Impacts of Privatization on PTCL

Impacts of Privatization on PTCL

IMPA IM PACT CTS S OF PRIVATIZATION ON PTCL PT CL

Submitt Subm itted ed T o: Mr. Haroon Hussain Submitt Subm itted ed By:

Umair Ahmed BBA (Hons.)7th Roll No. 06-164 Session: 2006-2010 2006-2010

Department of Management Sciences University of Education Okara Campus

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DEDICATION My great mother AND Loving Lovi ng father whose prayers are great sources Of Strength to me m e in every venture. MY Loving Lovi ng brother who who supported me with with lovely love ly attitude and long lon g Passion for completing My work and who’s sincere sinc ere invoke success throughout throughou t my life.

AND My teachers who who helped me m e through out the process AND All of those who who love and help me m e in this process

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ACKNOWLEDGEMENT In the name of ―Allah‖, the most beneficent and merciful who gave me strength and

knowledge to complete this report. This has proved to be a great experience. I would like to express our gratitude to my supervisor Mr. Haroon Hussain ; who provide me assistance to fulfill this report and all my friends who support me to accomplish this research.

UMAIR AHMED

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Table of Contents EXECUTIVE EXEC UTIVE SUMMARY... SUMMARY...... ...... ................................... ...................................................... ....................................... ................. 0 1. INTRODUCTION ……………………………………………......................... 1

1.1 Overview …………………………………………………………….. ..... 2 1.2 Problem Statement …………………………………………………...... 2 1.3 Research Question ……………………………………………………... 2 1.4 Goals of Research ……………………………………………………... 2 2. LITERATURE REVIEW ……………………………………………………… 3

2.1 What What is Privatization Privatization?.... ?............................... ...................................................... ......................................... .............. 4 2.2 Origin of Privatization.. Privatization..... .................... ....................................... ................................................. ............................. 4 2.3 History of Privatization.. Privatization..... ............... ....................................... ................................................. .......................... .... 4 2.4 Types Types of Privatization.. Privatization..... .................... ............................................ ................................................. ........................ 4 2.4.1 Share Share Issue Privatizat Privatization.. ion..... ............. .......................... ...................................... .......................... .... 5 2.4.2 Asset Sale Privatization. Privatization.... ......................... ................................................. ................................. ...... 5 2.4.3 Voucher Voucher Privatization.. Privatization..... ............... ....................................... .............................................. ................... 5 2.5 Points in Favor of Privatization. Privatization.... ......................... .......................................... ............................... ........... 5 2.6 Points in Favor of Anti-Privatiz Anti-Privatization. ation................................. ................................................. ................. 7 2.7 Alternatives Alternatives to Total Total Privatizat Privatization.. ion..... .................... ....................................... ............................... ......... 9 2.7.1 Public Public Utility. Utility.... ......................... ................................................. ................................................... ........................ 9 2.7.2 Non-Profit................................................................................ 10 2.7.3 Municipalization...................................................................... 10 2.7.4 Out Out sourcing or Sub-contracting......... Sub-contracting............. ........... ........... ........... .............. ........... ....... ... 10 2.7.5 Partial ownersh ownership..... ip........................... ................................................. ......................................... .............. 10 2.8 Nationalization................................................................................. 10 2.8.1 National Nationalization ization in Pakistan...... Pakistan......... .............................. ............................................. .................. 11 2.9 About PTCL..... PTCL........ ...... .................. .......................................... .............................................. ............................... .............. 12 2.11 History of PTCL..... PTCL........ ................................... ........................................................... ....................................... ............ 13 2.12 About Etisalat... Etisalat...... ...... .............................. ............................................... .............................................. .......................... 14 3. Analysis Analysis and Findings ...... ......... ..................... ............................................. ............................................. .................. 16

3.1 Privatization Privatization Process of PTCL..... PTCL........ ...... ............... ....................................... ................................. ...... 17 3.2 Impacts of Privatization on PTCL............... PTCL...................... .............. ........... ........... ........... ........... ........ 18 3.2.1 Impact on Competition.... Competition....... ...... .......... .................................. .......................................... ............... 18

IV

Impacts of Privatization on PTCL 3.2.2 Impact on Employmen Employment... t.................. ........................................ ........................................ ............... 19 3.2.3 Impact on Performan Performance... ce...... ......................... .......................................... .............................. .......... 20 3.3 Financial Financial Highligh Highlights.. ts..... ......................... ................................................. ............................................... .................... 23 3.4 SWOT Analysis.. Analysis..... ...... ........ ................................ ................................................. ........................................ .................. 27 3.4.1 Strength.................................................................................. 27 3.4.2 Weakness............................................................................... 29 3.4.3 Opportunity............................................................................. 30 3.4.4 Threat..................................................................................... 30 4. Conclusion And Recommendations.... Recommendations....... ...... ...... ............... .................................. ........................... ..... 31

4.1 Conclusion....................................................................................... 32 4.2 Recommendations........................................................................... 32 4.2.1 New Techn Technology... ology........ ................................ ...................................................... .................................. ....... 32 4.2.2 Price Discrimination Disc rimination... ...... ...... ............... ....................................... ........................................... ................ 32 4.2.3 Customer Customer Services..... Services........ .............................. ...................................................... ............................... .... 33 References.................................................................................................... 34

