Final Year Research Project

Transparency and Accountability in State-Owned Enterprises of Pakistan:

An Analytical Study of Lessons from the International Anti-Corruption

Regime.

SUPERVISOR

Ma’am Ammara Amer

GROUP MEMBERS

Marwan Kazim (01-177161-022)

Muzamil Hussain (01-177161-033)

Department of Law
 Fall 2020

Table of Contents

1. TITLE ................................................................................................................................................... 3

2. RESEARCH STATEMENT ................................................................................................................. 3

3. INTRODUCTION ................................................................................................................................ 3

4. LITERATURE REVIEW ..................................................................................................................... 7

5. RESEARCH OBJECIVES .................................................................................................................. 13

6. RESEARCH QUESTIONS................................................................................................................. 13

7. RESEARCH METHODOLOGY ........................................................................................................ 14

8. TENTATIVE OUTLINE .................................................................................................................... 14

9. BIBLIOGRAPHY ............................................................................................................................... 17
 1. TITLE

Transparency and Accountability in State-Owned Enterprises of Pakistan: An Analytical

Study of Lessons from the International Anti-Corruption Regime.

2. RESEARCH STATEMENT

Devising an efficient accountability and transparent legal framework on the parameters of

International Practices and laws, to tackle deeply rooted culture of corruption and lack of

transparency in policies of the Public Entities.

3. INTRODUCTION

The Scourge of Corruption has created the situation of insatiable interests and it enhances

economic and political insecurity among masses. While corruption in State-owned Enterprises

severely dismantles the essential social contract between state and citizens, the misappropriation

of Public funds by Public Officials, accumulated through stringent taxation creates trust deficit

between State and its Subjects. Growing inequality among masses, erosion of democracy in State

institutions and widening trust deficit are some of the reasons behind corruption.

Prevention of corruption requires the holistic identification of its different dynamics. The

menace of corruption consists of numerous illegal and malicious actions, which will be

enumerated at length in this research paper. Though, it is often viewed as a public-sector issue,

owing to abuse of entrusted power by public servants for personal gains. It is pertinent to

acknowledge and prevent the impacts of corruption in development sector, discouraging

legitimate foreign Investment.

 Corruption has many forms, some of its behaviors include 1:

 Public servants demanding or taking money or favors in exchange for services.

 Politicians misusing public money or granting public jobs or contracts to their sponsors,

friends and families.

 Corporations bribing officials to get lucrative deals.

According to the United Nations Convention against Corruption, corruption is a key

element in economic underperformance and a major obstacle to poverty reduction. 2 The level of

corruption exposed recently – in the ‘Panama Papers’, ‘Lux Leaks’, ‘Paradise Papers’ and

‘Luanda Leaks’ should compel national and global anti-corruption agencies to devise

international mechanisms with mutual legal assistance to counter the corruption that benefits

individuals in high positions, prejudicing ordinary people. International experts agree that high-

level corruption deprives governments of allocated resources for vital public services such as

health care, education, housing, food and basic infrastructure. 3 This crime of corruption has

ability to affect citizens in large numbers without having the cognizance.

There is strong awareness among the global community that corruption poses serious

threats to development goals and that international development agencies have a common

interest in managing and reducing, to the extent possible, the internal and external risks to which

aid activities are exposed, in order to obtain effective use of aid resources.

1
Transparency International, ‘What is Corruption’ <https://www.transparency.org/en/what-is-corruption> accessed
20 August 2020
2
Transparency International, ‘The Impact Of Corruption On Growth And Inequality’ (2014)
<https://www.transparency.org/whatwedo/answer/the_impact_of_corruption_on_growth_and_inequality>
accessed 20 August 2020
3
UNODC, Lima Statement on Corruption involving Vast Quantities of Assets (2018)
 The crucial role of State-Owned Enterprise (SOE) in the global economy, involved in

cross-border investments and trade, and competition with private enterprises, has become

prominent in recent years. SOE are usually the major utility providers and covering a substantial

portfolio of the financial and manufacturing sectors. The fact that in 2003 out of world’s 500

largest companies 102 were state owned is sufficient to take cognizance of misadministration of

SOE.4

This research paper specifically targets the corruption within SOEs of Pakistan,

functioning on public funds for the benefit of general public. Since the inception of Pakistan, its

Public entities have become redundant due to deeply rooted culture of corruption, abuse of

power and lack of transparency in their fiscal policies.

