Effects Of Privatization On Performance Economics Essay

This research study investigates the impact of privatization on the Pakistan Telecommunication Company Limited (PTCL) financial performance which is privatize in 2005.The variables “Net Profit Margin”, “Operating Profit Margin”, “Return on Assets” and “Earnings per Share” and “Number of trades of shares” are used as representation for financial performance. The paired-samples t test for mean difference has been used for comparing the pre and post privatization performance. Analysis of the financial data shows decline in the net profit margin, operating profit margins, return on assets and earnings per share after the privatization; but the impact is insignificant for all the variables except the operating profit margin. The effects of privatization on employees’ performance and management remain a potential problem and issue for further research due to shortage of resources and knowledge.

Effect of Privatization on Performance

Poor performance of many companies and public institutions in general has shown that in principle the government is not a good businessman. In this regard Privatization, a global phenomenon considered as a tool that leads to economic growth, increase in productivity, efficiency in utilization of resources and expansion in output and employment. The rational consumer takes benefits from competition among private firms in the form of better quality services and low prices especially in banking, air travel and telecommunication sectors. Due to rigidity in our culture, Public Sector companies do not become flexible and more dynamic as compared to Private companies. In general, it can be claimed that privatization is a part of a broader economic policy which is referred to as the economic release or connecting to the world economy by some governments. Privatization is the process of changing the conditions of governmental activities so that the major context is fixed but the atmosphere of the sectors changes and the effect of atmosphere and conditions of markets on companies’ performance is likely to consider private sectors’ mechanisms

Telecommunication plays a vital role in the economic development of any country. PTCL was privatized in 2005. Due to the privatization of PTCL, overall financial performance and the share prices of the PTCL became volatile. This purpose of this study is to study dynamic aspects of privatization and compare the pre and post privatization financial performance of the company.

An overview of PTCL

In 1947, after independence, Pakistan had an insufficient telecom base. Only 14,000 land lines were there in whole country and only one department of Telephone and Post Telegraph. In 1962 these two departments were alienated as Postal department and Telephone and

Telegraph Department (T&T). Pakistan started gradually enhancement in telecommunication sector in 1990. The brief history of PTCL is as follows:

Telegraph and Postal Department was established in 1947.

Telephone and Telegraph Department was established in 1962.

Pakistan Telecom Corporation was established in 1990-1991.

PTCL was listed in the Karachi Stock Exchange in 1996.

Internet and mobile subsidiaries was established in 1998.

Policies of Telecom sectors were finalized in 2000.

Deregulation policy of Telecom sector was announced in 2003.

Objectives of Research

This research study aims to examine the effect of firm’s privatization on the performance of the Pakistan Telecommunication Limited (PTCL). The objectives of the study are as follows:

To evaluate impact of privatization on the financial performance of PTCL.

To understand whether privatization how much privatization is effective

To help policy makers and other authoritative bodies regarding decision making about privatization.

Literature Review

Memon (2007) argue that privatization and the preparations for privatization are very important to minimize the social costs and dislocations caused by such initiative. Most South Asian countries have come to realize that privatization for the purpose of reducing fiscal deficits has caused them to off-load those enterprises which are loss making first. Such action has not inspired private sector confidence, and has resulted in large-scale worker retrenchment. Privatization is the key factor that enables markets to work properly and appropriately. According to Megginson & Netter (2006) from last two decades most countries of the world shifted their firms from state ownership to privatization. In 1999 the revenue of privatization firms was $ 1 trillion around the globe.

Given the importance of the subject, a lot of studies have been performed to analyze the impact of privatization in a number of countries. Taghizadeh (2009) compared 12 privatized telecom corporations with 12 non-privatized (governmental) ones regarding their per capita cost of operating, per capita cost to fix damages and per capita wage and costs of labor maintenance and conclude that the costs were lower in privatized centers regarding all three above mentioned domains. A recent study (Farinos et al., 2007) while investigating the companies privatized in Spain through the years 1990-2001 argue that privatization has had a great impact on efficiency, sale income and employment. Warzynski (2003) in his study of 300 Ukrainian firms finds that competition does not have a significant effect on firm performance measured by productivity and profitability while privatization has a marginal positive significant effect on profitability and an insignificant effect on productivity. He points out; however, that competition and privatization might be complementary measures, as he finds that competition increases the performance of privatized firms. Boubakri et al. (2005) study the post privatization corporate governance of firms and show that performance gains are associated with the type of dominant owners. Choi and Hassan (2011) argue that Privatized banks, on average, perform better than established banks, whereas this is not true where we do not consider country differences across privatizations. They conclude that although governance and foreign ownership are significantly correlated with decreased performance deviation of privatized banks relative to the established bank group, banking freedom (regulations) and extensive deposit insurance schemes in respective economies are associated with increased performance deviation. A recent study (Okten & Arin, 2006) on the effect of privatization argues privatized firms improve productive efficiency by increasing their capital and decreasing their labor endowment. But this effect disappears when we control for changes in market structure using a measure for market concentration. Hence, while private ownership has a robust positive effect on productive efficiency, whether gains in productivity will be passed on to consumers in the form of lower prices will depend on the market structure ensuing from privatization. Kerr et al., (2008) studied the privatization process in New Zealand and Australia through which they confirmed that the performance of companies after being privatized has improved greatly and privatization has increased the annual growth of New Zealand companies up to 12% and Australian companies up to 9%. Another study (Sarboland, 2012) conducted in Iran conclude that privatization has increased the overall financial performance of the corporation, however financial (debt) leverage ratios also increase, which reflects the company’s poor performance in the years after privatization because in such a situation creditors will have less assurance and, moreover, in the view of lenders the less financial (debt) leverage ratio, the better.

