Islamabad February 20 2025: Pakistan’s federal State-Owned Enterprises reported looses of PKR 30.6 billion, reflecting 88.8 percent decline, for the fiscal year 2024 compared to losses of PKR 275 billion for last year, according to recent report released by Finance Division.
Gross revenues of federal State-Owned Enterprises (SOEs) reached PKR 13,524 billion, reflecting a 5.2 percent increase YOY. Total aggregate profits were PKR 820 billion a 14.61 percent increase YOY while loss making SOEs reported aggregate losses of PKR 851 billion, a 14.03 percent decrease YOY for the 12 months ending June 2024. These losses include govt. assistance of PKR 782 billion in subsidies and PKR 367 Billion in grants added in revenues. Further, removing the PSWF entities the net aggregate losses after offsetting with profit making entities comes to 521.5 billion.
The book value of assets rose by 6.37 percent YOY to PKR38,434 billion, while liabilities increased by 6.7 percent YOY to PKR32,571 billion, resulting in net equity of PKR5,863 billion, a 4.47 percent increase YOY. Low free cash flow and high Weighted Average Cost of Capital (WACC) ranging from 17 percent to 22 percent led to a low Return on Equity (ROE) of -0.5 percent and Return on Invested Capital (ROIC) of 3.4 percent.
The Economic Value Added (EVA) of the SOE portfolio stood at – PKR2,500 billion, indicating the spread of ROIC vs. WACC is –ve and the true value lost. Increased financial leverage (6.2x) and operating leverage (10.6x), combined with high asset betas (above 1), contributed to annualized asset volatility of 7.92 percent. 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.
Several SOEs incurred significant losses during FY 2024. The largest loss was reported by the NHA at PKR295.5 billion, followed by QESCO PKR 120.4b, PKR PESCO 88.7b, PKR PIA 73.5b, Pakistan Railways PKR 51.3b, SEPCO PKR 37b, LESCO PKR 34.5b, Pakistan Steel Millions Corp. PKR 31.1b, HESCO PKR 22.1b, GENCO-II PKR17.6b, IESCO PKR 15.8b, Pak Post Office PKR 13.4b, TESCO PKR 9.5b, GEPCO PKR 8.5b, GENCO-III PKR 7.8b and all others cumulatively PKR 23.7 billion. Accumulated losses to date stand at a colossal PKR5,748 Billion with the majority in the past 10 years alone.
The top 15 profit-making entities was led by OGDCL at PKR 208.9b, Pakistan Petroleum Limited at PKR 115.4b, National Power Parks at PKR76.8b, Govt Holding PVT limited PKR 69.1b, Pak Arab Refinery Company PKR 55.0b, Port Qasim Authority PKR 41b, MEPCO PKR 31.8b, NBP PKR27.4b, WAPDA PKR 22.2b, KPT PKR 20.3b, PNSC PKR 20.1b, PSO PKR 19.6b, State Life Insurance Corp. PKR 18.3b, PKIC PKR 15.2b respectively. 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 totaling PKR 1,586 billion on IFRS compliant Accrual basis of financial reporting. This was divided into PKR 367 billion in grants, PKR 782 billion in subsidies, PKR 336 billion in loans & PKR 99 billion in equity injections. This was 13 percent of Federal budget receipts. However, CMU has observed that cash basis amounts differ from accrual amounts which lead to balance sheet in-accuracies of SOEs. Reconciliation needs to be carried out in this area where balance sheet pending support from Govt. either needs to be cleared or removed from their receivables.
SOEs contributed PKR 372 billion in taxes, Non-tax revenues, which include sales taxes, royalties, and levies, amounted to PKR1,400 billion. Dividends PKR 82 billion and interest paid PKR 206 billion. Aggregate contribution was PKR 2,062 Billion.
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 PKR3,600 billion indicating the working capital movement primarily arising from inefficiencies within the power sector, particularly the Distribution Companies (DISCOs) & spreading across the SOE chain. This 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 hasn’t been fully implemented. This has significantly increased credit risk exposures, which requires government attention and prompt mitigation strategies to stabilize the sector and prevent further fiscal challenges.
The government has provided guarantees amounting to PKR 1,419 billion. However, the valuation methodology for these guarantees requires significant enhancement to align with international standards. Modern approaches, such as option pricing models, credit risk frameworks, contingent claims analysis, and Monte Carlo simulations, should be adopted to improve accuracy and transparency. Key variables like Probability of Default (PD), Expected Annual Risk (EAR), and Loss Given Default (LGD) must be integrated into the valuation process to provide a more realistic assessment of the associated risks.
The Government of Pakistan’s loans to State-Owned Enterprises (SOEs) include PKR 1,767 billion in Cash Development Loans (CDLs) and PKR 1,747 billion in Foreign Relent Loans (FRLs). In addition, SOEs hold PKR 2,813 billion in loans from private sector banks and bonds/Sukuks, along with PKR 553 billion in other interest-bearing liabilities, such as leases. The rollover costs and accrued interest on these loans amount to PKR 2,333 billion, bringing the total value of outstanding loans, including accrued interest, to PKR 9,195 billion. The SOE portfolio exhibits significant financial risks, with a financial leverage of 6.62x and operating leverage of 10.6x, driven by substantial fixed costs. This results in an overall leverage of approximately 70.12x, making the portfolio highly sensitive to economic fluctuations. The Value at Risk (VaR) for the Government of Pakistan’s SOE portfolio is estimated at PKR 4,951 billion with a 95 percent confidence interval, highlighting the substantial risk exposure. Furthermore, the credit spread of SOE debt stands at 226 basis points over the risk-free rate, reflecting elevated borrowing costs based on structural modeling. Annualized volatility of the portfolio is measured at 7.9 percent, while the Altman Z-score of 0.29 underscores significant financial distress. These metrics collectively emphasize the need for strategic interventions to manage risks and ensure the financial sustainability of the SOE portfolio.
