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Shabana Naveed - Governance and Management of State

Owned Enterprises in Pakistan

- In the past 30 yrs there has been increasing trend in globalisation, and more role of pvt sector this
posed challenge for public sector as it has many SOEs.

- Thus many SOEs downsized & privatised, despite efforts for privatisation around the world SOEs
remained imp in both developed & developing countries

- Pak SOEs remain significant cause of failure in privatisation due to procedural difficulties &
hindering pol/social factors. Some SOEs could not be privatised cause of the imp position in
economy of pak. SOEs present in pak at national/provincial level both so efficient governance &
mgmt needed for SOEs

- Diff govts in pak established, privatised, restructured SOEs in diff times in response to intl
practices for public service delivery led by intl agenties & Econ situation of pak. So under various
reform models, legal forms, and governance, mechanisms of SOEs took diff shapes leading to
fragmentation in SOEs. So study needs to analyse variations in corporate arrangements in public
sector & their outcomes. So imp to classify SOEs of pak in terms of various org characteristics
including legal structural forms, corporate governance models, ages & tasks.

- Another imp thing abt SOE reforms is balancing state control & SOE autonomy. Autonomy
recognised when creating SOE as independent legal body, enterprise decisions placed outside
sphere of politics promotes efficiency of govt & enterprises. But some govt direction is imp as
SOEs are responsibility of govt. So the variations of state control & SOE autonomy in SOEs
created under diff laws in pak to be analysed

- Paper looks at ; 1)legal structural forms of SOEs in pak 2) corporate governance mechanisms
across SOEs created under various legal instruments in pak 3) see extent to which corporate
governance model is present in various legal instruments in pak 4) explore pattern of autonomy &
control across SOEs created under various legal instruments

• State Owned Enterprise/ Public Enterprise/ Parastatal org :

- An org established by govt under public or pet law having legal personality with autonomous or
semi autonomous status

- Produces/provides goods and services on full/partial self finance

- State has significant control thru full/majority/minority significant shares

- Distinct from other govt ministries/agencies as dont use general revenues but generate all/most
revenues from sale of goods/services. So are involved in commercial processes

- Contribute in govt agenda of achieving socio/econ growth

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- SOE sector gone thru diff public sector reforms under diff agendas. One of main q of reform
agenda is role/size of govt in economy so comes the state vs. Market debate among reformers
which resulted in enhancement or reduction in size/tasks of SOEs under diff reform agendas

- SOEs still remain significant in both developed/developing countries so reforms aim to improve
their performance thru good governance mechanisms.

- Also structure/mgmt of SOEs another imp policy concern ; balancing state control and org
autonomy big challenge for reformers

- Most popular reform intervention has been adoption of corporate governance model in state led
enterprises for better outcomes in terms of performance, quality, controls ,accountability of SOEs

• Corporate governance ;

- Processes, mechanisms, structures for decision making, accountability, controls & interaction
among key actors at top levels of org

- Process of determining deployment of org resources & resolving conflicts among diff participants
in orgs. Primary concern is to resolve issues coming from interaction b/w 3 key actors i.e board of
directors, senior management and owners. Many other actors also involved like creditors,
employees/labour, advisors, suppliers, members of community & govt/regulatory authorities.

- Carino on key elements of corporate governance model ; registration & state recognition,
separation of policy from administration, collective leadership thru a board, voluntary service in the
board, implementation by paid staff & formal accountability

• Classification of SOEs according to tasks ;

- According to legal/functional classification of federal orgs by national commission for govt

reforms ; total 99 SOEs in pak, engaged in various tasks. 21 financial, 25 business & industrial, 53
service providing

• Legal/structural classification ;

- Legal status refers to whether org set up under private law (company laW/ordinance), public law or
thru special instrument

A. PUBLIC LAW (called statutory corporations)

- 10 SOEs under public law; PIA, Pak broadcasting corp, Pakistan post office dept.

