SOEs: elephants on the table

That it takes two years after the end of financial years to compile basic financial and operational metrics of state-owned enterprises (SOEs) speaks volumes about the weak reporting and disclosure structure that exists, or perhaps does not exist, at those SOEs.

However, thanks to the efforts of Finance Ministry’s Economic Reform Unit (ERU), we now have the much pending SOE performance report 2016, and unlike the previous years, it offers more insights that make one cringe over the size and performance of these elephants. Consider the following nuggets gleaned from that report, as a curtain raiser of BR Research’s coverage on SOEs’ financials.

Titled ‘Federal footprint: SOE annual report’ for 2016, the report reveals the government of Pakistan’s investments in SOEs are substantial. With new investments in transport, infrastructure and energy projects (think roads, bridges, and LNG plants), the total asset base of SOEs increased from Rs10.8 trillion in FY15 to Rs11.5 trillion in 2016. That’s about 39 percent of the country’s GDP in 2016. Yes, a whopping 39 percent!

Net profitability of SOEs, however, declined from a combined net profit of Rs52.34 billion in 2015 to a net loss of Rs44.5 billion in 2016. This translates into a Return on Assets of negative 0.39 percent. In 2014, that ratio stood was better – but still a meagre 2 percent. The ROA has averaged 3.7 percent between 2014-2016 in the case of DFIs, negative 0.8 percent in the case of federal authorities, 1.2 percent in the case of commercial public sector companies (PSCs) and 1.6 percent in the case of non-commercial PSCs.

The Return on Investments is tad difficult to analyse at the moment, given the PDF format in which the data has been presented. But one does not really need that number to bring home the point that the state is sitting on a huge pile of poor yielding assets.

Consider also that combined net profits of top 10 commercial PSCs thinned to a little over Rs170 billion in 2016 from Rs208 billion in 2015 and Rs321 billion in the year before. Contrast that with combined net losses of top ten commercial PSCs that grew to around Rs200 billon in 2016, from Rs158 billion in 2015 and Rs144 billion in 2014.

To contextualize, the combined net losses of just these top companies alone averaged at 5.4 percent of annual FBR’s taxes during 2014-16. And these numbers do not include the losses made by Federal Authorities which includes the giants like Pakistan Railways and National Highway Authority.

Another interesting set of figures pertains to the age of the staff employed by the SOEs. In the case of biggest employing sector - the energy sector that includes power generation & distribution and hydrocarbons — there were 194,517 employees at the end of 2016 (174,261 in 2015). Of this 114,578 (94,096 in 2015) were older than 40 years. In other words, 60 percent of the employees in energy SOEs are in the last leg of their career. In 2015, that number stood at 54 percent.

This makes one wonder whether the new hiring inducted by energy sector SOEs were from the older age cohort or perhaps they regularized the contractual staff and thereby resulted in growth of over-40 employees. Be that as it may, anyone well versed with organisational and human resource management affairs, would flag this as a recipe for disaster.

An aging cohort of employees are the most resistant to change, which means they are a big barrier to the so-called SOE reforms that PTI plans to do, because one needs young blood to drive businesses and reforms. An aging cohort of employees also means that they would gather sympathies the most, if it comes to layoffs and golden handshakes, or otherwise much higher cost of retraining, if that’s the path the government chooses to follow.

Either way one imagines that a huge size of gratuity/pension payments loom over these SOEs, the details of which aren’t currently available. What’s the current size of annual gratuity/pension payments made by the SOEs; what’s the outstanding balance, if indeed those accounts are well kept; and whether these liabilities are funded or unfunded? These are the kind of questions that will hopefully be answered in 2017’s SOEs annual report.

One also hopes that 2017’s SOE annual report will be released in the next few months since it should not take more than 12 months for the SOEs to compile and report financial and operational data (financial year ends of these SOEs vary; for some it was December 2017 and for most others it was June 2017).

Sources say that for 2017 SOEs report the ERU is also compiling other datasets such as reports of SOEs compliance with their corporate governance rules as well as directors’ meetings, and so forth. On that note, the Goodfellas at the ERU would also do well to share these datasets in MS Excel format. Sharing such big datasets in PDF format hinders any meaningful analyses necessary to put spotlight on the federal footprint, and a failure to publicly share these datasets in analyses-friendly format implies that the government is not serious about generating a healthy debate on this subject.