Attract Private Capital in SOEs by Independent Boards and robust Regulations

A new study released by PRIME Institute has called for fixing SOEs by compliance with the principles of corporate governance and creating a robust regulatory environment to attract private investment.

The study “State-owned Enterprises in Pakistan: The Need for Corporate Governance and Private Investment” authored by a governance specialist Muhammad Naveed Iftikhar was released in a seminar here yesterday. Introducing the study, the author said that most of the State-owned Enterprises (SOEs) in Pakistan are a huge burden on the public exchequer without delivering results. These SOEs, sometimes, distort competition and crowd-out private sector through their inefficient operations and excessive commercial lending guaranteed by the government.

The study highlights that the opportunity cost of public money in the case of few SOEs is alarmingly high. They have also posed risks to fiscal sustainability of the economy while leaving limited space for social sector spending and other core functions of the state. Current practices of managing and governing SOEs are not yielding intended results. The multiplicity of accountability checks in case of SOEs including ministerial controls, parliamentary oversights, investigation agencies, judicial scrutiny, media investigations, regulatory agencies and other transparency checks also enhances operational inefficiencies and creates confusion about public sector company’s strategies and policies. It is utmost important for the SOEs in Pakistan to move towards a better system of governance in order to improve the current state of affairs.

The study recommends that SOEs that will continue to perform in public sector need to adopt and comply with Corporate Governance (CG) practices developed in the form of CG Rules issued by the Securities and Exchange Commission of Pakistan (SECP) together with basic laws enshrined in the Companies Ordinance 1984.

Highlighting the need of private investment in SOEs, the study argues that there are many sectors dominated by SOEs that are struggling for capital investment in order to improve and sustain their operations and quality of service. However, due to sheer neglect over the last many years and current fiscal constraints faced by the government, these sectors remain unable to attract capital investments from the public sector. This situation calls for innovative solutions to attract private sector investment in these sectors e.g. rail, aviation, energy, road and commodity sectors. However, private sector investment can be mobilized in an enabling environment facilitated by robust regulatory structures and strong contract enforcement mechanisms.

Ali Salman acknowledged the pioneering role CIPE played in formation of Task Force by the Ministry of Finance which with efforts of 18 months helped in enactment of Rules of Corporate Governance for SOE’s. Moin M Fudda, Country Director CIPE and Chairman of Board of Directors of Islamabad Stock Exchange shared the history of corporate governance rules. He urged that the parliamentarians need to take an active interest in the affairs of SOEs. Giving the examples of Tamasik in Singapore and Khazana in Malaysia, Moin Fudda highlighted the importance of an independent board of directors under the ownership of the government. Commenting on the on-going reforms, Moin Fudda said that the PML-N which was voted in with the promise of economic reforms must not shy away from tough decisions. Moin Fudda said that given the concerns of widespread political opposition to privatization, corporatization by adopting Corporate Governance rules may be a workable strategy.

The seminar was addressed by Sarwat Aftab of the World Bank. Sarwat spoke of the importance of education and awareness to improve the quality of governance in SOEs and stressed on the role of regulators in evolving a robust business environment. Participating in the discussion, SECP’s Waseem Ahmad Khan said that the government should come up with an ownership policy clearly spelling out rules and institutional framework. He identified judicial “doctrine of pleasure” and uncertainty in the tenure of board members and CEO as root causes of dysfunctional board of directors in the SOEs.

Participating in the discussion, Mueen Batlay Member, Competition Commission of Pakistan highlighted the role of CCP in ensuring transparent privatization and urged the government to gear up the process. Dr. Vaqar Ahmad, deputy Executive Director of SDPI, proposed that while lot of knowledge exists on the state of affairs on SOEs, it has not been branded properly thereby not attracting sufficient political attention.

In the concluding remarks Mr. Naveed Iftikhar recommended that there should be an annual public report on the status of performance of SOEs including the support these SOEs have received from the government.

Concluding the seminar, Executive Director PRIME Institute highlighted the importance of public education, independent regulators and political accountability in improving the state of SOEs and expressed that markets offer more robust platform of accountability of SOEs than the over-used accountability instruments of the state.

The seminar was organized by PRIME Institute with support from Friedrich Naumann Foundation for Freedom. It was attended by around 50 delegates from the government, corporate, international development including USAID, DIFID, World Bank, IFC, ADB, AUSAID etc. and media related organizations.

For Media Inquires: Ali Salman, Executive Director, PRIME (Cell: 0301 845 1179)

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