Pakistan’s state-owned enterprises (SOEs) are considered the least profitable in South Asia, with their combined losses increasing faster than their assets.
The trend results in a significant yearly drain on limited public resources and seriously threatens the nation’s sovereignty. Every year, SOEs in Pakistan require over Rs458bn in public funds to remain operational.
According to the World Bank, the combined loans and guarantees of these enterprises have risen from 3.1% of GDP (Rs1.05tr) in 2016 to nearly 10% of GDP (Rs5.4tr) in FY21. The organization has recommended a comprehensive reform program to reverse this trend.
The World Bank states that these SOEs create a considerable fiscal burden and present a significant financial risk to the federal government. Since FY16, these entities have consistently experienced losses, with average annual losses of 0.5% of GDP from FY16 to FY20. Furthermore, the Public Expenditure Review 2023 reveals that Pakistan’s federal SOEs are the least profitable in South Asia, and their accumulated losses reached 3.1% of GDP in FY20.
To cover these losses, the federal government provided direct fiscal support to the SOEs through subsidies, loans, and equity allocations totaling 1.4% of GDP in FY21. Moreover, the government guaranteed SOEs to secure loans from commercial institutions. As a result, in FY21, the federal government’s exposure to SOEs, measured by the outstanding stock of guarantees and government loans to SOEs, was 9.7% of GDP.
From FY2016 to 2022, the combined fiscal exposure against domestic and foreign loans and guarantees increased by 42.9% annually. This increase necessitates a thorough risk assessment due to the potential contingent exposure arising from guarantees.
In FY21, 32% of the outstanding guarantees were provided through the Pakistan Atomic Energy Commission (PAEC) for project financing of the K-3 and K-4 nuclear power plants. As a result, guarantees accounted for 44.4% of fiscal exposure in FY21, while Cash Development Loans and foreign loans accounted for 36% and 19.6%, respectively.
Outstanding government guarantees to SOEs have more than doubled since FY16. Over 75% of guarantees for financing circular debt are against the electricity sector. The Federal Government’s outstanding guarantees to federal commercial SOEs have risen from 2.2% of GDP in FY16 to 4.5% in FY22.
The report suggests that individual SOE performance is primarily determined by sectoral performance. Losses typically stem from unresolved corporate governance issues, sector regulations, underestimation of the cost of full restructuring, and insufficient current subsidies.
An analysis of an SOE portfolio revealed that individual SOE performance is influenced by sectoral policies and the degree of operational autonomy held by the Board of Directors and senior management.
SOE losses in the electrical, infrastructure, and transportation sectors exceed profits from profitable SOEs. Although a significant number of commercial SOEs posted profits in FY20, most of them were in the oil and gas industry.
