Over the past thirty-or so-years, State-Owned-Entities (SOEs) have played a limited role in the development of many capital markets in the African economies. It is estimated that there are over 1,100 SOEs operating across the continent, but less than 50 of which are currently listed in the African exchanges. Hence, much as in most African countries, SOEs continue to play an important role in providing basic services such as electricity (generation, transmission, and distribution), water, telecommunications, banking, etc, but have thus far failed to promote development and vibrancy of capital markets.

Although many African countries implemented privatization programs during the late 1990s and early 2000s, over 90 percent of those divestments have been via trade sales to strategic and industrial investors. The lack of transparency in many of those divestments provided opportunity for corruption with many entry points, resulting in a series of corruption scandals, mismanaged of the key resources and creation of unnecessary unemployment. As it stands many people remain worried about the social impacts of SOE listings, as past listings have led to employment shedding without alternative opportunities being provided. Hence, not surprisingly, this has left large parts of the African political leaders, policy makers and the public at large with a rather skeptical view on potential divestments of SOEs.

One thing to note though is that, despite the discontent related with the way privatization were handled/mishandled, the fundamental reasons behind privatization and the accompanied efforts have not disappeared. Demand for infrastructure services is high and increased as population and peoples’ mobility increases — many of social and physical infrastructure to be provided by SOEs — remain high and continues to increase relentlessly; roads, railroads and telephone networks, water and energy plants as well as other infrastructure assets continue to decay as the performance of many SOEs remains weak while governments continue to exhaust state budgets in the capitalization and investments in SOEs. Across parts of Sub-Saharan Africa, SOEs account for a significant share of public sector balance sheets, with liabilities in some measures in some countries averaging 20 percent of GDP, and assets averaging 35 percent of GDP. Coupled with the usual inherent challenges, however in recent days, the challenges faced by these SOEs have been compounded by the COVID pandemic, which brought about a 5 percent downward revision in the 2020/21 growth outlook for Sub-Saharan Africa.

Thus, there remains few choices but to search for private investors participation in the financing of some SOEs, especially those with commercial objectives, via capital markets in a way making capital markets vibrant, achieving inclusive economic growth and economic empowerment should be encouraged. The important question that remains is how to best pursue those divestments, one of the highly recommended option is via IPOs and listings into Exchanges, but then it remains as to what role SOE listings can play as part of it.

Privatization/Corporatization of SOEs — Lessons from China

It could be by default or clever design. The strategy for capital market development (and its role in economic development) in China left strong evidence and an experience that could become as aspiration for many emerging, frontier and less developed markets.

It is about the calibration of capital markets so finely tuned and developed within the relatively short time. Stock market growth began picking up from the early 2000s when the world equity markets began to find feet from the recession, that was so severe, that analyst compared it to the 1970s. Buoyed by the domestic economic strength, growing investor base and rapid pace of portfolio funds flow in the economy, stock market in China showed sharp turnaround in valuations, strong surge till a brief pause towards 2008/09 and then resuming the pace in 2010 onwards until today.

China used the 2000s market surge to productively place a large number of Initial Public Offering (IPOs) through privatization/corporatization of the SOEs for the purpose of achieving more efficient, enhance governance, encourage growth of capital markets and democratization of finance and investments among its people. When the Chinese were doing this in early 2000, some of us took a similar path – privatization, only that it was different – the focus was less on the use IPOs, rather the Government agencies mandated to oversee privatization, focused more on private sales. As a result, only a handful of SOEs were conducted through IPOs, which was a missed the local economic empowerment opportunity and an opportunity to grow of local capital market.

The secondary market in China is borne out of strong primary market (the market for IPOs), unlike in our case where liquidity haven’t provided the thrust for further privatization IPOs and private sector capital raising.

Some of the cerebrated IPOs from China that amazed the global finance included: US$ 10 billion of China Construction Bank (2005), US$ 14 billion of Bank of China, (2006) US$ 22 billion of ICBC (2006), US$ 22 billion of Agricultural Bank of China (2010) and about US$ 25 billion of Alibaba (2014) to mention but a few. Some estimates put China at nearly 40 percent of total global new capital issuance in the past three decades.

Just like the recent development in African countries, i.e., stock exchanges established segments in their market to cater for start-ups and SMEs (for the DSE, it is the EGM), but more and different to the Chinese, i.e., the scope of diverse range of companies, two exchanges were instead established, the Shanghai Stock Exchange for the sizable and mature companies, and Shenzhen Stock Exchange was established to accommodate the listing of start-ups and SMEs. As opposed to the Chinese, for many African nations and for various reasons including the social-economic history and the pace of evolution — social set-ups, levels of enterprising spirit, the willingness to advance, the political posture and willingness, has left markets almost stagnant and SOEs struggling.

So, what’s the lesson? Much as I clearly understand that the comparison shouldn’t be this simple, but China used the capital markets for privatization of most big-ticket SOEs, most African countries didn’t. China used the stock market to enhance their citizens’ economic empowerment and inclusivity in their economic growth, we didn’t. China used the stock market to finance economic growth in the relatively inclusive manner, we didn’t.

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