Pakistan continued to perform poorly in the 2019 Corruption Perception Index (CPI).

Pakistan scored 32 points out of 100 and was ranked 120 out of 180 countries in Transparency

International‘s CPI 2019.5 Pakistan lacks comprehensive systems for detecting fiscal risk linked

to SOE. A number of SOE lack an internal audit function for SOE and/or their financial

statements are not systematically subject to independent external audits. This gap can be filled by

establishing information reporting systems and performance evaluation systems thereby

acquiring transparency in financial and nonfinancial information from SOE. This should further

be combined with comprehensive legal and regulatory Frameworks regarding the public

disclosure of financial and nonfinancial information, which in turn is critical for good

governance of SOE.

4 Kim and Ali, ‘Policy Brief, Efficient Management of State-Owned Enterprises: Challenges and Opportunities’
(2017) <https://www.adb.org/sites/default/files/publication/390251/adbi-pb2017-4.pdf.> accessed 20
August 2020
5
Pakistan’s ranking in the Transparency Corruption Perception Index from 1995 to 2015.
 In 2015 the G20 Anti-Corruption Working Group enacted a set of Open Data Principles, 6

which was subsequently ratified by G20 countries. These general principles have compelled

these countries to promote digitalization in government sector and provide greater public access

to and use of data. A case for pragmatic implementation of these principles into the existing legal

framework of Pakistan regulating the right to information will be made. Although, each province

of Pakistan has enacted their law on “Right to Information”, but their objectives remain

unaccomplished till today due to absence of national strategy for execution of this indispensable

right which is significant for accountable and transparent governance.

This paper strives to analyze and reform Pakistan’s existing national mechanisms and

practices for strengthening the accountability and performance of SOE by exploring relevant

International legislations, policies, and practices in global developed economies. Pakistan’s

public corporate regulation will be critically analyzed in the view of internationally settled and

efficient anti-corruption mechanisms as illustrated by the OECD Guidelines on Corporate

Governance of State-Owned Enterprises. 7

Contemporary developed countries have increased the accessibility of their data that can

be freely used, modified and shared by anyone for any purpose. 8 The Concept of Open data has

procured significance as effective instrument in the fight against corruption due to its ability to

increase transparency and accountability in government activities, budgets and expenditures. It

does not only reduce the mishandling and misappropriation of resources but also help secure a

6
G20’s Anti-corruption Working Group, ‘G20 Anti-Corruption Open Data Principles’ (2015)
<http://www.g20.utoronto.ca/2015/G20-Anti-Corruption-Open-Data-Principles.pdf> accessed 25 August
2020
7
OECD, ‘OECD Anti-Corruption and Integrity Guidelines for State-Owned Enterprises’ (2019)
<http://www.oecd.org/daf/ca/Guidelines-Anti-Corruption-Integrity-State-Owned-Enterprises.pdf.>
accessed 25 August 2020
8
Open knowledge foundation, ‘Open Definition’ <http://opendefinition.org.> accessed 25 August 2020
transparent exchange of trust between governments and citizens. Indeed, public interest in ending

corruption and inefficiency in governance has generated a demand for governments to open up

more data and to improve information transparency.

Conclusively, this research intends to briefly introduce internationally recognized

principles for data disclosure and performance management of SOE, in consonance with relevant

elements of the OECD Guidelines on Corporate Governance of State-Owned Enterprises (the

“SOE Guidelines”). Then it takes stock of policy, legal, and regulatory measures for developing

and implementing disclosure measures including aggregate reporting practices and performance

management measures within SOE of Pakistan. The paper will further highlights the SOE-

specific obligations on disclosure and reporting; performance evaluation systems; aggregate

reporting practices; financial and non-financial indicators internal; and external audit functions.

