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Public sector governance: a blueprint of policy reforms

Good governance is essential for the economic development of any country. Today, governing Public Sector Companies (PSCs) has become quite challenging for Governments around the globe. In Pakistan, few reforms initiatives have been taken to make the public sector organizations respond to new challenges and instrumental in achieving socio-economic development; however, there are still opportunities for improvements in reforming the public sector governance in the country.

A few major recommendations are shared below:

Improving the structure of board appointments

The procedure for appointment of Members of the Board is not well-defined in the Public Sector Companies – Corporate Governance Rules 2013. Hence, it is imperative that a clear and well-defined procedure for appointments on the Board must be included in the Rules. The opportunities for appointment on Public Sector Companies’ Boards should also be advertised to ensure transparency and ‘equal opportunity’.

Presently, the composition for the board structure of PSCs is only defined with respect to Executive, Non-Executive and Independent Directors, however, ‘range of skills’ required for these positions has not been suggested. It is therefore suggested that the Rules be amended to include Directors who have sufficient expertise in various business areas such as Professional Accountants; HR Professionals; Procurement, Legal, Marketing & Communications and Technology experts. Moreover, the representation on behalf of ex-officio members of the Board should be considered as valid attendance and honoraria should be made mandatory for all Board Members as a reward for their time and efforts.

Introducing ‘board of management’ and its committees

The existing Public Sector Companies – Corporate Governance Rules 2013 does not have any provision of forming ‘Board of Management’ in Public Sector Companies. Board of Management represents a team of individuals at the highest level of management of an organization having the day-to-day task of managing the company. It is, therefore, recommended that the concept of the Board of Management and its Committees with well-defined roles and responsibilities may be introduced in the Rules.

The proposed Board of Management (BOM) may comprise of senior management representatives such as Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Procurement Officer, Chief Marketing Officer, Chief Technology Officer, Chief Legal and any other Head of Department of organization. Similarly, the management committees of BOM are proposed for effective conduct of business and may consist of HR Committee, Procurement Committee, Sales Management Committee, Technology Committee, Financial Management and Corporate Governance Committee, and Risk Management Committee.

Appointment of CEO

It is recommended that the Board of any Public Sector Company should be empowered to appoint the CEO of that company. There should be proper succession planning and preference should be given to internal resource if there is a skills match.

The contract of CEO should be a perpetual contract instead of a three year periodic contract with a termination clause for either party to terminate the contract on 2 months’ notice.

Furthermore, as the ‘Chief Executive Officer’ needs to manage the affairs of an organization on daily basis to perform day to day routine functions, it is recommended that in case the position of CEO is vacant, a senior employee of the organization should be appointed as Acting Chief Executive till the vacancy is filled rather than giving any charge to any person who is not an employee of the company.

Delegating of power to BoD, BoM and CEO

The power of the Board of Directors (BOD) has not been defined in detail in the Corporate Governance Rules 2013. Hence, there is a need for elaborated guidelines regarding delegation of power for BOD, BOM and CEO with regards to administrative, financial and operational matters of the Company. Such guidelines will eliminate the need for further endorsements from other departments such as vetting of Auditor appointment from Auditor General Office, Vetting of Legal Advisor appointment from Ministry of Law, Placement of advertisements through Press Information Department, etc., when power and authority will be delegated between BOD, BOM and the CEO.

Strengthened HR structure

In order to strengthen HR Structure in the Company, the Code of Corporate Governance Rules, may clearly define that an employee of any Public Sector Company should not be in the service of any other private or government entity. Similarly, deputation should not be allowed in PSCs. The Rules should also provide standard guidelines for recruitment and performance evaluation of employees of Public Sector Companies. Moreover, all notifications issued by the Establishment Division limiting powers of the Board w.r.t HR should be withdrawn.

Effective and efficient procurement system

Presently, PSCs are following Public Procurement Regulatory Authority (PPRA) Rules which are at times impractical and companies have to seek exemptions. It is suggested that PSC’s CG Rules may guide the companies to follow the PPRA Rules for general procurement. However, in case an exemption is required on justified grounds from such rules, BOD should be the competent authority to approve such an exemption and approve the procurement procedure. In case of exemption, full disclosure shall be provided in the annual report of the company.

