Cash bleeding SOEs face loss of Rs429b in two years—I

ISLAMABAD: Pakistan’s State-Owned Enterprises (SOEs) continued to face accumulated cash bleeding in the last two fiscal years (the financial year 2018 and FY2019) to the tune of Rs429 billion. The net losses of SOEs stood at Rs286 billion during FY2018 that were reduced to Rs143 billion in FY2019, so in totality these losses accumulated to Rs429 billion at the cost of the national exchequer.

The SOE’s annual report for the fiscal year 2018-19 released by the Ministry of Finance states that the overall losses were the highest in FY2018, amounting to Rs286 billion, which were curtailed to Rs143 billion in FY2019. This improvement in the financial performance of SOEs was mainly due to the reduction of losses in the power sector of selected SOEs during FY2018-19.

This time, the Ministry of Finance shared list of 10 top profit-making and 10 loss making PSEs and informed that OGDCL earned the profit of Rs118.3 billion, PPL Rs59.4 billion, and Government Holding Power Company Rs34.1 billion in the fiscal year 2019. The top 10 loss-making PSEs included National Highway Authority (NHA) Rs173 billion, then PIA Rs56 billion, QESCO Rs36.8 billion, LESCO Rs36.6 billion, PESCO Rs29.2 billion, MEPCO Rs22.7 billion, ZTBL Rs18.1 billion, Pakistan Steel Mills Rs16.5 billion, SEPCO Rs10.9 billion, and Pakistan Post Offices Rs9.13 billion in the fiscal year 2019.

The SOEs had turned into net losses in the fiscal year 2015-16 when it stood at Rs237 billion, Rs187 billion in 2016-17, Rs286 billion in 2017-18 and Rs143 billion in 2018-19.

The power sector has the largest number of commercial SOEs, with 21 entities, and has the largest share of assets within the SOE portfolio, amounting to over Rs7.8 trillion in FY2019. These companies range from power generation to distribution, transmission, management and trading. Financial sector SOEs are next in the list, having 18 entites with the third largest share of total portfolio of assets.

Commercial SOEs employ 415,670 workforce, including officers and executives. Sub-sectoral wise, distribution companies continue to lead in employment opportunities with 114,253. In terms of overall employment, 71.5 percent of all employees are non-management staff, while 15.8 percent are officers level. Less than 3 percent of the total employees are executives while another 3.9 percent are daily wage earners.

In FY2018-19 net loss of SOE, the portfolio was Rs143.6 billion, which was significantly lower than the net losses recorded in FY2018 amounting to Rs285.8 billion. The decrease in losses were mainly due to an improvement in the financial performance of some of the major loss-making entities, leading to lower fiscal risks for the federal government.

Despite significant reduction in net losses, the Government of Pakistan needs to continue its reform efforts to further curtail the losses in SOEs. It is imperative that commercial SOEs achieve positive financial returns on the back of prudent expenditure management, improved revenues and efficient use of resources such as staff, capital and assets.

The financial sector comprises banks, NBFIs, DFIs and insurance companies. The Ministry of Finance is the administrative ministry for banks, DFIs and NBFIs and Ministry of Commerce is the administrative ministry for insurance companies, whereas, the State Bank of Pakistan (SBP) plays the important function of regulatory oversight.

Although, the net profit of this sector declined in FY2019 as compared to FY2018, the financial sector remained profitable, posing no fiscal risk for the government. On a year-on-year basis, both the insurance companies and commercial banks showed an increase in revenues and profitability. The DFI’s, in turn, reported their highest net profit of Rs6.6 billion during the year.

All GOP-owned banks and insurance companies remained compliant with statutory capital requirements and played their part in providing capital to the unbanked population (such as the SME bank, NBP and ZTBL) and bringing efficiencies to capital markets. Some 15 out of 18 SOEs in this category were profitable in FY2018-19 with the aggregate net profit amounting to Rs33 billion. The National Bank of Pakistan (NBP) remained the largest profitable company with the net profit of Rs16. 6 billion, contributing 50pc to the aggregate profits; other two leading profitable companies in this category are Pak Kuwait Investment Company (Private) Limited and House Building Finance Company Limited with the net profits of Rs4.7 billion and Rs2.7 billion respectively. Only three loss-making SOEs in this group have combined net losses of Rs19.6 billion, and ZTBL remains the largest loss making company among financial SOEs with net loss of Rs18.2 billion in FY2018-19.

The Infrastructure, Transport & ITC sector comprises ports and shipping, railways, roads and highways, aviation, and communication companies. They are under the purview of M/o Ports & Shipping, M/o Railways, Aviation Division, M/o Communication, and M/o Information Technology and Telecommunication.

This sector performed well in the current year depicting 16 percent increase in net revenue, bringing it to Rs297.8 billion. The dividends realized for government from this sector rose to Rs4.9 billion in the current year. Furthermore, this sector also saw an influx of loans for roads and highway projects with total foreign lending increasing by 136 percent and reaching up to Rs154,529 million. Maximum revenues came from sub sector aviation due to overall improvement in revenue stream generated by the Pakistan International Airlines (PIA). The SOEs in this category fall in five sub-sectors with serious financial and operational implications for the entire economy. Among the majors companies, apart from PTCL and PNSC, which returned combined net profit of Rs4.5 billion, other SOEs i.e. National Highway Authority (NHA), Pakistan International Airlines (PIA) and Pakistan Railways (PR) incurred net losses of Rs173 billion, Rs56 billion and Rs36 billion, respectively, adversely impacting the profitability of the entire SOE portfolio.

Furthermore, a cursory glance at the nature of operations of NHA, PIA and PR reveals that the losses may partially be attributed to various public service obligations that these SOEs discharge. However, despite the heavy losses incurred by the SOEs in this sector, they remain leading employment provider.

The manufacturing, mining and engineering sector comprises metals and mining, engineering and consultancy, and printing companies under the purview of M/o Energy, M/o Industries and Production, M/o Defence Production, M/o Climate Change, Cabinet Division and M/o Communication respectively. Manufacturing, mining and engineering (14), metals and mining (9), engineering consultancy (3), printng (2); this sector showed a positive performance overall in the current financial year with net losses decreased by five percent amounting to Rs12.9 billion compared to Rs13.8 billion last year. The major losses in this category originate from Pakistan Steel Mills (PSM). Overall, the sector was able to generate revenue of Rs23.7 billion during FY2019. In terms of profitability, the top performers of the sector are metals and mining, followed by engineering consultancies. The engineering sector also remained the leading sub-sector in terms of net profit. There are 15 SOEs in category, which have cumulatively returned net loss of Rs13 billion during FY2018-19. Seven SOEs incurred losses amounting to Rs16.8 billion, led by Pakistan Steel Mills that incurred net loss of Rs16.5 billion, losses of other SOEs in this group remained materially small. In contrast, seven SOEs recorded aggregate profit of Rs3.8 billion in the reference period, among them National Security Printing Company remained the most profitable entity with the net profit of Rs1.5 billion during FY2018-19.