This document discusses corporate governance reforms needed for state-owned enterprises (SOEs) in Pakistan. It notes that SOEs currently contribute around 10% of Pakistan's GDP but lack transparency and oversight. Reforms proposed include privatizing some SOEs, restructuring boards to include more independent members, separating the roles of CEO and board chair, and establishing committees. A centralized ownership model is also recommended to improve accountability. Overall, strengthening corporate governance of SOEs is seen as crucial but external reforms are also needed like developing clear SOE policies and enhancing regulatory oversight.

1. Pakistan
State Owned Policy Reforms
Dr. Shamshad Akhtar
Corporate Governance Forum
Organized by IPCG & CIPE
April 11, 2012

2. Pakistan: SOE Sector
• Privatization has helped scaled down the size and scale of SOE sector
• SBP data suggests: there are currently about 220 SOEs and perhaps now
contribute 10% of GDP
• About 140 or so are federal entities
• 23 of these SOEs are listed on KSE and constitute about one third of
market capitalization include 7 FIs, 8 energy related entities and large
companies such as PIA and PNSC
• State’s presence remains overwhelmingly large in infrastructure sector
– 23 electricity and gas companies
– 17 transport and communication entities
– 15 financial institutions incl. insurance sector
– 38 manufacturing enterprises
– 38 support services entitites
– 2 mining and 2 agriculture enterprises
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3. Assessment of SOEs Sector is a complex endeavor –practices
and trends are disturbing
• The Government does not have consolidated data or central management
information system which could offer a comprehensive perspective on
operational and financial performance.
• Ownership and oversight dispersed and fragmented being with Sector
Ministries who do not have a transparent policy framework or reporting
on SOEs under their domain
• Quality of oversight varies as the Ministries lack capacities and
understanding of the principles of governing state enterprises
• Limited recognition of need for safeguarding the public assets and
enhancing their market valuation
• Pervasive State interference in SOE affairs and appointments, over-
employment and skill mismatches
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4. Fiscal burden unsustainable
• Losses of SOEs have grown in recent years and according to some
estimates could be in the range of 1.5% of GDP or so. For e.g
• Power sector is riddled with inter-enterprise arrears, tariff subsidies,
rising cost of oil, and transmission losses and most of all IPP payments.
The circular debt liabilities recently reached close to Rs391 billion – to
raise liquidity for settling these liabilities Government floated T-bills/PIBs
and is now obligated to assume this debt as well as the interest liabilities
of Rs44.5 billion. Aside from continuous build up of these obligations
the power entities have large receivables whose non payment generates
additional complications.
• PIA cumulative losses are estimated to be Rs111 billion over and above
this the Government has offered to PIAC long term financing for working
capital, guaranteed its borrowing and pays financial charges on selected
debt securities.
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5. State Owned Enterprise Reforms
• Privatization of SOEs on agenda
– The Council of Common Interest had endorsed privatization of 65 SOEs,
– the Cabinet Committee for Privatization considered 23 cases including the
generating and distributing companies, Pak Railways and insurance companies
etc.
• Progress stalled because of the political and economic uncertainty and concerns
with the valuation of companies in current state.
• Current focus is on developing and restructuring plans are being developed for
railways, and PIAC etc.
– Power Sector recovery plan: Genco Holding Company has been set up and has
a private sector led Board, the four Gencos CEOs being appointed and Boards
will include independent members , and PEPCO abolished and Other power
related entities board transformation to follow. Circular debt issue only
partially resolved but a complicated case
– Restructuring plans for other SOEs under preparation incl. PIAC/Pak Railways
• Good initiatives but
– pace of implementation too slow,
– Sequencing needs more reflection and efforts are fragmented
– Sector Ministries not fully aligned with the mandate
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6. Strengthening Corporate Governance most crucial – reinforce
few areas
• Appointment of CEOs, Board and its composition.
– Best way to insulate the process of appointment of CEOs and Board
member from politics is to set up an independent Commission with
high powered professionals to select
– appoint Board members based on fit and proper criteria and a roaster
of professional candidate.
– CEO ought to be appointed by the Board based on defined fit and
proper criteria including scrutiny of conflict of interest provisions and
based on an open and competitive process and Board should ensure
due process for misconduct.
