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A blueprint of policy reforms for improving public sector governance in Pakistan

Good governance is often considered essential for a country’s economic development. Today, governing Public Sector Companies (PSCs) have become quite challenging for governments around the globe. Many countries like China, Malaysia, Singapore, New Zealand, and France have introduced reforms to improve governance of PSCs. 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 improvement in reforming the public sector governance in the country.

ICMA Pakistan, being a professional accounting body of international repute, has always played a proactive role in advising the government and regulating agencies on professional, financial and economic policy matters. In addition to the submission of concrete recommendations, ICMA Pakistan also makes it a point to establish direct interaction with key government officials to convey its viewpoint and suggest ‘way forward’ on different financial and economic challenges as well as on improving public governance and productivity.

To provide technical support to the Government by identifying real challenges in governance and productivity of PSCs and to suggest the way forward by improving the professional competence, procedures and legislation, ICMA Pakistan organized technical sessions in major cities of Pakistan which were attended by over 250 CEOs, CFOs, Company Secretaries, CIAs and HODs of PSCs. The participants suggested reforms for bringing improvement in the functioning of PSCs including the empowerment of the Boards of such organizations.

Based on the outcome of the above technical sessions, ICMA Pakistan’s delegation had productive meetings with Dr. Ishrat Husain, Advisor to Prime Minister on Institutional Reforms and Austerity; and Mr. Hammad Azhar, Federal Minister for Economic Affairs Division and Secretary Finance during which recommendations on corporate sector governance reforms were presented and submitted, especially for amending and elaborating the ‘Public Sector Companies (Corporate Governance) Rules, 2013.This article briefly sums up all the recommendations with the hope that these would merit the attention of the Government and the Regulators.

Recommendations

1. The procedure for appointment of members on PSC Boards should be clearly defined

The procedure for appointment of Members of the Board is not well-defined in the PSC-CG Rules 2013. The current scenario is that the Government is appointing members on the boards of public sector organizations. It is strongly recommended that a clear and well-defined procedure for appointments on PSC Boards may be included in the Rules and opportunities for appointment on PSC Boards may be advertised to ensure transparency and ‘equal opportunity’ to every professional in Pakistan. Though few companies are now advertising the vacant positions on Boards; however, this is not specifically mentioned in the law. The advertising of available positions on boards of PSCs would help bring the right talent on the boards in PSCs.

2. Appointments on PSC Boards should be based on Skills-sets of nominees

PSC-SG Rules are ambiguous about the composition of Executive, Non-Executive and Independent Directors as the ‘range of skills’ required for these positions have not been defined. It has been suggested by ICMA Pakistan that the Rules be amended to include Directors who have sufficient expertise in various business areas such as Sector-specific experts; professional accountants; HR professionals; Lawyers 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 mandatory for all Board Members as a reward for their time and efforts. Furthermore, it must be ensured that no person should be elected or nominated as a ‘Director’ of more than three PSCs and Listed Companies simultaneously, except the ex-officials.

3. Mandatory formation of ‘Board of Management’ and its Committees in PSCs

The existing PSC-SG Rules 2013 does not have any provision of forming ‘Board of Management (BOM)’ in PSCs which represents a team of individuals at the highest level of management of an organization that is responsible for day-to-day tasks of managing the company. Everywhere in the world, the ‘Board of Directors’ of the organization have a supervisory and‘policy-making’ role; whereas the execution part is dealt by the Board of Management which 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 Compliance Officer; and any other Head of Department of organization. The executive functions of the company should be the responsibility of the Board of Management.

It is highly recommended that the formation of ‘Board of Management’ and its Committees may be made mandatory for all the PSCs and their roles and responsibilities should also be clearly defined in the Rules by the regulators. The management committees of BOM are proposed for the effective conduct of business and may consist of the HR Committee, Procurement Committee, Sales Management Committee, Technology Committee, Financial Management Committee, and Risk Management Committee.

4. Definition required as to who will take charge of CEO in case this position is vacant in PSCs

The PSC-SG Rules 2013 does not define or mention as to who will assume the acting charge of CEO in case this position falls vacant in any public sector company. This creates a conflicting situation between the various stakeholders within the organization. In Pakistan, a large number of PSCs are working without a CEO which is affecting their efficiency. Hence, it is strongly suggested that the Rules must clearly mention as to who will perform the duties of CEO in case this position falls vacant in any public sector organization.

5. Hiring of the CEO should be made through succession planning

The Chief Executive Officer is an important position in any organization and we should give some preferences in their hiring process. As per the existing law, the term of a CEO is for three years and after this period, the process of hiring a new CEO is initiated and then the selected CEO completes his/her three-year term as per the law.

It is suggested that CEOs in PSCs should be selected through succession planning, rather than going to any other option. The talent should be developed within the organization so that when one CEO completes his term, another CEO is ready to replace his position and lead the organization. Moreover, the term of three years is not sufficient for any CEO to prove his mettle; hence this should be extended further.

