ISLAMABAD: The government allocated a total of Rs436 billion to loss-making state-owned enterprises (SOEs) during the six months ending December 2023, amounting to over 7% of the federal budget’s annual receipts.
Breakdown of Financial Support:
- Grants: Rs120 billion
- Subsidies: Rs231 billion
- Loans: Rs85 billion
- Equity Injections: None reported
Fiscal Dependency and Challenges:
The bi-annual report on SOEs, released under IMF loan conditions, highlights the heavy reliance of many SOEs on government funding, which fosters inefficiency and discourages operational improvements.
Key Observations:
- Operational Inefficiencies:
- Many SOEs face liquidity issues due to extended receivables and payables cycles, leading to strained working capital.
- Inefficient debt servicing and dependency on fiscal support hamper long-term viability.
- Guarantees and Liabilities:
- Government guarantees for SOEs reached Rs1,400 billion, posing significant financial risks.
- Inadequate valuation methodologies for guarantees necessitate alignment with international standards such as option pricing models, credit risk models, and contingent claims analysis.
- Contingent Liabilities:
- Risks tied to Public-Private Partnerships (PPPs) require detailed analysis by the Public-Private Partnership Authority (P3A) in line with PIMA (Public Investment Management Assessment) provisions.
Recommendations for Reform:
- Self-Sustainability Plans:
- SOEs should enhance working capital management, restructure debts, and improve operational efficiency.
- Streamlining receivables/payables management and adopting stringent credit controls are critical to improving cash flow.
- Risk Management Enhancements:
- Robust financial models to assess liabilities accurately.
- Better valuation methods incorporating Probability of Default (PD), Exposure at Risk (EAR), and Loss Given Default (LGD) metrics.
- Long-Term Strategy:
- Reduce reliance on government support by focusing on sustainable growth and fiscal discipline.
- Strengthen governance and accountability mechanisms within SOEs.
This report underscores the urgent need for structural reforms in SOEs to address inefficiencies, mitigate fiscal risks, and ensure long-term financial stability.
