Chapter - 15   Pakistan Public Enterprise                                                       

1.    PROFILE OF PUBLIC ENTERPRISES

At the time of independence in 1947, there were only about a dozen public enterprises. They were mainly public utilities - railways, ports, posts and telegraphs and broadcasting.

Government policy in the post independence era was to encourage private sector industrialisation but much of the available capital went into imports. The poor performance of the private sector in industrial investment led to the establishment of the Pakistan Industrial Development Corporation (PIDC) in 1950. The PIDC was responsible for organising industries on its own or in partnership with commercial sector interests. Another important agency set up was the Water and Power Development Authority (WAPDA) which was to develop water and power resources. The strategy of creating corporations was not only to undertake industrialisation directly but also to promote such investments in the private sector. Between 1972 and 1974 several private industrial concerns were nationalised including banks, life insurance businesses, shipping companies and petroleum distribution companies. Export trading in major items, such as rice and cotton, was also brought under the control of official trading corporations.

1.1.    TYPES OF PUBLIC ENTERPRISES

Public enterprises in Pakistan, which have autonomy in financial and administrative matters, were established to foster economic growth and national development. Some were meant to undertake and control strategic industries in the national interest, as in the cases of ship building and steel production. Others were established to promote the export of important crops, such as cotton and rice, and generally to regulate the import of certain essential items. Specialised development finance institutions were created to provide credit for industry, agriculture and businesses, and some were set up to produce capital and industrial engineering goods for the development of technological skills.

In Pakistan there are 255 Federal public enterprises covering the major economic sectors including banking and finance, industry, trade, communica­tions, water, power, oil and gas, mining, urban and regional development, and insurance. There are 3 departmental undertakings, 43 public corporations, 27 autonomous bodies and 182 companies/projects where the government has majority ownership.

Departmental enterprises, which exist at both national and provincial levels, function in much the same way as government departments with the exception that they are required by law to implement commercial accounting in order to produce true financial results. Telecommunications, postal, rail and printing services are provided by these departmental enterprises.

Public corporations are established under special legislation of the Federal and Provincial Governments or under the Companies Act 1913/Companies Ordinance 1984. They are usually holding corporations of a number of public companies in the industrial sector. The State Cement Corporation of Pakistan, for instance, is the holding corporation of 14 public companies engaged in cement production. The Corporation holds all or majority equity in these companies on behalf of government and administers them.

Autonomous bodies are set up under legislation for undertaking specific objectives. These bodies cannot be classified as corporations or companies. Examples of such bodies include the Pakistan Tobacco Board, Port Qasim Authority, National Book Foundation, the Punjab Livestock Development Board and the Sind Agricultural Organisation.

Companies in the public sector, as in othercountries, are incorporated under the Companies Act 1913 or the later Companies Ordinance 1984. These are either managed by the respective Corporations or function independently such as the Indus Gas Company and the Karachi Shipyard and Engineering Works.

1.2.    ORGANISATIONAL STRUCTURE

Public enterprises in Pakistan may be divided into distinct sectoral catego­ries such as banking, development finance institutions, life insurance, trade and commerce, industries, and oil and gas. In the interests of organisational and operational efficiency and effectiveness many enterprises are supervised and controlled by a higher level management body. The Pakistan Banking Council, for instance, has supervisory control over the nationalised banks. Basic manufacturing industries - such as fertilisers, cement, engineering tools, chemi­cals, and automobiles - are grouped and managed by sectoral holding corpora­tions supervised by the concerned Ministry. The nationalised life insurance companies, on the other hand, after a brief period under the Life Insurance Management Board, merged into the giant State Life Insurance Corporation of Pakistan.

The management of each departmental undertaking is headed by a chief executive appointed by the Prime Minister or the Minister concerned or, in the case of a provincial body, by the Chief Minister of the particular province. At both national and provincial levels the appointing authorities also exercise powers of removal.

The Prime Minister also appoints the chairman and board members of corporations and autonomous bodies. The numbers on the boards vary according to the size of the enterprise but normally include representatives from the relevant ministries, Central Board of Revenue, Banking Council and others with the necessary expertise in that particular field. The number and composi­tion of management boards for government-owned companies are detailed in the Articles of Association establishing the company. Appointments to, and removals from, boards are made by the respective Ministers.

