Reform necessary for success of wasteful, large state enterprises

Competent boards can turn around these bleeding state-owned units

ISLAMABAD: Imagine a public limited company that was incorporated in 2014 to finance infrastructure projects after receiving $1.5 billion in seed money from Saudi Arabia.

This entity – Pakistan Development Fund – had a very clear agenda – raise capital for specific infrastructure investments through alternative sources such as by issuing Sukuk (Islamic bonds), but on a project-to-project basis.

Like any other state-owned company, it was expected to reduce government’s fiscal burden through better value for money and boost inflow of private capital. However, the fund remained dormant for four years primarily due to the reason that all its directors were ex-officio members from the planning and finance ministries who had no incentive to work pro bono for this initiative.

Now in late March 2018, the finance ministry advertised vacancies for professional chief executive officer, chief financial officer, chief internal auditor and company secretary for this zombie company, although there is no indication that the composition of the board will change. The underperformance of bloated state-owned companies due to unprofessional corporate governance is no longer seen as a one-time exception, but it is rather becoming a norm, highlighting complicated structural problems in the oversight framework.

The government’s lack of expertise in appointing a professional board for public companies has left the economy in dire straits. Whether it is a company chock-full of bosses like Pakistan International Airlines (PIA) or some power distribution company, there is no accountability for board members of these public companies.

Moreover, these large state enterprises get the lion’s share of credit from the banking sector at the expense of small businesses and budding entrepreneurs, impeding private-sector growth.

Reforming these wasteful and large state-owned white elephants is essential to Pakistan’s broader economic reform agenda and the appointment of a competent board of directors is a key success factor in turning around these inefficient public companies.

If we look at the five-year performance of the incumbent government in managing state-owned enterprises, it is found that the top profit-making public companies belong to the hydrocarbon and banking industries where the state enjoys an inherent market monopoly.

At present, the accumulated losses of state-owned enterprises have exceeded 4% of gross domestic product (GDP) while guarantees for these companies have more than doubled in the past year.

Appointment of a competent board is even more critical in the case of electricity distribution companies. Even better-performing distribution companies are found complacent, each missing Nepra targets for transmission and distribution losses.

Lessons to learn

There is a need to learn lessons from better-performing companies such as Faisalabad Electric Supply Company (Fesco) and Multan Electric Power Company (Mepco) and look into the causes for loss-making ones like Quetta Electric Supply Company and Hyderabad Electric Supply Company.

In fact, inadequate governance of the distribution companies is the root cause of the circular debt problem which is projected to surpass Rs1 trillion. The government then usually bites the bullet by paying some of its outstanding bills when producers stop supplying power to the national grid.

Although there are good guidelines provided by the Public Sector Companies Corporate Governance Rules 2013, there are numerous gaps when it comes to the terms of references for conducting business in board proceedings.

Political interference in operations often undermines independence of the board and compromises the company’s efficiency and effectiveness of operations. The board should be reasonably diverse and there should be a good balance between ex-officio government officials, leaders from the private sector and international experts.

Remuneration of directors and the CEO should be pegged to the achievement of agreed targets and there should be no room for freewheelers in the board. Similarly, the internal audit function may be outsourced as a best practice.

There are, however, some success stories, especially in the IT and telecom sector. The Universal Services Fund and Ignite are examples of two public limited companies being run in a professional corporate manner.

Inefficient companies could be consolidated into better-performing ones or even be privatised if all else doesn’t work out well. The government needs to sustain reform initiatives aimed at enhancing the performance of public sector companies by focusing on their corporate governance and accountability, which will then help reduce their liabilities and losses.

The government has to be blue in the face to ensure that long-term shareholder value becomes the governing principle for all companies in its portfolios.

The writer is a Cambridge graduate and is working as a strategy consultant. He tweets at @faranmah

Published in The Express Tribune, May 7^th, 2018.

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