Impacts of Privatization on PTCL

I

IMPACTS OF PRIVATIZATION ON PTCL

Submitted To:

Mr. Haroon Hussain Submitted By:

Umair Ahmed BBA (Hons.)7

th

Roll No. 06-164 Session: 2006-2010

Department of Management Sciences University of Education

Okara Campus

Impacts of Privatization on PTCL

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DEDICATION

My great mother

AND

Loving father whose prayers are great sources

Of Strength to me in every venture.

MY

Loving brother who supported me with lovely attitude and long

Passion for completing

My work and who’s sincere invoke success throughout my life.

AND

My teachers who helped me through out the process

AND

All of those who love and help me 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

Impacts of Privatization on PTCL

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Table of Contents

EXECUTIVE 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 is Privatization?........................................................................ 4

2.2 Origin of Privatization........................................................................ 4

2.3 History of Privatization...................................................................... 4

2.4 Types of Privatization........................................................................ 4

2.4.1 Share Issue Privatization......................................................... 5

2.4.2 Asset Sale Privatization........................................................... 5

2.4.3 Voucher Privatization............................................................... 5

2.5 Points in Favor of Privatization......................................................... 5

2.6 Points in Favor of Anti-Privatization.................................................. 7

2.7 Alternatives to Total Privatization..................................................... 9

2.7.1 Public Utility............................................................................. 9

2.7.2 Non-Profit................................................................................ 10

2.7.3 Municipalization...................................................................... 10

2.7.4 Out sourcing or Sub-contracting............................................. 10

2.7.5 Partial ownership.................................................................... 10

2.8 Nationalization................................................................................. 10

2.8.1 Nationalization in Pakistan...................................................... 11

2.9 About PTCL..................................................................................... 12

2.11 History of PTCL............................................................................... 13

2.12 About Etisalat.................................................................................. 14

3. Analysis and Findings ........................................................................ 16

3.1 Privatization Process of PTCL........................................................ 17

3.2 Impacts of Privatization on PTCL................................................... . 18

3.2.1 Impact on Competition........................................................... 18

Impacts of Privatization on PTCL

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3.2.2 Impact on Employment.......................................................... 19

3.2.3 Impact on Performance.......................................................... 20

3.3 Financial Highlights.......................................................................... 23

3.4 SWOT 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.................................................... 31

4.1 Conclusion....................................................................................... 32

4.2 Recommendations........................................................................... 32

4.2.1 New Technology..................................................................... 32

4.2.2 Price Discrimination................................................................ 32

4.2.3 Customer 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.................................................. 21

Figure: 3.2 Leverage of PTCL over the time.................................................. 22

Table: 3.3 Profitability of PTCL over the time................................................ 22

Figure 3.3 Profitability over the time.............................................................. 23

Figure: 3.4 EPS over the time....................................................................... 23

Table: 3.4 Financial Highlights...................................................................... 23

Figure: 3.5 Return on operating Assets & Equity.......................................... 25

Figure: 3.6 Revenue..................................................................................... 25

Figure: 3.7 Operating and Net Profit.............................................................. 26

Figure: 3.8 Dividend payout over the time.................................................... 26

Figure:3.9 Dividend Payout........................................................................... 27

Figure: 3.10 Market Share of Mobile Companies......................................... 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 are other resources of PTCL, making it a gigantic organization.

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 employees 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

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2.1 What 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 Privatization

There are three main methods of privatization:

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2.4.1 Share Issue Privatization (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:

Selling the entire firm or part of it to a strategic investor, usually by auction. As a

result of higher political and currency risk deterring foreign investors, asset 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 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 efficiency:

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 budget that must consider other areas of the economy.

3-Specialization:

A private business has the ability to focus all relevant human and financial resources

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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 investment decisions away from otherwise profitable areas.

6-Civil-liberty concerns:

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. State-

owned industries have to compete with demands from other government

departments and special interests. In either case, for smaller markets, political risk

may add substantially to the cost of capital.