1.3.    STAFFING AND TRAINING

Except for the appointment of the chief executives, the officers of depart­mental undertakings are appointed by the Public Services Commission and other employees by the managements themselves. In the case of other public enterprises, staff below the level of general manager are appointed by the boards of management. At the general manager level, the approval of the Minister concerned is mandatory. Staff are usually recruited on a permanent basis. In the professional and technical areas, personnel are recruited on contract, through secondment from the government, and by the re-employment of retired government and military officers. Remuneration varies between enterprises.

Overall the quality of professional and technical staff is satisfactory and training within the country and overseas is provided as necessary. Institutions such as the National Institute of Public Administration, Pakistan Institute of Management and Administrative Staff College also supplement the internal training programmes of individual enterprises.

1.4.    FINANCING

Public enterprises were established initially with government equity capital. Shares acquired by the government in the nationalised industries were trans­ferred to the respective corporations in exchange for corporation stocks. Also, development loans given to a number of holding corporations were converted into preferential and ordinary stock. These corporations were also expected to convert their investments in companies into debt and equity thus ensuring a wider capital structure.

Except where government sanction is required, all enterprises have jurisdic­tion in determining most of the rates and prices of products. The income derived is generally inadequate to cover operational costs but the deficits are covered by grants and subsidies from the government. Departmental undertakings receive additional appropriations but other enterprises receive grants on a quarterly basis to be used only for specific purposes. Any unspent balances are required to be surrendered at the end of the financial year.

In Pakistan public enterprises do not receive special dispensations such as tax exemptions from the government. However they are allowed to borrow from domestic sources, but foreign loans are arranged by the government. The usual conditions are that loan moneys must be spent on approved purposes only. The federal government underwrites the repayment of all foreign borrowings and some local loans. In some cases, default in loan repayments are converted to equity in the enterprise concerned. Loans from the government are given at concessional rates of interest, but other borrowings both domestic and foreign are usually at market rates.

The government holds equity in public enterprises to exercise control in areas of national interest. Private equity participation in enterprises is mainly to increase their share in the economy of the country.

Inter-corporate financing in not allowed, but surpluses generated by corpo­rations and autonomous bodies are retained and ploughed back as fresh capital investment in new and existing ventures or used for lending purposes. Corpo­rations/companies also distribute a part of their surpluses to their shareholders in the form of dividends.

2.    GOVERNMENT CONTROLS 2.1 MINISTERIAL CONTROL

In Pakistan public enterprises in the form of departmental undertakings are usually controlled by a manager, under the authority of a particular Minister. These departmental undertakings operate within the departmental administra­tive framework. The authority of the Minister extends to all matters involving major decisions. Staff of the departmental undertakings are accountable through the various levels of the departmental hierarchy to the Minister and he in turn to the Parliament, in common with the normal lines of accountability for other activities of the department involved.

In the case of statutory corporations, it is usual for the legislation establishing the body to set out the functions to be performed by the body and the extent of its powers. The responsible Minister is often required to authorise contracts over a certain amount, to approve estimates of expenditure, and determine product prices in consultation with the Minister for Finance. The Minister involved is also responsible to the Parliament even though legislation may have granted the board or commission of the corporation wide powers. The Minister's authority is basically one of policy, e.g. proposing legislative amendments where such are required or making a major policy statement about the operations of the corporation. Ministerial control extends to the appointment of or the making of a recommendation for the appointment of members of boards or commissions and senior executive staff.

The extent of direct ministerial control in the day-to-day functioning of nationalised companies is minimal. Control is usually exercised by the ministe­rial appointment of members of the board of directors, in conjunction with guidance by a policy directive which sets out general guidelines. The controlling Minister nevertheless is held accountable by Parliament for the policy and general operations of the company.

The Minister does not control the appointment of staff directly. This control is exercised by the selection committees or boards on whose recommendations the appointment orders are issued. For departmental undertakings, appoint­ment of the chief executive is made by the Prime Minister or Minister, or, in the case of provincial governments, the Chief Minister. In the case of other public enterprises, appointments to and removals from the board of management are similarly made by the Prime Minister in the case of enterprises controlled by the federal government and the particular Chief Minister in the case of provincial governments. For government-owned companies, the appointments and removals are made by the respective Ministers.

