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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Impact of Privatization on Performance of State-Owned Enterprises in Pakistan
Muhammad Akram, Hassan Mobeen Alam Hailey College of Commerce, Faculty of Commerce University of the Punjab, Lahore Pakistan Muhammad Saleem, Abdul Aleem & Muhammad Ali Raza Hailey College of Commerce, University of the Punjab, Lahore Pakistan

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Abstract The purpose of this study was to investigate the impacts of privatization on the performance of the state-owned enterprises in various sectors of Pakistan. The approach to this paper was to find out the answers of the research questions such as, "What was the background of Privatization in Pakistan?", What were the basic needs of Privatization in Pakistan?", "What were the effects of Privatization on the performance of various institutions in positive as well as negative manners?" and "What was the impact of privatization on banking sector of Pakistan?". By answering these questions conclusions of this study was drawn about Privatization in south Asian Countries especially in Pakistan and this study acknowledged that privatization is a very useful strategy by the government of Pakistan which has a positive impacts on overall performance of corporate bodies and economy of the state with some counter effects on working and labor conditions. Many options has explored in this study for future studies related to various aspects of privatization of many other sectors in Pakistan and many other developing countries as well. Keywords: Privatization, Nationalization, Impact of Privatization on Banking Sector. 1. Introduction Privatization is a way to re-allocate the resources and functions of public sector to private sector and it seems to be a cause which plays an important role in the mission for growth (Filipovic, 2005). Savas (2000); Shah, Haroon-Ur-Rashid, Ullah, and Ahmed (2009) stated that privatization, also called denationalization, is a process in which ownership of the enterprises is transferred to private sector from the government. Moreover, Megginson and Netter (2001) reported that privatization is deliberate sale of state-owned enterprises (SOEs) to private hands by a government. According to Aftab and Nasr (2008), there is a lot of difference between the government and private owned enterprises performance and assumed that private ownership performs better then government. Kikeri, Nellis, and Shirley (1992) believed on this fact that the share of government tenure is going to be reducing due to increasing trend towards privatization of various enterprises in developing countries. Subsequently, Joshi (1999) told that when a lucrative public sector enterprise sale out to general public, it attracts others to take interest in privatization process. Yoganandan (2010) reported that Pakistan has adopted the economic liberalization not as a policy for development but as a requirement imposed by International Monetary Fund (IMF) and World Bank and privatization process has faced strong resistance from political entities and trade related unions. The political wagering, the panic of losing jobs and giving additional benefits to nears and dears created havoc to the privatization process (Yoganandan, 2010). Initially, the privatization was considered as an economical issue but later on it became the part of some political hindrances over the countrys real assets

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(Megginson, 2000). Privatization demands the government backed employees and supervisors to adjust in a new and sometime a sore environment of privatized company. So the need was to emphasis on managing the entire sector rather then an individual entity by the government (Megginson, 2000). In order to get the goals of privatization, all the government sectors must be accountable and political interference must be curbed with legal hands (ADB, 2008) and in order to get the more cost effective results from the sale of state-owned enterprises, there must be a restructuring policy, regarding various socioeconomic issues, before and after the privatization process (Joshi, 1999). This important issue raised various questions to be answered and this study is aims at to address some of these questions. 2. Research Questions The research questions of the study were: RQ1 What was the background of Privatization in Pakistan? RQ2 What were the basic needs of Privatization in Pakistan? RQ3 What were the affects of Privatization on the performance of various institutions in positive as well as negative manners? RQ4 What was the impact of privatization on banking sector of Pakistan? According to a survey repot, the transactions amounting $15 billions have been made in South Asia related to privatization process and Pakistan and India have major contributions. While in Pakistan, telecom, banking and production sectors were widely affected by privatization process (Kikeri, Nellis, & Shirley, 1992) and Lieberman, Sukiasyan, Traver and Welch (2003) observed that privatization has reduced the government ownership in finance sector especially in Europe and Central Asia. 3. History of Privatization in Pakistan The idea of privatization was not new for Pakistani policy makers. In 1950s, Pakistan Industrial Development Corporation (PIDC) was formed for the purpose of development of industrial sector in the country. PIDC established more than 50 industrial entities with successful management and operations and than these undertakings were transferred to the private sector from public sector (Bokhari, 1998). Government of a country involved in the financial system was facing two types of views; development view; and political view. In development view, government intervenes in the financial institutions to give direction to their citizens for the purpose of development in the country. In developing countries, governments started to increase ownership in the financial institutions after observing the importance economic development in the period of 1960s and 1970s (Khalid, 2006) and it mostly government adopt only one type from above stated views. In 1970s, Pakistani government took a step to redistribute national assets from the private employers to the State of Pakistan. At that time, Government realized that national wealth was in the hands of some families and the rich was becoming richer and the poor was becoming poorer (Ishrat Husain, 2005). Financial sector was nationalized in 1970s under Banks Nationalization Act 1974 (Khalid, 2006). All the entities were nationalized in 1970s in Pakistan (Bokhari, 1998). The step of nationalization was taken with the object to direct the financial institutions and to provide funds to the government (Khalid, 2006) but the size of public owned undertakings were increased unmanageable extent when nationalization policy was adopted in 1970s in Pakistan (Bokhari, 1998). In 1970, after failing to achieve the objectives of nationalization; the government had to reframe its strategies regarding

