corporate governance

1. Assignment No # 3
Corporate Governance
Submitted to:
Mr. Uzair Farooq
Submitted by:
Amir Shafiq bhatti
Mbtf11-121
Sec - A

2. RESTRUCTURING PLANS ADOPTED BY GOVERNMENT
The government has initiated some concrete measures to improve the performance of
Public Sector Enterprises (PSEs). The Cabinet Committee on Restructuring (CCOR)
has identified Pakistan International Airlines (PIA); Pakistan Steel Mills (PSM); Pakistan
Railways (PR) and the Utility Stores Corporation (USC), among others, as bodies that
need improvement in corporate governance, service delivery, and reduction of fiscal
burden and savings.
A framework for hiring professional CEOs has been approved by the CCOR and the
Board of Directors (BoDs) of different PSEs are being empowered to induct
professionals from the market through a transparent process; consequently, financial
hemorrhaging has been curtailed in these PSEs.
Public sector entities resisting their restructuring would face the music in terms of
eventual privatization, sources close to the Minister for Privatization informed TheNation
on Thursday.
According to the sources, the Government has decided in principle either to make the
public sector entities (PSEs) financially viable through immediate restructuring or
dispose them of through privatization. The sources were of the view that the fiscal
crunch had forced the Government to get rid of the additional burden of hundreds of
rupees per annum in terms of losses and subsidies of these entities.
In this connection Finance Minister Abdul Hafeez Sheikh chaired the second meeting of
Cabinet Committee on Restructuring of Public Sector Enterprises (CCOR) here on
Thursday.
The Committee adopted a comprehensive formula for restructuring the Board of
Directors of the PSEs. The formula is based on principles that the size of the proposed
Board Of Directors may range between 8 to 10 members. The proposed names of
Board of Directors must contain a right-mix of the Government and private sector
professionals with a greater leaning towards the private sector. The private sector

3. nominations should represent a balance in their academic and professional background
to provide diversity of opinion for taking informed decisions by the Board. Regional
balances may be observed in the nominations to the Boards. Gender balances may
also be maintained while making nominations to the Boards. The nominees may also
reflect a balance in the age of the nominees to the Board of Directors of PSEs. With a
view to groom a second generation of private sector persons, at least the member of the
BoD should be a young private sector individual with potential to make his mark in
future. The nominees of the Board may be selected from the trade and industry, NGOs,
academia and the media. The ministers, secretaries/government officials may not be
nominated as chairpersons of the Board of Directors. The office of the Chairperson and
CEO should be kept separate. Apart from the concerned ministry, the tendency of
nominating BoD members from other ministries should be curbed. This may only be
resorted to if it is absolutely necessary. No representative of the Ministry of Finance
may be nominated on the BoDs unless absolutely necessary. The CEOs and head of
finance of each PSE would be a member of the BoD. The choice of private sector
nominees may also be based on the ability of the nominee to be able to devote time to
the PSE to which he/she may be nominated. Multiple nominations would be avoided at
all costs. One nominee of the CCOR be represented on the Boards of all PSEs
Pakistan Railways
A new BoD of PR has been constituted with an optimal mix of academia, management
professionals, rail experts and executive functionaries, which will become functional
after an amendment to the Railway Order. Repair of locomotives and freight operations
have been prioritized for improving revenue generation and restoration of rail services. It
has been decided that adjustment of fares and freight pricing will be determined
according to market conditions and cost of doing business.
Pakistan International Airlines
An overarching restructuring plan for PIA has been finalized which addresses corporate
governance, human resource rationalization, financial and operational restructuring,
engineering improvement, procurement and logistics, marketing and fleet, airport
services and dispatch reliability, among others. Increased fuel cost has been a major