Lastly, the paper will produce a list of issues and recommendations for the consideration of

policy makers.

4. LITERATURE REVIEW

The following research intends to give an insight into the mechanism of accountability

and transparency, the use of open data, the importance of transparency and accountability in SOE

and its effects, the methods of accountability and transparency, the internationally recommended

good governance practices and the laws which govern SOE and the necessity of single legal

framework for SOE in Pakistan. In addition, it also includes measures adopted by different States

for the corporate governance of their SOE.

Michael Johnston in his article “Good Governance” articulates the requirement of Rule of

Law, Accountability and Transparency within the ambit of good governance. Transparency
means substantive and procedural information broadly understandable of official businesses be

made available to the general public with reasonable restriction, on the other hand accountability

means officials must follow, lay down rules and procedures which define processes and

outcomes. However, following procedure of rules should be demonstrated by all the officials. In

his view point applicability of these principles produces legitimate government capable of

playing positive role in official businesses. 9

A State-owned Enterprise is a legal person that is formed by a State in order to carryout

commercial activities on behalf of the State. It can be either wholly or partially owned by a State

and is typically assigned to participate in commercial activities. 10

The report published by Transparency International “Connecting the Dots: Building the

Case for Open Data to Fight Corruption” highlights the use of Open Data to strengthen the

efforts made against corruption. The report articulates different strategies which include changes

in legal frameworks and the use of data standards to help advance the use of Open Data in fight

against corruption.11

Chung-a Park in his paper “Enhancing the Transparency and Accountability of State-

Owned Enterprises” discusses the importance of disclosure of financial and non-financial

information of SOE for the State to determine the progress of those Enterprises. 12

He further sheds light on the Legal Framework adopted by the States in Asia to enforce,

implement and improve transparent and accountable governance combined with disclosure
9
Michael Johnston, ‘Good governance: Rule of law, Transparency and accountability’ (2004) CU
10
Will Kenton, ‘State-Owned Enterprises (SOE)’ (Investopedia, 4 May 2019) accessed 28 August 2020
<https://www.investopedia.com/terms/s/soe.asp> accessed 28 August 2020
11
Jon Vrushi and Robin Hodess, ‘Connecting the Dots: Building the Case for Open Data to Fight Corruption’ (2017)
TI < https://images.transparencycdn.org/images/2017_OpenDataConnectingDots_EN.pdf> accessed 2 July
2020
12
Chung-a Park, ‘Enhancing the Transparency and Accountability of State-Owned Enterprises’(2020) 1070 ADBI
<https://www.adb.org/sites/default/files/publication/561151/adbi-wp1070.pdf> accessed 28 August 2020
measures in SOE to bring it in conformity with International Standards. The paper further laid

down and recommends international practices regarding SOE for the transparency and

accountability in management. It classifies the state ownership model into five different types

and places Pakistan in Decentralized model. It highlights challenges faced by the States in

centralization of SOE, obligation as to transparency and disclosure of the information in SOE. 13

Muhammad Naveed Iftikhar in his paper “State-owned Enterprises in Pakistan: The Need

for Corporate Governance and Private Investment” argues that how flawed institutional structure

and management policies of SOE has consistently effected their performance and has caused loss

of billions to the State. He states the factor responsible for the existing state of affairs in SOE in

Pakistan.14

The author further argues the weakness of corporate governance in SOE in Pakistan

because they operate under different legal framework which results in uncertainty and

inconsistency in the management of SOE.

