In the aftermath of Dubai World’s near default, The Economist magazine ran an interesting article that examines the so-called “Hybrid” organization (see The Rise of the Hybrid Company). According to the Economist:

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.

MY COMMENT: For examples from the U.S., see Fannie and Freddie, pre-nationalization. France, in the form of their national champions, also engages in the practice. So do many emerging economies: China (and their SOE’s), Russia, Malaysia, Vietnam, Brazil, etc.

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.

MY COMMENT: I have never been a fan of Publicly-Backed Private Companies (PBPC’s). Although they may be able to borrow at lower rates because they are “implicitly” backed by their home governments, they often grow too large, become too bureaucratic, and eventually crater under their own inefficiency (thereby costing home-country taxpayers dearly in the process). In addition, their objective function is not always clear. Are they meant to profit-maximize for shareholders/bondholders, or are they meant to serve a larger social purpose?

The most interesting part of the Dubai World saga (in contrast with Freddie and Fannie) is that the government of Dubai has seemingly repudiated Dubai World’s debt. So much for that “implicit” guarantee. If this becomes the norm rather than the exception, you can soon say goodbye to the last remaining benefit of Public-Private hybrid companies – the ability to borrow at favorable rates.

I have nothing, in principle, against government-backed companies. Although they are generally inefficient and often do not make sense, there are instances in which they might be appropriate — e.g., in instances of severe market failure. However, if there is severe market failure such that the government must become involved to prevent perverse societal outcomes, my intuition is that private companies operating in a system of more stringent governmental oversight and regulation perform better than a system comprised of public-private hybrids.

In this sense then, I agree with the conclusion of the Economist:

The clearer the line between the state and the private sector, the better it is for those on both sides.

I came across an interesting article yesterday that discussed the impact of the U.S. dollar weakness (and Canadian dollar strength) on the state of the National Hockey League (see Currency Rise Helps Canadian NHL Teams).

The decline of the American dollar has led to a trade imbalance north of the border, on the rinks of the National Hockey League

Over the past two decades, the Canadian teams in the N.H.L. were considered poor cousins of their colleagues in the United States. Some floundered financially, others packed up and moved south. The league even created the Canadian Assistance Program to subsidize the country’s struggling teams.

But the landscape in Canada has changed drastically, because of a rise of more than 50 percent in the Canadian dollar since 2002. A stronger currency has made it cheaper for the six Canadian teams to pay their players in United States dollars and to reduce debts. It has also inflated the revenue of the six Canadian franchises and, in turn, the league’s revenue.

…The rising Canadian dollar is nearing parity with its United States counterpart. The Canadian dollar, whose value against the United States dollar fell to a low of 62 cents in 2002, is worth about 96 cents today. As a result, the revenues for the six Canadian clubs helped the entire league earn its highest operating profit in more than a decade, according to Forbes magazine.

…added revenues have had the biggest impact for the Canadian teams with player salaries, which must be paid in American dollars under the collective bargaining agreement between the N.H.L. and the N.H.L. Players’ Association.

MY COMMENT: In hindsight, I bet that some players wished they had negotiated to be paid in Canadian dollars.

The Canadian teams’ relative wealth is quite a turnaround, given that the league initiated the Canadian Assistance Program at the start of the 1995-96 season to help small-market Canadian teams stay afloat.

The N.H.L. prefers exchange-rate stability, but recognizes that the rising Canadian dollar has helped revive some teams, which is good for the league.

MY COMMENT: Of course the league prefers relative exchange-rate stability (in a floating exchange-rate regime), as do most businesses that operate across multiple country markets. Exchange-rate stability makes predicting future states of the economies in which companies operate a much easier task. That said however, the larger question for the league is whether the strength in the Canadian dollar and the weakness in the U.S. dollar represents a temporary, transient effect or a more permanent, structural economic state (see Forces Impacting the Dollar).