How to govern public-sector companies?

Published: December 7, 2017
The writer is a public policy adviser and researcher having interest in competitive cities, entrepreneurship and governance. He tweets @navift

The writer is a public policy adviser and researcher having interest in competitive cities, entrepreneurship and governance. He tweets @navift

In the last couple of months, allegations of irregularities in the governance and operations of public-sector companies (PSCs) in Punjab have gotten significant attention of the media. This resulted in suo-motu notices by judicial and accountability forums in the country. Some are mistakenly expecting that these notices will help to improve governance of PSCs in Punjab and Pakistan. The reality is that judicial and accountability/investigative agencies, along with more than a dozen other parliamentary and executive forums, have long been investigating and scrutinising corruption and performance of PSCs in Pakistan. Still, many federal companies such as the Pakistan Steel Mills, Pakistan International Airlines, the Pakistan Railways, energy companies and food market operations have been performing poorly to deliver services, and on top of it they have accumulated huge losses and government-guaranteed commercial debt. Thus, the mess in PSCs governance simply implies multiplicity, vagueness and ineffectiveness of current accountability mechanisms. I would explain here why many of such PSCs are performing poorly and how institutional reforms can be introduced to better govern them.

The first problem is the lack of any effective legislative framework to govern PSCs. Many countries in the world have developed State-Owned Enterprises (SOEs) laws, to clarify roles and responsibilities of various stakeholders involved in the governance of these companies. No such law exists both at federal and provincial level in Pakistan. Some may point to existing regulatory functions performed by various regulatory agencies, but here I mean ownership framework that is steered by the government.

Secondly, corporate governance of these PSCs is the most neglected area. With the efforts of Economic Reforms Unit (ERU) of the Ministry of Finance, the Securities and Exchange Commission of Pakistan (SECP) and Centre for International Private Enterprise, Corporate Governance Rules were introduced in 2013. The compliance of these rules, later, became problematic for the current government and then they pushed SECP to undertake changes in the rules in order to enhance the grip of the government functionaries on the affairs of these companies. In one of my earlier pieces in this paper titled ‘Underperforming board rooms of public sector firms’, I discussed the issues related to board constitution, performance and removal. Most of the boards are filled with friends of politicians and bureaucrats, as there is no central database of prequalified independent directors. The performance of ex-officio members and independent directors is neither recorded nor comes into any consideration while appointing people on boards.

Third, there is no central performance benchmarking process for the assessment of PSCs. For the last three years, ERU is publishing a consolidated report of performance of PSCs, in the federal government. There is no such practice at the provincial level. Moreover, the performance report of even the federal government is currently not feeding into the decisions about fiscal allocation for PSCs and performance monitoring of the top management. Most of the times such decisions are based on adhoc practices and often the government bends to various labour and political pressures.

Fourth, human resource at all levels in most PSCs lacks professional capabilities and continuous capacity development due to various loopholes in the human resource systems of these companies. These companies are no more the choice of ‘Talent’, while there is always an influx of political appointees in these companies. A classic example of such a malpractice is that the last government regularised around 3,000 employees in the Pakistan Steel Mills when it was virtually closed. Moreover, multiple layers of accountability and political victimisation deter talented professionals from joining these companies.

Fifth, many of the not-for-profit companies under both the provincial and federal governments have been created to avoid delays of red tape in mainstream public financial management (PFM). Instead of carrying out reforms in mainstream PFM, shortcuts in the forms of development projects, autonomous bodies and not-for-profit companies have been adopted by the government. These avenues have opened doors of appointment for favourite bureaucrats in lucrative positions while their peers—who lack such political and social connections — are often barred from such privileges. This has negatively impacted ethos and morale of the civil service. Moreover, how can these companies perform better when their very foundations are flawed and not well-intentioned?

It is true that governing PSCs is challenging across the world. But some countries have been continuously introducing reforms to improve governance of these PSCs. These countries include Malaysia, China, Singapore, New Zealand and France, among others.

Moving forward, the first thing is to establish a high-level commission in both federal and provincial governments, which should analyse the rationale of creation of all such PSCs during the last two decades at least. I am convinced that around 70 per cent of them can either be disbanded or merged to improve effectiveness and performance. Though privatisation is not a panacea for this poor governance, but it is safe to say that most of the companies do not have any social, economic and political rationale. Privatisation process has recently been stalled that needs to be reconsidered or its soft forms such as public-private partnerships can be pursued. A recent article in IMF’s PFM blog by Taz Chaponda titled ‘Cost benefit analysis of state-owned enterprises’, proposes: “A careful re-assessment of the policy objectives underpinning each SOE and interrogating whether the original business models are still valid…Ultimately, SOE reform depends on political decisions, but generating sensible reform options depends on weighing up the costs and benefits.”

Secondly, an independent assessment of compliance and relevance of corporate governance framework should be carried out in order to introduce necessary changes in this framework. Third, legislations should be introduced at both federal and provincial levels to clearly provide governance, human resource structures and performance framework for such companies. Fourth, the mechanism for appointment, removal and assessment of members of boards of directors needs to be devised. Fifth, central performance monitoring and benchmarking should be carried out with the aim to decide fiscal allocations and other incentives for the senior management.

Published in The Express Tribune, December 7th, 2017.

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