Govt sets aside Rs73bn privatisation contingency, including PIA debt interest

The federal government has earmarked around Rs73 billion as a contingency provision for privatisation-related expenses during the current fiscal year

ISLAMABAD: The federal government has earmarked around Rs73 billion as a contingency provision for privatisation-related expenses during the current fiscal year, including approximately Rs30 billion to meet interest payments on legacy debt associated with Pakistan International Airlines (PIA).

The allocation comes as the government continues its broader programme to privatise state-owned enterprises while restructuring the liabilities of entities being prepared for sale or winding up.

Government budget documents indicate that taxpayers will effectively bear around Rs30 billion in interest costs this fiscal year on approximately Rs268.5 billion of PIA debt that was transferred to the newly established PIA Holding Company before the airline’s privatisation.

The annual interest bill is notably higher than the Rs10 billion in immediate cash proceeds received by the government from the sale of a 75% stake in the national flag carrier. The successful bidder’s total bid was reported at Rs135 billion, with only Rs10 billion going directly to the government while the remaining amount is being invested in the airline.

The government is also expected to transfer the remaining 25% stake to the same consortium for approximately Rs45 billion in cash, subject to the terms of the transaction.

Rs73bn provision to cover unexpected costs

A senior Finance Ministry official said the Rs73 billion contingency allocation has been designed to address expenses that may emerge during the government’s privatisation and restructuring programme.

The provision includes potential costs linked to the planned privatisation of three power distribution companies, in addition to interest payments arising from PIA’s legacy liabilities.

Another government official explained that the Finance Ministry is effectively providing the interest payment to the PIA Holding Company in the form of a loan.

The holding company currently lacks a substantial independent revenue stream with which to meet these obligations. Officials expect that proceeds from the disposal of assets, including PIA-owned hotels, could eventually be used to settle the liabilities.

PIA debt shifted to public sector books

The restructuring of PIA’s financial obligations dates back to 2024, when the board of the PIA Holding Company approved a plan to reorganise around Rs268 billion in commercial debt and transfer it into public debt.

Under the arrangement, banks agreed to extend the repayment period for a decade while receiving an interest rate of 12%.

Although the restructuring helped prepare PIA’s operating business for privatisation, it also transferred a substantial financial burden to the government.

At a 12% annual interest rate over 10 years, the cumulative interest burden is expected to exceed Rs300 billion, while the combined principal and interest payments could reach approximately Rs573 billion over the decade.

This means the government will need to make recurring budgetary provisions to service the debt, effectively placing a significant portion of PIA’s historical financial burden on public finances.

The Privatisation Commission clarified that the Rs73 billion contingency allocation does not represent funds specifically assigned to the commission or the Privatisation Division.

A Finance Ministry spokesperson said the contingency amount was intended to meet financial requirements that arise from the privatisation or winding up of public-sector organisations.

The ministry said the government was pursuing an extensive restructuring programme involving both the sale of state-owned entities and the closure or winding down of organisations considered non-essential.

Officials said some transactions could involve substantial legacy liabilities. In addition to obligations associated with PIA Holding Company, other planned transactions during the current financial year — including the restructuring or winding down of the Pakistan Agriculture Storage and Services Corporation (PASSCO) — could also require funding to settle inherited liabilities.

Sales tax relief to be extended to airlines

Meanwhile, the government has decided to extend sales tax exemptions to all locally operating airlines from fiscal year 2027-28, in an effort to create more equal tax treatment across the aviation industry.

The issue was discussed during a meeting of the National Assembly Standing Committee on Privatisation, which received an update on several ongoing transactions.

Privatisation Commission Secretary Usman Bajwa told lawmakers that the government had decided to extend the sales tax concession to other airlines rather than limit the benefit to PIA.

The decision follows concerns raised by the National Assembly Standing Committee on Finance over what lawmakers described as unequal treatment of competing airlines.

The government had earlier granted PIA an 18% sales tax exemption on aircraft procurement and leasing beginning in July. The concession was part of the government’s arrangements surrounding the airline’s privatisation.

Bajwa said the exemption had not been specifically demanded by the successful bidders and was instead a government policy decision.

PIA buyers receive long-term tax concession

The privatisation of PIA involved an Arif Habib-led consortium, which acquired the airline under a transaction valued at around Rs180 billion for 100% ownership.

Publicly available information shows that the consortium includes several major corporate groups, with Arif Habib Corporation and Fatima Fertiliser Company together holding around 34.1%, while Fauji Fertiliser Company holds approximately 34%. Lake City Holdings has around 14%, AKD Group about 10.25%, and City Schools approximately 7.65%.

Finance committee Chairman Syed Naveed Qamar questioned the financial implications of granting a 15-year tax exemption and suggested that the estimated value of the concession should be considered when assessing the overall price received for PIA.

According to Bajwa, the sales tax exemption for other airlines will become effective from the 2027-28 fiscal year and will also be available for a period of 15 years.

Privatisation Commission officials said the government had already discussed the proposed extension of the tax exemption with the International Monetary Fund (IMF).

DISCO privatisation moves ahead

The parliamentary committee was also briefed on the planned privatisation of three power distribution companies, commonly known as DISCOs.

The government has divided the distribution companies into four batches for the privatisation process. Under the first phase, Faisalabad Electric Supply Company (FESCO), Islamabad Electric Supply Company (IESCO) and Gujranwala Electric Power Company (GEPCO) are being prepared for private-sector participation.

Officials said investors could be offered between 51% and 100% of the shares in the companies.

The deadline for submitting expressions of interest for GEPCO has been set for August 21, while bidding for the first three companies is expected to take place in December.

Bajwa told the committee that the companies’ financial statements still contain historical losses and other transaction-related complications. The government will need to review these liabilities and assets before determining the final valuation of each company.

He also acknowledged that the losses recorded by several DISCOs have exceeded targets established by the power-sector regulator, raising concerns about their financial performance and attractiveness to prospective investors.

Lawmakers call for employee protection

The committee also raised concerns about the potential impact of DISCO privatisation on employees.

MQM-Pakistan lawmaker Farooq Sattar, who chairs the committee, recommended that workers of the power distribution companies should not be removed for at least five years following privatisation.

A similar demand had previously been made during the PIA privatisation process, although prospective buyers did not agree to a five-year employment guarantee.

During roadshows held for potential DISCO investors, prospective buyers reportedly sought greater flexibility to reduce staff, arguing that the introduction of advanced metering and other technological improvements could result in surplus manpower.

Officials indicated that a shorter employment protection period, potentially lasting one year, could be considered as part of the eventual transaction structure.

The committee also recommended conducting a performance audit of the DISCOs to assess their operational efficiency, financial condition and historical losses before they are transferred to private ownership.