Assignment No # 3 Corporate GovernanceSubmitted to: Mr. Uzair FarooqSubmitted by: Amir Shafiq bhatti Mbtf11-121 Sec - A
RESTRUCTURING PLANS ADOPTED BY GOVERNMENTThe government has initiated some concrete measures to improve the performance ofPublic Sector Enterprises (PSEs). The Cabinet Committee on Restructuring (CCOR)has identified Pakistan International Airlines (PIA); Pakistan Steel Mills (PSM); PakistanRailways (PR) and the Utility Stores Corporation (USC), among others, as bodies thatneed improvement in corporate governance, service delivery, and reduction of fiscalburden and savings.A framework for hiring professional CEOs has been approved by the CCOR and theBoard of Directors (BoDs) of different PSEs are being empowered to inductprofessionals from the market through a transparent process; consequently, financialhemorrhaging has been curtailed in these PSEs.Public sector entities resisting their restructuring would face the music in terms ofeventual privatization, sources close to the Minister for Privatization informed TheNationon Thursday.According to the sources, the Government has decided in principle either to make thepublic sector entities (PSEs) financially viable through immediate restructuring ordispose them of through privatization. The sources were of the view that the fiscalcrunch had forced the Government to get rid of the additional burden of hundreds ofrupees per annum in terms of losses and subsidies of these entities.In this connection Finance Minister Abdul Hafeez Sheikh chaired the second meeting ofCabinet Committee on Restructuring of Public Sector Enterprises (CCOR) here onThursday.The Committee adopted a comprehensive formula for restructuring the Board ofDirectors of the PSEs. The formula is based on principles that the size of the proposedBoard Of Directors may range between 8 to 10 members. The proposed names ofBoard of Directors must contain a right-mix of the Government and private sectorprofessionals with a greater leaning towards the private sector. The private sector
nominations should represent a balance in their academic and professional backgroundto provide diversity of opinion for taking informed decisions by the Board. Regionalbalances may be observed in the nominations to the Boards. Gender balances mayalso be maintained while making nominations to the Boards. The nominees may alsoreflect a balance in the age of the nominees to the Board of Directors of PSEs. With aview to groom a second generation of private sector persons, at least the member of theBoD should be a young private sector individual with potential to make his mark infuture. The nominees of the Board may be selected from the trade and industry, NGOs,academia and the media. The ministers, secretaries/government officials may not benominated as chairpersons of the Board of Directors. The office of the Chairperson andCEO should be kept separate. Apart from the concerned ministry, the tendency ofnominating BoD members from other ministries should be curbed. This may only beresorted to if it is absolutely necessary. No representative of the Ministry of Financemay be nominated on the BoDs unless absolutely necessary. The CEOs and head offinance of each PSE would be a member of the BoD. The choice of private sectornominees may also be based on the ability of the nominee to be able to devote time tothe PSE to which he/she may be nominated. Multiple nominations would be avoided atall costs. One nominee of the CCOR be represented on the Boards of all PSEsPakistan RailwaysA new BoD of PR has been constituted with an optimal mix of academia, managementprofessionals, rail experts and executive functionaries, which will become functionalafter an amendment to the Railway Order. Repair of locomotives and freight operationshave been prioritized for improving revenue generation and restoration of rail services. Ithas been decided that adjustment of fares and freight pricing will be determinedaccording to market conditions and cost of doing business.Pakistan International AirlinesAn overarching restructuring plan for PIA has been finalized which addresses corporategovernance, human resource rationalization, financial and operational restructuring,engineering improvement, procurement and logistics, marketing and fleet, airportservices and dispatch reliability, among others. Increased fuel cost has been a major
