Pakistan's SEOs report Rs851bn loss, marking 14% YoY decline

February 20, 2025 (MLN): Pakistan's State-Owned Enterprises (SOEs) recorded losses of Rs. 851 billion, a 14% year-on-year (YoY) decrease for the 12 months ending in June 2024.

After subsidies of Rs782bn and grants of Rs367bn, net losses stood at Rs521.5bn, according to a report issued by the Central Monitoring Unit (CMU) of the Finance Division.

Further, removing the PSWF entities the net aggregate losses after offsetting with profit-making entities comes to 521.5 billion.

Gross revenues of federal SOEs reached Rs13.5 trillion, reflecting a 5.2% increase YoY.

Total aggregate profits were Rs820bn a 14.61% increase YoY.

The book value of assets rose by 6.4% YoY to Rs38.4tr, while liabilities increased by 6.7% YoY to Rs32.5tr, resulting in net equity of Rs5.8tr, a 4.47% increase YoY.

Low free cash flow and high Weighted Average Cost of Capital (WACC) ranging from 17% to 22% led to a low Return on Equity (ROE) of -0.5 % and a Return on Invested Capital (ROIC) of 3.4%.

Economic Value Added (EVA) and Leverage the Economic Value Added (EVA) of the SOE portfolio stood at - Rs2.5tr, indicating the spread of ROIC vs. WACC is negative and the true value lost.

Increased financial leverage (6.2x) and operating leverage (10.6x), combined with high asset betas, contributed to annualized asset volatility of 7.92%.

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 National Highways Authority (NHA) at Rs295.5bn, followed by Quetta Electric Supply Company (QESCO) Rs120bn, Peshawar Electric Supply Company (PESCO) Rs89bn, Pakistan International Airlines (PIA) Rs73.5bn, Pakistan Railways Rs51bn.

Accumulated losses to date stand at a colossal Rs6tr with the majority in the past 10 years alone.

The top 15 profit-making entities was led by Oil and Gas Development Company Limited (OGDC) at Rs209bn, Pakistan Petroleum Limited (PPL) at Rs115bn, National Power Parks at Rs77bn, Govt Holding PVT limited Rs69bn, Pak Arab Refinery Company Rs55bn.

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 Rs1.6tr on IFRS compliant Accrual basis of financial reporting.

This was divided into Rs367bn in grants, Rs782bn in subsidies, Rs336bn in loans and Rs99bn in equity injections. This was 13% of Federal budget receipts.

SOEs contributed Rs372bn in taxes, non-tax revenues, which include sales taxes, royalties, and levies, amounted to Rs1.4tr.

Dividends Rs82bn and interest paid Rs206bn. Aggregate contribution was Rs2tr.

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 Rs3.6tr indicating the working capital movement primarily arising from inefficiencies within the power sector, particularly the Distribution Companies (DISCOs) & spreading across the SOE chain.

The government has provided guarantees amounting to Rs1.4tr. 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.

The Government of Pakistan's loans to State-Owned Enterprises (SOEs) include Rs1.7tr in Cash Development Loans (CDLs) and Rs1.7tr in Foreign Relent Loans (FRLs).

In addition, SOEs hold Rs2.8tr in loans from private sector banks and bonds/Sukuks, along with Rs553bn in other interest-bearing liabilities, such as leases.

The rollover costs and accrued interest on these loans amount to Rs2.3tr, bringing the total value of outstanding loans, including accrued interest, to Rs9.2tr.

The SOE Act mandates that all State-Owned Enterprises (SOEs) prepare their financial statements in accordance with IFRS, with full compliance required by February 2026.

This transition is critical for enhancing financial governance and fostering investor confidence.

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