SOHAIL SARFRAZ

ISLAMABAD: The loss-making State-Owned Enterprises (SOEs) reported aggregate losses of Rs851 billion, a 14.03 percent decrease, year-on-year (YoY) basis for the 12 months ending June 2024.

According to the Aggregate Annual Report on SOEs, Federal State Owned Enterprises (July 2023 to June 2024) issued by the Finance Division on Wednesday, the SOEs contributed Rs372 billion in taxes, non-tax revenues, which include sales taxes, royalties, and levies, amounted to Rs1,400 billion.

Dividends were Rs82 billion and interest paid Rs206 billion. Aggregate contribution was Rs2,062 billion. The report disclosed that the gross revenues of federal SOEs reached Rs13,524 billion, reflecting a 5.2 per cent increase YoY. Total aggregate profits were Rs820 billion a 14.61 per cent increase YoY while loss-making SOEs reported aggregate losses of Rs851 billion, a 14.03 per cent decrease YOY for the 12 months ending June 2024. These losses include government assistance of Rs782 billion in subsidies and Rs367 billion in grants added in revenues. Further, removing the PSWF entities, the net aggregate losses after offsetting with profit-making entities, comes to 521.5 billion.

The report revealed top Loss-Making SOEs and Aggregate Financial Losses.

Several SOEs incurred significant losses during FY 2024. The largest loss was reported by the NHA at Rs295.5 billion, followed by QESCO Rs120.4bn, PESCO 88.7bn, PIA 73.5bn, Pakistan Railways Rs51.3bn, SEPCO Rs37bn, LESCO Rs34.5bn, Pakistan Steel Mills Corp Rs31.1bn, HESCO Rs22.1bn, GENCO-II Rs17.6bn, IESCO Rs15.8bn, Pak Post Office Rs13.4bn, TESCO Rs9.5bn, GEPCO Rs8.5bn, GENCO-III Rs7.8bn and all others cumulatively Rs23.7 billion.

Accumulated losses to date stand at a colossal Rs5,748 billion with the majority in the past 10 years alone.

Profit-making SOEs revealed that the top 15 profit-making entities were led by OGDCL at a profit of Rs208.9bn, Pakistan Petroleum Limited at Rs115.4bn, National Power Parks at Rs76.8bn, Govt Holding (Pvt) Limited Rs69.1b, Pak Arab Refinery Company Rs55bn, Port Qasim Authority Rs41bn, MEPCO Rs31.8bn, NBP Rs27.4bn, WAPDA Rs22.2bn, KPT Rs20.3bn, PNSC Rs20.1bn, PSO Rs19.6bn, State Life Insurance Corp Rs18.3bn, and PKIC Rs15.2bn. However, despite these accounting profits, free cash flow remains low and WACC remains high.

The report further revealed that the book value of assets rose by 6.37 per cent YoY to Rs38,434 billion, while liabilities increased by 6.7 per cent YoY to Rs32,571 billion, resulting in net equity of Rs5,863 billion, a 4.47 per cent increase YoY. Low free cash flow and high Weighted Average Cost of Capital (WACC) ranging from 17 per cent to 22 per cent led to a low Return on Equity (ROE) of -0.5 per cent and Return on Invested Capital (ROIC) of 3.4 per cent.

To support these losses, the government of Pakistan extended fiscal support totalling Rs1,586 billion on IFRS compliant Accrual basis of financial reporting. This was divided into Rs367 billion in grants, Rs782 billion in subsidies, Rs336 billion in loans and Rs99 billion in equity injections.

This was 13 per cent of federal budget receipts.

However, CMU has observed that cash basis amounts differ from accrual amounts which lead to balance sheet in-accuracies of SOEs. Reconciliation needs to be carried out in this area where balance sheet pending support from government either needs to be cleared or removed from their receivables. The Government of Pakistan’s loans to SOEs include Rs1,767 billion in Cash Development Loans (CDLs) and Rs1,747 billion in Foreign Relent Loans (FRLs).

In addition, SOEs hold Rs2,813 billion in loans from private sector banks and bonds/ Sukuks, along with Rs553 billion in other interest-bearing liabilities, such as leases. The rollover costs and accrued interest on these loans amount to Rs2,333 billion, bringing the total value of outstanding loans, including accrued interest to Rs9,195 billion.

The SOE portfolio exhibits significant financial risks, with a financial leverage of 6.62x and operating leverage of 10.6x, driven by substantial fixed costs. This results in an overall leverage of approximately 70.12x, making the portfolio highly sensitive to economic fluctuations. The Value at Risk (VaR) for the government of Pakistan’s SOE portfolio is estimated at Rs4,951 billion with a 95 per cent confidence interval, highlighting the substantial risk exposure.

Furthermore, the credit spread of SOE debt stands at 226 basis points over the risk-free rate, reflecting elevated borrowing costs based on structural modelling. Annualised volatility of the portfolio is measured at 7.9 per cent, while the Altman Z-score of 0.29 underscores significant financial distress. These metrics collectively emphasise the need for strategic interventions to manage risks and ensure the financial sustainability of the SOE portfolio, the report added.