Periodical reports on the operations and working of the enterprises are submitted to the administrative ministry concerned. These reports are dis­cussed between the Ministers and top management of the various enterprises.

2.2.    CENTRAL AGENCY CONTROLS

The initial recruitment of staff personnel for departmental undertakings is centralised through the Public Service Commission. For other enterprises, recruitment is done by the respective boards of management. Central agency controls also exist for regulating the conditions of service of staff of public enterprises.

The budgets of such entities are approved by the National or Provincial Assembly, as the case may be. Borrowings from domestic and foreign sources in respect of these enterprises are also made by the government. In the case of other public enterprises, all foreign loans must be approved by the federal government. Where necessary, controls are also exercised by the government over the pricing policies of public enterprises.

The performance evaluations of public enterprises are made by central agencies, viz. the Monitoring Cell of the Planning Division, Performance Evalu­ation Cell of the Auditor-General, and Expert Advisory Cell of the Ministry of Production. Performance evaluation by the latter is, however, an internal evaluation which covers only about seventy enterprises operating under the administrative control of the Ministry of Production. Besides, its scope is limited to evaluating the enterprise's performance against pre-negotiated targets set on the basis of a few selected criteria, financial profitability being the main one. Performance evaluation by the Auditor-General's organisation on the other hand, besides being an external evaluation, is a more comprehensive exercise and encompasses analyses, on sound commercial and business standards, of all the operating areas of an enterprise with a view to forming a firm opinion about the state of its health and making recommendations for corrective actions. Further, no diversification or substantial increase in the existing activities of public enterprises can be undertaken without the sanction of the Central Planning Agency.

2.3.    OPERATIONAL FLEXIBILITY - AUTONOMY

Public enterprises manage their day-to-day functions independently of the government. The objectives, functions and work procedures of each division of a public enterprise are laid down in the respective manuals.

While financial activities of departmental undertakings are totally regulated by the government, other public enterprises have financial autonomy to the extent provided in the legislation under which a particular enterprise has been established. Accordingly the budgets of non-departmental enterprises are approved by the respective board of management.

Public enterprises generally determine the rates, fees and product prices without the necessity to seek approval by the government. In some cases of national importance, however, the government fixes the relevant tariffs.

3.    ORGANISATIONAL CONTROLS

Organisational control mechanisms to monitor the operations of public enter­prises depend on the particular form adopted on establishment, e.g. autonomous bodies, statutory corporations, and holding corporations which control other public sector companies incorporated under company law.

3.1.    BOARD OF DIRECTORS - POWERS

The management of each departmental undertaking is usually vested in a chief executive who is required to follow the regulations of the parent depart­ment. For each of the other types of public enterprises, there is a board of management which normally consists of a chairman and a few members, the number depending upon the size of the enterprise. The board members include representatives from different ministries, Central Board of Revenue, and Bank­ing Council who have necessary expertise in the relevant fields.

For enterprises in company form, the size and composition of the board of management is specified in the Articles of Association. The board exercises its functions within the policy guidelines laid down by the responsible Minister. Rules and regulations governing the day-to-day administration are approved by the board of management of the holding corporation in the case of subsidiary companies established under the Companies Ordinance, 1984.

The budgets of public enterprises, other than departmental undertakings, are approved by the respective boards of management. The boards are also empowered to fix remuneration of their members and to recruit personnel to the executive grades.

3.2.    FINANCIAL MANAGEMENT AND INFORMATION SYSTEMS

In Pakistan appropriate management reporting systems monitor the per­formance of public enterprises. Reports on subsidiary companies are made to the boards of holding corporations or other bodies monthly, quarterly, or half-yearly or annually. Other public enterprises report to the ministry responsible on a quarterly, half-yearly or annual basis.

Periodical reports on the operations and working of public enterprises generally cover the areas of financial returns, physical production, industrial relations, pricing decisions or other market developments, and completion of construction projects on hand. These reports are discussed between the top management of the enterprise and officials from the relevant administrative ministry. Reports may also be discussed with the Minister concerned. Public enterprises are required to prepare performance budgets, which are also discussed before acceptance by the administrative ministry.

The representatives of the administrative ministry on the board of manage­ment submit operating reports as required to that ministry, and to the Minister. Such reports may also be sent to the Finance Ministry or Planning Ministry if so required. These ministries also obtain reports regarding the generation of internal funds and attainment of planned targets.