6. PSC Boards should be empowered to approve the Budget and Service Rules

The powers of the Board of Directors (BOD) have not been defined in the CG Rules 2013. Hence, by making amendments in the Rules, the Board of Directors of PSCs may be empowered to approve the budget from the company’s own sources and also to frame the service rules. They should also be empowered along with the Line Ministry to appoint, promote, evaluate and terminate the CEO. Furthermore, the Chairman of the Board of PSC should be only authorized to approve the foreign traveling of the CEO. Secondly, in procurement matters, it should be made mandatory in the law that the approval of PEPRA should be obtained by PSCs.

It is quite reassuring that ICMA Pakistan’s recommendation on empowering the Boards was duly accepted by the Government and a notification to this effect was issued on 4th March 2019 by the Establishment Division whereby the respective Boards of PSCs have been delegated authority to frame their own service regulations. This would certainly lead to better opportunities for recruitment in PSCs.

The CEOs of PSCs along with relevant BOM Committees should be assigned powers to take decisions on the appointment, promotion, evaluation and termination of employees [other than the CEO]; appointment of Consultants; Award of contracts; price setting [except for utility companies] and release of newspaper advertisements [endorsement from PID be done away with]. The CEO must also be given elaborated power to approve foreign traveling of employees, other than him/her self.

Similarly, the Boards of PSCs should have powers to appoint the Auditors and Legal Advisors under the relevant laws i.e. the Companies Act, 2017, Companies (Appointment of Legal Advisers) Act, 1974 and Companies (Appointment of Legal Advisers) Rules, 1975 without seeking any further approvals from the office of Auditor General of Pakistan (AGP) and the Ministry of Law or any other concerned Ministry. The PSC-SG Rules do not provide clarification to this effect and it is the reason that leads to audit observations by the Government auditors.

7. Board Audit Committees should be empowered to hear and take actions on Audit Observations

The role of Board Audit Committees is quite significant and also clearly defined in the Companies Act, 2017. In the case of Public sector companies, the audit observations made by the Government auditors are referred at different levels to the Public Accounts Committee (PAC) and the Departmental Accounting Committees (DAC). It is almost impractical for PAC to hear the audit observations of all the Federal and Provincial Government organizations in Pakistan and this is the reason that there is a huge backlog of pending cases with PAC and DAC.

It is suggested that the Board Audit Committees in PSCs may be authorized to hear the audit observations and onward refer their recommended actions to the PSC Board of Directors for approval, rather than referring the audit observation to the PAC and DACs for hearing. This would not only relieve the burden of the PAC and DACs but it would also help in ensuring the efficiency of system and timely annual audits of government organizations.

8. PPRA Rules should be improved for clarity purposes

The procurement function as mentioned in the CG Rules 2013 are quite ambiguous and also contains limitations. The PPRA Rules need further elaboration for purposes of clarity. For instance, the term ‘lowest evaluated bid’ should be replaced with the term ‘the best-evaluated bid’ to ensure that contract is awarded to only those supplier or service provider who obtains the highest marks in both the technical and financial bids. Similarly, clear guidelines for the scoring of technical and financial evaluation need to be defined in the Rules. As far as limitations are concerned, the quotation-based procurement limit should be enhanced from Rs. 500,000 to Rs. 1,000,000 whereas petty purchase limit should also be increased from Rs. 25,000/- to Rs. 50,000/-. Moreover, the PPRA Rules should be uniform/ standardized for the Federal as well as for all provinces in Pakistan.

9. PSC Boards should be empowered to frame HR Policy

The PSC Boardsshould be empowered to frame the HR policy and procedures as per the job requirements, including the grade, pay-scales, etc and these should not be linked with the notifications of the Establishment Division. The reason is that the employees of public sector companies,which are established with commercial objectives, do not fall under the category of ‘public servants’ and this has also been endorsed by the verdict of the judiciary. Hence, the PSC-CG Rules may be suitably amended to empower the Boards as the ‘competent authority’to make decisions onHR policy and guidelines, related to recruitments, developing pay scales and benefits and performance evaluation of employees and these should be considered authentic.

10. Tariff setting should be aligned with the Cost Audit

The Board of PSCs has the power for tariff setting or pricing. To make the tariff process transparent, it is proposed by ICMA Pakistan that tariff setting should be aligned with proper costing system which includes the declaration of maximum capacity, possible usage capacity, and actual capacity. For this purpose, the PSCs may be directed to not only maintain proper cost accounting records but also to undertake annual cost audit. It is quite reassuring that the Competition Commission of Pakistan (CCP) has also endorsed the compulsory requirement of cost audit in different industry sectors and advised the Securities and Exchange Commission of Pakistan (SECP) accordingly for implementation. Many Advisors in the Government have also accepted the fact that cost audit is imperative for clarity in fixing tariffs of different public services. Needless to say, that mandatory cost audit for public utilities and service providing companies would improve their cost efficiency and public delivery services and at the same time, it would enhance public confidence and trust upon the Government.

