LAHORE:An audit report on the performance of the Board of Directors (BoD) of the Lahore Electric Supply Company (Lesco) has revealed that appointments of ineligible persons to board contributed to massive financial losses over two financial years.
According to the Auditor General of Pakistan’s performance audit report for 2023-24 on the BoD of Lesco, Ministry of Energy (Power Division), covering the financial years 2021-22 and 2022-23, “non-adherence to provisions of Corporate Governance Rules, 2013 resulted in irregular constitution of BoD of Lesco “due to appointment of ineligible persons having conflict of interest” during FYs 2021-23.
It further stated that “the irregularly constituted BoD resulted in poor strategic planning and lack of oversight. The necessary diversity of expertise and experience was missing, which led to inefficiencies in Lesco's operations and the Company incurred financial losses of Rs51,913 million (Rs51.9 billion) during FYs 2021-23.”
The primary objective of the audit was to assess the economy, efficiency, and effectiveness of the decisions made by the BoD and their implementation.
The audit, a copy of which is available with The News, noted that the Ministry of Energy (Power Division), consequent upon approval of the Federal Cabinet, notified the reconstitution of the BoD of Lesco on December 10, 2022 and nominated vice president/additional general secretary of the Punjab chapter of a political party as independent director and Chairman BoD of Lesco. Another office bearer of a political party, serving as president of the youth wing in Lahore, was also appointed as BoD member. Likewise, a doctor serving in the Ophthalmology Department of Mayo Hospital, Lahore, was appointed as an independent director.
The matter was taken up with the management in September 2023. The management replied that MoE notified the composition of the BoD after adhering to requisite legal requirements mentioned in relevant laws and after necessary scrutiny of the Board members of Lesco as “fit and proper persons.” The reply was not acceptable because the selection of independent directors during the selection process was not in accordance with the fitness criteria prescribed by the SECP (Securities and Exchange Commission of Pakistan). The Departmental Audit Committee (DAC) in its meeting held on February 15, 2024 directed the management to seek clarification from the Ministry of Law & Justice, Government of Pakistan, through the Administrative Ministry i.e. MoE (Power Division), and report to Audit within thirty (30) days. However, despite the directions of DAC, no progress in this regard was intimated to Audit till the finalization of the report. Audit recommended investigating the matter at the Ministry level and fixing responsibility for non-adherence to the Corporate Governance Rules, 2013.
The audit further highlighted irregular constitution of sub-committees of the BoD in violation of Corporate Governance Rules 2013; irregular proceedings of BoD meetings due non-due to non-compliance of Public Sector Companies Rules 2013; and deferment of critical agendas which undermined effective decision making and operational efficiency, violating corporate governance rules.
The audit noted the BoD approved a remuneration package for its directors as per approval of the Ministry of Water and Power dated 04.10.2016, wherein Rs35,000 per meeting fee was fixed. Later, the BoD in its 238th meeting held on 22.10.2021 approved the enhancement of meeting fee for directors to Rs60,000 without obtaining approval from MoE (Power Division), which was irregular. Moreover, the decision did not take into consideration the aspect of economy, as the company had accumulated losses of Rs143,825 million as on June 30, 2021 and a financial loss of Rs23,202 million during FY 2021-22. Non-adherence to instructions of the Power Division resulted in irregular enhancement and payment of remuneration to BoD members amounting to Rs34.19 million during FYs 2021-22 and 2022-23.
The matter was taken up with the management in September 2023. The management replied that as per Article 53 (c) of the Articles of Association of Lesco, and Rule 19 of Corporate Governance Rules, directors shall determine the directors' fee and reimbursement for attending meetings of the Board and committees. The reply was not acceptable as MoE (Power Division) appointed and notified the directors of the Board. Therefore, it was necessary to seek approval from MoE (Power Division).
It was further observed that the management failed to adhere to the directives given in the 235th meeting of the BoD. The BoD did not conduct any performance review meeting to devise policies to reduce losses and improve recovery, and to oversee management actions to control the surge in energy losses during FYs 2021-23. This showed that there was no mechanism in place whereby the BoD could ensure implementation of its directions. As a result, the total amount of circular debt pertaining to LESCO stood at Rs378,305 million as on June 30, 2023.
The matter was taken up with the management in September 2023. The management replied that there were two main reasons for circular debt, i.e., T&D (Transmission and Distribution) losses and shortfall in recovery against billing. LESCO had filed a request before NEPRA for review of T&D losses which was pending for adjudication before the Appellate Tribunal of NEPRA. The reply was not acceptable because the BoD did not follow up to ensure implementation of the Circular Debt Management Plan, 2023.
Suboptimal performance by the BoD also resulted in non-reduction of energy receivables by 5 percent, as per a performance agreement made between the Ministry of Energy (Power Division) and the CEO/BoD of Lesco for Financial Year 2022-23 by the end of June 2023 with respect to June 2022. Lesco failed to achieve the targets set by MoE (Power Division) relating to reduction in energy receivables. On the contrary, energy receivables increased by 30.71 percent. Receivables were Rs163.130 billion at the end of June 2022 and were required to be reduced by 5 percent, i.e. Rs8,157 million, including in all major categories such as government receivables, subsidies, permanently disconnected defaulters, and deferred amounts of court cases etc.
The matter was taken up with the management in September 2023. The management replied that Lesco was utilizing all its resources efficiently for achieving the desired targets. The reply was not acceptable because it lacked acknowledgment of the significant performance shortfalls highlighted in the audit para.
