Islamabad – Pakistan’s power sector is facing a deepening crisis, burdened by reports revealing liabilities exceeding Rs9.2 trillion – equivalent to half the nation’s annual budget. A recent report from the Ministry of Finance’s Central Monitoring Unit (CMU) paints a stark picture of operational deficiencies and financial mismanagement, raising serious questions about the sector’s long-term viability.
The CMU’s FY25 aggregate report on State-Owned Entities (SOEs), mandated by the International Monetary Fund (IMF), highlights a lack of analytical rigor in business plans submitted by power sector distribution companies (Discos). These plans, the report states, are largely descriptive, outlining intended activities like improving recoveries or reducing losses, but failing to model the financial impact of such interventions. “The absence of clear financial causality undermines the credibility and effectiveness of these plans,” the CMU observed.
Despite receiving the largest share of equity injections, the power sector continues to hemorrhage funds. The report details over Rs2 trillion in unfunded liabilities across all federal SOEs, with the power sector accounting for more than Rs1.5 trillion in unfunded pension liabilities alone. This exists alongside approximately Rs1.9 trillion in circular debt, even after an Rs800 billion capital injection during FY2025.
The issues extend beyond distribution. Generation companies (Gencos) are similarly criticized for presenting outdated business plans focused on preserving existing capacity rather than optimizing their asset portfolios. A “sunk cost fallacy” – the tendency to justify continued investment based on prior expenditures – is prevalent, leading to capital being tied up in low-yield assets. The CMU notes a lack of cost-benefit analysis regarding refurbishment versus decommissioning, and limited evaluation of potential asset disposals or privatization.
Discos’ plans are further faulted for omitting key financial planning elements, including capital prioritization, investment sequencing for loss reduction, and modeling of returns on investment. Critical indicators like the Debt Service Coverage Ratio (DSCR), Weighted Average Cost of Capital (WACC), and leverage receive insufficient consideration. The CMU concludes that these plans are “mere wish lists” rather than tangible restructuring roadmaps, reflecting an “activity-based” approach – plan, spend, and hope – rather than a “value-based” approach focused on strategic allocation and return on investment.
The financial strain on SOEs is evident in the broader fiscal picture. Fiscal support to SOEs increased by 37% to Rs2.079 trillion in FY25, compared to Rs1.513 trillion the previous year. This increase was largely driven by a one-off circular debt payment. Government loans to SOEs also rose, climbing 34% from Rs263.3 billion to Rs354.1 billion.
While grants and subsidies saw a reduction – falling 27% to Rs269.2 billion and 7% to Rs726.3 billion respectively – this appears to reflect shifting government priorities rather than improved operational efficiencies. Sovereign guarantees, however, increased significantly, rising 52% from Rs1.412 trillion to Rs2.164 trillion, largely due to accounting adjustments for self-liquidating guarantees.
Overall profitability of SOEs declined in FY25, with aggregate profits decreasing 13% from Rs820.7 billion to Rs709.9 billion. This downturn was primarily attributed to reduced contributions from oil sector SOEs due to declining international oil prices. Cumulative losses across SOEs saw a slight improvement, falling 2% to Rs833 billion, but the net result was a total net adjusted loss of Rs122.9 billion for FY25, compared to a loss of Rs30.6 billion in FY24.
The National Highway Authority (NHA) recorded the largest loss at Rs295 billion, followed by the power sector at over Rs315 billion. Total SOE equity increased by 7% to Rs6.246 trillion, but this growth was largely driven by recapitalization efforts and equity injections, particularly in the power sector, to address circular debt.
Total liabilities saw a moderate improvement, decreasing 3% to Rs31.742 trillion, while total assets remained relatively stable, declining marginally by 1% to Rs37.988 trillion. The government collected Rs12.97 trillion in tax revenue during FY25, of which approximately Rs2.1 trillion (around 16%) was channeled back to SOEs through subsidies, equity injections, grants, and loans – effectively absorbing Re1 for every Rs6 collected in taxes.
The report also highlights a shift towards “sovereign-intermediate financing,” where the federal government assumes the credit risk and SOEs act as borrowers. Cash Development Loans increased by 21% to Rs2146 trillion, and Foreign Re-Lent exposure rose by 24% to Rs2.16 trillion. Bank borrowing remained largely unchanged at Rs2.8 trillion, suggesting a tightening of credit exposure limits.
Unfunded pensions represent a significant liability, totaling Rs2.03 trillion, with Rs1.5 trillion attributed to the power sector (excluding Pakistan Railways). Statutory compliance standards across SOEs remain weak, with only 36% having finalized audited financial statements as of the reporting cutoff, hindering timely performance analysis and fiscal risk evaluation.
The CMU’s report concludes with a call for strengthened governance, improved audit timeliness, enhanced disclosure quality, and performance-linked accountability to foster strategic discipline and sustainable value creation within SOEs. The findings underscore the urgent need for comprehensive reforms to address the systemic challenges plaguing Pakistan’s power sector and prevent further strain on the national economy.
