Need for Increased Focus on Corporate Governance Survival Strategy for Public Sector Telecom Entities After Deregulation

Public sector enterprises in the world in general, and in Pakistan in particular, have always been vulnerable to corporate failures wherever deregulation has taken place. Pakistan has already experienced the demise of its public sector corporations in almost all the sectors of industry. These public sector corporate entities simply could not withstand the rigors of competitive markets due to many reasons. One of these reasons is a subject of this paper. Consequently, these corporations became a burden on already overtaxed taxpayers and the government had to seek their disposal at prices much lower than their real worth.

Telecommunication sector was, heretofore, highly monopolized by erstwhile Pakistan Telecommunication Corporation (PTC). As a result of re-organization of telecom sector through Pakistan Telecommunication (Re-organization) Act, 1996, the PTC was wound up and was survived by the following organizations:

The PTCL was allowed an exclusive monopoly of seven years from January 1996 to December 2002 during which no other telecom entity, except the NTC, could sell telecommunication services. The Government was obliged to deregulate the telecom sector after expiry of the exclusivity, from January 2003. The Telecom De-regulation Policy has already been announced in July 2003 paving way for entry of other market players, most probably telecom giants operating in other regions. The licenses to be issued under the policy are of two types; long-distance international (LDI) and Local Loop (LL). The PTCL, as the incumbent operator, is obliged under the policy to extend facilities like interconnection and local loop unbundling to the competitive carriers. The PTA has already issued necessary guidelines for these two facilities.

The PTCL and NTC are exposed to the risk of cutthroat competition by competitive carriers who are already well placed in the global market and are adequately experienced and properly organized for competitive environments. In order to survive in the de-regulated era, these public sector entities have to re-organize themselves properly and take drastic measures on war footings. If I may be allowed to borrow the phrase from Tom Peters, a management guru of the modern times, these entities must create chaos for re-organizing themselves and then thrive on it. There are various areas, which can be focus of attention for these entities. I would, however, confine this paper to the area of corporate governance.

Corporate governance in public sector telecom entities should receive increasing attention for the reasons that there is always a risk of corporate failures, both for public and private sector, whenever markets get deregulated. This deregulation will bring increasing pressures on these entities to perform when pitched against the global telecom giants and when the regulator, if and when it acquires total sovereignty, prescribes tough standards of quality heretofore unknown to these entities. In this situation, stakeholders’ relationship with these entities, and their expectations, will assume increasing complexities.

For public sector entities, corporate governance must recognize the differing accountability relationships that exist in the context of Pakistan. Ownership of these entities rests with taxpayers represented by the Parliament while management responsibility rests with Government in the Ministry of Information Technology & Telecommunication that has the power to appoint and sack directors and members of the governing boards of these two entities. The situation in Pakistan is particularly peculiar. The PTCL that has 88% ownership by the taxpayers is immune to taxpayers’ accountability because Supreme Audit Institution (SAI) of the country, which is an arm of parliamentary accountability, has no jurisdiction to conduct external audit of the company accounts under Pakistan Telecommunication (Re-organization) Act, 1996.

The accountability relationship of the other entity, namely NTC, with the taxpayers is also blurred because Article 171 of the Constitution which requires the SAI to report the results of audit on the accounts of the Federation and the Provinces to the President for eventual review by the Parliament through Public Accounts Committee (PAC), is silent about similar reporting obligation of the SAI in the case of corporations, though Article 169 requires the SAI to audit the accounts of such corporations. This clear absence of parliamentary accountability creates a vacuum for appropriate corporate governance paradigm. In this situation, therefore, it is incumbent upon the Government to require these entities to meet the expectations of the stakeholders regarding performance, transparency, integrity and accountability.

In view of above, the public sector telecom entities in Pakistan should ensure that generally accepted principles of corporate governance are properly adhered to. In this regard, the Government and/or these entities should take all of the following measures.

