Life-support to SOEs

That a majority of state-owned-enterprises (SOEs) have been on life-support, or clutches in the best-case scenario, is not exactly breaking news. But just how big the quantum of support by the government of Pakistan is something that’s always been clouded in mystery, no thanks to lack of proper periodic reporting mechanism.

The latest report by the Finance Ministry’s Economic Reform Unit sheds some light on the subject. According to that report, the government of Pakistan doled out about Rs450 billion as various forms of cash support and about Rs130 billion as sovereign guarantees in FY16 alone – and this does not include the support given to the National Highway Authority (NHA), (which is another story altogether).

Since grants and subsidies are P&L account items, their outstanding balances are not recorded in the end of the year balance sheets of these SOEs. In order to present the total quantum of grants and subsidies doled out to keep these businesses afloat, one hopes the ERU will be updating these datasets for at least the last ten years to give a picture of how much have these SOEs cost to the country’s exchequer.

Thankfully, the report does give some idea of the outstanding fiscal exposure in terms of loans and guarantees. And that’s nearly Rs2000 billion or almost half of annual FBR revenues, which is not a neat picture. The nature and risk assessment of these sovereign guarantees are not reported; must the public be really kept in the dark about these contingent liabilities.

Anyhow, keep in mind that this total does not include NHA’s figures, whereas the financial accounts of Pakistan Railways and Pakistan Post Office are on cash accounting method instead of the accrual accounting method. In the case of Pakistan Railways for instance, this means that the Rs26-27 billion losses that it has been making each year for the last two years do not include expenses accrued, such as perhaps pensions and gratuities.

It is quite clear that the biggest elephant in the room is the energy sector. The combined losses of power gencos and discos were about Rs137 billion in FY16, nearly offsetting the Rs143 billion profits of hydrocarbons and other energy players in the sector. That said, the transport sector shouldn’t be ignored, considering that the combined losses of gencos and discos in FY16 are less than the loss produced by NHA alone in FY16.

The reason why NHA figures are not consolidated in total SOE analyses, that is because its losses are singularly huge enough to distort the whole picture. The NHA incurred a loss of Rs157 billion in FY16, which single-handedly made it the biggest loss making SOE in the country in FY16. It puts PIA’s (FY16: Rs45bn) and Pakistan Railways’ (FY16: Rs26bn) losses to shame. Between 2015 and 2016, NHA’s fixed assets increased by nearly Rs3500 billion. A part of this increase comes from the new projects that were previously work in progress; but a much bigger part (Rs3027 billion) comes from revaluation gains that the company booked in 2016.

The Finance Ministry’s report points out that the losses incurred by the NHA “is an example of a classical public good – where investments have been made by the GOP with a belief that new infrastructure investments will accelerate the rate of economic growth and are essential for increased employment opportunities and improved infrastructure linkages. Also, investments in roads, bridges and highways cannot be undertaken by the private sector at large – either due to the scarcity of capital, greater project complexities or expectations of high rate of returns that will eventually burden the consumers at large.”

It adds that the major component of NHA’s losses is a non-cash depreciation expense, “which does not materially pose issues on its going concern status or day to day cash flow requirements”. And that “going forward NHA will meet all its operational and maintenance (O&M) costs from own resources and will not depend on GOP for its day to day operations.”

There are two points of contention here, granted that the private sector may not necessarily invest in such large public sector projects alone. But at the one end, toll collection has to be beefed up, and at other end, non-toll revenues ought to be explored, such as setting up of road side hotels & restaurants, advertising, tourism or entertainment parks. Tourism etc are not NHA’s domain per se, but these activities need to kick start so that highways give some return. Otherwise who will pay for the O&M costs?

The second aspect is that the social and economic benefits of setting up these highways ought to be made public. If a project is not commercially viable, its socio-economic benefits ought to be measured periodically and compared against the original justification for the project. The point being an accountability mechanism has to be in place. More on NHA’s and other SOEs’ accounts later!