SOEs need to embrace corporate governance to attract investors

LAHORE: State-owned Enterprises (SOEs), which are a huge burden on the public exchequer, need to adopt principles of corporate governance while creating a robust regulatory environment in order to attract private investment, a new study has said.
According to the study “State-owned Enterprises in Pakistan: The Need for Corporate Governance and Private Investment,” authored by a governance specialist Muhammad Naveed Iftikhar and conducted by the PRIME Institute, there is a need to develop a formal process and a unit to appoint, remove and evaluate the performance of independent directors of SOEs.
“The SOEs should comply with corporate governance practices developed in the form of Corporate Governance Rules issued by the Securities and Exchange Commission of Pakistan (SECP) together with basic laws enshrined in the Companies Ordinance 1984,” it said.
The report further added that the quality of Board of Directors (BoDs) needs to be improved and their autonomy and independence needs to be ensured in order to increase the efficiency and effectiveness of SOEs operations aimed at achieving a set of clearly defined objectives.
“There are many large scale SOEs which are yet not corporatized,” it explained, adding that the corporatization of these SOEs is essential to bring them under the ambit of good corporate laws enshrined in the Companies Ordinance and Corporate Governance rules to improve their performance, financial management, transparency and disclosures.”
Awareness and capacity building of all stakeholders including public servants, company executives, and members of BoDs and officials of SECP can play an effective role for supervision and enforcement of Corporate Governance rules, Iftikhar said in the report.
The implementation of Corporate Governance Rules will help clarify roles of different stakeholders involved in management and governance of SOEs and will also put effective accountability mechanisms in place instead of multiple and ineffective checks.
Compilation and publishing of annual report on consolidated performance of SOEs, including not for profit organizations, autonomous bodies, attached departments, authorities involved in commercial activities can help policy makers to make evidence based decisions. The study highlighted 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.
It said, “Current practices of managing and governing SOEs are not yielding intended results,” adding, “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 enhance operational inefficiencies and create confusion about public sector company’s strategies and policies.”
It called for the SOEs to move towards a better system of governance in order to improve the current state of affairs.
The study argued 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,” the report said, adding that private sector investment can also be mobilized in an enabling environment facilitated by robust regulatory structures and strong contract enforcement mechanisms.