The annual report of the relevant ministry also contains information about the functioning of public enterprises under the administrative control of that ministry.

3.3.    ACCOUNTING STANDARDS

Departmental undertakings follow the accounting principles and standards prescribed by the government. Other public enterprises are required to follow the accounting principles and standards prescribed by the national accounting bodies. They also have to adhere to the statutory provisions laid down in company and taxation legislation. The form of the financial statements required to be prepared by public enterprises are either approved by the President in consultation with the Auditor-General or are prescribed by company legislation. The SAI does not, however, participate in the preparation of the financial statements of public enterprises. This function is the sole responsibility of the individual enterprise concerned.

4.    LEGISLATURAL CONTROLS

4.1.    BUDGETS

The National Assembly exercises control over the finances of public enterprises through the examination of audited financial statements and the audit reports submitted by the Auditor-General. The legislature also reviews budgetary proposals where a specific subvention is to be voted, i.e. appropri­ated. Borrowings by public enterprises are controlled by the legislature.

4.2.    LEGISLATURAL COMMITTEES

The audit reports on financial statements relating to public enterprises submitted to the legislature are referred by it to the Public Accounts Committee. This Committee examines these statements and reports together with any departmental explanations, in the presence of representatives of the depart­ment and of the Auditor-General. The Public Accounts Committee then formulates its own recommendations, and reports to the National Assembly (the lower House of the Parliament).

The reports of the Public Accounts Committee on performance evaluation, and its views and directives, have an impact in increasing the awareness of company managements towards their responsibility for promoting improve­ments in executive efficiency. The Committee also expresses views from time to time on evaluation procedures and methodology, which are taken into account when making modifications.

In addition, there are Standing Committees for each ministry, constituted by the Senate (the upper House) and National Assembly. These committees conduct general reviews of the work of individual ministries and, in the process, may visit the public enterprises involved.

5.    AUDIT OF PUBLIC ENTERPRISES

5.1.    ROLE OF THE SUPREME AUDIT INSTITUTION

Originally only departmental undertakings were subject to external audit by the Auditor-General of Pakistan as SAI of the new independent republic. Now other forms of public enterprise come under the auditing jurisdiction of the SAI, either directly or indirectly.

In the early years of the Islamic Republic of Pakistan, there was no legal compulsion for non-departmental forms of public enterprise to be audited by the SAI, while it was similarly optional for the consent of the SAI to conduct the requested audit. All public corporations were eventually brought within the auditing mandate of the SAI by the Pakistan Audit and Accounts Order 1973.

Nationalised companies, however, remained outside the purview of this decree of the President but were still subject to annual audit and certification by commercial auditors under the provisions of company legislation applicable to the private sector. Much of this substantive independence of government companies was eroded by a policy decision of the government in 1977 to establish a special unit within the SAI - the Performance Evaluation Cell - to provide independent information on their operational performance and effi­ciency to the Public Accounts Committee of the legislature. Although the new unit had no responsibility for routine audit, it was given access to all internal records and other documents of individual companies to facilitate a comprehen­sive analysis and assessment consonant with the commercial and business criteria of the private sector.

Under the relevant provisions of the Companies Ordinance, 1984, the external audit function is undertaken by commercial auditors who are appointed by the shareholders. In the case of certain autonomous bodies/public corpora­tions, the appointment of external auditors is required, under the statutory provisions, to be made by the federal government. In such cases auditors are appointed in consultation with the Auditor-General. External auditors report to the shareholders. In addition, ail public companies and autonomous bodies established by the Federation or a Province are audited by the SAI in the interests of the legislature, apart from those of the shareholders.

The financial statements of government owned or controlled companies audited by commercial auditors are not required to be tabled in the legislature which consequently cannot exercise any direct control over such enterprises through the reporting process. Audit reports by the SAI on the performance and efficiency of these companies are, however, tabled in the legislature.

The SAI does not act as consultant or adviser to the management of public enterprises. Similarly, the SAI is not empowered to correct the decisions of management of public enterprises. Deficiencies in financial administration of individual enterprises are corrected either directly by the enterprise itself on the audit recommendations of the SAI, or indirectly through the reports of the SAI to the Public Accounts Committee.

