RESEARCH PROPOSAL ON THE EFFECTS OF PRIVATIZATION ON THE FINANCIAL PERFORMANCE OF PAKISTAN TELECOMMUNICATION CORPORATION LTD.

SUBMITTED BY: FAWAD HASSAN KAZMI FAIZAN MAHMOOD RABIA SAJJAD MB093014 MB093073 MB093023

COURSE: BUSINESS RESEARCH AND REPORT WRITING

SECTION: 3

SUBMITTED TO: SIR WASIM AHMED

SUBMITTED ON: 11 APRIL, 2011

EXECUTIVE SUMMARY
Research proposal on the effects of privatization on performance of PTCL begins with an overview of the background covering the historical developments of PTCL since 1991, in its environmental context followed by the purpose of the study on which research will be conducted. The research question has been divided into specific components or objectives to give an idea of the flow of our research. Then this proposal mentions some literature review relevant to our research followed by the research methodology. The section of research methodology covers the research approach, design and mode(s) of data collection. The next part is about how data will be analyzed. Both data collection and analysis will be done objectively to minimize researcher bias. Finally some light is thrown on the cost and time involved in conducting the research.

INTRODUCTION AND BACKGROUND

Pakistan Telecommunication Corporation (PTC) took over operations and functions from Pakistan Telephone and Telegraph Department under Pakistan Telecommunication Corporation Act 1991. This coincided with the Government's competitive policy, encouraging private sector participation and resulting in award of licenses for cellular, card-operated pay-phones, paging and, lately, data communication services. Pursuing a progressive policy, the Government in 1991, announced its plans to privatize PTCL, and in 1994 issued six million vouchers exchangeable into 600 million shares of the would-be PTCL in two separate placements. Each had a par value of Rs. 10 per share. These vouchers were converted into PTCL shares in mid-1996. In 1995, Pakistan Telecommunication (Reorganization) Ordinance formed the basis for PTCL seven years monopoly over basic telephony in the country. The provisions of the Ordinance were lent permanence in October 1996 through Pakistan Telecommunication (Reorganization) Act. The same year, Pakistan Telecommunication Company Limited was formed and listed on all stock exchanges of Pakistan. PTCL launched its mobile and data services subsidiaries in 2001 by the name of Ufone and PakNet respectively. None of the brands made it to the top slots in the respective competitions. Lately, however, Ufone had increased its market share in the cellular sector. The PakNet brand

has effectively dissolved over the period of time. The seven years monopoly of PTCL ended in 2002. The post-monopoly era came with Pakistans Liberalization in Telecommunication in January 2003. On the Government level, a comprehensive liberalization policy for telecoms sector is in the offering. In 2005 Government of Pakistan decided to sell some shares of PTCL to some private corporation. There were three participants in the bet for privatization of PTCL. Etisalat, an Abu Dhabi based company was able to get the shares with a large margin in the bet. In 2006 PTCL was completely privatized when government sold its 26% management share to Etisalat. Government's plan of privatizing the corporation was not welcomed in all circles; countrywide protests and strikes were held by PTCL workers. The year 2006-07 in the telecom sector witnessed a phenomenal growth in the mobile phone sector in Pakistan, which doubled its subscriber base to 60 million. The teledensity increased from 26% to 40%, helping to spread the benefits of communication technology across the country. PTCL's mobile phone subsidiary Ufone's subscriber base grew by more than 87%, from 7.49 million to 14 million. The year also witnessed the entry of major telecom companies, most notably China Telecom and Singtel, into the market.

PURPOSE OF THE STUDY

The purpose of the study is to evaluate the privatization process of PTCL and examine the effect of privatization on financial performance of the company. Given the fact that privatization has become an international phenomenon and it is often associated with increased efficiency, proper utilization of resources, no political interference and other benefits and also given that there is no existing comprehensive research on performance of PTCL both in the pre and post privatization periods, we believe that our research would be able to bridge this gap to an extent.

RESEARCH QUESTION AND OBJECTIVES

How has privatization of PTCL affected the financial performance of the company? In particular we intend to follow these objectives: To evaluate the privatization process in general and particularly with reference to PTCL. To examine the performance of PTCL pre and post privatization period.

To provide an assessment of the benefits and drawbacks of privatization.

LITERATURE REVIEW
Empirical Evidence Evidence demonstrates that private owned firms outperformed state owned enterprises e.g. (Megginson and Netter, 1998) privatization significantly (often dramatically) improves the operating and financial performance of divested firms. (Boubakri and Cosset, 1998) review before-and after-performance of 79 privatized firms in 21 developing countries mostly middle income, including Bangladesh, Jamaica, Nigeria, Pakistan and Philippine and conclude that on average the firms in their sample indicated significant increases in profitability, operating efficiency, capital investment spending, output and employment, and a decline in leverage and an increase in dividends. But other works find no remarkable changes in performance comparing previous to post-privatization periods (Parker and Hartley, 1992; Martin and Parker, 1997; Wei, 2003; Florio, 2003; Omram, 2004: Reeves and Palcic, 2004). Li and Xu (2002a, 2002b, 2004) use a panel data set of 166 countries (and 177 countries in a later study) covering the period from 1990 to 1998 (and from 1990 to 2001 in a later study) to study the impact of privatization and competition in the telecommunications sector around the world. The results of their fixed effects model indicate that privatization has contributed significantly to output growth, network expansion and labor productivity. Bortolloti et al. (2001) examined the privatization of thirty-one national telecommunication companies in twenty-five countries. Their findings show that financial and operating performance improved significantly after privatization due to regulatory changes than privatization itself.