List of Figures and Tables Table: 3.1 Liquidity of PTCL over the time..................................................... 21 Figure: 3.1 Liquidity of PTCL over the time.................................................... 21 Table: 3.2 Leverage of PTCL over the tome............ tome................... ........... ........... ........... ........... .............. ......... .. 21 Figure: Fig ure: 3.2 Leverage of PTCL over the the time................... time....................... ........... ........... ........... .............. ......... .. 22 Table: 3.3 Profitability of PTCL over the time................................................ 22 Figure 3.3 Profitability P rofitability over over the the time....... time.......... ......................... ................................................. .............................. ... 23 Figure : 3.4 EPS EP S over over the the time...... time......... ................................... ........................................................... .............................. ... 23 Table: Table: 3.4 Finan Fi nancial cial Highligh Highlights... ts................................... ........................................................... ................................... ........ 23 Figure: 3.5 Return on operating Assets & Equity.......................................... 25 Figure: 3.6 Revenu Revenue... e......................... ............................................ ................................................. ...................................... ........... 25 Figure: 3.7 Operating and and Net Profit....... Profit............................................ ....................................................... .................. 26 Figure: 3.8 Dividend payout over the time.................................................... 26 Figure:3.9 Figure:3.9 Dividen Di vidend d Payout... Payout...... ............... ....................................... ................................................. .............................. ........ 27 Figure: 3.10 Market Share of Mobile Compan C ompanies ies... ...... ...... ................................. ................................ .. 28

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EXECUTIVE SUMMARY This research consists of complete privatization process and impacts on PTCL after getting privatized. For this purpose I have collect financial reports of PTCL of five years and some journals to find the impacts of PTCL on the Performance (by calculating different kind of financial ratios of the PTCL), competition and employment.

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1.1Overview PTCL is the largest telecommunication company in Pakistan. This company provides telephony services to the nation and still holds the status of backbone for country's telecommunication infrastructure. The company consists of around 2000 telephone exchanges across country providing largest fixed line network. GSM, CDMA and Internet nternet are other other resources re sources of PTCL, making it a gigant giga ntic ic organization. org anization. The Privatization Commission, Government of Pakistan had planned to privatize 51 % shares of entity through bidding. In response, the government faced stirred opposition from the em ployees of PTCL lead of employee’s parties and strike of about 20 days lead the knees of government down, which re-scheduled the mechanism and presented plan of privatizing 26 % of shares along with the managerial powers in 2006 for some about US$ 2.6 billion to a Dubai based Telecom Company Eitsalat. PTCL was one of the Pakistan profits earning Telecom Company. After getting Privatized PTCL is losing its base as its subscription declined from 5.12 million to 4.40 million in 2008. While the revenue declined from Rupees 69,085 million in 2006 to RS. 61,085 million in 2008. Similarly the Profit after tax in 2006 was some about Rs 20,777 million while in 2008 there is a loss of Rs. 2,825 million. The financial statement shows a continuous growth till 2006 while after privatization the company is facing severe financial shortcomings (PTCL. limited).

1.2 Problem Statement ―After privatization a decline in the profitability of the PTCL is scene.‖

1.3 Research Question ―What is impact of privatization on PTCL?‖

1.4 Goals of Research 1 Impact on Performance 2 Impact on Competition Competi tion

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2.1 What W hat is is Privatization? ―It is the process of selling government assets to private buyers.‖ (International

business by: Alan M.Rugman). Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.

2.2 Origin of Term It has been claimed that the term was first used in the 1930s by The Economist in covering Nazi German economic policy

2.3 History of Privatization There is a long history of privatization dating from Ancient Greece when the government contracted out almost everything to the private sector. In the Roman Republic private individuals and companies performed the majority of services

including tax collection, army supplies, religious sacrifices and construction. However, the Roman Empire also created state-owned enterprises — for example, much of the grain was eventually produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire. In more recent times, Winston Churchill's government privatized the British steel industry in the 1950s, and West Germany's government embarked on large-scale privatization, including selling its majority stake in Volkswagen to small investors in a public share offering in 1961

[5]

. In the 1970s General Pinochet implemented a

significant privatization program in Chile. However, it was in the 1980s under the leaderships of Margaret Thatcher in the UK and Ronald Reagan in the USA, that privatization gained worldwide momentum.

2.4 Types of Priv Priv atization There are three main methods of privatization:

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2.4.1 Shar Sh are e Issue Privati Priv atization zation (SIP): Selling shares on the stock market. Share issue privatisation is the most common type of privatisation. Share issues can broaden and deepen domestic capital markets, boosting liquidity and potentially economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g. underpricing required) may be higher. For this reason, many governments elect for listings in the more developed and liquid markets, for example Euronext, and the London, New York and Hong Kong stock exchanges

2.4.2 Asset Sale Privatization: Priva tization: Selling the entire entire firm or part of o f it to a strategic investor, usually usually by auction. auction. As a result of higher political politi cal and currency currency risk deterring foreign foreig n investors, investors, asset a sset sales are more common in developing countries. A substantial benefit of asset sale privatizations is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues.

2.4.3 Voucher Vouc her Privatization: Privatization: Shares of ownership are distributed to all citizens, usually for free or at a very low price.

2.5 Points In Favor of Privatization 1-Performance: State-run industries tend to be bureaucratic. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive, and such an improvement can be reversed easily by another regime.

2-Increased eff e fficiency: iciency: Private companies and firms have a greater incentive to produce more goods and services for the sake of reaching a customer base and hence increasing profits. A state-owned firm would not be as productive due to the lack of financing allocated by the entire government's government's budget that must consider consi der other areas of the the economy. ec onomy.

3-Specialization: A private business has the ability to focus all relevant human and financial resources

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Impacts of Privatization on PTCL onto specific functions. A state-owned firm does not have the necessary resources to specialize its goods and services as a result of the general products provided to the greatest number of people in the population.

4-Improvements: Conversely, the government may put off improvements due to political sensitivity and special interests — even in cases of companies that are run well and better serve their customers' needs.