For proper corporate governance, the Boards of Directors and Management of these two entities are required to be independent and competent in order to become effective. While nominating members on these boards, the Government should exercise special care to ensure that the interests of the entities do not get compromised due to conflicting personal or business interests of the members. These members should be selected on merit keeping in view their experience in, and exposure to, the dynamics of telecom market. Selection criteria other than this merit will spell disaster and will hurt the commercial interests of these two entities much ahead of the commencement of actual competition.

Corporate governance principles require that these telecom entities should have clearly documented objectives and should establish clear roles and responsibilities within the organization. The entities should also ensure that these roles and responsibilities are clearly understood by everyone in the organization from the Board to the lowest level of the management. In the history of Pakistan’s corporate sector, there have been unfortunate instances of undue interference by the Ministries’ bureaucracy, which had no clue to the business, in the day-to-day affairs of these corporations with the result that no clear responsibilities could be fixed for the collapse of public sector. The Government should ensure that its role confines to policy directives only and it does not get down to transacting the business of these entities which is the responsibility of experienced professionals. For appropriate corporate governance, the respective Boards and managers should be made fully responsible for performance of these entities. Failing in this area will hamper the building of constructive relationships within the entity. In addition to this, the corporate accountability for poor performance and for failure to meet the expectations of taxpayers and stakeholders will be impossible to enforce in the absence of clear roles and responsibilities.

The public sector telecom entities should make effective monitoring arrangements within the organization. This monitoring system includes establishment of internal control mechanisms, a clear policy on internal audits and appointment of independent audit committees reporting to no one except the Board. While there is some arrangement for internal audit, this audit has to report to the management and not to the audit committees of the Board, which compromises independence of audit. The quality of internal audit within these entities, therefore, becomes questionable. The internal auditors should be adequately equipped with appropriate professional skills, should be truly independent of the management and should have a comprehensive view of the best international business practices, and should also have an understanding of all the spheres of the business of the entity. This internal accountability will keep the managers on their toes and they will be under pressure to perform in a transparent manner. We should keep in mind that it was independent internal audit in telecom giant of the USA, MCIWorldCom, which detected grave financial inadequacies committed by the management in order to cheat the stakeholders. In today’s telecom market, internal auditors will have to act in a bold manner, and they can deliver in this manner only in the environment of independence.

Risk management is a critical element of corporate governance and in the liberalized markets, when businesses are exposed to a variety of risks, conventional reactive approach is neither sufficient nor relevant anymore. These risks include financial risks, risk of losing subscribers’ confidence, risk of losing credibility with private sector partners, risk of unwarranted and illegal external interference and above all, risk of failure in view of all these risks. It is to be seen whether our public sector telecom entities incorporate risk management explicitly in their governance processes, or do these entities include risk management into strategic and business planning processes. Governance-specific information on these entities is rarely available through their Annual Reports, and little information that is readily available suggests that these organizations do not explicitly identify and asses their key risks or they do not have any risk management strategy or policy in place. The absence of a risk management system leads to inefficiencies in prioritizing and allocating resources to manage risk.

Transparency through good external reporting is an essential element of corporate governance in case of public sector telecom entities in Pakistan. For the time being, this element is totally non-existent in view of the absence of external public accountability through the SAI and Public Accounts Committees. Till such time that appropriate transparency arrangements are put in place, the absence of this critical element can be compensated through appropriate accountability by the regulator, provided the regulator is truly independent of the influence of vested interests of any of these entities.

In line with the Government policy to promote good governance, the corporate entities in general, and telecom entities in public sector in particular, need to explicitly include corporate governance principles in their mandate. This assumes greater significance in view of accountability vacuum when the state auditors have no jurisdiction to report on one of these entities with respect to the fairness of its financial statements, its performance, and for the benefit of public, any waste of public resources or any lack of probity or financial prudence in the use of these resources. In the deregulated environment, adherence to the corporate governance principles will be one of the critical survival factors for these entities.

*    The author is currently Director (Audit Policy) in the Office of Auditor-General of Pakistan after having served in a public sector telecommunication entity for over five years.