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August 20, 2019

State entities losses rise to unprecedented Rs191.5 bn

Top Story

August 20, 2019

ISLAMABAD: In an alarming development, total net losses of Pakistan’s State Owned Enterprises (SOEs) have ballooned to Rs191.5 billion in financial year 2016-17 against Rs44.7 billion in 2015-16.

Just two years back in 2014-15, Pakistan’s SOEs in totality were running into net profit of Rs 52 billion but then it turned into net losses of Rs 44.7 billion first time in the country history during 2015-16 which had now jumped up to Rs 191.5 billion at phenomenal pace, witnessing a record upsurge by over 330 percent just in one year.

A report prepared and released by Ministry of Finance silently admitted that among top ten loss making entities in public sector, National Highway Authority (NHA) clinched top position by incurring losses of Rs 133.488 billion, followed by Pakistan Railways Rs 40.702 billion, PIA Rs 39.5 billion, Lahore Electric Supply Company (LESCO) Rs 37.3 billion, Hyderabad Electric Supply Company (HESCO) Rs 27.3 billion, Peshawar Electric Supply Company (PESCO) Rs 19.372 billion, Sindh Engineering Rs 19.305 billion, Quetta Electric Supply Company (QESCO) Rs 18.703 billion, Multan Electric Power Company (MEPCO) Rs 17.935 billion and Pakistan Steel Mills (PSM) Rs 14.852 billion during financial year of 2016-17. Among top ten profit making SOEs are OGDCL, PPL, PSO and others. However, there was net loss of Rs 191.5 billion in totality.

A detailed report comprising of 351 pages states that total number of SOEs increased from 197 to 204 in financial year 2016-17.

In terms of sectoral classification, promotional and advocacy sector continues to have most SOEs (46) – mainly operating as funds and foundations and research and development entities for industries and production.

Energy sector comes next with 41 entities and has the biggest asset size in the entire SOEs portfolio with companies ranging from hydrocarbons to power distribution, transmission, generation and trading.

On human resources, the number of individuals employed decreased from 424,014 individuals in FY2015/16 to 422,962 in FY2016/17, largely due to employees retiring and no new hiring.

Sub-sectoral wise, distribution companies continue to provide employment opportunities to the greatest number of individuals (124,010) followed by Pakistan Railways (75,633). The number of Board of Directors (BOD) remained almost the same from 1,377 in FY2015/16 to 1,387 in FY2016/17.

For FY2016/17, 26% of the total directors are Executive Directors, 48% are Non-Executive Directors while 26% are Independent Directors.

Trading (43%) and energy sectors (37%) have the highest percentages of independent directors whereas transportation (15%) and services (14%) represent the lowest. However, the female participation in the overall BOD needs to be strengthened as less than 5% of females are represented in the BODs.

In terms of functional level, 73% of all employees represent the staff cadre whereas 15% are officers’ level. Only 3% of the total employee base represent executives while 4% are daily wagers. With increased investments in infrastructure, transport and energy sectors, and restating the numbers, the restated total assets base of SOEs reported last year increased from around Rs. 14.5 trillion in FY2015/16 to Rs. 17.1 trillion representing an increase of 20% in total asset base.

The assets have largely increased with a push to develop new energy infrastructure in the country (dams, energy assets, power plants) along with transport sector, mainly NHA. Commercial PSCs make up of 60% of the total assets base while federal authorities make up another 39% (FY2016: 21%).

In terms of sectoral share, energy sector continues to top the asset base with Rs. 7.5 trillion in FY2016/17 followed by transportation (Rs. 4.8 trillion) and financial sectors (Rs. 3.6 trillion). The net revenues of the SOEs regained some lost ground from last year with total revenues of Rs. 3.5 trillion in FY2016/17 as compared to Rs. 3.0 trillion in FY2015/16. The increase mainly came due to higher oil prices scenario which saw hydrocarbon companies receiving incremental well-head price of their products. In the energy sector, the hydrocarbons sector – especially the Oil and Gas Development Company (OGDCL), Government Holding Private Limited (GHPL) and Pakistan Petroleum Limited (PPL) – continue to provide bedrock support to total revenues and profitability of SOEs portfolio.

Policy makers in Pakistan are aware of the need to strengthen SOEs’ performance, reduce fiscal costs, and improve its impact on growth and poverty alleviation. Consequently, efforts to reform SOEs have been ongoing. However, the overlapping ownership and management functions coupled with the unclear and indefinite mandates have undermined their full efficiency.

To improve SOE performance, efforts must be taken to create an atmosphere where SOEs operate in an independent environment without any political affiliations and where a centralized, independent board regularly evaluates both the financial and nonfinancial performance.

In this regard, the Malaysian Khazanah model, Singapore Tamasek model and Indian Centrally Owned Public Enterprises (CPSEs) MOU model provide clear insights as to how SOEs can be structured and evaluated on an on-going basis.

The Government of Pakistan’s investments in SOEs are substantial. With new investments in transport, infrastructure and energy projects, the total asset base of the SOE portfolio has increased from Rs. 14.5 trillion (restated) in FY2015/16 to Rs. 17.1 trillion. However, the net profitability of SOEs slightly improved from a net loss of Rs. 235.5 billion in FY2015/16 (restated) to Rs. 191.5 billion.

The deficit has largely occurred in the transport sector with PIA, Pakistan Railways and NHA continue to incur large losses, along with distribution companies in the energy sector. With the tariffs notified in March 2018, it is expected that the DISCOs will recoup these deficits in subsequent years, the report stated.

However, the report states that the government has already sped up reforms required in Railways and PIA to turn it around and minimize the losses going forth. With well-head prices tied to international crude oil prices and subsequent rise in international oil price scenario, the profitability of five major public-sector energy enterprises (OGDCL, PPL, Govt Holding Private Company Limited (GHPL), PARCO and PSO) – bounced back with cumulative net profit of Rs157 billion.

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