Theoretical Evidence There are three main theories which support privatization of state-owned enterprises: property rights (Alchian and Demsetz, 1973), public choice (Niskanen, 1971; Tullock, 1976), and agency theory (Jensen and Meckling). Based on the tradition of neo-classical economies, these theories support the case of the superior performance of the private enterprises. Bozec et al. (2002) summarized each theory. The agency theory assumes that managers seek to maximize their own advantage rather than that of the owners of the firm or the firm itself. However, managers in

private firms are disciplined by a number of external control mechanisms, such as the market for managers, and also by internal control mechanisms, such as compensation and rewards incentives (Cuervo and Villalonga, 2000). The property rights theorists also argue that under state ownership property rights are poorly defined (Ramamuriti, 2000). They focus on the marketability of property rights (through securities markets), threat of bankruptcy, and prevention of the managers from seeking their own advantages. The managers in state-owned enterprises are not constrained by these types of control; it is thus stressed that they are less inclined to maximize profits.

METHODOLOGY
This section covers the following aspects: 1. Type of design: The research design employed in our research will be descriptive in nature, describing the financial performance of PTCL in pre and post privatization periods.

2. Type of data/information needed: We will use primarily secondary sources. Secondary data can be divided into two sources: Archival Records: There are many books and articles written on privatization of telecom sector that we will use to develop our understanding about privatization and the performance of organization prior to and after privatization. PTCL has a long history of operation till its privatization and three to four years history of operation (2006-2009/2010) after privatization so for the study of its performance before and after we can use the information that is existed in form of reports, financial statements and other statistical data archived in PTCL and PTA. Besides this, PTA publishes reports for each quarter about competition and number of customer etc. for all telecom operators, which portray current market and growth structure of the telecom operator. Privatization Commission of Pakistan also provides reports about companies that have been privatized. Moreover, there are reports generated by State Bank of Pakistan, IMF and World Bank.

Internet Sources: We will also use internet sources i.e. journals, databases and online newspapers to be up to date on the latest data and development.

DATA ANALYSIS
After collecting the financial data on pre and post privatization periods for PTCL we will transfer it to Microsoft Excel and perform ratio analysis, common size analysis and Du-Pont analysis calculations, all of which will give us a detailed picture of the financial performance of PTCL.

Ratio Analysis Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this a businesss ratios (i.e. in our case PTCL) are compared with the average of businesses similar to this business i.e. with the average of telecom providers and PTCLs ratios are compared for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important early warning indications that can allow PTCL to solve its business problems before its business is adversely affected or even destroyed by them.

Common size Analysis Common-size analysis expresses each line item on a single year's financial statement as a percent of one line item, which is referred to as a base amount. The base amount for the balance sheet is usually total assets (which is the same number as total liabilities plus stockholders' equity), and for the income statement it is usually net sales or revenues. By comparing two or more years of common-size statements, changes in the mixture of assets, liabilities, and equity become evident. On the income statement, changes in the mi x of revenues and in the spending for different types of expenses can be identified.

Du-Pont Analysis The DuPont model was internally developed as a tool to measure investment projects, but eventually became widely used as a financial tool. The DuPont analysis breaks down a companys return on equity or ROE into three components:

1. Profit margin as measured by net income as a percentage of sales 2. Asset turnover which is net sales divided by the total assets of a firm 3. Degree of financial leverage as measured by the equity multiplier which is the ratio of total assets financed by stockholders equity In formula form, DuPont return on equity is: ROE = net income/total stockholders equity = Profit margin x Asset turnover x Equity multiplier OR ROE = net income/total stockholders equity = net profit/net sales x net sales/total assets x total assets/total stockholders equity Profit margin indicates how efficient the companys management is in operating the company and in controlling costs. Asset turnover, on the other hand, measures the efficiency of the company in generating sales for every dollar of asset. Lastly, the equity multiplier shows how leveraged a company is by computing how much financing stockholders provided for every dollar of asset. Using the DuPont system in evaluating alternative stock investments helps investors in comparing why ROEs of these stocks differ by identifying the impact of operating efficiency, asset-use efficiency and financial leverage on the return on equity.

RESOURCES AND CONSTRAINTS

The resources and constraints of the research may be categorized as: Time- the Gantt chart given on the next page should enable us to be better organized and manage time more effectively. The month of April will be used to do the preliminary research and start work on financial performance. The time margin will be 2 weeks for analyzing the findings. The report will be prepared one week before midterms and submitted as and when directed by our tutor. Cost-our project will involve just incremental costs of printing and binding. Access to data- this will not be a problem as secondary data should be sufficient to complete the research.

Timetable of the research: Gantt chart Activity Week number 1 Find research topic 2 Read literature 3 Prepare research proposal Submit research proposal and await 4 feedback 5 Perform financial analysis 6 Analyze findings 7 Devise progress report 8 Complete remaining chapters of draft 9 Revise draft for submission 1 0 Print and submit final report April 1 2 3 4 1 May 2 3 4 June 1 2

Midterm

REFERENCES
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Evaluating

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Muhammad J., Haroon R., Ahmed S. Managing the Process of Privatization and its impacts on Performance and Development: A case Study of Pakistan Telecommunication Limited. Available from: http://www.bth.se/fou/cuppsats.nsf/all/a9529602471e0e4ac12575ec0037c500/$file/Impact%20of %20Privatization%20on%20PTCL%20Performance%20and%20Development%20Final.pdf [Accessed 9 April, 2011]