World Bank Highlighted Serious Flaws in Structures of Public Sector Enterprises (PSEs)

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World Bank Highlighted Serious Flaws in Structures of Public Sector Enterprises (PSEs)

Pakistan largely remains compliant with the corporate governance standards set by the Organisation for Economic Cooperation and Development (OECD), but it has not done much to uncover layers of secrecy that hide beneficial owners of companies, says a new report of the World Bank.

The Washington-based lender has also highlighted serious flaws in ownership and management structures of public sector enterprises (PSEs) – the findings that Finance Minister Asad Umar on Monday candidly endorsed.

The World Bank has sought the revival of a stalled privatisation programme and bringing improvement in governance structures of 169 PSEs. The bank on Monday launched the “Report on Observance of Standards and Codes (ROSC) – corporate governance assessment of Pakistan”. The report identifies the weaknesses that may contribute to the country’s economic and financial vulnerability. The report is based on 72 principles of corporate governance determined by the OECD. Pakistan has fully implemented 20 principles while another 33 are broadly in line with the OECD standards.

The remaining 16 principles were partially implemented and three were not applicable to Pakistan. But corporate governance in certain key areas, mainly beneficial ownership, was significantly weak.

The report highlighted that the corporate governance framework for public listed companies has improved in recent years as the government has enhanced the legal and policy framework and key institutions have grown in sophistication and maturity.

Disclosure and Transparency:

There are no requirements for beneficial ownership disclosure and group structures, according to the World Bank. It said pyramid structures, cross-shareholding and absence of joint action or acting in concert concepts can make it difficult for outsiders to grasp ownership structures of the more complex business groups.

The issue of beneficial ownership came to the fore after Panama Papers leaks that claimed that children of former prime minister Nawaz Sharif indirectly owned stakes in many companies.

The Washington-based lender said the beneficial ownership was an important element of international good practice and has implications for the efficiency of other parts of the legal framework.

The World Bank has also proposed full disclosure of the profile of board members, information on rules including voting procedures and disclosure of policies regarding risk management and internal controls.

Moreover, the legislative and regulatory changes of 2017 have left the non-financial disclosure requirements for listed companies in a state of flux. Relevant regulations are somewhat scattered across different documents and have slightly different priorities.

The lender also recommended that the independent audit oversight board should be made operational as quickly as possible, including the provision of full funding and staff.

Governance of PSEs:

The World Bank included a chapter in its report on the affairs of PSEs in Pakistan that pointed to many flaws. There are 169 PSEs, including 126 commercial companies and 43 non-commercial enterprises.

The PSEs contribute one-tenth to the total national output and one-third to the stock market capitalisation. These PSEs have generated 400,000 jobs, which is just 0.74% of the total employment.

There is an element of elitism in Pakistan as PSEs receive subsidies, which are more than double the amount that the country spends on health, said World Bank Country Director Illango.

“The government has not put in place any formal performance management system for the PSEs, although some line ministries have started to evaluate performance on an ad hoc basis and the ownership structure of the PSEs is fragmented that also defuses the concept of accountability,” according to the findings.

The line ministries lack staff with commercial and financial experience to properly exercise the state’s ownership structure, it added.

The World Bank country director said there were 1,500 regulations for a service sector company that were being regulated by 40 departments, highlighting overregulation that had discouraged the culture of corporatisation in Pakistan.

Regulators were more interested in extracting rents than regulating a company, said Asad Umar, Federal Minister for Finance. He said financial reporting and management control systems were weak in almost all of these companies.

In order to improve the working of the PSEs, the PTI government has set up Sarmaya-e-Pakistan company.

Sarmaya-e-Pakistan is a facilitating tool that will allow experienced people from the private sector to exercise the right of shareholders, said the finance minister. He said bureaucrats and politicians did not have training in managing the PSEs.

PPRA rules had become obstacles to running the affairs of PSEs in an efficient manner and now the cabinet gave the permission to change these rules, he added.

The governance should not be a sin for the companies and the SECP’s job was to facilitate the firms, Umar remarked.

The World Bank report stated that the PSEs’ boards are not sufficiently independent and not fully empowered to govern the company – important board and management decisions often require further informal approval from the parent ministry.

The parliamentary model weakens fiduciary duties of directors; each director represents the interests that led to his appointed. There is a high level of passivity and even incompetence, as the boards do not play active or assertive roles.

It is estimated that 40% to 50% of the PSEs do not comply with some aspects of the Corporate Governance Rules.

The World Bank has recommended enacting a law that establishes an ownership framework for the PSEs and creation of a centralised ownership entity for PSEs’ governance.

The bank recommended that the government should consider reviving the privatisation programme. It has already identified priority based entities but the implementation process has stalled owing to political pressures, the World Bank proposed. The privatisation process needs to be reinstated with caution but with consistency and transparency.

The international lender has urged the SECP to focus on listed companies regulations aimed at adoption of the code of ethics by the boards, adhering to succession plans and disclosure of internal controls. There is also a need to enhance the number of independent directors on the boards, as majority of the companies have only one independent member.

The World Bank has recommended amendments in the Companies Action of 2017, seeking to an end to the government’s role to appoint a chief executive officer of a company.

It has also proposed to further explain the duties of the boards within a holding company and a group structure. It has also recommended recovering remuneration from the company and board members in case of fraud or negligence. 

Source: Tribune