Pakistan's state owned firms worst in Asia: World Bank

Pakistan's state-owned entities (SOEs) are the worst in South Asia and their combined losses growing faster than assets, says a World Banks report.

The incremental loss is resulting in a significant annual drain on scarce public resources and posing a substantial risk to the sovereign.

The World Bank says, the SOEs together swallow more than Rs458 billion in public funds anually to stay afloat as their combined loans and guarantees surged to almost 10% of GDP (Rs5.4 trillion) in FY21 from 3.1% of GDP or Rs1.05 trillion in 2016.

The World Bank has advised a deep-rooted reform programme to reverse the trend, reports The Dawn.

They "impose a significant fiscal drain and pose a substantial financial risk on the federal government", said the World Bank, adding that these entities had been incurring losses since FY16, with annual losses averaging at 0.5% of GDP over FY16–20.

"Pakistan's federal SOEs have been found to be the least profitable in the South Asia region", said the Public Expenditure Review 2023, adding that with the persistent losses, the accumulated SOE losses had become substantial, amounting to 3.1% of GDP in FY20.

To cover the losses, the federal government has been providing direct fiscal support to the SOEs, in the form of subsidies, loans and equity injections, which totalled 1.4% of GDP in FY21. In addition to direct support, the government has been also issuing guarantees for SOEs to secure loans from commercial banks. Federal government exposure to SOEs, defined as the outstanding stock of guarantees and government loans to SOEs, has been rapidly increasing and stood at 9.7% of GDP in FY21.

The report noted that combined fiscal exposure against domestic and foreign loans and guarantees had been increasing rapidly with annual growth averaging 42.9% over FY2016–2021. But this required a detailed risk assessment on account of contingent exposure that may arise from guarantees. In FY 2021, 32% of the outstanding guarantees, given through the Pakistan Atomic Energy Commission (PAEC), were against project financing of the K-3 and K-4 nuclear power plants. The available data show that guarantees constituted the bulk of fiscal exposure, at 44.4% of total exposure in FY21, while Cash Development Loans and foreign loans accounted for 36% and 19.6% of exposure, respectively.

The stock of outstanding government guarantees to SOEs has more than doubled since FY16. Over 75% of the stock of guarantees is against the power sector for financing the circular debt. The stock of outstanding guarantees from the Federal Government to federal commercial SOEs has increased from 2.2%of GDP in FY16 to 4.5% of GDP in FY22.

The report said that individual SOE performance was largely dictated by sectoral performance. Although the primary reasons for SOE losses differ, they are typically related to unresolved corporate governance issues, sector regulations, an underestimation of the cost of the provision in complete restructuring and insufficient current subsidies.

An SOE portfolio analysis showed that individual SOE performance was influenced by sectoral policies and the level of operational autonomy by the Board of Directors and senior management. SOE losses are concentrated in the power, infrastructure, and transport sectors, and in the aggregate, outweigh profits from profitable SOEs. Although a sizable number of commercial SOEs generated profits in FY20, they were concentrated in the oil and gas sector.