4. downside risk to the financial strength of PIA, and effective measures have been put in
place to mitigate the effect. Fleet renewal and addition is being planned. Route
rationalization, code sharing and alliances are being pursued for moving to a new
business model. Rationalization of employment in PIA is being addressed through
attrition, and no new hiring is being undertaken except for operational staff. A financial
restructuring plan has been finalized, which includes an equity injection, rollover of
loans, and government guaranteed loans among others.
Pakistan Steel Mills
The BoD of PSM has been reconstituted. Process for selection of a professional CEO of
PSM has been finalized. Smooth availability of raw materials to PSM has been
ensured. A strategic view needs to be undertaken for sustainable revitalization of PSM,
which may entail collaboration and partnership with the Russian government,
privatization, private-public partnership and operations and management outsourcing
Future Strategy
Future strategy will be focused on developing a framework for ensuring well-functioning
Boards and engaging them in the turnaround of PSEs. The corporate governance
framework envisages: a transparent process of Board nominations; capacity building of
BoDs; clarifying the role of BoDs; monitoring performance of BoDs by setting key
performance indicators; and preparations for the privatization of the Faisalabad Electric
Supply Company and the Islamabad Electric Supply Company.
The meeting of the Cabinet Committee on Restructuring of Eight Public Sector
Enterprises was held here Thursday with the Federal Minister for Finance Dr. Abdul
Hafeez Shaikh in the chair. The meeting deliberated upon and finalized the already
submitted proposals to the Committee by the concerned ministries for the re-structuring
of the Board of Directors of the Pakistan Steel Mills, Pakistan Railways and National
Transmission and Distribution Companies, said a statement issued by the Ministry of
Finance. The proposals that were submitted emphasized for seeking more involvement
of private sector, members of the civil society and the best minds to get the job done.
The Board of Directors as proposed will be autonomous in its nature to formulate policy
of the respective enterprises so that they may be made financially and technically viable

5. and selfrelience.It was also decided that the CCOR on PSEs meeting shall be held
regularly on weekly basis to know the ongoing work and development in this regard.
Their restructuring proposals shall be submitted to the Cabinet for further discussion
and for the final approval by the Prime Minister.Federal Minister for Water and Power,
Minister for Railways , Minister for Law, Minister for Industries and Production , Minister
of State for Finance , Deputy Chairman Planning Commission, Secretary Finance,
Secretary Water and Power, General Manager Railways and other concerned officials
of the ministries and divisions attended the meeting –
PSC restructuring plan to strengthen agro-based economy
The provincial government has evolved a plan for the restructuring of Punjab Seed
Corporation to make it more efficient and viable so that it could play its due role in
strengthening the agro-based economy of the country, it is learnt reliably.
Informed sources told The Nation on Thursday that five other provincial departments
are also included in the restructuring plan of the government in order to make them
viable and competitive organizations to face the future challenges in the post WTO
regime.
The restructuring of Punjab Tourism Development Corporation, Punjab Small
Industries Corporation, Punjab Food Department, Punjab Mines and Mineral
Department and Punjab Agriculture Marketing Department is also on cards under the
plan to improve their performance and convert them into viable institutions, sources
said.
About the restructuring of Punjab Seed Corporation, the sources said
recommendations in this regard have been finalized and submitted to federal
government and Punjab Resource Management Programme, which will appoint
consultant from the short-listed firms by next month to evaluate the proposals and
convert the PSC into a public-private sector entity.

6. Sources further reveal that the full autonomy would be awarded to PSC under the
restructuring plan to develop its corporate image purely on commercial lines like other
public sector companies including the NFC, PTCL, SNGPL and WAPDA etc by
establishing its high powered governing council. “The council will devise strategy to
face the future challenges in forthcoming WTO regime that would help compete local
and multinational companies,” they maintained.
There is another option that the corporation will be converted into public limited
company but its shares will not be floated on stock exchanges, sources said added that
the affiliated registered growers would make partners of the PSC.
“The government has in principle decided that the existence of the PSC is essential for
farming community and national economy as well due to its significant role, which it
has been playing to strengthen seed sector on sound footing for achieving higher per
acre yield of major and minor crops in the country,” the sources maintained.
Reorganization of the PSC is also required to get multiplied local varieties of other
provinces, the sources said adding that the PSC is ready to sign accords with other
provincial governments provided necessary assistance in shape of seed production
farms is provided to the corporation. However, if other provinces are only interested in
seed distribution channel then they will have to place their confirm orders at the time of
procurement of crops with 50 per cent advance payment, they added.
Under the restructuring plan, the PSC may be allowed to produce hybrid seed of
maize, sunflower and fodder in collaboration with local and international research
institutes or by signing joint venture with multinational companies.
In order to reduce administrative expenses and keep the corporation a viable institution
within its resources, it may be allowed to take measures for right-sizing with golden