5-Accountability: Managers

of

privately

owned

companies

are

accountable

to

their

owners/shareholders and to the consumer, and can only exist and thrive where needs are met. Managers of publicly owned companies are required to be more accountable to the broader community and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias bia s investment investment decisio deci sions ns away from otherwise otherwise profitable areas.

6-Civil-l 6-Civil-liberty iberty concerns: concer ns: A company controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies.

7-Goals: A political government tends to run an industry or company for political goals rather than economic ones.

8-Capital: Privately held companies can sometimes more easily raise investment capital in the financial markets when such local markets exist and are suitably liquid. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. Stateowned

industries

have

to

compete

with

demands

from

other

government

departments and special interests. In either case, for smaller markets, political risk may add substantially substantially to the the cost of capital.

9-Natural monopolies: The existence of natural monopolies does not mean that these sectors must be state -6-

Impacts of Privatization on PTCL owned. Governments can enact or are armed with anti-trust legislation and bodies to deal with anti-competitive behavior of all companies public or private.

10-Concentration of wealth: Ownership of and profits from successful enterprises tend to be dispersed and diversified -particularly in voucher privatization. The availability of more investment vehicles stimulates capital markets and promotes liquidity and job creation.

11-Profits: Corporations exist to generate profits for their shareholders. Private companies make a profit by enticing consumers to buy their products in preference to their competitors' (or by increasing primary demand for their products, or by reducing costs). Private corporations typically profit more if they serve the needs of their clients well. Corporations of different sizes may target different market niches in order to focus on marginal groups and satisfy their demand. A company with good corporate governance will therefore be incentivized to meet the needs of its customers efficiently.

12-Job gains: As the economy becomes more efficient, more profits are obtained and no government subsidies and less taxes are needed, there will be more private money available for investments and consumption and more profitable and better-paid jobs will be created than in the the case of a more more regulated economy.

2.6 Points In Favor of Anti-Privatization 1-Performance: A democratically elected government is accountable to the people through a legislature, Congress or Parliament, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to social objectives.

2-Improvements: The government is motivated to performance improvements as well run businesses contribute to the State's revenues.

3-Accountability: The public does not have any control or oversight of private companies.

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4-Civil-l 4-Civil-liberty iberty concerns: concer ns: A democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened.

5-Goals : The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole.

6-Capital: Governments can raise money in the financial markets most cheaply to re-lend to state-owned enterprises.

7-Lack of market mark et discipline: discipline: Governments have chosen to keep certain companies/industries under public ownership because of their strategic importance or sensitive nature.

8-Cuts in in essenti esse ntial al services serv ices If a government-owned company providing an essential service (such as the water supply) to all citizens is privatised, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable.

9-Natural monopolies: Privatizations will not result in true competition if a natural monopoly exists.

10-Concentration of wealth: Profits from successful enterprises end up in private, often foreign, hands instead of being available for the common good.

11-Political influence: Governments may more easily exert pressure on state-owned firms to help implementing government policy.

12-Downsizing: ‖Private companies often face a conflict between profitability and service levels, and

could over-react to short-term events. A state-owned company might have a longerterm view, and thus be less likely to cut back on maintenance or staff costs, training etc, to stem short term losses. Many private companies have downsized while making record profits.

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13-Profit: Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority, and are thus anti-democratic. The more necessary a good is, the lower the price elasticity of demand, as people will attempt to buy it no matter the price. In the case of price elasticity of demand is zero; demand part of supply and demand theories does not work.

14-Privatisation 14-Privatisation and Poverty Pove rty: It is acknowledged by many studies that there are winners and losers with privatization. The number of losers which may add up to the size and severity of poverty can be unexpectedly large if the method and process of privatization and how it is implemented are seriously flawed (e.g. lack of transparency leading to state-owned assets being appropriated at minuscule amounts by those with political connections, absence of regulatory institutions leading to transfer of monopoly rents from public to private sector, improper design and inadequate control of the privatization process leading to asset stripping.

15-Job Loss : Due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company.

2.7 Alternative to Total Privatization 2.7.1 Public Utility: Utility: The enterprise can remain as a public utility.

2.7.2 Non-Profit: The enterprise could be managed by a private non-profit organization.

2.7.3 M unicipalization: unicipalization: Transferring control to municipal government.

2.7.4 Outsourcing or Sub-contracting: Sub-contracting: It is possible that national services may sub-contract or out-source functions to private enterprises. A notable example of this is in the United Kingdom, where many municipalities have contracted out their garbage collection or administration of

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Impacts of Privatization on PTCL parking fines to private companies. In addition, the British government has involved the private sector more in the workings of the National Health Service principally through outsourcing the construction and operation of new hospitals to private companies. There are also moves to refer patients to private surgeries to ease the load on existing NHS human resources, and covering the cost of this.

2.7.5 Partial Pa rtial ownership owner ship:: An enterprise may be privatized, with a number of shares in the company being retained by the state.In Germany, the state privatized Deutsche Telekom in small tranches, and still retains about a third of the company. Partial privatization could be an alternative, it is more often a stepping stone to full privatization. It can offer the business a smoother transition period during which it can gradually adjust to market competition. Some state-owned companies are so large that there is the risk of sucking liquidity from the rest of the market, even in the most liquid marketplaces, and thus must be sold off bit by bit.

