Taxpayers to pay Rs30b for PIA debt

Banks to earn Rs573b in interest over 10 years; govt extends sales tax exemptions to all airlines

ISLAMBAD:

The government has allocated Rs73 billion for privatisation contingency, including about Rs30 billion to pay interest cost on legacy debt of Pakistan International Airlines (PIA), as it also decides to extend sales tax exemptions to all locally operated airlines to provide a level playing field.

Government books showed that taxpayers would pay Rs30 billion interest on Rs268.5 billion PIA debt during the current fiscal year, which had been parked in a new PIA holding company before its privatisation. The interest cost for the current fiscal year alone is three times the cash Rs10 billion that the government received against the sale of 75% stakes. Of the Rs135 billion total bid money, the government received Rs10 billion, while the remaining amount was being invested in PIA by the successful bidder. The remaining 25% shares would also go to the same bidders for Rs45 billion cash.

A finance ministry official said the Rs73 billion contingency for privatisation was meant to cover unforeseen expenses during the privatisation of three power distribution companies and to pay interest cost on PIA debt.

A government official said the finance ministry was giving interest cost as loan to PIA holding company. The holding company does not have an independent revenue stream and hopes to settle the loan by selling hotels, he added.

In 2024, the PIA Holding Company board approved restructuring the airline's Rs268 billion commercial debt and incorporated it into public debt. Banks agreed to extend their debt for ten years in return for a 12% interest rate. The decision shifted the airline's debt into public debt and now requires annual allocations for interest payments from the budget.

This arrangement means banks will receive over Rs300 billion in interest payments over a decade, exceeding their outstanding stocks of Rs268 billion. The total pay-out to banks at a 12% interest rate will be Rs573 billion over ten years.

When contacted, a Privatisation Commission spokesperson said the Rs73 billion contingency did not pertain to the commission or the Privatisation Division.

A finance ministry spokesperson said the contingency allocation is meant to fund requirements arising from privatisation or winding up of public sector entities. The government is pursuing an extensive privatisation programme along with winding down non-essential entities. Some transactions require funding for legacy liabilities. Apart from legacy liabilities held with PIA Holdco, other privatisation and winding down actions planned during the current financial year, including Pakistan Agriculture Storage and Services Corporation (PASSCO), could entail funding their respective legacy liabilities, requiring the said contingency provisions.

Tax exemptions

The National Assembly Standing Committee on Privatisation on Tuesday took a briefing from the Privatisation Commission on the status of various transactions.

Secretary Privatisation Commission Usman Bajwa said the government has decided to extend sales tax exemption to all airlines from the next fiscal year to provide a level playing field. The National Assembly Standing Committee on Finance had first asked the government to end discriminatory treatment meted out to other airlines due to special tax treatment given to PIA buyers for 15 years.

In June, Bajwa said bidders did not ask for preferential treatment; it was the government's decision to give tax exemptions to only PIA for 15 years. The government had given 18% sales tax exemption to PIA on procurement and lease of aircraft from July this year. The Arif Habib-led consortium acquired 100% stakes in PIA for Rs180 billion. According to publicly available information, Arif Habib Corporation and Fatima Fertiliser Company together held a 34.1% stake. Fauji Fertiliser Company holds 34%, followed by Lake City Holdings 14%, AKD Group 10.25% and City Schools 7.65%.

Syed Naveed Qamar, chairman of the NA standing committee on finance, remarked that the government should exclude the cost of tax exemption for 15 years from the total sale price of PIA. According to Bajwa, from July 2027 onwards, sales tax exemption for all airlines will be for 15 years. The exemption for other airlines will be effective from next fiscal year 2027-28.

After the committee meeting, Privatisation Commission officials said the government has already taken the International Monetary Fund (IMF) into confidence about extending sales tax exemption to other airlines.

The committee also took a briefing on privatisation status of three power distribution companies.

Committee Chairman Farooq Sattar of MQM-Pakistan said employees of power distribution companies should not be sacked for five years. The committee made a similar recommendation during PIA privatisation, which bidders did not accept.

During road shows with prospective bidders, buyers demanded a free hand in retrenching employees on the grounds that the workforce would be surplus due to advanced metering. There is a possibility that new buyers may be bound not to fire employees for at least one year.

The committee also recommended a performance audit of DISCOs.

Bajwa stated that DISCOs have been divided into four batches. In the first phase, FESCO, IESCO and GEPCO will be privatised. The private sector is being offered 51 to 100% shares. The deadline for expression of interest for Gujranwala Electric Power Company (GEPCO) is August 21. Bajwa informed the forum that old losses exist on the books of DISCOs and there are transaction issues in their balance sheets.

After reviewing losses, a final value for assets can be determined, Bajwa said. The bidding date for the first three profitable companies is December this year.

He said DISCO losses were higher than targets set by the power sector regulator.