7. handshake scheme to get rid of unwanted, undesired and unwilling employees.
However, young blood and seasoned professionals having innovative approach will be
inducted into the PSC to fill up the gap.
To streamline the production of pre-basic and basic seeds on scientific lines according
to advance seed technology, the issue of pattedars of PSC Khanewal Farms should
urgently be get resolved for developing required system on 5,000 acres tenant free
farms as visualized by the World Bank in appraisal report.
Moreover, the government has also decided to restructure seed sector and amends
Seed Act to check black marketing of unapproved varieties by private seed companies.
An independent authority or Seed Development Board may be established to properly
monitor the activities of public and private seed sectors, the sources said.
The recommendations also stressed the need to check present status of public and
private sectors in order to boost production of high quality seed of major crops as well
as to increase output of vegetables, oil seed, fodder and floriculture seeds to cut down
import bill of respective crops seeds. It also urged to evolve a plan for developing seed
business as an industry to get easy credit facility, exemption of import duty on import of
processing machinery, Income Tax holiday and exemption of Sales Tax on seed
production material etc.
The sources further said that immediate action may be taken to get registered the
major and minor crops seed varieties of Pakistan under international patent and copy
rights regulations as further delay may damage the position of Pakistan like recent
issue of rice varieties raised by European Community.
Pakistan – Restructuring of PSEs
It is good to know that some concrete measures would be taken soon to improve the
health of Public Sector Enterprises (PSEs) in order to reduce burden on the budget.
According to the latest reports, the Cabinet Committee on Restructuring (CCoR) has
finalized a roadmap for the turnaround of eight loss-making public sector entities,

8. focusing in particular on replacing their managements with professionals from the
private sector.
Talking to a newspaper, EX- Finance Minister Shaukat Tarin revealed that the
Committee would replace the existing managements of Pakistan International Airlines
(PIA) and Pakistan Steel Mills (PSM) with others within two weeks after approval of the
plan by the Prime Minister. New and vibrant boards were also needed for corporate
restructuring of Pakistan Railways, Pepco, NHA, USC, TCP and Passco.
These eight entities were incurring annual losses of about Rs 200 billion and Ministry of
Finance had always been advocating for structural changes in the management of
these PSEs to make them profitable. Tarin deplored that weak governance,
susceptibility to outside influence and implicit guarantees by the government were the
major reasons behind these entities‟ under-performance.
In order to facilitate the transition and tone down the resistance from the related
ministries, the Committee had also decided to co-opt the concerned ministries in the
restructuring effort. Such an approach was deemed essential to get the necessary co-
operation of the concerned ministries and ensure consistency of policies by the
government.
As for the purpose of the whole exercise, the basic idea behind the new plan was to
empower the boards to operate business profitably and disassociate politics from
business affairs. The new boards would be made responsible to prepare and present
restructuring plans in a given timeframe based on the conditions in their particular units.
In our view, it is quite evident that the CCoR is moving in the right direction and the
active support provided by the Finance Minister would not only help expedite its work
but also reduce resistance at various levels which is essential for the success of the
exercise. It is a world-wide phenomenon that vested interests create all sorts of hurdles
in order to maintain the status quo and dissuade the government from taking a bold
approach of restructuring or privatizing the public sector entities. The power of the
bureaucracy and the trade unions, in particular, is generally eroded whenever such a
plan is implemented.

