Professionalising the ownership role in SOEs

Published July 29, 2019
204 state-owned enterprises posted a net loss of Rs191bn in 2016-17. — AFP/File
204 state-owned enterprises posted a net loss of Rs191bn in 2016-17. — AFP/File

In Pakistan, more than 200 state-owned enterprises (SOEs) are operating in different sectors of the economy at the federal level, and in recent years, a number of SOEs have also been established by provincial governments.

These SOEs are playing a vital role in providing public goods, promoting infrastructure development and are involved in the delivery of essential social services to the country’s population.

According to the State-Owned Entities Annual Report published by the Ministry of Finance, the total revenues of these entities at the federal level amounted to Rs3.305 trillion in 2016-17. Their asset base stood at Rs17.11tr in that year, representing 57 per cent of the country’s GDP, while they employ over 400,000 people.

204 state-owned enterprises posted a net loss of Rs191bn in 2016-17 while the top 10 most profit-making entities’ bottom line was Rs204.4bn

However, despite the important role of SOEs in Pakistan’s economy, their operational and financial performance has been on a downward slide over the past few years. Overall, a total of 204 entities posted a net loss of Rs191 billion in 2016-17, despite the net profit of the top ten most profit-making entities standing at Rs204.4bn.

On the other hand, the total loss of the top ten most loss-making SOEs amounted to Rs368.6bn, which included National Highway Authority, Pakistan Railways, Pakistan Steel Mills and 6 electricity distribution companies.

This dismal state of affairs of the state-owned entities is principally attributable to the lack of professional management and continued interference in their day-to-day matters by the government. These SOEs have been used as employment exchanges by successive governments over the past few decades resulting in overstaffing, absence of merit-based appointments, unionism and a host of other issues leading to a lack of performance orientation.

The leading cause of all these ills has been the ownership model of SOEs that has been in practice in Pakistan over the last 3-4 decades, which is out of sync with present day realities and global good practices.

In order to guide governments for ensuring that SOEs operate efficiently and transparently, the Organisation for Economic Cooperation and Development (OECD) issued Guidelines on Corporate Governance of State-Owned Enterprises 2005. One of the primary objectives of the guidelines, which were updated in 2015, is to professionalise the role of the state as an owner.

Globally, the ownership arrangements of SOEs have evolved since the OECD Guidelines were first issued, with the existing ownership models being broadly categorised into four main types.

First is the decentralised model where the ownership responsibilities are dispersed among different line ministries. Second is the dual model where in addition to line ministries another ministry, such as the Ministry of Finance, may also have certain responsibilities. Third is the advisory model, where ownership remains dispersed but an advisory or coordinating body advises ministries on ownership matters. And fourth is the centralised model, where ownership responsibilities are centralised in an entity or entities that may be independent or may fall within government.

The OECD Guidelines strongly recommend centralisation of the ownership function, meaning that such functions are performed by a single entity. The two main advantages offered by the centralised ownership structure is the concentration of authority and independence.

The Guidelines also highlight a number of core functions that are carried out by the ownership entity, which includes exercising basic shareholder rights, nominating and appointing the members of the board, and monitoring performance.

An increasing number of countries have adopted the centralised model of SOE ownership, such as Khazanah in Malaysia, Temasek in Singapore, and FONAFE in Peru. Others have in place the coordinating ministry model, such as in India where the Department of Public Enterprises in the Ministry of Heavy Industries and Public Enterprises serves as the coordinating agency for SOEs.

Pakistan has traditionally been following the decentralised model of SOE ownership. Presently, a total of 18 ministries and 2 divisions are overseeing the management of 197 SOEs. This structure is highly fragmented in terms of ownership responsibilities, which has opened doors for political intervention undermining the operational autonomy of the board and management.

The next generation of SOE reforms in Pakistan should endeavour to move to a centralised ownership model, as only such an arrangement can effectively improve the management of these entities by putting in place an institutional framework isolated from the political process.

A start in this regard has been made with the establishment of Sarmaya-e-Pakistan, which will serve as a centralised holding company for SOEs. However, the company which has been incorporated with the Securities and Exchange Commission of Pakistan in February 2019 is not likely to become functional soon due to the legal complications involved in transferring of SOE assets to the company’s books.

A strong political will to push through this vital reform is necessary, as the country can ill afford the heavy losses presently being incurred by the SOEs.

The writer is an economist.

Published in Dawn, The Business and Finance Weekly, July 29th, 2019


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