2.8 Nationalization Nationalization is the act of taking an industry or assets into the public ownership of a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being state operated or owned by the state. The opposite of nationalization is usually privatization or de-nationalization, but may also be municipa municipalization. lization. A renationalization occurs when state-owned assets are privatized and later nationalized again, often when a different political party or faction is in power. A renationalization renationalization process proces s may also be called reverse privatization . The motives for nationalization are political as well as economic. It is a central theme of certain brands of 'state socialist' policy that the means of production, distribution and exchange, should be owned by the state on behalf of the people to allow for rational allocation and operation, and rational planning or control of the economy. Many socialists believe that public ownership enables people to exercise full democratic control over the means whereby they earn their living and provides an effective means of redistributing wealth and income more equitably. Nationalized industries, charged with operating in the public interest, may be under

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Impacts of Privatization on PTCL strong political and social pressures to give much more attention to externalities. They may be obliged to operate some loss making activities where social benefits are clearly greater than social costs - for example, rural, postal and transport services. As an instance, the United States Postal Service is guaranteed its nationalized status by the Constitution. The government has recognized these social obligations and, in some cases, provides subsidies for such non-commercial operations. Since the nationalized industries are state owned, the government is responsible for meeting any debts incurred by these industries. The nationalized industries do not normally borrow from the domestic market other than for short-term borrowing. However, if profitable, the profit is often used as a means to finance other state services such as social programs and government research which can help lower the tax burden.

2.8.1 Nationalization in Pakistan: 1972 On January 2, 1972, Zulfiqar Ali Bhutto, after the fall of East Pakistan,

announced the nationalisation of all major industries, including iron and steel, heavy engineering, heavy electricals, petrochemicals, cement and public utilities.

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2.9 About PTCL Paki stan Telecommunication Telecommunication Company Limited Limi ted Name of Company: C ompany: Pakistan

Monogram:

Slogan: Industry:

“Feel the Difference ”

Telecommunication

Vision: To be the the leading leadi ng Information nformation and Communicatio Communication n Techn Technology ology Service Provider Provid er in the region by achieving customer satisfaction and maximizing shareholders' value'. The The future is unfolding unfolding around us. In times time s to come, we will be the the link li nk that that allows a llows global communication. communication. We are striving towards mobilizing mobi lizing the world for the the futu future. re. By becoming becomi ng partners partners in innovation, innovation, we are ready to shape a futu future re that that offers telecom services that bring us closer.

Mission: To achieve our vision by having:

An organizational environ environment ment that that fosters professional professio nalism, ism, motivation moti vation and



quality An environm environment ent that is cost effective and a nd quality quality conscious consci ous



Services that are based on the most optimum technology



"Quality" and "Time" conscious customer service



Sustained growth in earnings and profitability



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Core Value: Professional Integrity



Customer Customer Satisfaction

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Teamwork



Company Loyalty

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2.10 2.1 0 History of PTCL When Pakistan came into being then it start with name of "Pakistan post & telegraph Department" in 1947. As time passed and new technology developed communication system has also developed. So in 1962 telephone and telegraph department was established and Pakistan post was declared as separate department. Telephone &Telegraph department has converted to Telecommunication Corporation in 1991 under under Paki P akistan stan Telecommunication Telecommunication Corporation Corpo ration (PTC) ordinance of 1991. With Pakistan Telecommunication Corporation Ordinance 1991 government open the way for private competition and start awarding licenses for cellular phone and card operated pay phones. With this liberalization 1991 government of Pakistan decided to privatized PTC and use voucher method in 1994 for privatization that later were convertible to shares, total number of voucher was six million that were equal to 600 million shares at the rate Rs. 10 per share. The telecom sector was liberalized but PTCL was still the monopolist of the land line telephone services. In 1996 "Pakistan Telecommunication Company" was formed and declared the monopoly for the basic telephony of the country with "Pakistan Telecommunication (reorganization) Act 1996‖,

the same year the company has been listed on all stock markets in Pakistan.

In 2001 PTCL open two subsidiaries for mobile phone service and for internet services called Ufone and PakNet respectively. Paknet was not that affective and dissolved later, the recent DSL services are being directly supervised and operated by PTCL (PTCL Internal Report), While Ufone is continue competing in the mobile market and is able increasing its market share. In 2003 PTCL monopoly comes to an end when government decided to completely liberalize the telecommunication industry. In 2006 the company was completely privatize when government sold its 26% management share to Etisalat.

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2.11 About Etisalat Etisalat Name of Company: C ompany:

Etisalat

Monogram: Our Vision: A world wo rld where people’s reach is not limited by matter or distance.

People will effortlessly move around the world, staying in touch with family, making new

friends

as

they

go,

as

well

as

developing

new

interests.

Businesses of all sizes, no longer limited by distance, will be able to reach new markets. Innovative technologies will open up fresh opportunities across the globe, allowing the supply s upply of new goods goo ds and service se rvices s to everyone who wants them.

Our Mission To extend people’s reach.

At Etisalat, we are actively developing advanced networks that will enable people to develop, to learn and to grow.

Our Values Energy

We value and nurture the energy and dynamism needed to achieve the very best in business. We look forward to future challenges and opportunities. Openness

As a company, we are welcoming, sociable and friendly to customers, suppliers and employees. We deal with people in a clear, direct way and are always honest and fair in business dealings. Enablement

Our aim is to open up opportunities and to actively help people reach their goals. We always deliver what we say we will.

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The Future Future A world in which w hich technology extends our reach.

Already, music, books and services no longer have to have a physical format to be sold online. Advanced networks will increasingly provide education, healthcare and other services and goods. For instance, telemedicine already allows patients to seek the best advice from doctors around the world; now robotic aids are beginning to make remote surgery possible. As the pace of technological change increases, Etisalat will extend its reach into new technologies, services and markets to create opportunities for our customers.