9-Natural monopolies:

The existence of natural monopolies does not mean that these sectors must be state

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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 case of a 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-liberty concerns:

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 discipline:

Governments have chosen to keep certain companies/industries under public

ownership because of their strategic importance or sensitive nature.

8-Cuts in essential services

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 longer-

term 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 and Poverty:

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:

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 Municipalization:

Transferring control to municipal government.

2.7.4 Outsourcing or 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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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 ownership:

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 municipalization.

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 process 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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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

Name of Company: Pakistan Telecommunication Company Limited

Monogram:

Slogan: “Feel the Difference”

Industry: Telecommunication

Vision:

To be the leading Information and Communication Technology Service Provider in

the region by achieving customer satisfaction and maximizing shareholders' value'.

The future is unfolding around us. In times to come, we will be the link that allows

global communication. We are striving towards mobilizing the world for the future. By

becoming partners in innovation, we are ready to shape a future that offers telecom

services that bring us closer.

Mission:

To achieve our vision by having:

An organizational environment that fosters professionalism, motivation and

quality

An environment that is cost effective and quality conscious

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 Satisfaction

Teamwork

Company Loyalty

2.10 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 Pakistan Telecommunication Corporation (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

Name of Company: Etisalat

Monogram:

Our Vision:

A world 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 of new goods and services 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

A world in which 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)

PTCL , Pakistan

Etisalat Misr (Egypt)

Zantel, Tanzania

Etisalat Afghanistan

Etisalat Software Services Private Limited (ESSPL) - Technologia

Atlantique Telecom (AT)

Millicom Sri Lanka ―TIGO‖

Etisalat International

Etihad Etisalat ―Mobily‖ Saudi Arabia

Etisalat DB Telecom India PVT 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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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 privatization of PTCL many Competitors have entered in Pakistani

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 both Warid and Telenor one by one

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

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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

Impacts of Privatization on PTCL

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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 on Performance:

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 are current and quick ratios.

Generally, the higher the current ratio, the more liquid the firm is considered to be.

Years 2009 2008 2007 2006 2005 2004

Current Times 1.50 1.81 2.19 1.66 1.89 2.78

Quick Times 1.36 1.58 2.03 1.54 1.73 2.67

Table: 3.1 Liquidity of PTCL over the time

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.

Impacts of Privatization on PTCL

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Figure: 3.1 Liquidity of PTCL over the time

0

0.5

1

1.5

2

2.5

3

2004 2005 2006 2007 2008 2009

Current

Quick

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 2009 2008 2007 2006 2005 2004

Debt : Equity Ratio 16:84 15:85 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 of 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 unfavorable result which is (5.26) Times.

Figure: 3.2 Leverage of PTCL over the time

Impacts of Privatization on PTCL

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-20

0

20

40

60

80

100

2004 2005 2006 2007 2008 2009

The Time Interest EarnedRstio

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 2009 2008 2007 2006 2005 2004

Operating 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

Impacts of Privatization on PTCL

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-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2004 2005 2006 2007 2008 2009

Operating Profit Margin

Net Margin

Return on Equity

Fig

ure: 3.4 EPS over the time

-1

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009

EPS

3.3 Financial Highlights

Year ended June

30

2009 2008 2007 2006 2005 2004

Operating

Operating Profit

Margin

% 18.15 24.67 26.33 35.50 41.63 51.37

EBIT 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

Performance

Return on Operating

Assets

% 10.96 (3.34) 18.76 25.53 34083 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

Leverage

Impacts of Privatization on PTCL

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Debt : Equity Ratio 16:84 15:85 14:86 14:86 13:87 13:87

Leverage % 35.66 27.48 27.92 31.28 25.65 23.91

The Interest Earned Times 15.43 (5.26) 46.54 92.07 86.35 64.34

Liquidity

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

Valuation

Earnings per share

(pre tax)