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nationalization process. So, in 1977, the government modernized its policies to encourage the private entrepreneurs to participate in de-nationalization process (Yoganandan, 2010). Privatization process was started in late 1980s, but its full momentum was begun in 1991 when the Government of Pakistan formed Privatization Commission of Pakistan to create and support the practices of privatization (Bokhari, 1998). According to Bokhari (1998), the privatization process became effective in Pakistan in 1991but again privatization process got its track when the government set the foundation of privatization Commission that enlist the name of 106 state-owned companies eligible for privatization proceeds in Pakistan (Yoganandan, 2010). Government announced privatization as its primary objective of economic policy in November 1990 and declared the agenda of privatization to cover the fields like banks, tele-communications, industries, development finance institutions and infrastructure facilities (Bokhari, 1998). The concept of privatization of public owned financial institutions was introduced in the early 1990s and two government owned banks (Muslim Commercial Banks and Allied Commercial Banks) were privatized (Khalid, 2006). The first banking sector reform initiated in late 1980s, while in 1992, two main financial institutions (Muslim Commercial bank and Allied bank of Pakistan) started their working under the liberalization policy in Pakistan (Yoganandan, 2010). Government of Pakistan constituted Pakistan Telecommunication Corporation Ordinance in 1991, for the purpose to develop private competition and licensed cellular phone companies. Total telecom sector was privatized and liberalized but PTCL was not. In 2006, 26% management share of PTCL was sold for 2.6 billion US dollar by Government of Pakistan to Etisalat, a UAE based company, and in this way; PTCL became totally private organization (Shah, Haroon-Ur-Rashid, Ullah, and Ahmed, 2009); ADB, 2008). The period between 1992 to 1994, Pakistan privatized assets worth near to Rs. 120 billion and between 2001 to 2002 about Rs. 65 billion (Shah, Haroon-Ur-Rashid, Ullah, and Ahmed, (2009). In Feb 2002, government involved general public by creating their shares in public enterprises through a useful program to enhance their interest towards privatization in Pakistan (ADB, 2008). Until December 2006, notable planned sales in the sectors of finance, energy, electricity and manufacturing, have been made in Pakistan. The assets value PKR 418.6 billion had been privatized from 49 dealings (ADB, 2008) but in early 2007, the privatization program faced a hindrance when the privatization of the Pakistan Steel Mills (PSM) was stopped by the Supreme Court of Pakistan because of some major political and economic issues (ADB, 2008). 4. Needs for Privatization in Pakistan Privatization is important to improve efficiency and to decrease financial burden of the government. The performance and development of state owned enterprises (SOEs) were not satisfactory; therefore, Government took the step of privatization of these enterprises for their betterment (Kikeri, Nellis, & Shirley, 1992). According to Joshi (1999), the need of privatization was usually based on 3 major reasons: i. Increased the number of private enterprises in overall economic growth; ii. Enhancement in the economic development and employment; and iii. Decrease in the financial deficits. But it was realized after two decades that nationalization was unrealistic and the results were not in the favor of Pakistan (Ishrat Husain, 2005). The size of public owned undertakings was increased unmanageable extent when nationalization policy was adopted in 1970s in Pakistan (Bokhari, 1998).
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It was also observed that the reasons of privatization was that whenever a government manager was come to lead a company, his 1st objective was to hire the labor on political basis rather then merit (Aftab& Nasr, 2008). In Pakistan, the public offices were loaded with a large number of un-skilled employees selected on the basis of political references and highly paid, low morale of workers and lack of check and balance system created the need of privatization (Yoganandan, 2010) and the incompetency at public owned organizations was connected to the surplus of employees hired on the behalf of politicians. Continuous government control also became the cause of decrease in integrity and proved helpful to build constant pressures for advancing the loans toward preferred borrowers, and has a negative affects on earnings aspects of the banks (Caprio, Gerard, Fiechter, Litan, & Pomerleano, 2004). Therefore, there was a need to take serious steps to enhance the outcomes of state-owned organizations by making reasonable changes in our policies regarding privatization and open the doors for new entry in this sector (Kikeri, Nellis, & Shirley, 1992). 5. Impact of Privatization in Pakistan Privatization has purely emphasis on economic goals rather then political goals, which let us to expand the market economy (Filipovic, 2005). The privatization or liberalization policies gave a great change in financial sectors (Khalid, 2006). Privatization of stateowned assets was anticipated to reduce waste, decrease corruption, and expand the attention and excellence of services such like financial sector (ADB, 2008). The impact of the privatization process was admirable in Pakistan. In Pakistan, Privatization was the cause of many successful improvements in the fields of banking, textile, telecom, sugar, cement and fertilizers. As a result, about 77 percent of commercial banks and 100 percent of telecom and textile companies are now handed over to private sector (ADB, 2008). The performance of privatized sectors like automobile, power generation, cement and financial institutions are satisfactory, improving in quality and financial health by new successful management (Bokhari, 1998). Most of the developing countries have used privatization as an instrument to improve the performance of state-owned enterprises that shows relatively poor performance as compared to private enterprises (Kikeri, Nellis, & Shirley, 1992). Previous studies illustrated that not more then 79 state-owned companies of various developing countries displayed a remarkable change in profitability and efficiency from 1980 to 1992 and dramatically increase in productions, efficiency, profit, investment opportunities of the firms being privatized and they offered good returns on investment to their investors as private firms do, due to the privatization (Megginson, 2000) and workers have also benefited in terms of higher salaries and better working conditions (Bokhari, 1998). It was observed that government encouraged the privatization policies to enhance efficiency, create competition, promote foreign direct investment and raise revenue for the government (Megginson, 2000). Privatization also provides a way for foreign direct investment (FDI) to come in and it also plays an important role in the growth and development (Filipovic, 2005). The privatization of PTCL and increasing number of cellular companies open many ways for foreign investors (ADB, 2008). Privatization can also helpful to diminish financing deficits arise mostly because of continuous losses of public enterprises and subsidization by the state (Joshi, 1999). In Pakistan, a major portion of the proposal value for privatization was used for payment of golden handshakes (Kemal,

