THE raison d’être for public-sector enterprises (PSEs) in any economy are two-fold; to provide services that cannot be equitably provided by the private sector or to protect strategic interests that cannot be managed effectively under private ownership.
In some economies, certain enterprises are kept under state ownership for purely investment purposes, so that their profits contribute in a meaningful way to the country’s coffers.
In Pakistan, public-sector losses are one of the major factors impeding growth. At present, there are about 220 PSEs, which fall under some form of partial or full state ownership. According to some estimates, the poor performance of PSEs in Pakistan results in an estimated loss of almost 1.5 per cent of GDP due to inappropriate governance, corruption, inefficiencies and lapses in policymaking.
Realising the impact of the governance structure on the inept performance of the PSEs in Pakistan, a task force was constituted by the government to propose new guidelines for the governance of PSEs. While these guidelines have recently been launched in the form of Corporate Governance Rules (2013) for PSEs, the real challenge will be faced at the time of their implementation.
At present, ownership and oversight is dispersed between various sector ministries with inadequate reporting mechanisms. Limited recognition of the need for safeguarding public assets and enhancing their market valuation by the concerned ministries have led to pervasive state interference in PSE affairs and appointments, over-employment and skill mismatches. These interventions into the operational affairs of the PSEs have opened the door to corruption and conflicts of interest within the PSEs resulting in huge losses to the exchequer. While the ideal state for corporate governance of PSEs would be to move towards a centralised ownership structure, akin to the Temasek model in Singapore or the Khazanah model employed in Malaysia, this may not be appropriate for Pakistan in terms of political will and ease of implementation. A sensible first step would be the setting up of an independent committee to nominate, monitor and determine the remuneration of board members.
However, before discussing the implementation modalities for this, a certain amount of groundwork needs to be done to clarify the government’s policy on PSEs and to ensure that the enabling environment is there for them to contribute effectively to the country’s economy.
Develop a clear PSE policy:1. Reasons need to be enunciated for the government to own or control companies that are deemed critical to Pakistan’s security and economic wellbeing.
A rationalisation of the current list of PSEs into those that are of strategic importance or those that are for special assignment is needed to focus government attention towards privatisation or corporatisation.
All remaining PSEs should be brought under standard legal structures. Proper compilation of accounts and information sharing will enhance overall transparency.
For those remaining under government control, the majority shareholder needs to clearly articulate the mandate and key performance indicators for the PSEs. This should be kept distinct from the government’s function of policymaking, market regulation or social obligations.
Create an enabling environment for reform of PSEs:1. PSEs have to be managed on a sound commercial footing and held accountable for the judicious use of public resources. PSEs should make full disclosure of tradeoffs they face in terms of costs and quality of delivery. The budget should annually provide for financing of the required shortfall or subsidies in a transparent manner.
State ownership should not create a competitive edge for the PSEs. There is a need to ensure a level playing field by nurturing competitiveness in markets. Competition will enhance economic efficiency and innovation.
There is also a need to enhance the role and capacities of the sector regulators and the Competition Commission to examine the PSEs’ role in sectors which often operate as “natural monopolies” (even if private entry is allowed) and examine whether state ownership is ensuring an adequate level of service provision.
Set up an independent steering committee to oversee implementation:There is probably no institution better placed than the board of directors to ensure good corporate governance at the entity level. Therefore the primary focus of corporate governance reform of PSEs needs to be on the selection of qualified and competent people on the board of directors of these entities.
The appropriate mechanism needs to be put in place that ensures the right selection and continuous monitoring of the members of the board, divorced from political interference.
This mechanism could take the form of a separate government department, similar to the Department of Public Enterprises in India, or it could be outside the ambit of any particular ministry like the Crown Company Monitoring Advisory Unit in New Zealand. The proposed steering committee needs to be comprised of members from both the public and private sector to ensure an appropriate mix of skills as well as to ensure ownership of the process across a broader spectrum.
Professionals need to be tapped for the steering committee, applying the same fit and proper criteria developed for individual board members of PSEs. Ex-officio membership from ministries should be discouraged as should institutional representation. These recommendations have been made keeping in mind that some of the more successful centralised models of governance may be premature and impractical in Pakistan’s milieu.
However, if the above corrective measures prove inadequate to stem the rapid deterioration in the PSEs, a more radical shift towards centralised ownership models may be required. As with all reform measures, the implementation has to be in “letter and spirit” so that its chances of success are not sacrificed at the altar of political expediency.
The writer was a member of the Task Force on Corporate Governance for Public Sector Enterprises.