AGP questions Petroleum Division as SSGC, PSO, PPL subsidiaries operated with unauthorized boards

ISLAMABAD: The Auditor General of Pakistan (AGP) has questioned the Petroleum Division's oversight after finding that subsidiaries companies of Sui Southern Gas Company Limited (SSGC), Pakistan State Oil (PSO) and Pakistan Petroleum Limited (PPL) operated with unauthorized boards despite a legal clarification requiring federal government nomination of their directors.

According to AGP’s audit report for the audit year 2024-25, three state-owned enterprises, namely SSGC, PSO and PPL, established subsidiary companies and appointed members to their boards without approval or nomination from the federal government.

The audit noted that despite a clarification issued by the Law and Justice Division on January 17, 2024 that subsidiaries directly or indirectly controlled by state-owned enterprises also fall within the definition of state-owned enterprises under the SOE Act, 2023, the Petroleum Division failed to initiate the process for appointing board members for these subsidiaries.

As a result, according to the report, "these companies were operating with unauthorized boards leading to inadequate oversight and accountability, exposing potential risks to the Government's interests in these subsidiaries."

The audit concluded that "due to inadequate regulatory oversight resulted in unauthorized board appointments by SOEs in their subsidiaries."

During the Departmental Accounts Committee (DAC) meeting held on January 2, 2025, the Petroleum Division agreed with the audit observation and informed the committee that the matter would be placed before the Board Nomination Committee. The DAC directed the management to take up the matter with the relevant forum for nomination of boards of directors of subsidiary companies by the Federal Government.

The audit also highlighted several other governance deficiencies in the Petroleum Division's management of state-owned enterprises.

One of the major observations relates to a 24-month delay in reconstituting the board of SSGC.

According to the report, although the Federal Cabinet approved nominations for the SSGC Board on August 9, 2023 and the Petroleum Division issued a notification for the directors' election on August 17, 2023, the election was postponed because the approved nominations were deficient.

The audit observed that the deficiencies primarily stemmed from appointing an independent director as chairperson for two consecutive terms and failing to adequately safeguard the rights of minority shareholders in accordance with the SOE Act, 2023.

According to the audit, "these irregularities and inefficiencies in the nomination process led to a 24 months delay in reconstituting of SSGC Board."

The Petroleum Division informed the DAC that the tenure of the previous board had expired in 2022 but appointments could not be made during the caretaker government due to restrictions imposed by the Election Commission of Pakistan. The DAC directed the Petroleum Division to submit a detailed chronological report for audit verification.

The AGP further observed that the Petroleum Division failed to comply with the SOE Ownership and Management Policy, 2023 by retaining more than one ex-officio representative on the boards of Inter State Gas Systems (ISGS), Pakistan Mineral Development Corporation (PMDC), Government Holdings (Private) Limited (GHPL), Sui Northern Gas Pipelines Limited (SNGPL) and Pakistan State Oil (PSO).

According to the report, the Board Nomination Committee recommended only the number of ex-officio members for the boards of ISGS, PMDC and GHPL instead of recommending specific ex-officio positions as required under the SOE Act, 2023.

The audit further observed that "the Secretary, Petroleum Division, unilaterally selected the ex-officio positions without adequate deliberation or consideration of the required knowledge, skills, and experience."

According to the AGP, this "resulted into excess and irregular appointment of ex-officio members to SOE boards."

Another audit observation relates to non-compliance with Federal Cabinet directives governing appointments of ex-officio directors.

The report stated that the Petroleum Division approved the nomination of a BS-19 officer as ex-officio director on the board of GHPL to represent the Government of Khyber Pakhtunkhwa, while BS-19 and BS-18 officers continued serving as ex-officio directors on the board of SML despite the Cabinet's decision requiring such representatives to be not below BS-20.

The AGP concluded that non-compliance with the Federal Cabinet's decision resulted in appointments below the prescribed rank.

The audit also found that the Petroleum Division reconstituted the boards of ISGS, SML and PSO without ensuring appointment of the mandatory female director required under the Companies Act, 2017, SECP regulations and the SOE Ownership and Management Policy, 2023.

According to the report, despite enforcement of the policy, the Petroleum Division failed to take corrective action, leaving the boards in violation of gender representation requirements.

The audit attributed the lapse to "weak regulatory oversight by the Secretary of the Petroleum Division and a lack of diligence on the part of the ex-officio members involved."

Another governance weakness identified by the AGP was the absence of an effective performance monitoring mechanism for state-owned enterprise boards.

According to the report, the Petroleum Division neither maintained nor analysed agendas of board meetings of companies in which the Federal Government has shareholding, nor established any formal mechanism to communicate the Government's position to its ex-officio directors before board meetings.

The audit further observed that no Key Performance Indicators had been developed to evaluate the performance of ex-officio directors, increasing the risk that board decisions may not align with the Federal Government's interests.

The Petroleum Division did not submit any reply to this audit observation before finalisation of the report.

The Auditor General recommended immediate compliance with the State-Owned Enterprises (Governance and Operations) Act, 2023 and the SOE Ownership and Management Policy, calling for corrective measures to regularise board appointments, strengthen oversight mechanisms, ensure proper gender representation and improve governance across state-owned enterprises under the Petroleum Division.