Municipally owned enterprises 2018-07-18T16:48:13+00:00

MUNICIPALLY OWNED ENTERPRISES

Municipally owned enterprises (MOEs) are increasingly utilised to provide public services in high-risk sectors, often oriented towards local infrastructure, utility, energy and natural resources, such as, roads, power, water distribution, transportation, etc. They are typically „organisations with independent corporate status, managed by an executive board appointed primarily by local government officials, and with majority public ownership.“

MOEs often have a significant economic and social impact in local communities, and are among the largest employers, contributing to a substantial percentage of the workforce. Because of their role, structure, mandate and legal status, MOEs focus complex interests and are exposed to critical integrity risks. Compared with private companies, MOEs can face particularly heightened corruption risk owing, among others, to underlying issues in their ownership, regulatory and corporate governance arrangements, as well as shortcomings in the quality and credibility of corporate disclosure.

A special governance challenge is the “intrinsic closeness” between the local government, and the enterprise. The potential for political interference, as well as, the complexity of the accountability chain affect vulnerability of MOE to corruption. In many MOEs, the quality of internal controls is often weak, auditing practices are inadequate, and the corresponding levels of financial and non-financial disclosures are low. These effectively limit accountability, and create conditions for abusive practices. All of the above calls for effective anti-corruption strategies.

INTEGRITY RISKS

  • The presence of politically-affiliated individuals on MOEs boards may lead to CoI. Political favouritism and nepotism may evade decision making in MOEs.

  • Because of political nominations, MOEs may lack professional knowledge and expertise.

  • Leadership of local government may use MOEs and their assets for political ends. MOE managers may divert funds from the MOE to finance a political campaign.

  • Officials solicit or receive bribes from employees of MOEs for the latter to obtain licenses, contracts or other advantages.

  • Politicised boards and political appointment of MOEs lead to poor oversight of managers and increase the risk of corrupt activities going unchecked. The weak internal controls, the inadequate and/or irregular auditing practices as well as low levels of financial and non-financial disclosures may be exploited to engage in corrupt practices.

  • Local government officials identify too closely with the interests of the MOEs accept under-performance and offer preferential treatment in later dealings.

  • Local governments demonstrate unwillingness to bring corruption cases against MOEs or their employees.

RISK MANAGEMENT STRATEGIES

Following the integrity risk assessment, the local government may consider the following risk management strategies as development points:

  • Develop a clear ownership policy/strategy to define the overall objectives of the municipal ownership. The strategy should refer to integrity, and provide a structured board nomination process to let MOEs boards exercise their responsibilities without undue political interference and without taking an active role in a day-to-day management.

  • Clearly define the role and responsibilities of the boards. Mandate qualified and independent boards to oversee management, based on clear performance objectives defined by the local government.

  • Systematically require MOEs to either commit to, or be guided by, relevant international standards related to combatting corruption and doing business responsibly, and to establish ethics and compliance measures for preventing corruption. Provide MOEs with access to available good practices, such as ISO 37001:2015 Anti-bribery management systems. Requirements.

  • Promote the practice of periodic integrity risk assessment in MOEs. Require MOEs, in which the local government has a significant control, to adhere to the same integrity safeguards (i.e. standards on transparency, accountability, integrity, audits and financial management, internal controls, procurement and service provision.)

  • Systematically require Codes of Ethics to be developed and made applicable to MOEs executives and employees. The Code should apply both to the business practices as well as to the personal conduct of employees within the MOEs. Set clear guidelines on CoI for the MOE’s board and management.

  • Promote awareness events to make sure all employees and company representatives become aware of the code of ethics and integrity policies. Provide MOEs executives and employees with access to trainings in the field of integrity, organized or supported by the local government.

  • Systematically include local MOEs in the internal and external communication regarding integrity. Encourage participation of local MOEs in joint projects with CSOs, media, or businesses in the area of integrity.

  • Systematically require that the MOE allocate responsibilities for the integrity compliance function. An integrity compliance officer may be entrusted to lead and manage the ethics programmes, the integrity risk assessment, to provide ethics counselling, and/or initiate investigations related to corruption on behalf of the MOE.

  • Encourage reporting of corruption in MOEs. Require that MOEs provide secure and accessible channels to raise concerns and report violations (whistleblowing) in confidence and without risk of reprisal. Promote a culture of transparency and encourage improved reporting systems at the level of MOEs.

  • Encourage MOEs to undertake periodic reviews of the ethics and compliance programmes, as well as of the implementation of their integrity measures.

  • Require MOEs to strengthen internal control system. Establish internal risk management systems and build relevant capacities. Strong disclosure standards, bolstered by effective internal controls as well as external audits of MOEs’ financial statements are critical for monitoring MOEs’ operations and detecting irregular transactions.

  • Encourage a culture of greater accountability by publishing aggregate reports on the activities and performance of state-owned enterprises. Aligned with relevant regulatory environment, set up a reporting system that allows the local government to regularly monitor and oversee MOEs performance.

GUIDE TO CORRUPTION-FREE LOCAL GOVERNMENT