Pakistan Inches Towards Reforming Public Sector Enterprises

Participants at the roundtable on corporate governance of public sector enterprises in Islamabad. (Photo: CIPE Staff)

“The government was determined to enhance the efficiency of public sector enterprises (PSEs) by restructuring their boards and appointing professional heads of these organizations, mostly from the private sector, in order to make the entities profitable institutions.”

– Dr. Abdul Hafeez Shaikh, Finance Minister of Pakistan

Pakistan’s loss-making public sector enterprises (PSEs), also known as state-owned enterprises, are a major cause of economic concern. This year, ccording to official estimates from the Ministry of Finance, eight major PSEs received more than  US $3.5 billion in support from the federal government, which is higher than the federal component of Pakistan’s development budget. According to the Ministry of Finance, “Inefficient public sector enterprises are draining fiscal resources and choking the economy.”

A major reason that these companies lose so much money is a low level of transparency and poor governance; but historically, any discussion of the governance of Pakistan’s PSEs was taboo. Successive governments used these companies to provide jobs to their supporters. Moreover, non-transparent financial transactions continued to drain resources while reducing PSEs’ operational efficiencies.

Understanding the political sensitivity of the issue, CIPE’s Pakistan team has taken a subtle approach to the reform of PSEs, with patient efforts aimed at generating a debate on the importance of a introducing a code of corporate governance for PSEs. These efforts began to yield results when, on CIPE’s advice, the Ministry of Finance constituted a taskforce in October 2011, comprising a wide range of stakeholders, including relevant ministries with ownership of PSEs, private sector representatives, the Securities and Exchange Commission of Pakistan (SECP), the Pakistan Institute of Corporate Governance, and others. The taskforce became the driving force behind a productive debate. As a result of several meetings and a consultative process, on March 22, the SECP released new draft regulations for PSEs.

Recognizing Pakistan’s unique regulatory framework, under which ministries are the owners of relevant PSEs, existing codes of corporate governance were not sufficiently relevant to these firms to ensure local buy-in. Instead, CIPE advised the taskforce to develop a homegrown solution that would still be based on international best practices. After careful consideration and study of international models, a technical committee appointed by the taskforce prepared the draft regulations to correspond to the complex reality of public sector enterprises in Pakistan.

“The draft regulations have been designed in view of the distinct governance challenges faced by the PSEs. Recommendations made in the draft regulations include measures to optimize efficiency, enhance the transparency of operations, and provide a mechanism for accountability of management.”

Securities and Exchange Commission of Pakistan

The draft regulations are now available on the SECP’s website for review and comment.

In order to generate further public debate, and to build awareness about corporate governance of state-owned enterpises, CIPE also assisted the taskforce in organizing Pakistan’s first major roundtable on governance of PSEs, on April 10 in Islamabad.  This event received an overwhelming response, with over 125 participants from various PSEs attending. Moreover, a subject which, as mentioned, was previously considered taboo in Pakistan, received extensive media coverage.