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1999). Privatization helps us to gain efficiency, better financial results and growth in accessibility of credit for private owned firms (Filipovic, 2005). The performance of Pakistan Telecommunications Company Limited (PTCL) was increased after privatization and development came through technological changes, wireless communication technology and innovation in wired (Shah, Haroon-Ur-Rashid, Ullah, and Ahmed, 2009). In Pakistan, the formation of Pakistan Telecommunication Authority (PTA) and strong government policies regarding privatization of telecom sector were the key factors of the success of Pakistan Telecommunication Limited (PTCL) after its privatization in 2006 and it still lead the market with 98% of total market share (ADB, 2008). The performance of Karachi Electric Supply Corporation (KESC) was going to be improved after shifting of its control towards private sector from Government (ADB, 2008). The efficiency and performance of Kot Addu Power Company (KAPCO) had increased after its privatization in 1996 (Humayun & Anjum, 2000). The government concentration towards public sector lead inefficiency in banking zone (Haque, 1997) and it was a fact that the shift of ownership from public to private investor can bring a straight forward change in reward and labor policies in the boundaries of privatized entities, the power was shifted towards management and it discouraged the labor unions (Megginson, 2000). In Pakistan, the part of labor union has been significantly reduced as privatization of a public enterprise (Joshi, 1999). According to a recent survey, it was observed that more then 60-80 percent people felt that their living standards becoming worse after privatization process (Kikeri, Nellis, & Shirley, 1992). The policy of privatization was going to be shocking when Supreme Court of Pakistan issued a decision against the privatization of Pakistan Steel Mill due to controversy in the process of privatization (The News, 2006; MCB Bank Limited; and Shah, Haroon-Ur-Rashid, Ullah, and Ahmed, 2009). It was concluded by one of the researcher that high un-employment, low performance of agriculture-trade sectors, increase poverty and many other problems were the results of privatization process in Pakistan (Yoganandan, 2010). The privatization of some sectors like roti plants and edible oil was not so result oriented (Bokhari, 1998). Privatization generally leads to bad economic fluctuations, worse liberalizing policies and deficiency of public information (Kikeri, Nellis, & Shirley, 1992). 6. Impact of Privatization on Banking Sector in Pakistan In Pakistan, the privatization of financial sector became more effective when there was a remarkable change in ownership towards private sector from public sector and its aggregate assets worthiness had increased from 44% to 77% during 2000-05 (ADB, 2008). Also the share in the assets of government owned banks was reduced from 92 percent in 1990 to 41 percent in 2002. The share in the deposits of private banks reached from 0 to 45 percent in 1990 and the share in deposits of public owned banks was reduced from 93 percent in 1990 to 43.5 percent (Khalid, 2006). In the time of Nationalization, banking sector was badly affected by the incompetent management control, overstaffing and inefficient policies. This situation creates the need of privatization of banking sector of Pakistan (ADB, 2008).