International Investment of Etisalat: 

Thuraya



Excelcomindo (XL) Indonesia



Canar, Sudan



Etisalat Nigeria (EMTS) (EMTS)



PTCL , Pakistan



Etisalat Misr (Egypt)



Zantel, Tanzania



Etisalat Afghanistan



Etisalat Software Services Services Private Limited (ESSPL) - Technol Technologia ogia



Atlantique Telecom (AT)



Millicom Sri Lanka L anka ―TIGO‖ ―TIGO‖



Etisalat International



Etihad Etisalat ―Mobily‖ Saudi Arabia



Etisalat Etis alat DB Telecom Telecom India India PVT LTD. LTD.

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3.1 Privatization Process of PTCL In December 1990 "Pakistan Telecommunication Corporation" was established to replace the "Pakistan Telephone and Telegraph Department". In 1991 government of Pakistan show its intention for the privatization of PTC to meet the need of the country and also for esteem growth of economy. A consortium was hired for this purpose to see the feasibility and on the bases of his report government decided to sell out the 26 % share capital with management rights and to convert it to limited company. As decided in the "privatization session of 1991-1992" 12% shares of Pakistan Telecommunication have been divested during 1994. One million exchangeable vouchers has been issued in august 1994 these were equal to 100 million shares each has a value of Rs 10. In September 1994 five million vouchers has been issued to international 31 investors. The value of these issues were $900 million from international and Rs.3 billion from domestic issue while the values of the voucher in first and second issues were Rs.3000 and 5500 respectively. While the issues of 26 % management share was still a controversy, the Government was continue with its mission by issuing Notes with 150 million US dollar worth to international investor in 1997. The Notes were convertible to fully paid "A" class ordinary shares of PTCL and these were 3.3 % of the total share capital issued. In august 1997 foreign receivable has been securitized successfully obtaining 250 million US dollar to GOP. In 1995 a new financial advisor was hired by Privatization commission for the implementation of strategic sale (26% management shares) but the new governments suspended the services of the financial advisor, and in 1998 hire the M/S Goldman Sachs International to provide advisory services on PTCL privatization. The Financial Advisor has start working and established a data room at the head quarter of PTCL where all possible information that is related to PTCL were available to facilitate the team. Government approved the proposed policy and decided to complete the Re-regulation by December 2003, major steps has been taken on legal and regulatory measures, PTA granted license to PTML (Ufone) and proposed DSI regulation for tariff and licensing has also been accepted. At last in April 2006 control of the Pakistan Telecommunication corporation was handed over to Etisalat(UAE based company), Etisalat assume the control of the

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Impacts of Privatization on PTCL company by paying 2.6 billion US dollar to buy 26% share with management right in PTCL. With the control of PTCL Etisalat also assume the control of Ufone, one the top class mobile service provider subsidiary of PTCL. This privatization has bring in great technological change and innovation, as we can now connect to internet through mobile from all around the country, telenor is providing TV coverage, MMS and GPRS are the services available on all the mobile operator. PTCL

also

signed

a

contract

with

Emaar

to

provide

information

and

telecommunication technology services to household in Karachi and Islamabad. After this agreement PTCL is the only services provider that offer ICT to two big project of Emaar Pakistan, every household and office will be connected through fiber optics.

3.2 Impacts of Privatization on PTCL 

Impact on Competition



Impact on Employment



Impact on Performance

3.2.1 Impact on Competition: With the the privatization of PTCL many Competitors Compe titors have have entered entered in Pakistani Paki stani market. Paktel and Instaphone were entered in Pakistan telecom industry in 1990 and in 1994 Mobilink started its function. In 2001, Ufone, a supplementary part of PTCL entered in the market and in 2005 20 05 both Warid and Telenor Telenor one o ne by one started

their their services. services . From the the year 2000 there is tremendous tremendous increase in the the

cellular users. Mobilink is the largest cellular company with the highest number of users, compare to Ufone. Currently 79% population in Punjab have mobile phones, 75% in Sindh, 34% in Baluchistan, 63% in N.W.F.P. and overall 73.3% of population in Pakistan enjoying this facility. Zong (previously Paktel) has great share in the cellular market. Latest data from PTA shows that Telenor rise to number two and Warid telecom is becoming more popular and capturing market share with the high pace as compare to other traditional rivals. Within 4 year of time Telenor has reached to the second largest cellular mobile company after Mobilink with Subscribers of approx. 19 million. - 18 -


3.2.2 Impact on Employment: PTCL has approx. 65000 employees before privatization. The main workforce of the PTCL is unqualified and unskilled. About 50% employees are under graduate. After privatization of PTCL the new management has realized that company spent huge amount on employees in respect of salary and other different remunerations. In order to reduce the operational cost of the organization, to make it more effective and profitable, PTCL need to layoff these unskilled employees. PTCL has launched a scheme called VSS (Voluntarily separated scheme). Under this scheme PTCL has to pay a lump sum amount to the employee who is willing to leave PTCL. The VSS scheme cost Rs. 34.94 billion to PTCL for the period 2007 and 2008, assuming that 60 percent of the employees avail this package. PTCL HR wing stepped forward to facilitate the emergence of new Corporate Culture by becoming Equal opportunity employer, inducting fresh blood from the market, improving the way PTCL runs and reducing the number of employees having outdated skill set. The Training & Development wing of the HR Department also organized a comprehensive six months ―Urgent Training Needs‖ program in

technical and managerial fields to enhance soft skills. Healthy improvements have been made in the area of Recruitment and Retention as the whole recruitment process has been redefined to cope with the changing business requirements. Detailed facilitation programs have been initiated for the orientation of newly hired employees. PTCL employees have been provided excellent international placement opportunities across various Etisalat International Business Operations.

