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Friday, July 23, 2010

Want to save PIA, PR and PSM? Fire cronies and embrace corporate governance principles...

Public sector corporations, which are yet to be privatized, are bleeding the economy, threatening national survival and making us poorer by the day. The Government has to keep their lifeline by injecting billions of tax-payers hard-earned money so that these white elephants keep doling out luxuries to those who are mis-managing them.  It is feared that by the time government puts them on sale, their value would have been reduced to zero and taxpayers would have to subsidize their sale. Of these entities, PIA and Pakistan Railways enjoy tremendous patronage and protection of the Government.

The passengers have to wait for weeks to be able to book a seat in PIA, yet the airline is making huge losses. It is a fact that it is not operating in monopoly and has to compete with other national and international airlines but it has a position of advantage; (a) it does not have to spend as much in variable costs as other airlines as its food is cheap and substandard and it does not have to offer expensive alcoholic drinks to its passengers, (b) passengers of Pakistani origin, mostly semi-literate expatriate workers traveling to and from Middle East, always prefer to travel PIA due to dietary and linguistics limitations and PIA’s generosity in carrying excess baggage and (c) all travels to be financed by the Government must be undertaken through PIA if not by PIA.

With comparatively higher fares and lower variable costs, PIA enjoys virtual competitive advantage but this advantage is offset by very exorbitant fixed costs. PIA is probably the only airline which has the maximum number of employees per aircraft. At one time, it was the best airline but it suffered at the hands of those who tried to stuff it with incompetent political workers in order to get political benefits at the cost of this vibrant organization. Its story was published in detail in this or a sister blog. It has no hopes of any recovery unless some remedial measures are taken on war footings otherwise, it will not sink alone, it will sink the entire economy and the national integrity along with it.

The other white elephant is Pakistan Railways which suffered similar blows at the hands of politicians and is now being closed down, bit by bit. The blame of its demise is being conveniently laid at the doors of bureaucrats but by training and experience, bureaucrats are incapable of destroying national assets. This job has always been successfully undertaken by other players. The story of Pakistan Steal is no different and its death is taking place right in full sight of everyone.

What is it that the Government can do to save these entities, and consequently the country, in the present circumstances? There was a paper which appeared in April 2004 edition of Asian Journal of Government Auditing on survival strategy of public sector entities. Although the paper discusses post-regulation scenario of telecom sector, yet some of the solutions can be adopted for survival of these white elephants. The paper stresses increased focus on the principles of corporate governance for survival of public sector corporations which are as under:

Effectiveness of the governing bodies

For proper corporate governance, the Boards of Directors and Management of these entities are required to be independent and competent in order to become effective. While nominating members on these boards, the Government should exercise special care to ensure that the interests of the entities do not get compromised due to conflicting personal or business interests of the members. These members should be selected on merit keeping in view their experience in, and exposure to, the dynamics of telecom market. Selection criteria other than this merit will spell disaster and will hurt the commercial interests of these two entities much ahead of the commencement of actual competition.

Roles and responsibilities within the organization and accountability

Corporate governance principles require that these entities should have clearly documented objectives and should establish clear roles and responsibilities within the organization. The entities should also ensure that these roles and responsibilities are clearly understood by everyone in the organization from the Board to the lowest level of the management. In the history of Pakistan’s corporate sector, there have been unfortunate instances of undue interference by the Ministries’ bureaucracy, which had no clue to the business, in the day-to-day affairs of these corporations with the result that no clear responsibilities could be fixed for the collapse of public sector. The Government should ensure that its role confines to policy directives only and it does not get down to transacting the business of these entities which is the responsibility of experienced professionals. For appropriate corporate governance, the respective Boards and managers should be made fully responsible for performance of these entities. Failing in this area will hamper the building of constructive relationships within the entity. In addition to this, the corporate accountability for poor performance and for failure to meet the expectations of taxpayers and stakeholders will be impossible to enforce in the absence of clear roles and responsibilities.

Effective monitoring

The public sector entities should make effective monitoring arrangements within the organization. This monitoring system includes establishment of internal control mechanisms, a clear policy on internal audits and appointment of independent audit committees reporting to no one except the Board. While there is some arrangement for internal audit, this audit has to report to the management and not to the audit committees of the Board, which compromises independence of audit. The quality of internal audit within these entities, therefore, becomes questionable. The internal auditors should be adequately equipped with appropriate professional skills, should be truly independent of the management and should have a comprehensive view of the best international business practices, and should also have an understanding of all the spheres of the business of the entity. This internal accountability will keep the managers on their toes and they will be under pressure to perform in a transparent manner.

Systematic and integrated risk management system

Risk management is a critical element of corporate governance and in the liberalized markets, when businesses are exposed to a variety of risks, conventional reactive approach is neither sufficient nor relevant anymore. These risks include financial risks, risk of losing subscribers’ confidence, risk of losing credibility with private sector partners, risk of unwarranted and illegal external interference and above all, risk of failure in view of all these risks. It is to be seen whether our public sector telecom entities incorporate risk management explicitly in their governance processes, or do these entities include risk management into strategic and business planning processes. Governance-specific information on these entities is rarely available through their Annual Reports, and little information that is readily available suggests that these organizations do not explicitly identify and asses their key risks or they do not have any risk management strategy or policy in place. The absence of a risk management system leads to inefficiencies in prioritizing and allocating resources to manage risk.

Transparency through good external reporting

Transparency through good external reporting is an essential element of corporate governance in case of public sector telecom entities in Pakistan. For the time being, this element is totally non-existent in view of the absence of external public accountability through the SAI and Public Accounts Committees. Till such time that appropriate transparency arrangements are put in place, the absence of this critical element can be compensated through appropriate accountability by the regulator, provided the regulator is truly independent of the influence of vested interests of any of these entities.

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