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Table 1: The Impact of Privatization on Assets in Banking Sector
Number Years Public Private Foreign Total 1990 7 17 24 2002 5 16 17 38 Share (%) 1990 92.2 7.8 100 2002 41.3 45.5 13.2 100 Amount (Rs. billion) 1990 392.3 33.4 425.6 2002 877.6 968.3 280.9 2126.8

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Source: Financial Sector Assessment 1990-2002, State Bank of Pakistan. Figure 1: Percentage of Shares in Assets in Banking Sector before and after Privatization

Source: Financial Sector Assessment 1990-2002, State Bank of Pakistan. Figure 2: Amount in Billions in Assets in Banking Sector before and after Privatization

Source: Financial Sector Assessment 1990-2002, State Bank of Pakistan.

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Table 2: The Impact of Privatization on Deposits in Banking Sector in Pakistan Amount (Rs. Billion) 1990 2002 329.7 24.9 721.9 754.2 184.1

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Years Public Private Foreign

Number 1990 7 17 2002 5 16 17

Share (%) 1990 93 7 2002 43.5 45.4 11.1

24 38 100 100 354.6 1660.2 Total Source: Financial Sector Assessment 1990-2002, State Bank of Pakistan. Figure 3: Percentage of Shares in Deposits in Banking Sector before and after Privatization

Source: Financial Sector Assessment 1990-2002, State Bank of Pakistan. Figure 4: Amount in Billions in Deposits in Banking Sector before and after Privatization

Source: Financial Sector Assessment 1990-2002, State Bank of Pakistan.

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Table 3: Privatization and Budgetary Deficit variations of Different South Asian Countries Country Sri Lanka India Nepal Bangladesh Pakistan No. of units privatized 75 39 10 1083 106 Budgetary Deficit (% age of GDP) 7.7 6.5 6.4 5.4 5.4 Privatizations receipts $715 millions Rs. 126.38 billions Rs. 797 millions $ 2.0 millions Rs. 59.6 billions

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Source: Regional meeting on privatization in South Asia, November (1999)

7. Conclusions The aim of our study was to know, how privatization can affect the outcomes of an organization. Research questions were used to support our findings and it was concluded that there was a deep and positive impact of privatization process on the performance of various entities in Pakistan. Our past showed that privatization always shaped desirable results regarding various industries such as auto-mobile, cement, telecom and power generation organizations. Volume, profit, efficiency, progress; promoted FDI and investment opportunities increased; and improved working conditions in the organizations and living standards of the employees also increased due to privatization and there was a highly significant impact of privatization on the performance of financial institutions especially in banking sector. Privatization also produced many strict rules and regulations regarding labor and working environment but it can be improved by making flexible policies. The limitation of our study was that it discussed the performance analysis of banking sector of Pakistan only but it opens many doors for future studies about other sectors of Pakistan like power generation companies, cement industries, telecommunication companies that are being privatized till date.

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References

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