Some research studies found average performance after reforms, whereas, some studies found positive effect of reforms. However, most of the literature suggests that there is a significant relation between privatization and efficiency and due to the importance and the role that privatization has in increasing efficiency and optimum use of resources, more research is needed to confirm or reject the findings of previous studies. To do so, this current study has been tried to investigate the relation between privatization and efficiency in PTCL.

Methodology

The study basically focuses on the impact of Privatization on the financial performance of PTCL. Since the domain is PTCL, financial ratios of years 2000-2004 (before being privatized) and financial ratios of years 2005-2009 (after being privatized) have been analyzed, research population and sample are the same. Information and data needed for this research has been collected from the annual reports of PTCL. Since used data was obtained from company documents and financial records and accounting, the data is considered reliable. For measuring financial performance the following four variables have been used:

Operating Profit Margin

Net Profit Margin

Return On Equity

Earnings per share

Number of Share trade

In this study, to analyze data obtained from documents available in finance department, first, after separating and identifying the data of two periods (i.e., after and before privatization), the paired-samples t test for mean difference has been applied to analyze the data. This test explains volatility and significance of the variables, with the assumptions that the distribution of the variable is normal and that the variance of the variable is same in both set of populations. The test id done with help of Microsoft excel and SPSS.

Analysis and Findings

Refer to Table.1 in appendix, the shows summary of result of Paired-samples t test for the variable operating profit margin. Mean value of the operating profit margin is lower in the post privatization period. On the other hand, standard deviation is higher in the post privatization period as compared to pre privatization period. It indicates that privatization has negative impact on the net profit margin; moreover, it has also become more volatile after privatization. Whereas, the significant value is less than 0.05 which indicates that significant change has been observed in the operating profit margin after privatization.

Refer to Table. 2, 3, 4 in appendix, the result shows summary of result of Paired-samples t test for the variable Net Profit Margin, Return on Equity, and Earning per Share respectively. Results show that all of these three variables have declined after privatization, and have become more volatile. The significance value is greater than 0.05 which indicates that changes in these variables are not statistically significant.

Refer to Table. 5 in appendix, the result summarizes result of paired t test for the variable Number of trades. The mean value of the Number of trades is almost double in the post privatization whereas, the standard deviation for the number of trades is high in the post privatization period. P or significant value for the variable Number of Trades is highly significant as it is less than .005 indicating that the number of trades per day is significantly affected due to privatization.

Conclusion

Based on the results obtained, it was shown that there is a significant effect of privatization on the average number of trades of shares. This effect is being found positive as well. However, Analysis of the financial data shows decline in the financial performance of the company after privatization measured by operating profit margin, net profit margin, return on equity and earnings per share ratio. These entire four variables show decline in the post privatization period but the change is significant only in the variable operating profit margin. Hence we can conclude that privatization of PTCL has not been found analytically favorable. It is recommended, based on the result of the research, the legislative agencies should make appropriate policies to achieve a suitable market for Pakistan. Information clarification, choice of investor and a transparent privatization process should be the top priorities of authoritative bodies in order to make privatization more effective and efficient. As suggested by Zeitun and Tian (2007) a privatization reform should go gradually and government should provide all necessary social securities to reduce the negative social impact of a firms’ liquidation.

Issues for Future Research

Many issues are not covered during the study due to shortage of resources and time. Based on the findings of the current research the following suggestions are recommended for further research:

To examine the relation between privatization and management performance.

To examine the impact of privatization on employees’ sense of job security.

To examine the failures of financial ratios in decision makings.

To examine the analysis of financial ratios in decision makings.

To examine the impact of privatization on staff’s efficiency.