Loss-making SOEs

We still have a large public sector despite a considerable privatisation effort of the 1990s.According to some estimates, there are still 255 public enterprises on the roll in a variety of sectors ranging from airlines, railways and road-building to banking, insurance, engineering industries and a steel mill.
Most of these are good at losing money and swallowing up government bailouts and subsidies. The managements of these enterprises are normally selected on political bases and influences than merit. The successive managements have been more adept at polishing balance sheets than introducing efficiency. It is not easy to privatise most of these enterprises.
Most employees would resist it- powerful unions and employees from the elite families. Sometimes strategic interests are involved based on misconception or are brought in simply to defend these enterprises. Nawaz Sharif lost his job as a PM at the hands of Ghulam Ishaq Khan following differences on PTCL privatisation, among other complications.
We keep hearing these days of a large number of trains being shut off by Railways. The reason, probably, is losing money on certain uneconomic passages. Will PR come into profit after such a massive closure and pruning of service coverage and level? It is doubtful that it will. I am no expert on Railways, but it is widely known that massive corruption and leakages are mostly responsible for its predicament.
PR is not expected to run into profit. Instead of earning a profit, the excess revenue of such service organisations should bring down the fares? But PR is in massive RED and has to be bailed out through subsidies. Indian Railways, some eight times bigger than PR in almost all respects, suffered from similar and comparable problems.
Lalu Prasad Yadav, the same former flamboyant and corrupt Chief Minister of the poor Indian State of Bihar, and now the minister of Indian Railways for some years, has transformed IR into a profitable entity without increasing the fares and service level. Honesty is not his strength, to say the least. But probably Efficiency is. IR is full of bureaucracy, perhaps even more than PR is. Lalu utilised the same people and turned IR around.
This brings some hope. Lalu's Pakistani counterpart could do the same. It is worth going to India and learn a few lessons from the turnaround of IR. There is a big market and need for the poor and highly densely populated countries like India and Pakistan, where massive urbanisation has occurred, creating massive markets for cheaper travel services. Air travel, at least in Pakistan, has become awfully expensive. Not only the poor, but higher economic classes and businessmen and their executives would find it appropriate to travel by cheaper trains.
There does not appear to be a basic unsolvable problem. The concerned minister has to apply his mind and energy. You do not have to be a Railway genius. If Lalu can do it, our lesser lalloos can do it as well. Forget the ministers, even the boards of these public enterprises have not functioned properly in monitoring or guiding the performance of these enterprises. Again most appointments in this respect are either political or monopolised by the bureaucracy for both understandable and un-understandable reasons.
Where boards have tried to be pro-active, there have been stalemates and destructive actions. GoP has finally become alive to correct the situation and has reportedly decided to make the enterprise boards pro-active, effective and efficient. It is hoped that the jobs do not again go to the cronies and the powerful. I would like to invite the attention of the readers and the policy makers to some alternatives and models in this respect.
In Germany and some other European countries, there is a two-board system for corporate management of companies exceeding a certain size; the rationale being, broader risk management, transparency and accountability and catering to the stakeholders and not just shareholders.
There are two boards; one board of directors as we find in Pakistan and elsewhere where Anglo-Saxon model is practised; the other called Board of Supervisors or Supervisory Board. Board of directors is subordinate to the Board of Supervisors. Supervisory Board (BoS) has a chairman of the board and several members. At least two of the BOS members are to be independent, not belonging to or associated with the company or share-holders. Normally consumer associations, civil society or university professors are inducted/elected in the general meeting as independent members.
BoS and BoD are supposed to act together. BoS is concerned with broad policy guidelines, risk management, major contracts and audit. BoD is responsible for day to day operational management of the company under a chief executive (CEO). Lately both models have been converging; single board's powers being more circumscribed and receiving varying levels of external oversight; and BoS's diffused power system and consultative process shortened in the interest of efficiency and quick management.
My proposal is to try this system of two-boards in Pakistan in large public sector companies .We have seen the results of single board managed companies: mounting losses, corruption, falling level and quality of service etc; take PIA, Railways, Pakistan Steel, Wapda, Pepco, National Bank of Pakistan, OGDC etc. Under the current style of management, the CEO has unbridled powers of black and white, who is manipulated from behind by controlling ministries.
If CEO manages to keep the ministry happy, he is not asked many questions and is free to do all kind of nepotism, and corruption etc. Some powerful CEOs have direct line with the PM or president of the country and are immune from ministry's control either. Board members are only part-time and either has full tome jobs elsewhere or are board members of numerous organisations earning fee and other formal and informal advantages such as misuse of official vehicles, travel and leverage in appointments of personnel.
BoS, in case of large public sector corporations can bring external and independent oversight, transparency and control over powerful individuals of the board and the CEO. The stakes involved in organisations like PIA and Railways are too much and too many. It is worth examining the viability of such a system in our circumstances.
We need not copy the whole system in toto and can and should make suitable adjustments to the German model. We have seen that in the US and other Anglo-Saxon countries, the supremacy of the CEOs has brought in many problems of recklessness and lack of transparency giving rise to financial crashes. Public sector is going to remain in Pakistan for a long time despite efforts of privatisation; hence the need of some innovation in respect of corporate governance.
(The writer is a former Research Fellow of the Harvard University)