11. Financial Reporting system should be made applicable in Government Departments

The public sector companies normally engage the professionals for external or financial reporting who try to follow the double-entry accounting system as well as International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). On the other hand, the Government Departments in Pakistan are following the single-entry accounting system and it is imperative that to cope with the global requirement, they should adopt the financial reporting system to fulfill the requirements of their stakeholders. It is also important that they should install tailor-made ERP systems to improve their operations and efficiency.

Due to not following the double-entry accounting and financial reporting systems, the transactions are not correctly recorded. For instance, budgets are transferred to various government departments under the Public Sector Development Program (PSDP) for undertaking various infrastructure development or capacity building projects like schools, hospitals, roads and highways, etc; however, on the books of accounts of the concerned Ministry, these allocations are recorded as ‘expenditures’ whereas in the true sense these are creating the ‘assets’ in the shape of buildings and other projects but unfortunately these are not reflected as ‘assets’ on the books of accounts. ICMA Pakistan had suggested to the Planning Commission that where budget allocations are provided under PSDP specifically to the commercial entities, they should inject it as ‘equity’ and where infrastructure projects are developed under PSDP, those should be recorded as ‘assets’ instead of ‘expenditure’.

12. Creating an e-Portal for Financial Reporting of Public Sector Companies

ICMA Pakistan suggests that an e-Portal may be created where all the public sector companies (PSCs) may be asked to get registered foruploadingtheir financial statements like Balance Sheet, Income Statement and Cash Flow Statement along with the annual audited accounts and the current positions of assets, liabilities, and equity and government funding. The mandatory requirement to upload this information publicly would help in the timely completion of financials by the PSCs. The PSCs may also be bound to provide other additional disclosures annually on the proposed e-portal, which are normally required by the Parliamentarian and may include:

a) Details of foreign tours of officials

b) Geographic/demographic breakdown of staff strength

c) Number of vehicles owned along with their usage

d) Details of land/building and leased/rented properties

e) Number of foreign/ dual national employed

f) Number of staff who are in the category of ‘Disability’

13. There should be only one audit of PSCs instead of multiple audits by AGP and Audit Firms

Wherever public money is involved, the Government has the right to carry out audits of public sector companies through the Office of Auditor General of Pakistan (AGP). However, with time, there is a always need for improvement. Multiple audits are being performed by the Government Auditors as well as by the firms of Professional Accountants due to which every public sector company is engaged in audits for almost six months. This cast a negative impact on their productivity, efficiency, and performance.

ICMA Pakistan, therefore, recommends that there should be only one audit of PSCs either by a firm of Chartered Accountants or by the Auditor General of Pakistan to avoid duplication and excessive cost. If there is an issue of the regulatory audit or statutory audit, this could be easily resolved by defining their scopesin one place. We need to promote professionals by inducting them at different government positions and also give them pathways to perform auditsand other financial reporting tasks as per the best international practices. If we do not give opportunities to our professionals, this would lead to a ‘brain drain’ which is a loss to our country. It is quite imperative that we need to revisit our system and legislations to provide entry to professionals and improve the mechanism to bring improvements in public sector governance.

14. A‘Professional Cadre’should be introduced in Pakistan Accounts and Audit Services (PA&AS)

Another key recommendation that came out of the Experts Forum was the need for introducing a ‘Professional Cadre’ in Pakistan Accounts and Audit Services (PA&AS) to provide a direct route to the professional accountants to serve and prove their mettle in the PSCs and other autonomous organizations. At present, there are two generalized employment routes in PA&AS namely; Inter-Departmental Cadre (IDC) Route and Departmental Cadre (DC) Route. Under IDC Route, direct recruitment is made on Grade 17 which ends at the post of Auditor General or upto Grade 22 according to the length of service; whereas under DC Route, the entry of professional accountants, including CMAs and CAs, is on the post of ‘Junior Auditor’ with maximum career progression upto the post of Accounts or Audit Officer (BS-18) and that too at a very senior age, almost close to retirement. Furthermore, the appointments on Grade 17 and below through DC Route are made with relevant qualification background of finance and accounts; whereas under IDC Route the appointments made are without any consideration of relevant qualification due to which other generalized resources such as BA, Masters in Political Science, Journalism, Biology, etc. are hired for ‘specialized jobs’ of accounting and auditing which tantamount to encroaching upon the right of certified Accountants like CMAs, CAs or other finance professionals.

Hence, it is strongly recommended by ICMA Pakistan that professional accountants should be inducted in the mainstream by creating a ‘Professional Cadre’ rather than to hire them through civil service. For this purpose, the quota should be reserved for professional accountants qualified from ICMA Pakistan and CA Pakistan for induction and promotion. This development will help to improve the quality of auditing and accounting functions of PA&AS so that they can serve the nation most appropriately and professionally.

Conclusion

To conclude, ICMA Pakistan is very much optimistic that the Government would consider all these suggestions on merit to improve the public sector governance in Pakistan. These suggestions are made in the best interest and the Government must take all the professionals accounting bodies as well as executors on board to frame new policies to bring reforms in the public sector and create a feel-good factor in the society to gain public trust.

The contributor is President ICMA Pakistan

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