5.2.    TYPES OF AUDITS UNDERTAKEN AND AUTHORITY

The SAI conducts compliance and regularity audits of the public enterprises in the form of departmental undertakings under Article 169 of the Constitution of the Islamic Republic of Pakistan. Similar types of audits of public corporations are undertaken by the SAI under the Pakistan Audit and Accounts Order 1973.

The SAI conducts the audit attesting the financial compliance and regularity of government owned or controlled companies. As noted previously, the external auditing mandate for such companies is vested in auditors from the private sector, and is now subject to relevant provisions of the Companies Ordinance 1984. The SAI also conducts performance and efficiency audits of these government owned or controlled companies under a 1977 policy decision.

5.3.    OBJECTIVES AND SCOPE OF AUDITS

The objectives and scope of audits of public enterprises conducted by the SAI focus on three elements:

1. regularity, where moneys disbursed are legally available for and applied to the designated purposes;
2. compliance, where rules and regulations governing the expenditure are observed; and
3. propriety, where expenditure decisions are taken correctly in accor­dance with specific criteria.

In addition, performance audits and performance evaluation by the SAI are aimed at promoting the efficiency, economy and effectiveness of public enter­prises. Performance audits relate to appraisals of government programmes and development projects, involving comprehensive reviews to ascertain the levels of efficiency and economy achieved in planning, implementation and operation. As these reviews also measure effectiveness in achieving results, evaluators are trained in discounted cash flow analysis and input-output budgeting tech­niques.

5.4.    INTERNAL AUDITS

There is no statutory requirement for public enterprises in Pakistan to have an internal audit function. Individual enterprises, however, have usually estab­lished such a function with variable results. Generally the internal audit function of public enterprises has proved ineffective, as evidenced by adverse reports of the SAI.

The various public enterprises do not commonly have audit committees to advise on internal auditing procedures and to generally oversee the auditing function. Further, commercial auditors are not engaged to perform the internal audit function.

5.5.    USE OF COMMERCIAL AUDITORS

The SAI does not have the power to engage commercial auditors on contract. However, some autonomous bodies are required to appoint commer­cial auditors in consultation with the SAI to conduct the statutory audit required by companies legislation in the interests of shareholders, while the SAI conducts a parallel audit of the operational performance and efficiency of the companies in the interests of the legislature.

In these cases where the public enterprise is subject to audit by the SAI, the enterprise does not have the option of dispensing with the SAI and substituting a commercial auditor. In such instances the appointment of the SAI is a statutory requirement which cannot be changed by either the SAI or the enterprise concerned.

5.6.    AUDIT METHODS AND TECHNIQUES

The principal audit methodologies employed by the SAI are pre-auditing and transactions-based auditing. Questionnaire packages are commonly used in the audit.

5.7.    ORGANISATIONAL MANAGEMENT FOR AUDIT

The SAI operates a special staffing group for the audit of public enterprises. As far as possible and practicable, specially trained and qualified staff are engaged in the audit. However the overall efficiency of such audits has tended to be limited by the difficulty of recruiting professionally qualified staff for this special staffing group.

Specific audit guidelines are issued for the audits. Accordingly the relevant audit work is carried out using the various manuals prepared for this purpose by the SAI.

5.8.    PERIOD AND FREQUENCY OF AUDITS

Most public enterprises are required to be audited on an annual basis but, in some cases, biennial and even triennial audits are considered sufficient. Audits are not undertaken until the enterprises concerned have prepared their annual accounts. In addition to the normal compliance and regularity audits prescribed by the Audit and Accounts Order 1973, performance evaluation and performance audits are also carried out, as mentioned previously.

5.9.    AUDIT REPORTS

The reports of the SAI relating to public enterprises within the jurisdiction of the Federation are submitted, according to the Constitution, to the President. Similarly, reports of the SAI relating to Provincial undertakings are submitted to the Governor of the relevant province.

5.10.    UTILISATION OF AUDIT FINDINGS AND REPORTS

The audit reports of the SAI are followed up by the Public Accounts Committee of the National Assembly. The Committee's examination of perform­ance evaluation reports, and its subsequent views and directives, have had considerable impact in increasing the awareness of company managements towards their responsibility for promoting executive efficiency. The format, content and usefulness of the SAI reports have also been subject to the Committee's views which have been taken into account in modifying evaluation procedures and methodology.