Revamping public enterprises through fundamental reforms

The News 23th May 2011

By Jamil Nasir

State ownership per se is not the only reason for the lacklustre performance of the public sector entities (PSEs). In this context, privatisation might not be the most pragmatic solution to salvage the futile PSEs, particularly if the government lacks adequate regulatory capabilities or is generally perceived as a corrupt state institution. On the other hand, if the ruling leadership has a strong political will to introduce organisational reforms in the PSEs, the economy’s condition can be improved without resorting to privatisation. Moreover, privatisation of loss-incurring enterprises is not an easy affair. It requires introducing fundamental reforms for improving the overall governance in these organisations to make their functioning and administrative affairs better. It implies that ‘third options’ should be explored that can either act as a substitute for privatisation or pave way for successful privatisation process to occur.

Introduction of fundamental organisational reforms is the first set of policy prescriptions that can be explored as one of the options. The goals and objectives of the PSEs need to be examined critically. Different weights can be assigned to the goals in order of priority. As a result of this critical analysis, the goals of PSEs should be reduced to the minimum possible number. The redundant or overlapping functions should be done away with. In this way, the charters of the PSEs can be redefined to avoid the overlapping of goals among various PSEs.

Another important ingredient of the organisational reforms is to ensure transparency in its operations and money matters. The PSEs should be required to maintain high standards of transparency and disclosure. The maximum possible information should be made available to the public at large related to their functions, policies, contracts/deals, HR aspects etc. Recruitment, placement and transfer should not be based on patronage and political considerations. A code of corporate governance after analysing the best global practices may be a good step forward to improve the governance of the PSEs. The code of governance should, inter-alia, provide answers to the significant questions, such as how the employees are selected, what they are paid, etc.

The appointment of CEOs and other top officials who are primarily responsible to set the direction of the organisations should be through an open, transparent and merit-based process. Recruitment of CEOs may be advertised in the newspapers. The aspirants may be asked to submit their strategy papers for making these enterprises profitable and efficient organisations. Only the candidates of known integrity and possessing proven leadership qualities should be selected through an independent commission that enjoys trust of both the government and the opposition.

In order to reduce interference from the government, the CEOs of such organisations must be accountable to a parliamentary committee composed of representatives of both the government and the opposition, having good understanding of managerial and economic issues. Once a CEO is selected through a competitive and merit-based process, the government should support the actions he/she takes to improve the performance and efficient running of the organisation. The government should not interfere in day- to- day operational matters of the organisations. They should be allowed full operational autonomy to achieve their objectives.

Linking the incentive system with performance, efficiency, productivity, and consumer satisfaction may be another important initiative in the domain of HR. The incentive system need not be construed as meaning materialistic rewards only and must include non-materialistic elements as well. Managerial autonomy, improved performance evaluation system, and a better incentive system can go a long way in improving the performance of the PSEs.

Further, high quality auditing and accounting standards ought to be prescribed for the PSEs. Information relating to accounts like balance sheets and income statements etc. should be available on their websites. Efficient internal audit function should be put in place. In our case, the office of the Auditor General of Pakistan may be tasked with the ‘performance audit’ of such organisations. The performance audit reports could become the starting point for a restructuring strategy of the PSEs.

Another set of policy prescription to salvage the PSEs can be increasing competition. Agreed that in cases where PSEs enjoy natural monopoly, increasing competition is either impossible or socially unproductive. Also agreed that coordination costs of escalating competition can be sometimes high but it does not mean that we do not have room for improving the productivity of a PSE by stimulating competition. For example, a PSE can be divided into regional units. Reward/punishment of such regional units should be according to their relative performance. Such a strategy can pave way for privatisation of some of the regional units at some later stage as was experimented by the British Railway system.

But above all it is the political will of the government that matters. The administrative and structural reforms require a high level of commitment. The culture of political patronage that has permeated into the public sector organisations is the biggest stumbling block to organisational restructuring and reforms. But the fact of the matter is that PSEs are here to stay. There are limits to the down-sizing and right-sizing of the public sector. So the need of the hour is that these organisations and enterprises are subjected to wide-ranging reforms of fundamental nature.