power concerning day-to-day operational matters, as the case of Pakistan powerfully shows (see Box 9).

# **<mark>Box 9 The Case of Pakistan</mark>**

<mark>Though WAPDA was largely unbundled in 1998, the successor companies have not been given, so far financial autonomy and WAPDA has continued to tightly manage the affairs of the sector. While perhaps useful during a transition period, until the companies and the government build capacity, this arrangement substantially constrains the autonomy of the decision making powers of the companies and contains significant conflict of interest. Boards of Directors are not fully empowered to effectively govern the companies within the mandate under the Company Ordinance and Memorandum and Articles of Associations of the companies. The delegation of powers for these companies usually requires any item of material significance to be referred to WAPDA.</mark> <mark>Moreover, WAPDA is still considered as the focal point for technical advice, endorsement of decisions and the final approval authority. For instance, chairman PEPCO – who has until recently been also Chairman WAPDA - exercised the ownership function, including the appointments of all the Board of Directors, including the representative of the private sector. The integration of chairmanship of PEPCO and WAPDA contributed to further constrain the autonomy of the decision making powers of the companies and contains significant conflict of interest. Generally, 3 out the 7 directors are from the private sectors, with the exception of IESCO, that has 4 nonexecutive directors. Although their presence in the Board has been a welcome improvement, full value has not been realized due to the limitations described above.</mark> <mark>WAPDA has until recently also exercised full control on all staff on and above grade 18 for all WAPDA-successor entities, both in terms of selection and promotion. Many companies face challenges in exercising autonomous decisions in HR. Some of them face difficulties in increasing the salary to attract and/or keep suitable candidates for crucial staff, including Chief Financial Officers. Moreover, promotion is mostly based on seniority, rather than merit. Performance-based pay for the staff has not been introduced and there are little incentives to improve performance.</mark> _<mark>Source:</mark>_ <mark>World Bank Pakistan: Transmission and Distribution Power Project, Aide de Memoire, 2007</mark> More attention should also be paid at the interface between regulatory rules and internal incentives: "sticks" (penalties) for SOEs are problematic and "carrots" may not translate into incentives within the organization, given civil service salary constraints. More credible penalties should be considered beyond the traditional ones under external regulatory schemes. How can the regulator influence internal reward systems for SOEs? These dilemmas have not yet been adequately addressed. However, even in the absence of a sectoral regulator, the Ministry of Economy and/or Finance -- as the steward for citizen/taxpayer investments -- could be instrumental in devising contractual arrangements, governance/accountability procedures, and incentive programs (with "hard" targets") that promoted strong performance (see Box 10).

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