downside risk to the financial strength of PIA, and effective measures have been put inplace to mitigate the effect. Fleet renewal and addition is being planned. Routerationalization, code sharing and alliances are being pursued for moving to a newbusiness model. Rationalization of employment in PIA is being addressed throughattrition, and no new hiring is being undertaken except for operational staff. A financialrestructuring plan has been finalized, which includes an equity injection, rollover ofloans, and government guaranteed loans among others.Pakistan Steel MillsThe BoD of PSM has been reconstituted. Process for selection of a professional CEO ofPSM has been finalized. Smooth availability of raw materials to PSM has beenensured. A strategic view needs to be undertaken for sustainable revitalization of PSM,which may entail collaboration and partnership with the Russian government,privatization, private-public partnership and operations and management outsourcingFuture StrategyFuture strategy will be focused on developing a framework for ensuring well-functioningBoards and engaging them in the turnaround of PSEs. The corporate governanceframework envisages: a transparent process of Board nominations; capacity building ofBoDs; clarifying the role of BoDs; monitoring performance of BoDs by setting keyperformance indicators; and preparations for the privatization of the Faisalabad ElectricSupply Company and the Islamabad Electric Supply Company.The meeting of the Cabinet Committee on Restructuring of Eight Public SectorEnterprises was held here Thursday with the Federal Minister for Finance Dr. AbdulHafeez Shaikh in the chair. The meeting deliberated upon and finalized the alreadysubmitted proposals to the Committee by the concerned ministries for the re-structuringof the Board of Directors of the Pakistan Steel Mills, Pakistan Railways and NationalTransmission and Distribution Companies, said a statement issued by the Ministry ofFinance. The proposals that were submitted emphasized for seeking more involvementof private sector, members of the civil society and the best minds to get the job done.The Board of Directors as proposed will be autonomous in its nature to formulate policyof the respective enterprises so that they may be made financially and technically viable
and selfrelience.It was also decided that the CCOR on PSEs meeting shall be heldregularly on weekly basis to know the ongoing work and development in this regard.Their restructuring proposals shall be submitted to the Cabinet for further discussionand for the final approval by the Prime Minister.Federal Minister for Water and Power,Minister for Railways , Minister for Law, Minister for Industries and Production , Ministerof State for Finance , Deputy Chairman Planning Commission, Secretary Finance,Secretary Water and Power, General Manager Railways and other concerned officialsof the ministries and divisions attended the meeting –PSC restructuring plan to strengthen agro-based economyThe provincial government has evolved a plan for the restructuring of Punjab SeedCorporation to make it more efficient and viable so that it could play its due role instrengthening the agro-based economy of the country, it is learnt reliably.Informed sources told The Nation on Thursday that five other provincial departmentsare also included in the restructuring plan of the government in order to make themviable and competitive organizations to face the future challenges in the post WTOregime.The restructuring of Punjab Tourism Development Corporation, Punjab SmallIndustries Corporation, Punjab Food Department, Punjab Mines and MineralDepartment and Punjab Agriculture Marketing Department is also on cards under theplan to improve their performance and convert them into viable institutions, sourcessaid.About the restructuring of Punjab Seed Corporation, the sources saidrecommendations in this regard have been finalized and submitted to federalgovernment and Punjab Resource Management Programme, which will appointconsultant from the short-listed firms by next month to evaluate the proposals andconvert the PSC into a public-private sector entity.
