State-owned enterprises remain a burden despite Rs12tr revenue

ISLAMABAD: Despite their annual revenues touching Rs12 trillion, the state-owned enterprises (SOEs) remain a substantial and increasing drain on taxpayers’ money, with power sector firms leading the losses and eating up the value of the nation’s assets.

According to the Aggregate Annual Report on Federal SOEs for Fiscal Year 2023 released by the Ministry of Finance on Tuesday, gross revenues reached Rs11.92tr, a 15 per cent increase from the previous year, primarily driven by inflationary pressures, with the oil and financial sectors leading the growth.

“Total aggregate profits were Rs703 billion, while loss-making SOEs reported an aggregate loss of Rs905bn, up 23pc from last year. This resulted in aggregate net losses of Rs202bn, reflecting a 25pc increase from the previous year,” the report said.

The book value of assets rose 16pc to Rs35.22tr and liabilities jumped 20pc to Rs29.72tr, indicating higher financial leverage. Consequently, net equity stood at Rs5.496tr, down 2.55pc.

Report over Rs200bn in net losses as gross revenues jump 15pc

“Overall portfolio volatility remains of a significant concern for the federal government with value at risk on the higher range,” the report said, pointing out that the power sector, particularly on the distribution side, continued to be dominated by loss-making entities. “Aggregate losses on the power side totalled Rs304bn despite the fact that Rs759bn was spent to support this sector,” the report noted.

Additionally, the infrastructure sector, with high financial costs for entities like the National Highway Authority, exacerbated the loss-making scenario. Railways also continued to contribute to the rising losses.

Aggregate losses of these entities for the past 10 years totalled Rs5.595tr. The government provided aggregate support of Rs1.021tr in the form of Rs267bn equity injections, Rs223bn grants, Rs403bn subsidies, and Rs128bn loans to sustain these SOEs and support the economy.

This support represented more than 10pc of the federal budget’s receipts, indicating significant fiscal strain,“ it said.

Various risks were identified within the SOE sector, notably the substantial working capital lock-up due to aged receivables and payables throughout the SOE chain, leading to a circular debt exceeding Rs4tr. Additionally, operational inefficiencies in the power sector continued to negatively impact SOE profitability, with spillover effects all across the chain.

Guarantees provided stood at Rs1.656tr, while the debt stock reached Rs3.545tr, with accrued interest on NHA loans alone contributing more than Rs1.1tr. “This substantial level of debt and guarantees issued create significant risks for the sector, exposing it to both systemic and un-systemic risks,” it said.

Systemic risks, such as economic downturns, inflation and interest rate fluctuations, can exacerbate the financial strain on SOEs, making debt servicing more challenging, which can be clearly seen in the SOE portfolio. Un-systemic risks, including operational inefficiencies, are also visible and can further impact individual entities’ financial stability.

The report said that these SOEs contributed to the national exchequer in the form of taxes amounting to Rs466bn, a 24pc increase. Non-tax revenues, including sales taxes, royalties and levies, amounted to Rs952bn, up 58pc. Dividends contributed Rs63bn, marking a 43pc increase.

It strongly advocated a critical need on the corporate governance front for more independent and technically qualified directors to ensure effective governance and robust monitoring criteria to maintain a streamlined tone at the top.

The report also called for better integration of SOE business plans with dynamic business models to enhance effectiveness and adaptability.