The paper emphasized upon the fact that there is need to introduce International

recommended corporate governance practices in Pakistan to assure accountability and

transparency as multiple layers of accountability has resulted in ineffectiveness of Transparency

and accountability in SOE. It explains the market phenomena through which SOE are generally

held accountable. It further sheds light into different regulatory framework adopted by different

13
OECD, ‘Disclosure and Transparency in the State-Owned Enterprise Sector in Asia: Stocktaking of National
Practices’ (2017) <https://www.oecd.org/corporate/Disclosure-and-Transparency-in-SOE-Sector-in-
Asia.pdf> accessed 29 August 2020
14
Muhammad Naveed Iftikhar, ‘State-owned Enterprises in Pakistan: The Need for Corporate Governance and
Private Investment’ (2015) <https://www.researchgate.net/publication/283331051> accessed 30 August
2020
countries related to improvement of Corporate Governance and transparency and suggests

improvement of regulatory framework to resolve the challenges faced by SOE. 15

Simon C. Y. Wong in his paper “The State of Governance at State-Owned Enterprises”

discusses developmental reforms for building strong transparency and measures to ensure that

the SOE and Private Companies are competing on a level playing field. 16

The author presents that SOE mainly operate in infrastructure businesses which has

substantial effect on the economy of the States and argues that the SOE should be subject to the

same regulations as privately owned entities. Further the challenges faced by the SOE including

balanced objectives, de-politicization, discipline of the employees and need for independent

board of directors as government servants and officers having political affiliation are not able to

create a balance between objectives of SOE.

The paper presents three areas of development which are crucial to improvement of

governance in SOE, that are Professionalization of Ownership, Independency of the Boards of

Director and Strong Commercial Orientation. The paper further stressed upon the need to clarify

the intervention right of the State in SOE, as excessive government intervention has destroyed

Accountability, Profitability and Productivity of SOE combined with the need of the States to

narrow down the scope of Intervention Right.

The guide published by OECD “Accountability and Transparency: A Guide for State

Ownership” focuses that for a first-class Corporate Governance it is necessary that High Quality

15
World Bank, ‘Corporate Governance of State-Owned Enterprises’ (2014)
<https://openknowledge.worldbank.org/bitstream/handle/10986/20390/9781464802225.pdf> accessed 30
August 2020
16
C. Y. Wong, ‘The State of Governance at State-Owned Enterprise’ (2018)
<https://www.ifc.org/wps/wcm/connect/b1adde06-267d-4d79-bfaf-
62f17de51f4a/PSO40.pdf?MOD=AJPERES&CVID=m7T0xLQ> accessed 30 August 2020
of Transparency and Accountability is ensured. It takes into account the existing general

practices by the States for SOE and determines globally successful practices. 17

It further lays down that the clear objectives of SOE by the State can be considered the

first crucial step towards the accountability and due to non-defined vague and complex

objectives the accountability is greatly hindered. The accountability can be enormously

facilitated by looking into the performance combined with the laid objectives of SOE by the

State.

The paper emphasizes that the State should issue clear Ownership Policy (policy

documents) which helps the SOE and other individuals to understand the long term objective of

the State as an owner. The State must define and review the mandates of SOE transparently and

in doing so it must lay down the goals of SOE. It recommends that the State must ensure that it

has relevant information of SOE on regular basis to review the performance of SOE and publish

the performance report periodically. The paper further discusses and explains the methods of

auditing to improve overall performance of SOE.

Onia Royoa , Ana Yetano and Javier García-Lacalle in their paper “Accountability Styles

in State-Owned enterprises: The good, the bad, the ugly And the pretty” highlight that

information related to SOE must be made publicly available through official websites. The

authors articulate different accountability methods used by SOE and assess the disclosure of data

by Spain’s SOE. They further highlights that Financial Accountability is the main focus of

17
OECD, ‘Accountability and Transparency: A Guide for State Ownership’ (2010)
Spanish Government and there is still dire need of improvement to fulfill the recommendation of

OECD for transparency and accountability. 18

The OECD report “State-Owned Enterprises and Corruption What are the risks and what

can be done?” lays down that through review of National legal framework and adoption of

successful approaches of different State Owned agencies combined with the analysis of recent

experiences the productivity of SOE can be maximized. The report discusses many

recommendations for State-owners to prevent corruption risks by encouraging SOE to enforce

the rules and procedures. The report further deliberates the global discussion on corruption in

