STRENGTHENING corporate governance in public sector enterprises is a serious matter for economic recovery.

The weak performance of large public sector enterprises (PSEs) in key Pakistani industries is a drag on both public finances and growth, and has deteriorated the country’s fiscal balances, according to Jeffrey Franks, who recently headed a delegation of the IMF to Pakistan.

When the IMF and the government reached a tentative July 4 agreement on a three-year, $5.3 billion Extended Fund Facility, the IMF cautioned that approval of the agreement by its executive board in September will depend on Pakistan’s timely completion of several conditions, including reforming PSEs.

In the last five years, the federal government has borrowed 2.7 trillion rupees from the IMF, while spending 2.3 trillion rupees to finance the losses of PSEs through equity injections, subsidies, grants, loans and loan guarantees. Improving corporate governance in PSEs would be an important way to help address this problem.

Indeed, the recently-approved rules for PSE corporate governance stipulate that these companies’ boards appoint professional managers as CEOs, thus reducing government interference in their operations, and allowing the PSEs to take the steps needed to cut losses and increase earnings.

The ministry of finance has moved swiftly on some of the IMF’s conditions, including tackling the issues of circular debt and energy, but improving PSE governance must not be left out of the equation. Yet historically, this has been one area where the country has dragged its feet. Then finance minster Shaukat Tareen called for a Code of Corporate Governance for PSEs in 2009, but the new corporate governance rules for PSEs were only approved in March 2013.

Moreover, according to observers, the government has delayed implementation till August 8, and tried to weaken these rules before they are put into effect. For instance, the Companies Ordinance and the stock exchange listing regulations approved by the Securities and Exchange Commission of Pakistan give a company’s board of directors the power to appoint its CEO.

But in the case of PSEs — even listed PSEs — the government amended the draft rules, creating a system whereby the board would propose three names, from which the government would choose the CEO.

Then in July, in a surprise move, the government ordered the creation of a three-member commission to appoint those CEOs. The government based its decision on a recent Supreme Court ruling, the reasoning of which itself has been called into question by some legal analysts since it is in conflict with the sections 198 and 199 of the Companies Ordinance, also enacted by the Parliament.

At this point, corporate governance specialists can only hope that the newly-created commission, rather than assuming the power of appointing CEOs, will abide by the Companies Ordinance, listing regulations and international best practices on corporate governance. The commission could reframe its terms of reference, asking the government instead to entrust it with the task of appointing competent professional directors to the PSEs boards. These directors, in turn, would be accountable to the government and minority shareholders for the companies’ performance, and would appoint CEOs who are responsible to the boards.

The end result will be to strengthen the management of the country’s PSEs, improving their financial performance and eventually moving them toward privatisation — which was one key result of the prime minister’s first tenure. This, in turn, would help stop the losses to the federal budget from the PSEs, but also help put the economy on a long-run sound fiscal footing.

The writer is the Pakistan Country Director at the Center for International Private Enterprise, an affiliate of the US Chamber of Commerce. He was a member of the taskforce that drafted the rules on PSE corporate governance.