Govt Identifies 24 Loss-Making State-Owned Enterprises for Privatization

The federal government has identified 24 loss-making SOEs including 8 DISCOs, 1 GENCO (Jamshoro Power Company) along with Pakistan Textile City Ltd, State Engineering Corporation and Telephone Industries of Pakistan for privatization.

According to ‘State-Owned Enterprises Triage: Reforms and Way Forward’, the government after the consultation with development partners such as IMF, WB and ADB, selected 84 State Owned Enterprises (SOEs) for Triage.

The report states that 24 SOEs are identified for the next batch of privatization, 12 of which were loss making in FY 2018-19 with a combined loss of Rs. 156 billion.

Among the loss making SOEs proposed for privatization, the major loss-making entities are 8 DISCOs (HESCO, IESCO, PESCO, SEPCO, MEPCO, LESCO, FESCO and QESCO), 1 GENCO (Jamshoro Power Company) along with Pakistan Textile City Ltd., State Engineering Corporation and Telephone Industries of Pakistan.

In addition, 10 SOEs have been identified as potential privatization candidates and due consultations with line ministries have already been initiated. In FY 2018-19, six entities were loss making with a combined loss of Rs. 38.5 billion mainly emanating from ZTBL (Rs. 18 billion), SSGC (Rs. 14.8 billion) and USC (Rs. 5 billion).

The SOEs Triage refers to a comprehensive review of existing SOEs portfolio for the purpose of their categorization for retention, privatization and liquidation was initiated in November 2019 as a part of IMF EFF 2019-22 structural benchmark.

According to report, more than 98% of the government’s assets and almost 100% of the losses in the SOEs portfolio are related to commercial SOEs and the operational performance of commercial SOEs has a direct bearing on fiscal risks and fiscal deficit of the federal government.

Although National Highway Authority (NHA) has been the major loss-making entity for several years, it has been excluded from the triage examination due to its unique nature of operations as NHA is simultaneously a regulatory body and is also the main implementing agency for highways projects generally financed from Public Sector Development Program (PSDP).

Similarly, all regulatory bodies have been excluded from the triage examination like Pakistan Telecommunication Authority, Pakistan Electronic Media Regulatory Authority etc. mainly because the regulatory functions are different from commercial operations and are primarily meant for efficient functioning of imperfect markets.

Currently, there are around 212 SOEs operating in various sectors of Pakistan with 85 commercial SOEs, 44 Non-commercial SOEs (Section 42, not-for-profit entities as well as trusts, universities, training institutions and welfare funds), and 83 subsidiaries of the commercial SOEs.

SOEs in Pakistan have significant market presence particularly in key service sectors like power generation and distribution, energy, aviation, and railways sectors. The overall revenues of all the SOEs in 2018-19 was Rs. 4 trillion (approx.) while the book value of their assets was Rs. 19 trillion.

As per the report, the SOEs recorded an overall net profit of Rs. 204 billion which fell to Rs. 61 Billion in the following year and declined further to record an aggregate loss. Since FY 2015-16 SOEs have consistently incurred significant losses creating a heavy burden on the GOP’s fiscal position.

Further breaking down the performance of SOEs reveals that over past six years, one-third of the commercial SOEs have experienced losses intermittently. Moreover, the sum of the losses of top-10 loss-making SOEs contributes around 90% to the total losses of SOEs portfolio each year. NHA, Pakistan Railways, PIA and power sector DISCOs have been among the major, top 10 loss-makings SOEs.

Among the SOEs performing core functions, 25 SOEs were profitable in FY 2018-19. Using a more stringent criteria to evaluate their financial viability as explained in the last section, four SOEs are categorised as financially viable, namely GHPL, Pak-Arab Refinery Company, Pak-Kuwait Investment

Company and Pakistan Revenue Automation Ltd. Another 19 entities have been consistently profitmaking during the last three years – FY 2017, FY 2018 and FY2019 – however, their ROAs have been lower than the threshold required. Another two SOEs – CPPA and Pak-Iran Investment Company – have positive equity and were profitable in FY 2017 and FY2019.

Although these SOEs are financially self-sustaining their financial performance needs improvement which shall be addressed through institutional reforms to be undertaken including governance improvement through an Ownership and Management Policy for SOEs, operationalization of the Central Monitoring Unit in Finance Division and the introduction of an SOE Bill in the Parliament.

There are 14 entities which are planned to be retained under government ownership but require immediate reforms and possible restructuring. Among them Pakistan Railways and Pakistan International Airlines which were collectively making a loss of Rs. 88 billion in FY 19, are already under active restructuring and reform process.

During FY 19, collective losses of rest of the SOEs in this subcategory were around Rs. 17 billion out of which Pakistan Post Office had the largest losses of over Rs. 9 billion. A major source of losses of this entity generates due to the annual pension liability.

There are 10 SOEs which are on an active privatization list and are at various stages of the privatization process. Pakistan Steel Mills is an important entity on the active list and is at an advanced stage of the privatization process. SME bank is another loss making SOE which is on active privatization list. In addition to these, partial divestment of OGDCL and PPL is also underway.

Source: Pro Pakistani