Budgetary impact of SOEs

The Federal Ministry of Finance has published a report recently on the state-owned enterprises (SOEs). The focus is on the triage of reforms and the way forward. This report has apparently been prepared in collaboration with the World Bank, Asian Development Bank and the IMF. The triage refers to the decision on the portfolio of SOEs from the viewpoint of retention, liquidation or privatisation of individual SOEs.

The coverage of the report is of the 85 commercial SOEs. This includes 18 SOEs from the financial sector, 14 from manufacturing and mining, 21 from the power sector, 12 from infrastructure, transport and information technology and the remaining units from other sectors. The total employment in these SOEs combined is large at almost 416,000. Therefore, decision on the future of these SOEs has fundamental implications for many families in the country.

Statistics have been presented on the commercial SOEs. The total value of assets is as much as Rs 20.7 trillion. The annual revenue is in excess of Rs 5.5 trillion. The bottom line is the financial position of these enterprises. Collectively, despite their commercial nature they collectively incurred a large loss of almost Rs 129 billion in 2018-19.

The performance in different sectors is diverse. At one extreme, enterprises like the Oil and Gas Development Corporation (OGDC) and others in the exploration sector have made large combined profits of Rs 212 billion. At the other extreme, the units in the power sector have incurred a combined loss of Rs 143 billion, while the National Highway Authority is in the red to the tune of Rs 173 billion.

Other units with significant losses include the Railway, PIA, Zarai Taraqiati Bank Limited, Pakistan Steel Mills and the Pakistan Post Office. As opposed to this, units with large profits, besides OGDC, are Pakistan Petroleum Limited, Government Holdings (Private) Limited, National Bank of Pakistan, Pak-Arab Refinery, Pakistan State Oil and Sui Northern Gas Pipelines.

The fundamental problem with the report is that the numbers do not reflect the extent of the negative budgetary impact of these SOEs. There is a positive inflow of profits, interest payments and dividends from some SOEs. But this needs to be compared with outflows from the Federal budget in the form of payments against contingent liabilities of guaranteed debt with SOEs, subsidies, grants, loans, etc.

The objective of this article is to arrive at an estimate of the net budgetary implications of the commercial SOEs. This is based on the revised estimates for 2017-18, 2018-19 and 2019-20. In addition, the budget estimates for 2020-21 have also been examined. The conclusions from this analysis will have broader implications on the policy on commercial SOEs rather than the simple triage approach adopted by the MoF.

The first set of estimates relate to the revenues into the Federal budget from the SOEs. These include the interest payment on Government loans and dividends. They are jointly estimated at Rs 210 billion in 2017-18. The bad news is that they plummeted thereafter to Rs 181 billion in 2018-19 and to only Rs 85 billion in 2019-20. Dividends, for example, from entities like OGDC have been reduced following the Covid-19 attack. However, some recovery is anticipated in 2020-21. The inflow of interest payments plus dividends is expected to rise by over 80 percent and reach Rs 154 billion. This may well be on the optimistic side.

The cost of supporting these SOEs to the budget is substantially higher and it has mushroomed in the last three years. It is estimated at Rs 370 billion in 2017-18 and rising to Rs 704 billion by 2019-20, an increase of over 90 percent in two years.

What are the major components in these costs? The first and the largest is the meeting of contingent liabilities. These consist of debt servicing of Government guaranteed debt which SOEs are unable to service from their own revenues. According to the Pakistan Economic Survey, the outstanding guaranteed debt portfolio of the Federal Government at end March 2020 was Rs 1890 billion, of which 25 percent was external debt. During the first nine months of 2019-20, the Federal Government issued fresh/rollover guarantees aggregating to Rs 115 billion.

The payment against contingent liabilities was Rs 195 billion in 2017-18. It has increased by 66 percent by 2019-20 to Rs 302 billion. It now constitutes almost 43 percent of the total support given to SOEs. This is over and above the debt servicing of the Federal Government’s own debt.

The second large component of the cost borne by the Federal Government is subsidies to entities like Wapda, Pepco, Passco and TCP. The largest subsidy is to Wapda and Pepco of Rs 81 billion in 2017-18, which has more than doubled to Rs 211 billion in 2019-20. This is primarily for covering the inter-Disco tariff differential.

The third major intervention from the federal budget is in the form of grants or loans to big loss-making entities like the Railways, PIA and the Pakistan Steel Mill. These aggregated to Rs 38 billion in 2017-18. They have now risen to over Rs 88 billion.

Overall, the cost to the Federal Government of supporting the SOEs was Rs 370 billion in 2017-18. Net of income from these entities, the cost was Rs 280 billion. By 2019-20, the net cost has mushroomed to Rs 619 billion, with an unbelievable annual growth rate of 40 percent. Now the budgetary impact of SOEs is 1.5 percent of the GDP. Almost 24 percent of the budget deficit is due to the SOEs.

The conclusion is clear that this cost is becoming unmanageable, especially given the pressure to reduce the size of the budget deficit to contain the growth of the public debt to GDP ratio and to meet the tough performance criteria in the shortly to be revived IMF programme. The first estimate is that this cost will approach 1.7 percent of the GDP in 2020-21 after the inclusion of the proposed retirement of circular debt of Rs 160 billion in this financial year.

The report by the MoF represents only a partial solution of the problem through the process of privatization. 10 SOEs are reported to be already under the process of privatization. 24 SOEs are to be privatized in the next phase while there are 10 other SOEs which are potential candidates according to the report. Therefore, there are as many as 41 SOEs which will be retained.

The fundamental problem is that the process of privatisation will not substantially reduce the cost of the SOEs to the federal exchequer. The continuing liabilities will include servicing of guaranteed debt and subsidizing the costs of operations.

There is need for inclusion in the report specific measures on how the financial viability of the retained SOEs can be enhanced. There should be a plan to improve the operations of large entities like the Railway, PIA, National Highway Authority, Utility Stores Corporation, etc. Further, a clear-cut plan for restricting the growth of circular debt in the power sector needs to be presented. Privatization of the DISCOs may reduce some losses due to better management but there will continue to be a need for some inter-Disco tariff differential and better management of timely payment of subsidies.

Overall, the SOEs perform many essential services and deserve support on economic grounds of externalities, falling marginal costs or for providing access to poorer segments to the population. But the cost to the government budget is rising exponentially due to poor management practices and decisions, overstaffing and leakages. The burden of this failure is falling on the general taxpayer and top priority must be attached to reducing the cost on the budget of the SOEs.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021