THOUGH the rules for Corporate Governance for Public Sector Companies 2013 have been notified, the major challenge lies in effective enforcement of the corporate code.

Making policy or rules is the easier part, their implementation suffers because of weak regulatory bodies.

The rules, which had been notified by the Securities and Exchange Commission of Pakistan (SECP), will apply to 130 public sector companies (PSCs) after 90 days of their promulgation, or from mid-June 2013.

The rules focus on empowering the boards of these entities, and also on creating greater transparency and accountability.

Various departments estimate that only eight public sector enterprises are losing a cumulative Rs400 billion a year. These eight companies also do not fall under the jurisdiction of these SECP rules, due to the special legal cover extended to them.

The corporatisation of public sector companies will remain a challenge for the government. There are eight big non-corporate PSCs that are operating under various ministries or divisions. The government has, so far, failed to reform them and bring them under the companies’ structure. These include the Utility Stores Corporation of Pakistan (Pvt) Limited (USCPL), National Highway Authority (NHA), TCP, Pakistan Agricultural Storage and Services Corporation Limited (PASSCO), Pakistan Steel Mills (Pvt) Limited (PSM), Pakistan Electric Power Company Limited (PEPCO), Pakistan International Airlines Corporation, and Pakistan Railways.

These companies and entities are governed under special enactments, statutory corporations, directorates, departmental undertakings, cooperatives, trusts and so on. Therefore, the challenge for the government is to streamline the legal form and shape that these PSCs are currently operating in.

In the first instance, all these entities will be incorporated as limited liability companies under the Companies Ordinance, since the company law framework itself takes care of most of the governance issues and problems faced by these entities.

This harmonisation of the legal status will allow a leveling of the playing field with private competitors. Furthermore, the fragmented ownership of the government in various PSCs, operating in different forms, also needs to be controlled through a centralised mechanism.

The governmental intervention in day-to- day affairs of the public sector companies has been a major cause for their inefficient operations. Then trade unions have become very powerful in these organisations and they may oppose reforms. Also, it may not be easy to stop the government’s undue intervention in management affairs of these PSCs.

To counter such interventions, the new rules propose a separate holding company which will have a pool of talent to manage the company affairs on behalf of their shareholders. Currently, government officials are doing the same.

Meanwhile SECP Chairman Mohammad Ali says the empowerment of the board will bring about more transparency in the operational matters of the PSCs, and plug their huge losses. Under the new rules, the board shall have 40 per cent of its members as independent directors within two years of the notification of the rules, and a majority of them will be independent subsequently.

No person shall be elected or nominated as a director for more than five public sector companies, including listed companies, simultaneously. The chairman of the board will be elected by the board from amongst its independent directors. The board will also recommend at least three individuals to the government for appointment as chief executive, and shall appoint the chief executive after receiving concurrence of the government in line with the provisions of the ordinance.

To ensure transparency, Mr Ali said all PSCs shall adopt the International Financial Reporting Standards. A directors’ report to members will include detailed disclosures specific to the PSC’s operations, based on its social mandate.

As far as accountability is concerned, special committees of the board of directors will be constituted to reinforce the competency of the board, and in underpinning their critical responsibility in important matters. These will include human resources committee, nomination committee, procurement committee, risk management committee and audit committee.

According to the chairman of the regulatory body, the position of the chairman and CEO have been proposed to be separated, to achieve an appropriate balance of power, increasing accountability and improving the board’s capacity for decision making independent of the management. The board will also implement a standard of conduct for its directors, and capacity building of directors and a reinforced system of audit will be established in every PSC.

Despite major challenges, former finance minister Saleem H Mandviwala still believes that the rules are expected to bring more transparency in the operational matters of the PSCs, and put an end to huge losses by these entities.