Training and Development

The role of training and development in a service involved organization is many times more in comparison with what it has in a manufacturing involved organization. This role becomes more significant in a situation where the need to transform organizational culture is identified as the most glaring problem and the most difficult impediment on the way to organizational growth. PTCL employees are a great asset not only for the company but also for the country. Their marvelous potential is yet to

- 19 -

Impacts of Privatization on PTCL be exploited. Their skills need to be developed, their expertise need to be updated for which training and development department is at their disposal to cater to their training needs. At PTCL, training and development team would never miss an opportunity to contribute towards the betterment of the company. Training and Developments is playing an essential role in changing PTCL from a government sector organization to corporate sector company. PTCL consider every employee of the company as our customer and firmly believe that meeting their expectation would help us achieve customer satisfaction. We look forward to your input for making our endeavors more effective. The Training and Development has a clear road map of activities and is committed to provide high quality trainings for the development of every single employee.

3.2.3 Impact Impact on Performance: Performance : Liquidity Liquidity Ratio: Liquidity: A firm’s ability to satisfy its short-term obligatons‖, (Lawrence J. Gitman;

Principles of Managerial Finance). Liquidity refers to the solvency of the firm’s overall financial position, the ease with which it can pay its bills. Because a common precursor to financial distress and bankruptcy is low or decilinig liquidity, these ratios can provide early sign of cash flow problems and implementing business failures. The two basic measures of liquidity liquidi ty are current current and quick quick ratios. rati os. Generally Generally,, the the higher the current current ratio, ratio , the the more liquid the the firm is considered to be. be . Years Yea rs

2009

2008

2007

2006

2005

2004

Current

Times

1.50

1.81

2.19

1.66

1.89

2.78

Quick

Times

1.36 1. 36

1.58

2.03

1.54

1.73

2.67

Table: 3.1 Liquidi Liquidity ty of PTCL PTCL over over the time tim e

Interpretation:

The above figures shows that the firm had more liquid before privatization, company has privatized in 2006 and above table shows more favorable figures before 2006, which shows that the liquidity of PTCL has decreased after privatization.

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Impacts of Privatization on PTCL Figure: 3.1 Liquidity of PTCL over the time 3 2.5 2 Current

1.5

Quick

1 0.5 0 2004

2005

2006

2007

2008

2009

Le verage Ratio:

By using a combination of assets, debt, equity, and interest payments, leverage ratio's are used to understand a company's ability to meet it long term financial obligations. Leverage ratios measure the degree of protection of suppliers of long term funds. The level of leverage depends on a lot of factors such as availability of collateral, strength of operating cash flow and tax treatments. Years Yea rs

2009

2008

2007

2006

2005

2004

Debt : Equity

Ratio

16:84

15:85 15:85

14:86 14:86

14:86

13:87

13:87

The Interest Earned

Times

15.43

(5.26)

46.54

92.07

86.35

64.34

Table: 3.2 Leverage Leverage of PTCL PTCL over the tome

Interpretation:

Debt equity ratio shows that PTCL after privatization use more aggressive financing for its operations, and its debts continuously increases after privatization which owner’s investment more risky.

In case of Interest Earned Ratio, the ability to pay its interest payments before privatization continuously improving but after privatization it shows decline, even that in 2008 it shows negative or o r unf unfavorable avorable result which is i s (5.26) (5.26) Times. Figure: 3.2 Leverage of PTCL over the time

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100 80 60 The Time Interest Earned Rstio

40 20 0 -20 2004

2005

2006

2007

2008

2009

Profitability Ratio:

There are many measures of profitability. As a group, these measures enable the analyst to evaluate the firm’ s profits with respect to given level of sale, a certain level of assets, or the owner’s investment. With out profit a firms could not attract the

outside capital. Owners, creditors and management pay close attention to boosting profits because of the great importance placed on the earning in the marketplace. Years Yea rs

2009

2008

2007

2006

2005

2004

Operating Operating Profit Profit Margin

%

18.15

24.67

26.33

35.50

41.63

51.37

Net Margin

%

15.45

(4.26)

22.01

26.16

30.46

35.73

Return On Equity

%

9.28

(2.71)

14.45

20.22

25.45

28.20

Earnings per share

Rs

1.79

(0.55)

3.07

4.07

5.22

5.72

Table: 3.3 Profitability of PTCL over the time

Interpretation:

Operating Profit Margin of PTCL before privatization is above 40% of sales and in 2004 it is 51.37%, but after privatization is constantly decreases and in 2009 it is only 18.15% of sales. Figure 3.3 Profitability over the time

- 22 -


60.00% 50.00% 40.00% 30.00%

Operating Profit Margin

20.00%

Net Margin Return on Equity

10.00% 0.00% -10.00% 2004

2005

2006

2007

2008

2009

Fig ure: 3.4 EPS over the time 7 6 5 4 EPS

3 2 1 0 -1

2004

2005

2006

2007

2008

2009

3.3 Financial Highlights Yea r e nded June June

2009

2008

2007

2006

2005

2004

%

18.15

24.67

26.33

35.50

41.63

51.37

EBIT EB IT Margin

%

25.20

(5.45)

34.13

39.43

45.50

53.94

Net Margin

%

15.45

(4.26)

22.01

26.16

30.46

35.73

%

10.96

(3.34)

18.76

25.53 25. 53

34083

38.46 38.46

Debtor’s Turnover

times

4.9

5.35

4.87

4.76

5.35

5.14

Return On Equity

%

9.28

(2.71)