– The Board should include broad based and diverse skills including
industry specialist, financial and human resource experts etc.
• If the Government is sole or controlling owner, it is undoubtedly in a unique
position to nominate and elect the board but there is often tendency to appoint
excessive government representatives. Even if the government opts to nominate
BOD it should perform effective due diligence in identifying, nominating and
electing board members.
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7. Role and responsibility of Board.
• The key is for the government and directors to understand that the SOE Board is
accountable to shareholder and wider stakeholders and is responsible for SOE
performance
• Board and shareholders should have a clear understanding of the SOE Board
roles and responsibility
• SOE Board, like private companies, have to be involved in the Mission and
Vision, strategy and oversight of the company, while delegating management to
CEO
• Good to have a recognition of that SOE Boards capacities need strengthening
and Board has to have an understanding of the public role and functions SOEs
• Directors need to develop a clear understanding of the risks and liabilities
company faces and ensure risk mitigation strategies are applied to safeguard
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public 7

8. Separation of the role of Chairman and CEOs
• This is quite common in Europe with German and Dutch regulators requiring this
split
• In the United Kingdom, over 80% of large companies have an independent
chairman, and
• In US this proportion has steadily grown from a low of 16% to about 40% or so.
• There is also a rise in the share of companies with independent Chairman.
• Cleaving the CEO and chairman role makes senses as CEO is responsible for
company management and cannot realistically be expected to self monitor and
evaluate own role and performance.
• Chairperson is responsible for driving the strategy and policy and for managing
dynamic interaction among the Board and carrying greater compliance and
reporting requirements.
• Success depends on how effectively the role of Chairman and CEOs is defined and
segregated.
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9. Formation of Committees.
• The guidelines recommend rightly for SOEs to constitute range of Board
committees:
• audit,
• risk,
• human resource,
• procurement etc.
• These Committees to be chaired by Board members competent in this areas and
be offer a clear mandate and accountability.
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10. Corporate Governance of SOEs
• The draft Public Sector Companies (Corporate Governance) Regulations
– a first step but a necessary precondition for setting right the principles of
internal governance at firm level.
– The code for SOEs is similar to the Code of Corporate Governance applicable
to the listed entities
– 23 SOEs who are publicly listed and are likely to be following most of the
Requirements of the Code.
– The proposed code offers to SOEs guidance consistent with the OECD
Guidelines for Corporate Governance of State Owned Enterprises, 2005
• Add to Code elucidations to offer more deeper guidance on SOEs
– SOEs need to be held to higher standards of accountability than private
companies as they are public assets and use tax payer money
– State ownership does not automatically guarantee State control over the
mission and activities of an SOE.
– Recognition that the goals of SOEs are typically a more complex mixture of
social, political, and commercial objectives.
– there has to be simultaneous resolution of a host of external factors that
adversely impact governance
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11. Fixing internal governance of companies is necessary but not
sufficient for setting the governance right
Nurture a sound external governance framework
1. Consider pros and cons of decentralized model of ownership and oversight of
Pakistan and centralize ownership model
2. Ensure competitive neutrality and contestability of markets in which SOEs operate –
use the power of competition to introduce better results
3. Develop an objective and clear SOE policy
4. Convert SOEs to a proper legal structure
5. Develop a policy for public service obligations
6. Develop role and capacities of sector regulators
7. Develop a Watch dog and offer them tools such as corporate scorecard for ensuring
transparency and compliance with the Code
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12. No one size fit model for centralized ownership model
• A survey of OECD and study of the World Bank suggests a growing trend among its
members to move from decentralized to a centralized ownership model. Under the
centralized ownership model, the shareholding of SOEs have been transferred to a
government holding company or in a designated Ministry or a coordinating body.