9. However, the problems of loss-making PSEs are now so severe and complex in
Pakistan that there seems to be no alternative for the government but to make a bold
departure from the past and take a more sensible route. Most worrying is the continuous
hemorrhage on the budget due to the mismanagement that is rampant in these
business organizations. According to certain estimates, total annual loss by the 22
state-owned enterprises was now over Rs 300 billion, which was almost, equal or more
than government spending on the development projects.
An intriguing aspect of this loss is that in certain cases such as PIA, PSM and NHA,
such a loss subsidies the rich but would punish the poor through increased taxes.
Circular debt and increasing contingent liabilities of the government are also the by-
products of the losses of certain PSEs. We feel that it is imperative for the government
to move speedily to restructure the PSEs in order to enable them to improve their
financial position by increasing their efficiency levels and arrest this rot once for all. The
work done by the CCoR so far, its plans for the future and the co-operation elicited from
the related ministries could go a long way in restructuring the PSEs and make them
profitable. However, all this requires across-the-board support of heads of political
parties that matter.
Support from within the ruling clique or the opposition to labour unions – vicariously
opposed to rightsizing and restructuring from either quarters will create insurmountable
obstacles. Secondly, the Board of Directors of these institutions – filled by cronies of
either the Prime Minister or ministerial elite – would need to be replaced by people who
can add value to the Board and provide a shield to the management of PSEs. Needless
to add that a successful outcome of this exercise could contribute a great deal in
improving public finances of the country, reducing government borrowings from various
sources and releasing resources for the badly-needed development expenditures.
EMPLOYMENT SHARE OF PUBLIC AND PRIVATE SECTOR

10. Public sector employment accounts for over one-half of waged employment in Pakistan.
The empirical analysis undertaken in this study for Pakistan tends to concur with the
summary consensus offered by Gregory and Borland (1999) on public sector labour
markets in developed countries. As elsewhere, public sector workers in Pakistan tend
to have both higher average pay and education levels as compared to their private
sector counterparts. In addition, the public sector in Pakistan has a more compressed
wage distribution and a smaller gender pay gap than that prevailing in the private
sector.
Our empirical analysis suggests that about two-fifths of the raw differential in average
wages between the public and private sector is accounted by differentials in average
characteristics. The estimated ceteris paribus public sector mark-up is of the order of
49 percent and is substantial by the standards of developed economies. The mark-up
was found to decline monotonically with movement up the conditional wage distribution.
In particular, the premium at the 10th percentile was estimated at 92 percent as
compared to a more modest 20 percent at the 90th percentile.
The existence of a sizeable public-private sector differential has obvious implications for
the Pakistan labour market and can create „queues‟ for public sector jobs given they are
comparatively well-paid across a spectrum of low- and high-paid jobs. An obvious
agenda for future research would be to investigate the extent to which these differentials
influence sectoral attachment and give rise to the phenomenon of „wait‟ unemployment.
Finally, employment in the public sector is generally viewed as an attractive option in
Pakistan not only because of the wage differentials documented in this study but also as
a consequence of the perquisites, such as housing, free telephone provision for civil
servants, job security, free medical benefits, etc., associated with employment in this
sector. Public sector employment in Pakistan could be interpreted as providing rent
seeking opportunities for some. The tax-payer is not represented at the negotiating
table and the state bureaucracy has an incentive to conceal the nature and magnitude
of spending on such fringe benefits. The expenditure on fringe benefits impacts strongly
on the national exchequer but also bestows an unfair advantage on the public sector
relative to the private sector. This subsidized advantage curtails the potential for the

11. private sector‟s development, a key ingredient for an economy‟s transformation and its
Sustainable long-term economic growth. One issue that warrants consideration for
future research in this area would be an investigation into the magnitude of such fringe
benefits in Pakistan and their contribution to the more broadly defined public-private
sector differential. It would be informative to investigate within this framework the likely
cost implications to the national exchequer if fringe benefits were actually replaced by
cash payments. It is an empirical question whether such a policy would reduce the
overall cost to the exchequer, but it would certainly introduce a greater degree of
transparency to public sector spending.