- All SOEs under public law fall in category of statutory corporation except pak post office dept
which is an attached dept

B. COMPANY ACT/ORDINANCE (PRIVATE LAW) ==> called public companies

- Have status of Public companies

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C. ACT OF CABINET or EXECUTIVE ORDER or other legal instrument => called attached
departments

- 5 SOEs

- Afgan Trade development cell, Pakistan housing authority

• CORPORATE GOVERNANCE OF SOES

- Analysis of corporate governance of SOEs based on data obtained from formal official docs

- Key indicators for examination of governance mechanisms include presence of governing body,
appointing authorities of Chairperson of Board & managing director, composition of board of
directors, appointment of auditor, sep of chairperson & managing director positions

1. Board of Directors :

- Presence/composition of governing body is most imp element in examining model of corporate

governance in SOEs

- Indicators for this include presence of board, no. of directors required, appointment of directors,
composition of board members.

- Separate board present under all legal instruments ; according to companies act 1914 3 directors for
every board needed, according to companies ordinance 1984 7 directors for every company needed

- Directors to be elected at AGM while govt representation in the board depends on govt’s
shareholding in SOE

- ACT 1965 PIA(public) ; 9 directors out of which 7 including chairperson appointed by govt and 2
by shareholders other than govt (govt has 78% rep)

- PNCS’s ORDINANCE 1979 (public); 7 total, govt appoints 5 & remaining 2 elected by
shareholders

2. Appointment of chairman & CEO/MD

- Chairman of board elected by directors in Companies act 1913 & companies ordinance 1984
(private law). In rest 3, chairman appointed by FG (public law)

- Difference also seen in appointment of CEO/Managing director ; Private Law (companies act 1913,
companies ordinance 1984) MD/CEO appointed by directors. Public law ( PNSC, ACT 1956)
MD/CEO appointed by FG

- Orgs under pvt law have status of public sector companies and orgs under public law/special act
are statutory corporations fully financed by govt

- Board compostion, appointment of chairman & MD/CEO show that governance mechanism diff in
case of public sector companies (private law) and statutory corporations( public law)

- In statutory corporations legal instruments allow FG to appoint directors, chairman, CEO/MD so

govt has direct control in mgmt and policy matters

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- In case of public companies only minimum no. of directors is specified in the law. Size and comp
of governing body of each SOE is given in articles of association of that SOE. Govt
intervention/control depends on shareholding in company which also tells if govt appoints
chairman and no. of ministerial appointment of members of board of directors. Govt shareholding
varies from 25% to 80%, which tells influence govt exercises in affairs of SOE but influence
practiced indirectly thru reps in board of SOE

3. Separation of policy from administration :

- To separate policy from administration role of board & executive directors is to be separated

- Single person not to be both chairman of board & CEO/MD

- Board responsible for policy making, CEO/MD responsible for implementation

- No specific provision for separation in Companies Act (private) and PNSC ordinance (public)

- In companies ordinance board of directors cannot hold position of executeive directors

- Corporate Governance Regulations 2012 of security & exchange commission of pak has a
provision for sep

- PIA’s Act 1956 & PCB act say positions to be held by sep individuals

4. Appointment of Auditors :

- Auditors to be appointed in AGM in companies act 1913 (private) and companies ordinance
1984(private) and PNSC ordinance

- But in PIA act they are appointed by federal government in consultation with auditor general of
Pak who can also direct the auditors

5. State control & SOE autonomy in Pakistan

- State control mechanisms examined thru provisions related to govt reps in board of SOE, auditing
mechanisms and reporting systems in legal instruments

- SOE’s autonomy examined in respect to managerial autonomy & policy autonomy of SOE
provided in law

6. HRM Autonomy

- All legal instruments have provisions for Board’s power for strategic & operational HR decisions
except PNSC’s Ordinnce 1979

- PNSC Ordinance empowers board to take HR decisions but Federal Govt can intervene & direct
such decisions which company has to then follow

