ISLAMABAD: The government has allocated Rs73 billion for privatisation-related contingencies in the current fiscal year, including around Rs30 billion to cover interest on legacy debt linked to Pakistan International Airlines (PIA).

The allocation comes as the government expands its privatisation programme and prepares to restructure or wind down several public-sector entities.

The Rs30 billion interest bill relates to Rs268.5 billion in PIA debt transferred to the PIA Holding Company before the airline’s privatisation.

The annual interest cost is three times the Rs10 billion cash payment the government received from the sale of a 75% stake in PIA. The total bid value stood at Rs135 billion, with the remaining amount going into the airline under the agreed transaction structure.

PIA debt adds pressure on budget

The PIA debt was restructured in 2024 after the airline’s holding company board approved the transfer of Rs268 billion in commercial debt into public debt.

Banks agreed to extend the loans for 10 years at an interest rate of 12%. The move shifted the financial burden from the airline to the public sector.

Under the arrangement, banks could receive more than Rs300 billion in interest over the decade. The total repayment could reach around Rs573 billion when principal and interest are combined.

A government official said the Finance Ministry is providing the interest payment as a loan to PIA Holding Company.

The holding company has no independent revenue stream, according to the official. It expects to repay the loan through the sale of its hotel assets.

Rs73bn contingency covers wider costs

A Finance Ministry official said the Rs73 billion contingency would cover unexpected costs linked to the privatisation of three power distribution companies.

It will also cover interest payments on PIA’s legacy debt.

The Privatisation Commission said the contingency does not fall under its own budget or that of the Privatisation Division.

A Finance Ministry spokesperson said the allocation would fund costs arising from the privatisation or winding down of public-sector entities.

The government is pursuing a wider programme to privatise selected entities and close non-essential organisations.

Some transactions require funding for legacy liabilities. These include liabilities held by PIA Holding Company and potential costs linked to the planned winding down of the Pakistan Agriculture Storage and Services Corporation (PASSCO).

Government expands airline tax relief

The government has also decided to extend sales tax exemptions to all locally operated airlines from the next fiscal year.

Secretary Privatisation Commission Usman Bajwa informed the National Assembly Standing Committee on Privatisation about the decision on Tuesday.

The move aims to create a level playing field among airlines.

The National Assembly Standing Committee on Finance had previously raised concerns about preferential tax treatment for PIA’s buyers.

The government had approved an 18% sales tax exemption for PIA on aircraft purchases and leases from July.

The Arif Habib-led consortium acquired a 100% stake in PIA for Rs180 billion. Publicly available information shows Arif Habib Corporation and Fatima Fertiliser Company together hold a 34.1% stake in the consortium.

Fauji Fertiliser Company holds 34%, followed by Lake City Holdings with 14%, AKD Group with 10.25% and City Schools with 7.65%.

Committee chairman Syed Naveed Qamar suggested that the government should deduct the cost of the 15-year tax exemption from PIA’s overall sale price.

Bajwa said all airlines would receive the sales tax exemption for 15 years from July 2027. The broader exemption will begin in fiscal year 2027-28.

Privatisation Commission officials said the government had already discussed the plan with the International Monetary Fund.

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DISCO privatisation moves forward

The committee also reviewed plans to privatise three power distribution companies.

Committee Chairman Farooq Sattar said DISCO employees should not face dismissal for five years after privatisation.

The committee had made a similar recommendation during the PIA privatisation process. However, PIA bidders did not accept the proposal.

During roadshows, prospective DISCO buyers sought greater freedom to reduce staff. They argued that advanced metering could make parts of the workforce redundant.

Officials are considering a possible requirement that new owners retain employees for at least one year.

The committee also recommended performance audits of the distribution companies.

Bajwa said the DISCOs had been divided into four batches. FESCO, IESCO and GEPCO will form the first group offered to private investors.

The government plans to offer between 51% and 100% of the shares in the companies.

The deadline for expressions of interest for Gujranwala Electric Power Company (GEPCO) is August 21.

Bajwa said the DISCOs still carry historical losses on their books. Their balance sheets also contain transaction-related issues.

Officials will determine the final asset values after reviewing the losses, he said.

The government plans to hold bidding for the first three profitable DISCOs in December.

Bajwa also told the committee that DISCO losses remain higher than the targets set by the power sector regulator.

The government’s expanding privatisation programme therefore faces two parallel challenges: managing legacy liabilities while making state-owned companies attractive to private investors.

The Rs73 billion contingency allocation is designed to address some of those financial pressures as Pakistan pushes ahead with its reform and privatisation agenda.