Net financial inflows, though tepid during 1HFY25, are expected to improve as a sizable part of official debt repayments has already been made. photo: file
ISLAMABAD:
The Ministry of Finance on Friday warned that mounting debt levels of state-owned enterprises (SOEs) pose a threat to Pakistan’s “financial stability and economic growth”, as net cash returns from these entities to the government plunged to just Rs41 billion.
The report disclosed that for every Rs1 provided by the government as fiscal support to SOEs in the last fiscal year, it received a return of only one paisa – a situation that truly depicts the sorry state of affairs in these entities.
The annual aggregate performance report of SOEs for fiscal year 2024-25 – the first full year of Prime Minister Shehbaz Sharif’s government – also challenges official claims of improvement in these SOEsand structural reforms, particularly in the power sector.
Mounting debt levels, primarily arising from operational inefficiencies, market volatility and outdated infrastructure, have increased the government’s contingent liabilities and threaten both financial stability and economic growth, the finance ministry stated in the report released on Friday. The report was prepared by the Central Monitoring Unit of the ministry.
The report also punctures governmentclaims of power sector reforms, noting that power distribution companies rely on activity-based planning and “hope for positive outcomes, rather than a value-based approach”.
An analysis of all SOEs presents a bleak picture and highlights the gravity of the situation. The report was released less than two weeks before the arrival of an International Monetary Fund (IMF) mission, which is also expected to review compliance with SOE-related conditions.
The finance ministry said SOEs face significant risks across sectors including oil and gas, power, infrastructure, information and communication technology (ICT), financial institutions, insurance, trading and manufacturing.
Their growing dependence on government guarantees, subsidies, circular debt mechanisms and weak revenue recovery has further exacerbated fiscal vulnerabilities, it added.
As another indicator of the deteriorating situation, the ministry said net cash returns by SOEs to the government dropped sharply by 91% to Rs40.7 billion.
Net fiscal flow, calculated as the difference between SOE contributions to the government, including taxes, dividends, levies, royalties and interest payments, and fiscal support received through equity injections, grants, subsidies, loans and guarantees – declined dramatically.
The report said net fiscal flow fell from Rs458.2 billion in the previous fiscal year to just Rs40.7 billion in fiscal year 2025. “This sharp reduction highlights a substantial decline in the net cash returns provided by SOEs to the government.”
Alongside the fall in net fiscal flow, the fiscal efficiency index also dropped significantly. In practical terms, for every Rs1 of government support, SOEs now return only Rs1.01, lower than the preceding year, according to the report.
During the last fiscal year, the government provided Rs2.1 trillion in fiscal support, 37% higher than a year earlier. It also extended Rs2.2 trillion in sovereign guarantees, an increase of 52% within a year.
The ministry said the declining returns reflect increased dependency on government transfers, reduced internal cash generation capacity and a diminished fiscal contribution from the SOE portfolio.
Another weak performance indicator showed that for every Rs100 spent on operational activities by SOEs, only Rs80 was earned in revenue, highlighting persistent operating cash flow deficits and rising negative operating leverage.
“As a result, these entities continue to rely heavily on external financing and government transfers to sustain their operations.”
The finance ministry said SOE credit risk remains a critical concern, as many enterprises are heavily dependent on sovereign support. Delays in receivables often force them to resort to costly borrowing, further straining fiscal resources.
In the oil sector, companies such as Oil & Gas Development Company Limited, Pakistan Petroleum Limited and Pak-Arab Refinery Company Limited are particularly exposed to the circular debt cycle. Overdue payments from entities like Pakistan State Oil and the power sector worsen credit risk, reducing liquidity, constraining free cash flow and limiting investment capacity.
Power sector
The report also carries negative implications for the power ministry, which is already facing criticism over its U-turn on solar policy.
“Business plans submitted by power sector distribution companies tend to be descriptive rather than analytical,” the finance ministry said. These plans often list intended activities, such as improving recoveries or reducing losses, but fail to model the financial impact of such interventions.
It added that DISCO plans frequently omit essential financial planning elements, including capital prioritisation, sequencing of loss-reduction investments and modelling of returns on investment.
There is little consideration for indicators like Debt Service Coverage Ratio (DSCR), Weighted Average Cost of Capital (WACC), or leverage.
“As a result, these plans lack the rigour required to serve as credible restructuring roadmaps and instead remain mere wish lists.”
This reflects a broader issue, as DISCOs tend to follow an activity-based planning approach – plan, spend and hope for positive outcomes – rather than a value-based approach focused on modelling, prioritisation and strategic allocation based on returns.
Similarly, power generation companies typically submit outdated and defensive business plansfocused on preserving existing capacity rather than optimising asset portfolios.
The report noted a lack of cost-benefit analysis on refurbishment versus decommissioning, as well as limited evaluation of asset disposal or privatisation options, leaving capital tied up in low-yield assets.
Distribution companies also continue to suffer from weak recoveries, technical losses and excessive reliance on government support through the tariff differential subsidy.