– Role model being quoted world wide is Singapore established Temasek – an old
Malay names “sea town” (or similar bodies with different characteristics in other
countries)
– Temasek is registered under Company Act and a Government linked Company
– It is national holding company for SOEs shares & 100% owned by the MOF
– Under Singapore’s Constitution and laws, neither the President of Singapore nor
the Government can be involved in THL investment, divestment or other business
decisions
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13. Singapore Temasek
– Temasek has substantial authority in its subsidiary companies and is responsible
for appointment of Board and CEOs. Exercise good government internally in THL
and subscribes standards for its subsidiaries or independent statutory
corporations
– Strong and ethically sound civil service and statutory boards legislated by
Parliament have full autonomy but accountability is strong and this together
contributes to smooth function of Temasek
– the President is custodial of the investments approves THL’s annual budget but
there is clear separation of ownership and control and the Chairman and CEO
operate with full flexibility
– To institutionalize its role, Temasek has recently became more transparent and
sought credit rating to establish it long term role and be supportive of raising
capital
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14. Move to centralize ownership model
• In Poland, the bulk of SOEs are under the Ministry of the Treasury, which has
special units for privatization and SOE governance.
• In Indonesia, the Ministry of State-Owned Enterprises exercises the states
ownership rights in SOEs.
• In Jordan, the ownership function are vested with the Jordan Investment
Corporation
• In Turkey, the Treasury and the Privatization Administration, are the legal
owners of SOEs.
• Re-examination of ownership functions are also critical as a uniform
approach has to be adopted to nurture well SOEs for an eventual
privatization that is often resisted by the relevant sector ministry whose
interference in any case impacts the company performance and dilutes the
accountability. In conjunction, the Government may consider
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15. Competitive Neutrality
• State ownership should not entitle competitive edge to SOE so create a level
playing field and nurture contestability in markets
• Competition forces firms to minimize costs and to search for new and better
ways of doing business and will enhance economic efficiency and innovation.
• Enhance role and capacities of Regulators and Competition Commission to
examine the SOEs role in transport, power generation and public utilities
which often operate as ‘natural monopolies’ (even if private entry allowed)
and examine whether state ownership is ensuring an adequate level of
service provision.
• Examine ways of generating competition within the market. For example,
through competitive tendering – i.e. competition for the market – as an
option: for e.g countries have allocated on a competitive tendering basis the
public service obligation such as the domestic transport routes (air and
railways), particularly for social and regional access
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16. Other Factors
• Develop a clear SOE policy
– The Government as a shareholder needs to communicate what the objectives,
role and mandate of SOEs ought to be and what is their expectation regarding
operational and financial performance.
– The government to modernize the operating guidelines and rules.
– SOEs should be allowed to be run on commercial principles, and held accountable
to ensure judicious use of public resources, while serving the demands of society
at an affordable price.
• Convert most SOEs to standard legal structures
– corporatize the departmental undertakings delivering services (such as Pakistan
Railways), bodies set up under special Acts/Statues (PIA) and joint ventures (such
as Development Financial Institutions).
– Corporatization would contribute to overall transparency by requiring proper
compilation of accounts and information, while bring companies under company
and other laws and insulating companies from political intrusion. Boards should
be empowered with full powers to oversee the companies.
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17. Other factors
• Develop a policy for public service obligations.
– Given its broad based implications for public, SOEs should make full disclosure of
trade offs it faces, costs and quality of delivery etc.
– Legislature to approve the PSO policy and its cost implications
– The budget should annually provide for financing of the required subsidies in a
transparent manner.
• Develop the role and capacities of sector regulators
– Enhance the regulatory frameworks in accordance with the sector policies
– Check the compliance with sector policies, regulation and pricing regime
– Involve stakeholders in consultations
– Enhance advocacy of corporate governance beyond firm level and
– develop awareness of the legislature and executive branch so that these bodies
reinforce corporate governance.
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18. Conclusion: Compliance of Corporate Governance of SOEs
• The Government and private sector need to reflect on how to
institutionalize the reporting on compliance of Code
• For listed companies, SECP is the main hub and SOEs come under the
purview of standard covenants of company, securities and other key
legislation and regulations.
• Recommend setting up a focal unit – perhaps a public private partnership
based on international best practice and sponsored with support of IFC a
Commission or body which is empowered and mandated to
– Collate the operational and financial performance and service
standards offered vis a vis the corporate strategy and benchmarks
– Develop a score card which both the listed and other SOE
undertakings adopt and report their compliance relative to the
corporate governance code
– Offer online this information to public and the performance of
comparative companies
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