14.45

20.22

25.45

28.20

30 Operating

Operating Profit Margin

Performance Return on Operating Assets

Leverage

- 23 -

Impacts of Privatization on PTCL Debt : Equity

Ratio

16:84

15:85

14:86

14:86

13:87

13:87

%

35.66

27.48

27.92

31.28

25.65

23.91

Times

15.43

(5.26)

46.54

92.07

86.35

64.34

Current

Times

1.50

1.81

2.19

1.66

1.89

2.78

Quick

Times

1.36

1.58

2.03

1.54

1.73

2.67

Rs

2.75

(0.88)

4.66

6.07

7.71

8.50

Earnings per share

Rs

1.79

(0.55)

3.07

4.07

5.22

5.72

Breakup value per

Rs

19.49

19.19

21.75

20.68

19.61 19. 61

21.39

%

83.60

-

65.22

122.73

38.34

87.42

Times

0.88

2.01

2.62

1.96

3.58

1.97

Dividend Dividend per share

Rs

1.50

-

2.00

5.00

2.00

5.00

Market value value per

Rs

17.24

38.64

57.00

46.40

70.25 70. 25

42.15

Rs.(m)

87,924

197,064

290,700

207,060

358,275

241,965

Revenue Revenue

Rs.(m) Rs. (m)

59,239

66,336

71,068

69,085

87,356

81,633

Profit/ (loss) before

Rs.(m) Rs. (m)

14,021

(4,463)

23,744

30,974

39,296

43,360

Rs.(m)

9,151

(2,825)

15,639

20,777

26,606

29,170

Rs. (m)

7,650

–

10,200

25,500

10,200

25,500

Rs.(m) Rs. (m)

51,000

51,000

51,000

51,000

51,000

51,000

Reserves Reserves

Rs. (m)

32,183

32,183

32,249

31,992

32,008

32,000

Shareholders’

Rs.(m) Rs. (m)

99,390

97,888

110,913

105,475

100,014

109,100

Current Current Ass ets

Rs.(m)

54,220

39,603

53,561

50,168

39,269

48,294

Non Current

Rs.(m) Rs. (m)

18,572

17,646

17,460

16,489

15,258

15,126

Leverage Leverage The Interest Earned Liquidity

Valuation

Earnings per share (pre tax)

share Payout Ratio (after tax) Market Market Price t o Breakup Value

share (as on June 30) Market Capitalization Historical Trends

Operating Results

Tax Tax Profit/ (loss) after Tax Tax Dividend Dividend declared Financial position

Paid up Share Capital

Equity

- 24 -

Impacts of Privatization on PTCL Liabilities

Table: 3.4 Financial Highlights

Figure: 3.5 Return on operating Assets & Equity

Figure: 3.6 Revenue

- 25 -

Impacts of Privatization on PTCL Figure: 3.7 Operating and Net Profit

Dividends

Financial aspects show PTCL has had a history of paying out significant portion of its earnings to its shareholders. However, with huge cash requirement for Voluntary Separation Scheme, PTCL is unlikely to announce any cash payout during FY08. VSS is i s explained explained in i n Impact Impact on Employment. Employment. Figure: 3.8 Dividend payout over the time

30000 25000 20000 Dividend

15000 10000 5000 0 2004

2 0 05

2 0 06

2 0 07

- 26 -

2008

2009


Figure:3.9 Dividend Payout

3.4 SWOT Analysis The above discussion illustrates different impact of Re-regulation and privatization in detail. But to know about the current internal situation ―strength and weakness‖ of

PTCL and the external environmental condition ―opportunities and threats‖ in the telecom market we need to conduct SWOT analysis. This will off course help us to suggest a suitable strategy to PTCL.

3.4.1 Strength 

Largest operational network and infrastructure within ICT (Information & Communication Technologies) segment.



Market leadership in Local loop, Wireless local loop (WLL) and Fixed telephony.



Competitors still depend on PTCL network either directly or indirectly



About Ab out 2000 200 0 exchanges all around the the country and a nd leader leade r for landli landline ne netwo network. rk.



Internet nternet facility facili ty on basic basi c telephon telephone e line li ne and both Dialup and DSL. DS L.



With the brand name "Vfone" using CDMA based "wireless local loop" to provide services of fixed line and has a largest network across the country. It has around 1,250,000 Vfone customers. The service is both for household

- 27 -

Impacts of Privatization on PTCL and businesses; Vfone has a largest wireless local loop network and provide services in 10,000 rural and urban areas. 

"Ufone", PTCL subsidiary for mobile communication, is the country's third largest mobile phone operator with 21.5% market share, and about 20 million subscribers.

Figure: 3.10 Market Shares of Mobile Companies



Ufone Ufone

has the top class c lass technology technology and services in mobile mobi le telecom

sector; it i t is continue continue expanding expanding its coverage coverage and customer base and as one of the leading services provider in Pakistani cellular market. 

Ufone have its own 21 sales and customer service center and about 250 franchise franchisees es all around around the the country country,, its customer service center is known for effici effi ciency ency and friendliness, frie ndliness, and they have inn i nnovative ovative solutions solutio ns and a "Web Based Franchise management system".



There is a consortium of the three ―Submarine Communication Cable" networks called "I-ME-WE, SEA-ME-WE 3 and SEA-ME-WE 4" and PTCL is part of the consortium. SMW-3 has a "Landing Station" at Karachi and connects 33 countries from 4 continents; it has a total length of 39,000km and a world longest system with 39 landing station. SMW-4 connect 14 countries and has 16 landing station within Asia, Middle East, and Europe, SMW-4 uses Terabyte Terabyte DWDM DW DM technology, technology, it connect connect two destinations desti nations by STM-1. "SMW-4 "S MW-4 is designed for relatively higher traffic volumes". The third one IMEWE cable has a terabyte capacity and connects Europe to India through going through Middle East. It has 10 landing station in 8 countries and a 13,000 km long - 28 -

Impacts of Privatization on PTCL cable. 

