Reforming SOEs in Pakistan

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VIADR OMER JAVED
SOURCEBusiness Recorder
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The state-owned enterprises (SOEs) are defined in Pakistan under the (Corporate Governance) Public Sectors Companies’ Rules (PSC Rules, 2013) as those companies where government exercises either direct or indirect beneficiary control or ownership, whereby the government or any agency holds 50% of voting shares or otherwise has ‘the power to elect, nominate or appoint a majority of its directors’. Moreover, some of the SOEs were brought under further directions – pertaining to disclosure and reporting, but not risk management – through the Pakistan Companies Act (2017).

Here, SOEs are required to comply with PSE Rules, including those pertaining to risk management, and in the language of the Rules, the SOE boards of directors are required to ‘formulate significant policies of the Public Sector Company, which may include the identification and monitoring of the principal risks and opportunities […] and ensuring that appropriate systems are in place to manage these risks and opportunities, including safeguarding the public reputation of the Public Sector Company’.

Moreover, PSC Rules also ask SOE boards, among other things, to a) hold annual trainings in internal control and risk management areas, and b) to ‘assist the SOE to achieve its principal objective by exercising its powers and carrying out its fiduciary duties with a sense of objective judgement and in the best interest of the company’.

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An OECD (Organisation for Economic Co-operation and Development) Report (2018) titled ‘Managing risk in the State-owned enterprise sector in Asia’, for example, highlights deficiencies/concerns with regard to risk management practices of SOEs in Pakistan, whereby firstly, there is no explicit requirement for SOEs to ‘establish an internal risk management function or to employ risk officers or other staff specialised in risk management’. Secondly, only one relevant line ministry representative is included in the risk management committees of SOEs.

Thirdly, no maximum leverage ratio and no related SOE guidelines have been established by the state, which ‘reflects the broader absence of a common state ownership policy in Pakistan’. Fourthly, no linkage exists between SOE executive remuneration policy and risk-taking. Lastly, while ‘the Auditor General of Pakistan is responsible for undertaking performance audits of most SOEs, but does not appear to have an explicit responsibility for reviewing SOEs’ risk management practices’.

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One of the main reasons for the poor performance of SOEs in Pakistan, over the years, is with regard to their weak risk management performance. The Committee tasked with reforming SOEs should come up with better quality risk management/governance system, and where technically capable board of directors are selected.

Huge build-up of contingent liabilities, happening on account of overall loss-making by SOEs in Pakistan for many years now, requires greater ownership to resolving the underlying issues. It must come from the highest level of government. In China, for example, it comes from country’s ‘State Council’, which is headed by no less than the Prime Minister there; and it is known globally the success with which China has been running its excellent performing economy for several decades on the back of well-functioning SOEs. Moreover, under the direct leadership/control of the State Council was created a strong regulator/support authority to the SOEs called ‘State-owned Assets Supervision and Administration Commission of the State Council (SASAC)’. Pakistan must consider formulating a similar authority to allow better oversight/monitoring and provide a better enabling environment for SOEs to perform effectively.

The main functions of SASAC include a) management the assets of SOEs, including approving sales or mergers of assets or stock, b) overseeing implementation of policies, c) formulate policies to regulate the incomes of top executives, along with wages and remuneration of workers, d) helps evolve reform agenda, including that of SOEs restructuring and its corporate governance, e) appoints/removes top executives of SOEs, and in this regard is responsible for evaluating their performance, and for overall establishment of selection system of corporate executives, and f) is overall responsible for management of SOEs. It, therefore, makes sense for the government in Pakistan to evolve a similar entity, for which it could even request SASAC to provide technical assistance.

At the same time, Pakistan should also seek to learn from the extensive work of ‘the OECD Working Party on State Ownership and Privatisation Practices’, which ‘facilitates policy dialogue and information exchange between OECD Member countries and key partners on improving corporate governance of state-owned enterprises and implementing privatisation policies’. Technical assistance should be sought in this direction by Pakistan. The fact that it is represented by Scandinavian countries in particular – where SOEs have historically performed brilliantly – should serve as an additional incentive for Pakistan.

Here, the writer was a bit surprised that among the countries that were invited since 2001- when this Working Party was formed – in addition to the 36 OECD-member countries, the EU Commission, and the World Bank as observer, Pakistan was never invited to participate. Given the huge economic issue that the poor performance of SOEs has become for Pakistan for many years now, it is strange to say the least as to why Pakistan was not invited and to understand if something went missing in the country’s own efforts in forging a strong relationship with the Working Party. Going forward, this situation should be rectified at the earliest.

To learn and receive guidance from the Working Party would be a good idea, given the huge experience it holds on overall improving SOEs, and in particular the guidelines of corporate governance of SOEs. Hence, the government should urgently look to learn from both SASAC and the Working Party (and it is a sea of knowledge of cross-country best practices). Pakistan can no longer delay such initiatives, when meeting contingent liabilities of SOEs dearly costs the state exchequer.

Reforming SOEs should also mean opening these to private investors; with limits on such invitation depending on the extent of strategic nature of a particular SOE. For example, the PSC rules should be amended to include transforming SOEs into joint-stock companies of the nature of limited liabilities, so that investors are firstly given space to invest, and secondly only face the risk to the extent they have invested. At the same time, as the country improves the underlying markets of these SOEs, it should even look to move as many SOEs as possible to a Mixed-Ownership Enterprises (MOEs) framework, something which China has undertaken as an effort to inject dynamism into its policy of SOE transformation, which allows greater private sector participation, and builds further upon the limited liability framework.

Investor confidence

Overall, the level of transparency of SOEs should be enhanced in Pakistan, where the public – the electorate/ taxpayer – should be provided information by SOEs the same way private firms provide to their shareholders. At the same time, there should be both a strong and an effective independent audit system put in place internally, and a similar but independent external audit system, all put in place to overall boost the efficiency of SOEs. Similarly, the SOE board not only approves strategy and monitors management, but also is modernized to include the features of being smaller, more independent, more like private sector enterprises, and more diverse.

Reforms in SOEs need to take front-seat in the country. This has already taken too long. And before one decides to look for outright moves to privatization, it should be remembered that the world has felt the importance and significance of SOEs in recent years all the more indicated by the growing interest to create or stick with SOEs, with as much private accommodation as possible, especially after the Great Recession of 2007/08 when the whole edifice of Neoliberal/Washington Consensus fell on its face, and the rising income inequality/ poverty levels, and growing welfare concerns.

(The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund. He tweets @omerjaved7)

(This news/article originally appeared in Business Recorder on September 13th, 2019)

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