What's a hybrid company? According to The Economist, it's a company that operates "in the grey area between the public and private sectors ["The rise of the hybrid company," 5 December 2009 print issue]. The rise of hybrid companies, the magazine insists, is not a good thing. The article reports:
"The travails of Dubai Inc have left commentators struggling for the right phrase to describe Dubai World and its various siblings. They have come up with various formulations—state-controlled, state-supported, quasi-state, parastatal—without ever quite capturing what they are talking about. And Dubai is not the only place that is challenging the business vocabulary in this way. Wherever you look you can see the proliferation of hybrid organisations that blur the line between the public and private sector. These are neither old-fashioned nationalised companies, designed to manage chunks of the economy, nor classic private-sector firms that sink or swim according to their own strength. Instead they are confusing entities that seem to flit between one world and another to suit their own purposes."
Lest one thinks that this is only a problem in the developing world or with former communist states, the article reminds us that there is "some blurring of the line between the public and private sectors occurs in the rich world" as well.
"The French have always had a penchant for partially state-owned firms. The Americans used Fannie Mae and Freddie Mac to subsidise the housing market. The recent financial hurricane has forced governments everywhere to inject money into companies to save them from collapse. But the fashion for hybrids is at its height in developing countries."
One of the reasons that there has been a rise in hybrid companies is that there has been a corresponding rise in state capitalism and sovereign-wealth funds. As I wrote in a previous post [State Capitalism and Sovereign-Wealth Funds], "Sovereign-wealth funds are typically established when governments have budgetary surpluses and little or no international debt. Rather than let the money sit in a bank and earn small returns, the notion was to invest the money and obtain greater returns." Investments from these sovereign-wealth funds are giving governments stakes in private companies. Sometimes these investments simply make the SWF funds stockholders in companies. In other cases, the line gets very blurry. The article continues:
"China and Russia have led the world in embracing these organisations. Thousands of Chinese companies have convoluted ties to the central or local governments. Russia has created a large class of 'state companies' that have an uncanny knack for acquiring assets from the private sector at knock-down prices. The government also has such close ties with many of the country’s most powerful companies that it is almost impossible to tell where the government ends and the corporate sector begins. Hybrids are also flourishing in the energy industry. The world’s 13 largest oil companies, as measured by reserves, are controlled by governments. But these companies are very different creatures from their forebears. They operate all around the world. Petronas of Malaysia and China National Petroleum Corporation (CNPC), for example, run businesses in more than 30 countries. They have access to lots of private capital and sophisticated know-how. Norway’s Statoil, China’s CNOOC and India’s ONGC are all publicly listed. So is Petrobras of Brazil, which operates more deepwater drilling rigs than any other oil company."
Having provided background about the growth of hybrid companies, the article gets to meat of its argument by asking, "What should we make of these hybrid organisations?"
"Their supporters have long argued that they enjoy the best of both worlds: the security of the public sector and the derring-do of the private sector. They can use their global reach to provide their home countries with the pick of the world’s resources. They can borrow money at a favourable rate thanks to 'implicit' government guarantees. They can use their political muscle to outperform their less well-connected rivals. The government-run oil companies not only get the best deals at home, for example. They are also protected from asset strippers: the likes of Kazakhstan and Venezuela are much less inclined to go in for corporate plunder if they think that they will have to answer to Beijing. But the Dubai debacle suggests that the best of both worlds can easily turn into the worst of both worlds. The biggest problem with hybrid companies is that they are inherently confused organisations, buffeted by all sorts of contradictory pressures. This means that their internal operations can be hard to understand and their behaviour difficult to predict."
The article points to the problems currently faced by Dubai World, but it insists that "Dubai World is a model of clarity compared to most Chinese hybrids." Another reason that The Economist doesn't like hybrid companies (aside from the confused financial situation) is that they are often used to advance political agendas beyond economic development and capital growth. The article continues:
"Hybrid companies are almost always politicised. This often means giving jobs to political apparatchiks: Chinese firms are so entangled with the Communist Party that people have started talking about 'red entrepreneurs'. But it can also mean becoming involved in power struggles. In Russia corporate decisions are often driven as much by squabbles between factions in the Kremlin as by strategic considerations. This problem is not just confined to the emerging world: before their demise Fannie Mae and Freddie Mac were omnipresent forces in Washington politics, protected from criticism by their generous contributions to the politicians who regulated them. This politicisation is particularly troublesome when it comes to expanding abroad. State-supported companies often conjure up images of imperialism. It is hard to read about CNPC’s promises to build roads in Africa in exchange for oil without thinking of the East India Company. State-supported companies also make it easy for xenophobes to whip up protectionist sentiment: witness the frenzied reaction in America when Dubai’s DP World tried to buy American ports, or when CNOOC bid for Unocal."
Although it might be easy to dismiss the worries of xenophobes, The Economist asserts that dismissing concerns about hybrid companies too easily would be a mistake. The article concludes:
"Many politicians like to give the impression that they understand these problems. Chinese argue that hybrid companies are simply a stage in the evolution of fully-fledged capitalist organisations. Russia’s president recently declared that 'out-of-control' state companies needed to be reined in. Most Western governments claim that they want to sell off their shares in rescued firms as quickly as possible. It is to be hoped that they all mean what they say. The clearer the line between the state and the private sector, the better it is for those on both sides."
Sovereign-wealth funds are not going away. I suspect, however, that calls for them to operate more transparently will increase following the debacle in Dubai. It won't be easy. The reason it won't be easy is because politics are likely to interfere. The temptation to politicize investments will remain strong and few politicians or rulers seem able to withstand it.