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

share

Rs 19.49 19.19 21.75 20.68 19.61 21.39

Payout Ratio (after

tax)

% 83.60 - 65.22 122.73 38.34 87.42

Market Price to

Breakup Value

Times 0.88 2.01 2.62 1.96 3.58 1.97

Dividend per share Rs 1.50 - 2.00 5.00 2.00 5.00

Market value per

share (as on June

30)

Rs 17.24 38.64 57.00 46.40 70.25 42.15

Market

Capitalization

Rs.(m) 87,924 197,064 290,700 207,060 358,275 241,965

Historical Trends

Operating Results

Revenue Rs.(m) 59,239 66,336 71,068 69,085 87,356 81,633

Profit/ (loss) before

Tax

Rs.(m) 14,021 (4,463) 23,744 30,974 39,296 43,360

Profit/ (loss) after

Tax

Rs.(m) 9,151 (2,825) 15,639 20,777 26,606 29,170

Dividend declared Rs. (m) 7,650 – 10,200 25,500 10,200 25,500

Financial position

Paid up Share

Capital

Rs.(m) 51,000 51,000 51,000 51,000 51,000 51,000

Reserves Rs. (m) 32,183 32,183 32,249 31,992 32,008 32,000

Shareholders’

Equity

Rs.(m) 99,390 97,888 110,913 105,475 100,014 109,100

Current Assets Rs.(m) 54,220 39,603 53,561 50,168 39,269 48,294

Non Current Rs.(m) 18,572 17,646 17,460 16,489 15,258 15,126

Impacts of Privatization on PTCL

- 25 -

Liabilities

Table: 3.4 Financial Highlights

Figure: 3.5 Return on operating Assets & Equity

Figure: 3.6 Revenue

Impacts of Privatization on PTCL

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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 explained in Impact on Employment.

Figure: 3.8 Dividend payout over the time

0

5000

10000

15000

20000

25000

30000

2004 2005 2006 2007 2008 2009

Dividend

Impacts of Privatization on PTCL

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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 2000 exchanges all around the country and leader for landline network.

Internet facility on basic telephone line and both Dialup and DSL.

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

Impacts of Privatization on PTCL

- 28 -

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 has the top class technology and services in mobile telecom

sector; it is continue expanding its 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

franchisees all around the country, its customer service center is known

for efficiency and friendliness, and they have innovative solutions 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 DWDM technology, it connect two destinations by STM-1. "SMW-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

Impacts of Privatization on PTCL

- 29 -

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 subscribers from 150 towns and cities across the 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 Weakness

Not been able to nurture its growth around customer services oriented

strategy

Internal organizational and business processes issues

Monopolistic culture has further added to its complexities

PTCL-V, the fixed wireless phone service is poor

Over employment & low productivity.

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

Impacts of Privatization on PTCL

- 30 -

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 Threats

Increased competition in long distance continues to exert pressure.

Exposure to market competition

Migration to Cellular Networks

Ability to Attract & Retain Quality Professionals

Reduction in International Settlement Rates

There is continues price war between telecom operator in Pakistan.

Impacts of Privatization on PTCL

- 31 -

Impacts of Privatization on PTCL

- 32 -

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 impacts PTCL also have some positive impacts:

PTCL introduced new 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. Some are as under:

4.2.1 New Technology

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

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-

Impacts of Privatization on PTCL

- 33 -

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.

Impacts of Privatization on PTCL

- 34 -

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 Business, Third Edition

Balance Sheet Analysis

BSA of Joint Stock companies listed in KSE (2003-08).

Lawrence J. Gitman

Principles of Managerial Finance, Eleventh Edition

Khair uz Zaman, Shumaila Hashim and Zhid Awan

Impact of Regulatory Reforms on the Effectiveness & Efficiency of Telecom

Sector in Pakistan.

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

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