Pakistan’s SOEs: A $20bn hole in economy

ISLAMABAD: Since 2014, Pakistan’s state-owned enterprises (SOEs) have quietly become a formidable drain on the nation’s economy, racking up a gargantuan Rs5.59 trillion ($20 billion) in cumulative losses. Leading the roster of 23 loss-making entities of the federal government are the National Highways Authority (NHA), Pakistan International Airlines (PIA), Pakistan Railways, and regional electric supply companies such as Quetta, Peshawar, Sukkur and Hyderabad.

Combined, these seven SOEs have been responsible for Rs4.437 trillion ($15.84 billion) in deficits, accounting for an overwhelming 80 per cent of the total losses. Keeping these enterprises afloat has cost taxpayers dearly, exposing the Pakistani economy to persistent fiscal vulnerabilities.

The extent of the inefficiency is staggering. At the forefront of this financial wreckage is the National Highways Authority (NHA), which alone has accumulated losses of Rs1.55 trillion over the past decade. This year alone, the agency reported a loss of Rs413.45 billion, revealing acute deficiencies in oversight and planning.

Pakistan’s power sector is similarly beleaguered, with eight major distribution companies (DISCOs) reporting a combined Rs2.386 trillion ($8.52 billion) in losses since 2014. QESCO, with Rs594.3 billion in cumulative losses, and PESCO, with Rs549 billion, represent the worst of the group. Besides, Sukkur Electric Power Company Limited (SEPCO) accumulated losses of Rs374.6 billion, Hyderabad Electric Supply Company Limited (HESCO) Rs264.6 billion, Lahore Electric Supply Company (LESCO) Rs219.4 billion, Multan Electric Power Company (MEPCO) Rs190.8 billion, Faisalabad Electric Supply Company Limited (FESCO) Rs96.7 billion and Islamabad Electric Supply Company Limited (IESCO) with Rs92.3 billion losses.

Notably, the state-owned power generation companies (GENCOs) also accumulated total losses of Rs138 billion in these 10 years. Of them, GENCO-II known as Central Power Generation Company Limited losses were of Rs51 billion, GENCO-III Northern Power Generation Company Ltd Rs47.5 billion, GENCO-I known as Jamshoro Power Company Limited with Rs30.62 billion and GENCO-IV or Lakhra Power Generation Company with Rs8.95 billion.

In sum, Pakistan’s state-run power sector (generation and distribution combined) accounts for Rs2.524 trillion ($9.01 billion) in losses, or nearly half of the total SOE losses.

In the transport sector, PIA and Pakistan Railways epitomize dysfunction. PIA has cost taxpayers Rs712.9 billion, while Pakistan Railways, also unable to stem the bleeding, has accumulated Rs390.1 billion in losses. Such deficits have now become an annual fixture, with the two organizations reporting respective FY23 losses of Rs75.75 billion and Rs48.53 billion. Even smaller SOEs like Pakistan Steel Mills, which accumulated Rs224.6 billion in losses, and Sui Southern Gas Company (SSGC), with Rs89.77 billion in red ink, have contributed to the worsening financial plight. Pakistan Post Office also accumulated losses of Rs77.7 billion.

The Financial Cost of Bailouts

The Pakistani government’s efforts to prop up these SOEs have only deepened its fiscal woes. In FY23 alone, state support for SOEs reached Rs1.02 trillion, albeit a 42 per cent reduction from Rs1.77 trillion the prior year. This assistance, which includes loans, grants, subsidies, and equity injections, represented nearly 11 per cent of the federal budget, down from 24 per cent the previous year.

Sovereign guarantees for SOEs surged by 6 per cent, reaching Rs1.65 trillion, while SOE debt as a percentage of GDP more than doubled, climbing from 2.15 per cent to 4.22 per cent in FY23.

The power sector absorbed the bulk of this support, securing Rs759.9 billion, which included equity injections worth Rs267.2 billion, subsidies of Rs309 billion, and grants of Rs164 billion. Total guarantees and loans for the sector reached Rs1.02 trillion and Rs87.2 billion, respectively.

Meanwhile, the transport and ICT sectors received Rs166.2 billion in government support, mostly in loans and grants. The oil and gas sector, though smaller in comparison, received Rs54.14 billion in subsidies, with guarantees totaling Rs250 billion.

Critics have argued that these financial hemorrhages are more than a sign of economic malaise; they indicate systemic governance failures. Many SOEs are plagued by political patronage, overstaffing, and misaligned incentives, leaving them ill-equipped to pursue profitability or efficiency. Despite occasional attempts at reform, entrenched inefficiencies persist, leaving SOEs as financial black holes that absorb significant public resources without delivering proportional economic returns.

Privatization has long been touted as a potential solution, particularly for the SOEs in the power sector and transport industries, which account for the lion’s share of losses. However, the government’s recent attempt to privatize PIA faced a lack of investor interest, underscoring the difficulties of privatizing entities burdened with debt, inefficiencies, and legacy costs. Discos are next in line for privatization, yet the PIA experience has tempered expectations and raised questions about the viability of attracting investors to such distressed assets.

Strategic Implications

While the financial toll of supporting SOEs is clear, the strategic implications for Pakistan’s economy are even more concerning. The cost of maintaining these entities not only diverts resources from critical sectors such as health and education but also undermines public confidence in the government’s economic stewardship. Every rupee spent on bailing out a mismanaged SOE is a rupee unavailable for infrastructure development, social welfare programs, or economic growth initiatives.

Moreover, the International Monetary Fund (IMF), which has been a key financial partner to Pakistan, has consistently urged the government to implement bold reforms, including privatizing loss-making SOEs. The IMF argues that unless Pakistan reduces its fiscal exposure to failing enterprises, it will be unable to achieve sustainable economic growth. Although privatization remains a contentious political issue, the alternative — continuing to finance these SOEs — poses an untenable burden on public finances. Addressing these fiscal challenges requires a mix of reforms, including enhanced accountability, stringent financial oversight, and a reduction in political interference. At a minimum, governance reforms within SOEs should aim to improve operational efficiency and increase transparency. Concurrently, the government must develop a robust strategy to offload the most problematic SOEs through privatization or public-private partnerships, even if this means taking a phased approach. Former adviser to Ministry of Finance Dr Khaqan Najeeb said that the government support to keep the 88 commercial entities and their subsidiaries alive is another massive fiscal burden which continues on the exchequer. The SOEs reform, restructuring and actual privatization probably needs the utmost effort to create efficiencies and productivity in the economy, concluded Khaqan.