Losses Under State-Owned Enterprises Spike to Near Rs. 6 Trillion

Pakistan’s state-owned enterprises (SOEs) losses hit a staggering loss of Rs. 408 billion, bringing accumulated losses since 2014 to Rs. 5.9 trillion. It was revealed in a report titled “Federal State Owned Enterprises bi-annual report on SOEs fiscal year 2024 (6 months–July 2023 to December 2023), released by the Central Monitoring Unit (CMU) of the Finance Division, which also noted that SOEs contributed Rs. 200 billion in taxes, reflecting a 14 percent decrease compared to the previous six months. Several SOEs incurred significant losses during the first six months of fiscal year 2024. The largest loss was reported by the National Highway Authority (NHA) at Rs. 151.3 billion, followed by QESCO with Rs. 56.2 billion, and Pakistan International Airlines (PIA) with Rs. 51.7 billion. Other notable entities with significant losses included PESCO, which reported a loss of Rs. 39 billion, and Pakistan Railways, which reported a loss of Rs. 23.6 billion. Additional SOEs such as SEPCO, Pakistan Steel Mills Corporation (Private) Limited, and IESCO also reported considerable losses of Rs. 20.9 billion, Rs. 14.4 billion, and Rs. 12.1 billion, respectively. The Central Power Generation Company Limited (GENCO-II) reported a loss of Rs. 8.3 billion. Other loss-making entities include PTCL Rs. 7.7 billion, Pakistan Post Office Rs. 5.5 billion, and several electric supply companies like HESCO Rs. 5.2 billion, TESCO Rs. 2.6 billion followed by SSGPL Rs. 4.6 billion and, USC Rs. 2.1 billion loss contributed to cumulative losses, illustrating widespread inefficiencies and operational challenges within the SOE sector. The top 15 profit-making entities for the six months of July-December 2023 demonstrated strong financial performance, with OGDCL leading with a profit of Rs. 123.2 billion, followed by PPL with Rs. 68.7 billion, and National Power Parks Management with Rs. 36.2 billion. Other significant contributors include PARCO with Rs. 35 billion and Government Holdings (Private) Limited with Rs. 32.5 billion. Additional profitable entities include the NBP with Rs. 26.6 billion and the Port Qasim Authority with Rs. 18.4 billion. However, despite these accounting profits, free cash flow remains low and WACC remains high. To support these losses, the Government of Pakistan extended fiscal support totaling Rs. 436 billion over the six-month period ending December 2023. This support was divided into Rs. 120 billion in grants, Rs. 231 billion in subsidies, and Rs. 85 billion in loans. Notably, no equity injections were made during this period. This financial intervention accounted for over 7 percent of the federal budget’s receipts on an annualized basis. Non-tax revenues, which include sales taxes, royalties, and levies, amounted to Rs. 349 billion, representing a 27 percent decline. Dividends provided were Rs. 9 billion, a significant 71% decrease. These declines in contributions highlight fiscal pressures on the government’s revenue streams from the SOE sector for the first six months of fiscal year 2024. Gross revenues of federal SOEs reached Rs. 7,011 billion, reflecting a 15 percent increase from the previous year’s corresponding period. Total aggregate profits were Rs. 510 billion (including Pakistan Sovereign Wealth Fund (PSWF) entities profits of Rs. 249 billion), marking a 45 percent increase, while loss-making SOEs reported an aggregate loss of Rs. 408 billion for the six months ending December 2023. Removing the PSWF entities the net aggregate loss comes to Rs. 147 billion. The book value of assets rose by 2.2 percent to Rs. 36,147 billion, while liabilities increased by 2.44 percent to Rs. 30,624 billion, resulting in net equity of Rs. 5,522 billion, a 1.38 percent increase. Low free cash flow and high Weighted Average Cost of Capital (WACC) ranging from 17 percent to 22 percent led to a low Return on Equity (ROE) of 1.83 percent and a Return on Invested Capital (ROIC) of 2.3 percent. The Economic Value Added (EVA) of the SOE portfolio stood at – Rs. 2,400 billion, indicating the spread of ROIC vs. WACC is -ve. Increased financial leverage (6.6x) and operating leverage (1.9x), combined with high asset betas, contributed to annualized asset volatility of 9 percent. These factors point to the need for enhanced cash flow management, risk mitigation, and operational efficiency improvements. The challenge of converting accounting profits into liquidity remains significant for these SOEs. The report noted that the SOE sector faces a liquidity issue caused by a working capital lock-up due to prolonged aged receivables and payables within the supply chain. This has led to pronounced circular debt, which is quantified at Rs. 3,447 billion (on a gross basis) & on a net basis Rs. 2,800 billion, primarily arising from inefficiencies within the power sector, particularly the Distribution Companies (DISCOs). The entrenchment of circular debt has adversely impacted the financial health of otherwise strong entities such as GHPL, OGDCL, PSO, and PPL. The accumulation