In Pakistan PTCL has a fastest growing and largest network of broadband services. Within a short time after its services launch (2years) it acquires more than 150,000 150 ,000 subscribers from 150 15 0 towns towns and cities ci ties across the the country. country.



PTCL offer "digital interactive television" services with the highest digital quality picture. More than hundred TV channels are offer in big cities like Lahore, Karachi and Rawalpindi and Islamabad by PTCL Smart TV.

3.4.2 Weakne Weakness ss 

Not been able to nurture its growth around customer services oriented strategy



Internal nternal organizational and business business processes process es issues iss ues



Monopolistic cul c ultu ture re has furth further er added to its complexities



PTCL-V, the fixed wireless phone service is poor



Over employment & low productivity. prod uctivity.



Slow decision making including external interferences.



PTCL has a continuous downward trend in its revenue since 2005, where PTCL has Rs.75,972 million revenue and the year Ended June, 2008 it has Rs.61,086 million, when it comes to after tax loss of 2825 million Rupees.



Continuous decline in the number of subscriber from 5million in 2006 to 3.5million till late 2008. .



Employees are unaware of work ethics, and are irresponsible especially those working in the rural areas.



Slow pace in adopting the latest technology.



Telephonic complaint will rarely complete, customer need to go physically to the offices for making complaints.



PTCL has no Research and Development.

3.4.3 Opportunity 

Have vast infrastructure and real estate assets which can be leveraged further.



Global connectivity reliability has been improved. PTCL is expanding the long

- 29 -

Impacts of Privatization on PTCL distance and infrastructure side through spreading out two sea-me-we submarine cables. 

Large unmet market with total population of 150million



PTCL has the opportunity to utilize its sources namely submarine cable system and satellite communication system for low cost long distance communication.



There is no strong competition in the landline market.

3.4.4 3.4.4 T hreats 

Increased competition in long distance continues to exert pressure.



Exposure to market competition



Migration to Cellular Networks



Ability Abi lity to Attract & Retain Retain Quality Quality Professionals Profess ionals



Reduction Reducti on in International nternationa l Settlement Se ttlement Rates



There is continues price war between telecom operator in Pakistan.

- 30 -


- 31 -


4.1 Conclusion: Privatization of PTCL have both positive and negative impacts but the negative impacts are more then its positive impacts. Some negative impacts are: 

The numbers of subscribers are decreases year to year because of poor customer services, poor quality of service, old technology and higher prices then major telecom competitors.



PTCL is in the process of layoff and provides a huge some for this purpose while competitors have skilled Personnel and offers attractive packages.



Due to competition the revenue of the PTCL is decreases.

Besides these negative negative impacts PTCL also have have some positive posi tive impacts: 

PTCL introduced introduced new technology technology in some areas.



Improve customer service



Improve

4.2 Recommendations: I suggest PTCL to improve quality of service, and introducing new products and emerging services to satisfy specific market segment needs besides consolidating its leadership position in fixed line business. The customer interfaces will be fully empowered to achieve corporate objectives. Automation and simplification of internal process, optimization of operational expenditure, enhancement of national backbone infrastructure. infrastructure. Some are as under: under:

4.2.1 New New Technology T echnology Prior to the start of the competition, PTCL should be well equipped with new technologies, billing, marketing & customer care infrastructure, skilled trained professionals with focus to win business and earn customer loyalty.

4.2.2 Price Discrimination Discrimination In order to retain and even expand the market share, PTCL can resort to price discrimination. This can be between users of own network and other operators networks. For example PTCL may fix different rates for intra-network calls and inter- 32 -

Impacts of Privatization on PTCL network calls. Lower rates of intra-network calls will be strong temptation for customers to remain stuck with PTCL instead of switching over to other choice operators. This practice will be a restraint for other operators, hence will be considered anticompetitive.

4.2.3 Customer Services I have found that customer service of PTCL is not competitive. The complains of customers are rarely solved out on their on their phone calls. It is very rare that your call connect to operator of customer services. In case of damage of communication wire, two to three weeks are needed to repair it.

- 33 -


References: Ahmed Nawaz Hakro and Muhammad Akram Pre-Post Performance Assessment of Privatization Process in Pakistan, International Review of Business Research Papers Vol.5 No. 1 January 2009 Pp. 70-86. Alan M. Rugman and Richard M. Hodgetts International nternational Business, Third Third Editi Ed ition on Balance Sheet Analysis BSA of Joint Stock companies companies listed in KSE K SE (2003-08). Lawrence J. Gitman Principles Princi ples of Managerial Finan Fi nance, ce, Eleventh Eleventh Editio Edi tion n Khair Khai r uz Zaman, Shumaila Hashim Hashi m and Zhid Zhid Awan Impact of Regulatory Reforms on the Effectiveness & Efficiency of Telecom Sector in Pakistan. P akistan. Khan Is Privatization In Pakistan Purposeful? James C. Van Horne, John M. Wachowicz, JR. Fundamentals of Financial Managenment, Twelfth Edition. Syed Anwar-ul-Hasan Bokhari Bok hari History And Evolution Of Privatization In Pakistan.

Websites PTCL financial reports and company information www.ptcl.com.pk About Etisalat www.etisalat.com PTA, Telecom sector Current Situation www.PTA.gov.pk SBP, Balance Sheet Analysis www.sbp.org.pk

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Impacts of Privatization on PTCL

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