Jul-Dec: SOEs post staggering Rs408bn losses

ISLAMABAD: Pakistan’s state-owned enterprises (SOEs) losses hit a staggering Rs408 billion during the first six months (July-December) of fiscal year 2024, bringing accumulated losses since 2014 to Rs5.9 trillion till December 2024.

It was revealed in a report, 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 on Friday, that also noted that SOEs contributed Rs200 billion in taxes, reflecting a 14 per cent 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 Highways Authority (NHA) at Rs151.3 billion, followed by QESCO with Rs56.2 billion and Pakistan International Airlines (PIA) with Rs51.7 billion.

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Other notable entities with significant losses included PESCO, which reported a loss of Rs39 billion, and Pakistan Railways, which reported a loss of Rs23.6 billion. Additional SOEs such as SEPCO, Pakistan Steel Mills Corporation (Private) Limited, and IESCO also reported considerable losses of Rs20.9 billion, Rs14.4 billion, and Rs12.1 billion, respectively.

The Central Power Generation Company Limited (GENCO-II) reported a loss of Rs8.3 billion. Other loss-making entities include PTCL Rs7.7 billion, Pakistan Post Office Rs5.5 billion, and several electric supply companies like HESCO Rs5.2 billion, TESCO Rs2.6 billion followed by SSGPL Rs4.6 billion and, USC Rs2.1 billion 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 Rs123.2 billion, followed by PPL with Rs68.7 billion, and National Power Parks Management with Rs36.2 billion. Other significant contributors include PARCO with Rs35 billion and Government Holdings (Private) Limited with Rs32.5 billion.

Additional profitable entities include the NBP with Rs26.6 billion and the Port Qasim Authority with Rs18.4 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 totalling Rs436 billion over the six-month period ending December 2023. This support was divided into Rs120 billion in grants, Rs231 billion in subsidies, and Rs85 billion in loans.

Notably, no equity injections were made during this period. This financial intervention accounted for over seven per cent of the federal budget’s receipts on an annualised basis.

Non-tax revenues, which include sales taxes, royalties, and levies, amounted to Rs349 billion, representing a 27per cent decline.

Dividends provided were Rs9 billion, a significant 71per cent 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 Rs7,011 billion, reflecting a 15 per cent increase from the previous year’s corresponding period. Total aggregate profits were Rs510 billion (including Pakistan Sovereign Wealth Fund (PSWF) entities profits of Rs249 billion), marking a 45 per cent increase, while loss making SOEs reported an aggregate loss of Rs408 billion for the six months ending December 2023. Removing the PSWF entities the net aggregate loss comes to Rs147 billion.

The book value of assets rose by 2.2 per cent to Rs36,147 billion, while liabilities increased by 2.44 per cent to Rs30,624 billion, resulting in net equity of Rs5,522 billion, a 1.38 per cent increase.

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 1.83 per cent and Return on Invested Capital (ROIC) of 2.3 per cent.

The Economic Value Added (EVA) of the SOE portfolio stood at - Rs2,400 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 annualised asset volatility of nine per cent.

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 Rs3,447 billion (on gross basis) and on net basis Rs2,800 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 has not been fully implemented. This has significantly increased credit risk exposure, requiring government attention and prompt mitigation strategies to stabilise the sector and prevent further fiscal challenges.

Guarantees provided by the government amounted to Rs1,400 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 analysed in detail by the Public-Private Partnership Authority (P3A) in line with PIMA provisions.

The Government of Pakistan’s loans to SOEs include Rs1,712 billion in Cash Development Loans (CDLs) and Rs1,469 billion in Foreign Relent Loans (FRLs). Additionally, SOEs have Rs2,826 billion in loans from private sector banks and bonds/ Sukuks, along with Rs1,069 billion in other interest-bearing liabilities such as leases.

The rollover costs and accrued interest on these loans is Rs2,195 billion. The total value of outstanding loans, including accrued interest, is Rs9,274 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 Rs3,700 billion with a 95per cent confidence interval, and the credit spread of debt is 266 basis points over the risk-free rate, based on structural modelling. Annualized volatility is 9.1per cent, and the Altman Z-score is -1.4.

CMU analysed 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 15per cent of the electricity units they purchase from the Central Power Purchasing Agency (CPPA) via National Transmission and Despatch Company (NTDC).

This means that for every 100 units of electricity purchased, Discos are only able to 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 Rs140 billion, which directly impacts the operational liquidity and profitability of these companies. This gap between the cost of electricity procured and the revenue generated from its sale places immense pressure on the already constrained financial resources of Discos.

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.

The NHA is struggling with a massive debt burden of over Rs3 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.

The 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.

The PIA’s inability to compete in international markets or offer efficient services has resulted in declining passenger volumes and mounting operational inefficiencies.

Copyright Business Recorder, 2024