SOE and identifies the hurdles that emasculate integrity efforts of State in SOE. The report

suggests combining the current good corporate governance practices and anti-corruption laws to

develop new guidelines for SOE to bring balance between private business and SOE. 19

The report “State-Owned Enterprises in Georgia: Transparency, Accountability and

Prevention of Corruption” recommends that mechanism of Anti-Corruption can be improved by

laying down Standards of transparency and accountability for SOE. The legislation related to the

principles of Accountability, disclosure of information and transparency must be introduced for

all SOE based on international best practices. The report further suggests that mechanism for the

protection of whistleblowers for SOE must be introduced keeping in view the international

practices. SOE must be obligated by the legal framework to publish information and must

entertain requests related to freedom of information. Legal framework must lay down High

Standards of transparent criteria for the selections of board members of SOE. The report further

18
Onia, Ana, Javier, ‘Accountability Styles in State-Owned enterprises: The good, the bad, the ugly ... And the
pretty’ (2019) SAR 156
19
OECD, ‘State-Owned Enterprises and Corruption: What are the risks and what can be done?' (2018)
<https://doi.org/10.1787/9789264303058-en> accessed 1 July 2020
suggests the elimination of political interference in the SOE and also the government should not

interfere in the daily management of SOE to reduce the risk of Corruption. 20

5. RESEARCH OBJECIVES

(i) This research is a legal and analytical attempt, to identify ways and means for developing

more effective anti-corruption mechanisms in SOEs.

(ii) This paper aims to harmonize the national anti-corruption regime with feasible

International practices of transparency in Public Entities.

(iii)This research recommends taking on board all significant stakeholders, for increased

collective action against corruption, by publicizing administrative data of SOEs, in

accordance with Open Data Principles of G-20 Anti-Corruption Working Group.

6. RESEARCH QUESTIONS

(i) What is the concept of Open Data and how effective it has proved internationally in

combatting corruption?

(ii) What legal framework in Pakistan exists for accountability and transparency of SOE

and its effectiveness in tackling all forms of corruption?

(iii) How is it possible to align Pakistan’s accountability framework with International

Anti-Corruption Mechanisms?

(iv) What implementation hurdles affect the process of accountability and transparency in

SOEs?

20
Transparency International Georgia, ‘State-Owned Enterprises in Georgia: Transparency, Accountability and
Prevention of Corruption’ (2016)
 7. RESEARCH METHODOLOGY

By looking at the nature of the work, the following thesis, for the purpose of answering

various questions posed regarding effectiveness and reformation of Anti-corruption policies and

laws regulating SOEs of Pakistan, adopts a qualitative approach as well as the doctrinal aspects.

Qualitative approach: This approach would be adopted in order to determine what constitutes

the act of corruption and the implementation hurdles in accountability laws leading to

maladministration and misappropriation of public assets in SOEs. Moreover, the scope of the

relevant international guidelines as well as role of anti-corruption working bodies and

organizations in curtailing the issue of corruption will be analyzed.

Doctrinal Approach: The following approach is used to determine all the relevant laws or

sources of laws regarding ones topic of research. These laws are then analyzed and interpreted in

order to reach a tentative conclusion. Doctrinal research involves systematic analysis of legal

provisions and legal principles and logical or rational ordering of legal provisions and principles.

In the following research, this approach is adopted to analyze different international and

national frameworks and to propose a global solution to curb corruption in SOEs of Pakistan.

