The new government intends to improve the policy of privatisation to better manage state-owned entities (SOEs). This article suggests six concrete steps to jump-start the process.
Research over the last few decades has established that the performance of SOEs suffers because of two critical reasons. One, SOEs are tasked with multiple objectives: in addition to financial profitability, they are expected to absorb surplus labour, develop priority markets, sectors and regions, and fulfil other socio-economic objectives.
Two, SOEs are subject to plural controls. As a result, their managers are expected to meet conflicting demands from multiple stakeholders.
To remedy these two critical problems, SOEs need to be provided with an efficient autonomous structure and an incentive-linked performance evaluation system.
Improving SOEs’ autonomy is no longer rocket science. Forty years ago, a broad framework for the delegation of powers was set out by two authors – Oliver Williamson for multi-divisional firms in 1975 and Elliot Jacques for general hierarchies in 1976. Their recommendations, which have stood the test of time, are that government as the owner of SOEs should do five things and not do one thing.
The government should “set objectives, appoint the chief executive officers, evaluate the performance according to those objectives, reward and penalise the chief executive officers according to their evaluation, provide resources (finance), and conduct long-range planning and coordination among units”. And they must not do (almost) anything else. The last don’t is more important than the first five do’s because it is so often violated, making it impossible to hold managers accountable for performance.
This six-point outline can serve as a broad framework for constructing a desirable autonomy structure for the public enterprise sector.
Equally, the design and implantation of a successful performance evaluation system are the things in which we have experience in Pakistan. Globally, two systems are recognised. Under the performance contract system — called Contra Plan and designed by Simon Nora, adviser to President Charles De Gaulle — managers of the leading French SOEs signed a contract with government representatives to ensure performance under a plan. The second one, which evolved from the French Contra Plan, is the Signalling System for Public Enterprises that was designed and implemented in Pakistan and also replicated in a number of other countries, like South Korea, India, Mexico and the Philippines. The system is based on clearly quantifiable targets, negotiated and mutually agreed to at the beginning of the period, which are linked to pre-agreed performance incentives to mangers and embodied in a formal performance contract.
It is supported by a management information system that enables monitoring and a corporate planning system that provides a long-term framework for performance improvement. The most important benefit of the latter is to assist in identifying units to be privatised based on a strategic analysis of long-term potential rather than political considerations.
While the devil is always in the detail, these broad directions are sufficient to initiate the following steps towards establishing an institutional mechanism to move forward.
SOEs suffer because they have multiple objectives to achieve and are subject to plural controls
First, designate an officer-in-charge or OIC, perhaps privatisation secretary, to coordinate and implement the initiatives outlined below.
Second, the OIC should identify eminent non-government experts (perhaps three or fewer) who have solid knowledge and experience of SOE management in Pakistan, preferably with a background in investment banking, corporate law, managerial accounting and economics. These experts should have a track record of accomplishing success in innovative ventures.
Third, within 30 to 60 days, the government should notify a Committee on Reform of State-Owned Assets (Corsoa) consisting of all relevant ministers and, by special invitation, eminent experts. The committee should be charged with formulating within 90 days a 10-year, time-bound SOE Reform Action Programme (RAP). Corsoa should meet every month to review progress, resolve problems and modify future courses of action.
Fourth, Corsoa should decide if SOEs will be transferred and managed by a sovereign wealth fund or a holding corporation. The new institutional arrangement of the SOEs may be called State-Owned Enterprises Management Corporation (SEMC).
Fifth, a concise profile of each SOE should be prepared, according to a format provided by SEMC. The profile should comprise the latest financial, operational and other critical information of the respective SOEs. Based on this information, an initial list of enterprises should be prepared that should be given priority.
Sixth, SEMC should evolve a framework for managing both SOEs and a highly professional supervisory organisation, Centre for Management of State-Owned Enterprises (CMSE), to run SOEs with the help of management techniques and systems developed, tried and tested within Pakistan and in some Asian countries, like Malaysia, Singapore and China. Details of these techniques and systems are well-known and can be specified in consultation with experts.
With these steps, the government will initiate a process that will lead to better performance in SOE management. The financial and political costs of inaction are high given the urgency of the fiscal crisis and the short time frame announced by the new government.
The writer is a former CEO of Experts Advisory Cell, Ministry of Industries and Production.
Published in Dawn, The Business and Finance Weekly, September 17th, 2018
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