of inter-company debt is affecting balance sheets and impacting operational efficiency, especially since IFRS 9 with stage 3 provisions on circular debt hasn’t been fully implemented. This has significantly increased credit risk exposure, which requires government attention and prompt mitigation strategies to stabilize the sector and prevent further fiscal challenges. Guarantees provided by the government amounted to Rs. 1,400 billion. However, the valuation methodology for these guarantees needs improvement and alignment with international standards, including the use of option pricing models, credit risk models, contingent claims analysis, and Monte Carlo simulations. Variables such as Probability of Default (PD), Exposure at Risk (EAR), and Loss Given Default (LGD) should be used to value guarantees. Contingent liabilities related to Public-Private Partnerships (PPPs) should also be analyzed in detail by the Public-Private Partnership Authority (P3A) in line with PIMA provisions. The Government of Pakistan’s loans to SOEs include Rs. 1,712 billion in Cash Development Loans (CDLs) and Rs. 1,469 billion in Foreign Relent Loans (FRLs). Additionally, SOEs have Rs. 2,826 billion in loans from private sector banks and bonds/Sukuks, along with Rs. 1,069 billion in other interest-bearing liabilities such as leases. The rollover costs and accrued interest on these loans are Rs. 2,195 billion. The total value of outstanding loans, including accrued interest, is Rs. 9,274 billion. With financial leverage at 6.6x and operating leverage at 1.9x due to high fixed costs, the overall leverage of approximately 12.5x makes the SOE portfolio highly volatile to economic changes. Furthermore, the Value at Risk (VaR) of the GOP portfolio of SOEs stands at Rs. 3,700 billion with a 95 percent confidence interval, and the credit spread of debt is 266 basis points over the risk-free rate, based on structural modeling. Annualized volatility is 9.1 percent, and the Altman Z-score is -1.4. CMU analyzed the business plans and six-month financials for SOEs in the first half of fiscal year 2024. The performance of these business plans has been mixed, with some SOEs, particularly in the oil, gas, and financial sectors, achieving their targets. However, sectors such as power and infrastructure still require significant improvements. Liquidity issues and negative return ratios continue to hinder overall progress, underscoring inefficiencies in cost management, operational efficiency, and capital structure. Addressing these challenges through strategic interventions, including cost control, debt restructuring, and enhanced financial management, is essential for aligning SOE performance with business plan objectives and ensuring long-term growth and stability. Despite progress in certain areas, improved financial performance and shareholder returns remain key areas for further improvement. The report also noted that DISCOs across Pakistan have been struggling with severe transmission and distribution losses, averaging 10 to 15 percent of the electricity units they purchase from the Central Power Purchasing Agency (CPPA) via the National Transmission & Despatch Company (NTDC). This means that for every 100 units of electricity purchased, DISCOs can only sell approximately 85 units, while the remaining 10-15 units are lost due to a combination of theft, technical inefficiencies, and poor management. These distribution losses represent a significant financial burden on DISCOs, further amplified by their already fragile financial positions. The financial implications of these losses are severe. Over the course of just six months, the average cost of this lost electricity amounts to approximately Rs. 140 billion, which directly impacts these companies’ operational liquidity and profitability. This gap between the cost of electricity procured and the revenue generated from its sale places immense pressure on DISCOs’ already constrained financial resources. Additionally, because these losses are not recovered through billing, they further widen the revenue deficit in an industry that is already struggling with circular debt. NHA is struggling with a massive debt burden of over Rs. 3 trillion, significantly hindering its ability to finance new infrastructure projects or even maintain existing ones effectively. Its business plans rely heavily on toll revenues, which are insufficient given the scale of operations and debt obligations. The absence of a comprehensive revenue enhancement strategy and inefficient toll collection mechanisms exacerbate the issue, leading to increasing operational costs and financial strain. PIA’s current business plan is ineffective due to outdated operational practices, excessive reliance on government bailouts, and a high-cost structure. The airline continues to suffer from financial losses, a heavy debt burden, and limited autonomy in decision-making. PIA’s inability to compete in international markets or offer efficient services has resulted in declining passenger volumes and mounting operational inefficiencies.