- In rest public companies the board of directors without consent of ministers & departments can
formulate and change general policies of personnel including level of salaries, conditions for
promotion, performance evaluation system, recruitment policies

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- In regards to operational HR mgmt board has great autonomy in individual decisions, it can decide
remuneration packages for members & recruit personnel to executive grades but key positions
appointed by FG (chairman of board, CEO/MD) depending on govt’s shareholding in the enterprise

7. Financial Autonomy

- Companies under company law ; financial activities handled by board of directors & govt can
intervene depending on its shareholding. Budgets approve by board of management. Public
companies normally determine rates/fees/product prices & dont need approval of govt but if some
case is of national imp then govt fixes tarriff rates. SOE’s can only arrange foreign loans thru govt

- Statutory corporations ; financial autonomy is partial, board is given financial powers but got can
impose certain conditions

8. Policy Autonomy

- Companies under company law ; autonomy to take policy decisions given to board of directors.
Govt can only intervene depending on its shareholding

- Statutory corporations ; government has direct control over policy making

9. Auditing Mechanisms

- Statutory corporations ; accounts audited by 2 auditors appointed by the FG in consultation with

Controller Auditor General of Pak. Auditor General can given directions to auditor and statement
of audited accounts is submitted to FG who presents it to NA.

- Public companies (companies under company law); accounts audited by private auditors

10. Reporting Systems

- SOE’s to provide quarterly, half yearly and annual reports to respective ministries who are
responsible for monitoring performance of SOE’s.

- Periodical reports on operations & working of public enterprises cover areas of financial returns,
physical production, industrial relations, pricing decisions, completion of projects

- These reports then discussed b/w top mgmt of enterprise & govt reps in governing board of
enterprise

- Reps of concerned ministry on the governing board submits reports required by the ministry and to
the minister. These reports can also be sent to ministry of finance and Economic affairs or planning
commission. These ministries obtain reports in regards to generation of internal funds & achieving
planned targets. Annual report of relevant ministry has info about functioning of SOEs under
administrative control of the respective ministry

• Discussion

- Corporate governance model (CARIO) and how it is followed in Pakistan

I. All SOEs have sep legal status thru creation under public law, private law or special instruments

- Majority SOEs created under private law (public sector companies) and those created under
parliament act also have sep legal status except for pak post office

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- Majority SOE’s working as autonomous agencies with independent legal status

II. Collective leadership thru a board present in all instruments, presence of board shows distance
from ministry

III. Sep of policy from admin found in majority SOEs except for PNSC’s ordinance. Imp for
corporate governance model, sep of chairman from CEO/MD

IV. Appointment of chairman & CEO by board is present only in case of private law, in public law
statutory corporations FG appoints chairman and CEO/MD. These appointments imp for policy
making and implementation so imp to know if board of directors are collectively choosing them
or if government is to exert its influence which it does in statutory corporations

V. Provisions for formal accountability present in all instruments in form of auditing mechanism, so
all SOEs are subject to independent audits

=> so there is presence of corporate governance model in all legal instruments except for a few

-SOE autonomy is less in statutory corporations, more in public companies

-state practices its control in both strategic/operational matters either directly or indirectly thru board

-SOE’s accountable to govt thru ministerial hierarchies & other regulatory/controlling bodies and thru
various audits and reporting mechanisms

-corporate governance model is present regardless of public or private law, corporate governance
adopted to gain legitimacy and adopt best practices. Similar practices have led to similar mechanisms.
This corporate governance model is being propagated by reformers for better governance
mechanisms, accountability and controls of SOE

- this study was based on governance mechanisms and autonomy of SOEs on a formal level. All legal
instruments provide strategic/operational autonomy to SOE & separate status to operate independently
w less govt interference. Creation under sep legal instrument provides SOE an autonomous status
from govt and corporate governance strengthens independence of SOEs. But state still has to practice
some intervention cause it is responsible for SOE’s performance.