8. TENTATIVE OUTLINE

1. Introduction

1.1. Literature review

1.2. Objectives

1.3. Chapterization

1. Chapter No: 1 Introduction to Corruption

1.1 Defining the Act of Corruption and its forms

 1.2 Costs of Corruption in Pakistan

1.3 Situation of SOE

1.4 Need for Anti-Corruption Mechanisms in SOE

2. Chapter No: 2 Prevailing Accountability and Transparency Frameworks in Pakistan

2.1 Multiple Layers of Accountability

2.2 Weak Corporate Governance

2.3 Evolving Regulatory Structures

2.4 No Accountability through Markets

2.5 Implementation Hurdles

2.5.1 Heterogeneous Regimes for Governance of SOEs

2.5.2 Quality of BoDs of SOEs

2.5.3 Enforcement and Supervision of Corporate Governance Rules

2.5.4 Evolving Regulatory Structure

2.5.5 Political Intervention

2.5.6 Private Corporations Interventions

3. Chapter No: 3 International Recommended Practices on SOE Transparency and

Accountability

3.1 OECD Guidelines on Corporate Governance of State-Owned Enterprises

3.2 Open Data Principles by G-20 Anti-Corruption Working Group

3.2.1 Linking Up Open Data and Anti-Corruption

3.2.2 Data for Improved Governance and Engagement of Citizens

3.2.3 Five Principles to Encourage Greater Citizen Engagement

3.2.4 Pakistan’s framework on Open Data.

 3.3 Ten Anti-Corruption Principles for SOEs

4. Chapter No: 4 Legal and Regulatory Frameworks for improving Transparency and

Accountability of SOEs

4.1 Centralization of State Ownership Function

4.2 SOE-Specific Obligations on Disclosure and Reporting

4.3 Internal and External Audit Functions

4.4 Aggregate Reporting Practices

4.5 Formalizing Performance Evaluation Systems

Conclusions and Policy Recommendations

 9. BIBLIOGRAPHY

ARTICLES

I. Chêne, M. ‘The Impact Of Corruption On Growth And Inequality’ [2014]

II. Iftikhar M. ‘State-owned Enterprises in Pakistan: The Need for Corporate Governance

and Private Investment’ [2015] RG

III. Johnston, M. ‘Good governance: Rule of law, Transparency and accountability’ [2004]

CU

IV. Kim, C and Z Ali, ‘Policy Brief, Efficient Management of State-Owned Enterprises:

Challenges and Opportunities’ [2017] ADBI 2017-4

V. Park C, ‘Enhancing the Transparency and Accountability of State-Owned

Enterprises’[2020] 1070 ADBI

VI. Sonia, R and A Yentano,‘Accountability Styles in State-Owned enterprises: The good,

the bad, the ugly ... And the pretty’ [2019] SAR 156

VII. Vrushi, J and R Hodess, ‘Connecting the Dots: Building the Case for Open Data to Fight

Corruption’ [2017] TI

VIII. Wong C, ‘The State of Governance at State-Owned Enterprise’ [2018]

INTERNET CITATION

I. Open knowledge foundation, ‘Open Definition’ <http://opendefinition.org.> accessed 25

August 2020

II. Kenton,W, ‘State-Owned Enterprises (SOE)’ (Investopedia, 4 May 2019) accessed 28

August 2020 <https://www.investopedia.com/terms/s/soe.asp> accessed 28 August

2020
 III. Transparency International, ‘What is Corruption’

<https://www.transparency.org/en/what-is-corruption> accessed 20 August 2020

REPORTS

I. G20’s Anti-corruption Working Group, G20 Anti-Corruption Open Data Principles

(2015)

II. OECD, State-Owned Enterprises and Corruption: What are the risks and what can be

done? (2018)

III. OECD, Accountability and Transparency: A Guide for State Ownership (2010)

IV. OECD, Disclosure and Transparency in the State-Owned Enterprise Sector in Asia:

Stocktaking of National Practices (2017)

V. OECD, OECD Anti-Corruption and Integrity Guidelines for State-Owned Enterprises

(2019)
VI. Transparency International Georgia, State-Owned Enterprises in Georgia: Transparency,

Accountability and Prevention of Corruption (2016)

VII. UNODC, Lima Statement on Corruption involving Vast Quantities of Assets (2018)

VIII. World Bank, Corporate Governance of State-Owned Enterprises (2014)