It is further recommended that limits for procurement without tender need to be enhanced given the significant rise in inflation. Digitisation in procurement process by the Government such as maintaining a central database of all contractors and inventory will result in immediate efficiency in the procurement system. The Government may also consider framing regulations for inventory management.

Forming a national public sector governance board

The public sector companies’ rules emphasize that every public sector company shall adopt Financial Reporting Standards (IAS/IFRS) as notified by the SECP under sub-section (3)(i) of Section 234 of the Companies Act, 2017. It has been recommended that a Public Sector Governance Board (PSGB) may be formed with a mandate to regulate the financial reporting mechanism, scope and quality of audit and corporate governance in Public Sector Companies. It should have well-defined representation of Regulator, Government officials, professional accountants and legal experts.

Harmonization in various laws

Harmonization should be established between Constitution, the Companies Act, the Public Financial Management Act, tax laws and other related legislation, in order to avoid contradictions in these laws. For instance: Article 165 of the Constitution is providing exemption to Federal entities from provincial taxes, however, provincial tax laws on the contrary require submission of such taxes from Federal Entities. Such ambiguities result in litigation between the Government Entities. Therefore harmonization in various laws, will be essentially required to avoid conflicts and wastage of productive time and healthy resources.

Avoid duplication of audit and role of Principal Accounting Officer (PAO)

At present, there is duplication of audit as multiple audits of public sector companies are being carried out, i.e., by Professional Accountants Audit firms, Auditor General of Pakistan (AGP) and sometimes the audit wing of relevant government ministry. It is, therefore, suggested that there should only be one annual audit of Public Sector Company either by a firm of Professional Accountants or by the Auditor General of Pakistan to avoid duplication of time and efforts. Furthermore, as the Audit Committee of the Board is the relevant forum for presentation of audit observations in the case of statutory audit by professional auditing firms, similarly, Audit Committee of the Board must be made the competent forum to decide on audit observations raised in the report of Auditor General of Pakistan. Chairman BOD should be the Principal Accounting Officer of the Company rather than the Secretary of the administrative Ministry, as there are several companies under any Ministry whereas a focused approach is required by the Principal Accounting Officer.

Tariff setting and cost audit

The board of public sector companies has the power for tariff setting or pricing. In order to make the tariff process transparent, it has been proposed that tariff setting should be aligned with proper costing system which includes the disclosure of maximum capacity, possible usage capacity, and actual capacity. For this purpose, the public sector companies should be directed to maintain proper cost accounting records.

It is further recommended that the Government must consider mandatory cost audit for the public utilities and major segment of consumer companies to protect consumer interest and to minimize cost of doing business in Pakistan.

Public sector development funds as government equity

Under Public Sector Development Programme, the government is developing various assets like buildings of schools, hospitals, civil infrastructure and installing equipment, etc. Presently, most of the organisations receiving these development funds are treating this spending as expenditure, whereas, they are creating an asset. It is suggested that all such development expenditures should be reflected as an investment/equity of Government of Pakistan as an asset is created. Assets must also be properly recorded and reflected in the books of account of the company. This would improve public financial management in Public Sector Companies.

Corporatization of public sector entities

The government is managing its affairs by creating entities in different modes like government departments, boards, cells, authorities, corporations, and companies, etc. However, with the passage of time, companies, duly registered with SECP, were established by the government for entities engaged in any kind of commercial activity or involved in services to the society without any profit making objective. Such entities, as registered with SECP were required to comply with relevant Corporate Laws and Governance Rules. However, recently, due to shortcomings in governance, Government has started converting such Companies into Authorities. This is not a healthy step as it will adversely affect SECP’s efforts towards corporatization.

It is therefore recommended that mode of doing business shouldn’t be converted from a company to authority; instead governance in such companies should be strengthened. Strengthened Governance can immediately be achieved by filling the vacancies on the board of such companies with professionals, hiring of CEOs on vacant positions, by effective delegation of power and by implementing a robust reporting mechanism. Mode of doing business as a Company is also in line with the international best practices.

Good corporate governance in public sector companies is crucial for the improvement in the public sector as it will help with the long term sustainability of public services and effectively build the public trust in the performance of the sector.

Zia ul Mustafa, "Public sector governance: a blueprint of policy reforms," Business Recorder. 2021-05-20.
Keywords: Political science , Federal government , Budget allocations , Fiscal responsibility , National Assembly , Monetary policy , Economic Corridor , Pakistan , PSC , BOM , CEO

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