Sources further reveal that the full autonomy would be awarded to PSC under therestructuring plan to develop its corporate image purely on commercial lines like otherpublic sector companies including the NFC, PTCL, SNGPL and WAPDA etc byestablishing its high powered governing council. “The council will devise strategy toface the future challenges in forthcoming WTO regime that would help compete localand multinational companies,” they maintained.There is another option that the corporation will be converted into public limitedcompany but its shares will not be floated on stock exchanges, sources said added thatthe affiliated registered growers would make partners of the PSC.“The government has in principle decided that the existence of the PSC is essential forfarming community and national economy as well due to its significant role, which ithas been playing to strengthen seed sector on sound footing for achieving higher peracre yield of major and minor crops in the country,” the sources maintained.Reorganization of the PSC is also required to get multiplied local varieties of otherprovinces, the sources said adding that the PSC is ready to sign accords with otherprovincial governments provided necessary assistance in shape of seed productionfarms is provided to the corporation. However, if other provinces are only interested inseed distribution channel then they will have to place their confirm orders at the time ofprocurement of crops with 50 per cent advance payment, they added.Under the restructuring plan, the PSC may be allowed to produce hybrid seed ofmaize, sunflower and fodder in collaboration with local and international researchinstitutes or by signing joint venture with multinational companies.In order to reduce administrative expenses and keep the corporation a viable institutionwithin its resources, it may be allowed to take measures for right-sizing with golden
handshake scheme to get rid of unwanted, undesired and unwilling employees.However, young blood and seasoned professionals having innovative approach will beinducted into the PSC to fill up the gap.To streamline the production of pre-basic and basic seeds on scientific lines accordingto advance seed technology, the issue of pattedars of PSC Khanewal Farms shouldurgently be get resolved for developing required system on 5,000 acres tenant freefarms as visualized by the World Bank in appraisal report.Moreover, the government has also decided to restructure seed sector and amendsSeed Act to check black marketing of unapproved varieties by private seed companies.An independent authority or Seed Development Board may be established to properlymonitor the activities of public and private seed sectors, the sources said.The recommendations also stressed the need to check present status of public andprivate sectors in order to boost production of high quality seed of major crops as wellas to increase output of vegetables, oil seed, fodder and floriculture seeds to cut downimport bill of respective crops seeds. It also urged to evolve a plan for developing seedbusiness as an industry to get easy credit facility, exemption of import duty on import ofprocessing machinery, Income Tax holiday and exemption of Sales Tax on seedproduction material etc.The sources further said that immediate action may be taken to get registered themajor and minor crops seed varieties of Pakistan under international patent and copyrights regulations as further delay may damage the position of Pakistan like recentissue of rice varieties raised by European Community.Pakistan – Restructuring of PSEsIt is good to know that some concrete measures would be taken soon to improve thehealth of Public Sector Enterprises (PSEs) in order to reduce burden on the budget.According to the latest reports, the Cabinet Committee on Restructuring (CCoR) hasfinalized a roadmap for the turnaround of eight loss-making public sector entities,
focusing in particular on replacing their managements with professionals from theprivate sector.Talking to a newspaper, EX- Finance Minister Shaukat Tarin revealed that theCommittee would replace the existing managements of Pakistan International Airlines(PIA) and Pakistan Steel Mills (PSM) with others within two weeks after approval of theplan by the Prime Minister. New and vibrant boards were also needed for corporaterestructuring of Pakistan Railways, Pepco, NHA, USC, TCP and Passco.These eight entities were incurring annual losses of about Rs 200 billion and Ministry ofFinance had always been advocating for structural changes in the management ofthese PSEs to make them profitable. Tarin deplored that weak governance,susceptibility to outside influence and implicit guarantees by the government were themajor reasons behind these entities‟ under-performance.In order to facilitate the transition and tone down the resistance from the relatedministries, the Committee had also decided to co-opt the concerned ministries in therestructuring effort. Such an approach was deemed essential to get the necessary co-operation of the concerned ministries and ensure consistency of policies by thegovernment.As for the purpose of the whole exercise, the basic idea behind the new plan was toempower the boards to operate business profitably and disassociate politics frombusiness affairs. The new boards would be made responsible to prepare and presentrestructuring plans in a given timeframe based on the conditions in their particular units.In our view, it is quite evident that the CCoR is moving in the right direction and theactive support provided by the Finance Minister would not only help expedite its workbut also reduce resistance at various levels which is essential for the success of theexercise. It is a world-wide phenomenon that vested interests create all sorts of hurdlesin order to maintain the status quo and dissuade the government from taking a boldapproach of restructuring or privatizing the public sector entities. The power of thebureaucracy and the trade unions, in particular, is generally eroded whenever such aplan is implemented.
However, the problems of loss-making PSEs are now so severe and complex inPakistan that there seems to be no alternative for the government but to make a bolddeparture from the past and take a more sensible route. Most worrying is the continuoushemorrhage on the budget due to the mismanagement that is rampant in thesebusiness organizations. According to certain estimates, total annual loss by the 22state-owned enterprises was now over Rs 300 billion, which was almost, equal or morethan government spending on the development projects.An intriguing aspect of this loss is that in certain cases such as PIA, PSM and NHA,such a loss subsidies the rich but would punish the poor through increased taxes.Circular debt and increasing contingent liabilities of the government are also the by-products of the losses of certain PSEs. We feel that it is imperative for the governmentto move speedily to restructure the PSEs in order to enable them to improve theirfinancial position by increasing their efficiency levels and arrest this rot once for all. Thework done by the CCoR so far, its plans for the future and the co-operation elicited fromthe related ministries could go a long way in restructuring the PSEs and make themprofitable. However, all this requires across-the-board support of heads of politicalparties that matter.Support from within the ruling clique or the opposition to labour unions – vicariouslyopposed to rightsizing and restructuring from either quarters will create insurmountableobstacles. Secondly, the Board of Directors of these institutions – filled by cronies ofeither the Prime Minister or ministerial elite – would need to be replaced by people whocan add value to the Board and provide a shield to the management of PSEs. Needlessto add that a successful outcome of this exercise could contribute a great deal inimproving public finances of the country, reducing government borrowings from varioussources and releasing resources for the badly-needed development expenditures.EMPLOYMENT SHARE OF PUBLIC AND PRIVATE SECTOR
Public sector employment accounts for over one-half of waged employment in Pakistan.The empirical analysis undertaken in this study for Pakistan tends to concur with thesummary consensus offered by Gregory and Borland (1999) on public sector labourmarkets in developed countries. As elsewhere, public sector workers in Pakistan tendto have both higher average pay and education levels as compared to their privatesector counterparts. In addition, the public sector in Pakistan has a more compressedwage distribution and a smaller gender pay gap than that prevailing in the privatesector.Our empirical analysis suggests that about two-fifths of the raw differential in averagewages between the public and private sector is accounted by differentials in averagecharacteristics. The estimated ceteris paribus public sector mark-up is of the order of49 percent and is substantial by the standards of developed economies. The mark-upwas found to decline monotonically with movement up the conditional wage distribution.In particular, the premium at the 10th percentile was estimated at 92 percent ascompared to a more modest 20 percent at the 90th percentile.The existence of a sizeable public-private sector differential has obvious implications forthe Pakistan labour market and can create „queues‟ for public sector jobs given they arecomparatively well-paid across a spectrum of low- and high-paid jobs. An obviousagenda for future research would be to investigate the extent to which these differentialsinfluence sectoral attachment and give rise to the phenomenon of „wait‟ unemployment.Finally, employment in the public sector is generally viewed as an attractive option inPakistan not only because of the wage differentials documented in this study but also asa consequence of the perquisites, such as housing, free telephone provision for civilservants, job security, free medical benefits, etc., associated with employment in thissector. Public sector employment in Pakistan could be interpreted as providing rentseeking opportunities for some. The tax-payer is not represented at the negotiatingtable and the state bureaucracy has an incentive to conceal the nature and magnitudeof spending on such fringe benefits. The expenditure on fringe benefits impacts stronglyon the national exchequer but also bestows an unfair advantage on the public sectorrelative to the private sector. This subsidized advantage curtails the potential for the
private sector‟s development, a key ingredient for an economy‟s transformation and itsSustainable long-term economic growth. One issue that warrants consideration forfuture research in this area would be an investigation into the magnitude of such fringebenefits in Pakistan and their contribution to the more broadly defined public-privatesector differential. It would be informative to investigate within this framework the likelycost implications to the national exchequer if fringe benefits were actually replaced bycash payments. It is an empirical question whether such a policy would reduce theoverall cost to the exchequer, but it would certainly introduce a greater degree oftransparency to public sector spending.