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Failure of Corporate Governance: Privatization of PTCL Pakistan

Abstract

Purpose: This case study discusses the failure of corporate governance in the perspective of

privatization of (PTCL) Pakistan Telecommunication Company Limited.

Introduction: PTCL is the major phone company in Pakistan. It operates about 4.4 million fixed

lines and has a cellular arm Ufone that has a second largest share of the cell phone market in

Pakistan. It had a monopoly on all phone services, but the telephone industry has been gradually

deregulated. PTCL was privatized in 2006.

Methodology: The study is descriptive in nature and uses case study design to present the

artifact of one of the biggest financial scam of Pakistan of its time. All the data has been

collected from published sources on print media and internet only.

Findings: Financial facts seem to confirm the lack of a serious consideration of corporate

governance standards during the privatization process of PTCL. In the case of PTCL,

privatization both parties miserably failed to comply with the key standards and structures of

corporate governance in Pakistan.

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The role of auditors and officials responsible for the appraisal of assets of PTCL including Ufone

and PakNet was ambiguous and below international standards. The sale of 26% share of PTCL

along with the management control is considered as financial blunder in the privatization history

of Pakistan. The study clearly elucidate that there was no need for the hasty privatization of

PTCL.

Lesson Learned: What PTCL needed was just proper corporate governance through

accountability, transparency, integrity, corporate ethics and executive control.

Keywords: Privatization, Corporate Governance, Financial performance, Failure

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Introduction

There are many rationales for governments of the countries to liberalize the telecommunications

sector

[1], especially in non-industrial nations; privatization has arisen as strategy apparatus for

overseeing declining monetary conditions

[2]. The primary explanation of privatization of administrations area and explicitly telecom area

is the specialized exhibition

[3]. They further remarked that in non-industrial nations, huge delay in interfacing the call, low

quality of client administrations, low usefulness and absence of ability and aptitude to get trend

setting innovation are not many of the reasons for the liberation of telecom area.

In Pakistan the course of privatization and monetary advancement was begun in mid nineties,

where some monetary foundations were given over to public and workers. The principle

intention of financial advancement was to limit the strain on government and acquire venture the

country. During this period the majority of the privatization endeavors were spoiled by various

charges.

Methodology:

The review is graphic in nature and utilizations contextual analysis plan to introduce one of the

greatest privatization of public telecom administrator. This contextual analysis begins with the

presentation of PTCL and gives a concise presentation on its privatization and toward the end it

gives effect of this disappointment of corporate administration in offering perfect and clean
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privatization process. Every one of the information has been gathered from distributed sources

on print media and web as it were. Chosen duplicates of distributed material are likewise added

for a speedy reference.

1. PTCL – An Introduction
Pakistan Telecommunication Company Limited (PTCL) is considered as one of the most quickly
developing telecom organizations in Asia [4]. It involves cell organization Ufone and

internet service PakNet [5]. In 2005, it was to some degree privatized to UAE based association.
The significant target of the PTCL privatizations was to bring speculation and capable
administration that might work on the reaction towards shopper requests, particularly with
increment the establishment of new lines to meet the raising necessities of data innovation.
Privatization Commission at first offered 2% portions of PTC through voucher conspire in mid
1994. In the wake of getting a positive and empowering reaction from individuals, the public
authority offered one more 10% offers to the unfamiliar purchasers in September 1994 worth $
898 million [6].

Table. No1. Historical Background of Telecommunication in Pakistan

1947 Posts & Telegraph Dept. established

1962 Pakistan Telegraph & Telephone Dept.

1990-91 Pakistan Telecom Corporation ALIS: 850,000 Waiting list: 900,000 Expansion

Program of 900,000 lines initiated (500,000 lines by Private Sector Participation

400,000 lines PTC/GOVERNMENT own resources).

1995 About 5 % of PTC assets transferred to PTA, FAB & NTC.

1996 PTCL Formed listed on all Stock Exchanges of Pakistan

1998 Mobile & Internet subsidiaries established

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2000 Telecom Policy Finalized

2003 Telecom Deregulation Policy Announced

2005 26% shares of PTCL offered

2006 26% shares sold with Management Control

(Source: Pakistan Telecommunication Company Limited)

To ensure purchasers and live with the WTO Agreement, the Pakistan Telecommunications

Authority submitted taking out PTCL's restraining infrastructure on fixed lines later 2002. A

privately owned business working in a cutthroat market with the oversight of an administrative

authority is probably going to offer better support to clients and to keep costs seriously low [7].

The private administrators were preferable suppliers of general administrations over open

administrators during the early last century [8 and 9].

Table No.2. Privatization of PTCL

PTCL (2%) Aug-94 General Public Through Stock Exchange

PTCL (10%) Sep-94 Through DR form

26% (1.326 billion) of shares of PTCL Jul-05 Etisalat-UAE

(Source: Privatization Commission of Pakistan)

During the cycle and progress of privatization, PTCL's 26% offers were presented for privatization alongside

the administration control in 2004.Initially three associations for example Etisalat from a UAE consortium,

SingTel from Singapore and China Mobile were short recorded for the last offering. PTCL comprised three

specialty units, Ufone, PakNet and country wide landline organization. The assessed resources of the

organization were roughly 10 billion US dollars was one of the major corporate exchange in history of

Pakistan. In 2006 the last offered was gotten by Etisalat at most exorbitant cost of $ 1.96 per share though, $

1.16 by SingTel and $ 1.40 by China Mobile separately. The Etisalat offered $ 2.6 billion with the executives
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control of the organization. 66% of the portions of the organization were held by Government of Pakistan and

remaining offers were presented for public membership. In this manner Etisalat assumed control over the

control of PTCL alongside the control on Ufone and PakNet [10].

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1. Privatization of PTCL - Poor Corporate Governance

This case study is conducted with view to describe the non compliance of corporate

governance during the hasty transfer of PTCL to new administration. A number of issues

have been highlighted in this paper to provide evidence for corporate governance failure at

PTCL privatization.

Inappropriate choice for privatization:

Regularly, the legislatures all over the planet offer those associations for privatization whose

exhibition is considered underneath principles or they devour tremendous sum on

administration and managerial grounds. However, the instance of PTCL privatization was to

some degree novel, that a profoundly productive hierarchical was presented for

privatization. It is pleasant that PTCL privatization some way or another decreased the

Government risk however what the rationale to move the executives powers and control to a

not comfortable acquirer with the hierarchical culture in Pakistan. The 26% of offers were

offered to in one of the most questionable monetary arrangement at any point recorded in

the privatization history of Pakistan. The privatization interaction of PTCL was started in

2004 through EOI (articulation of interest) in neighborhood and global media. 18 nearby

and global organizations showed interest in purchasing the portions of PTCL; nonetheless,

just three organizations were short recorded for the last offering process. The offers cost

presented by UAE consortium was $1.96, $1.16 by SingTel and $1.40 by China Mobile.

Considering the most elevated per share value the proposal by UAE consortium, PTCL was

sold with the executives control.

Under Valued Assets: The independent sources quoted that even Ufone and PakNet had
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market value of more than US $4 billion, it was also revealed afterwards that the valuation

of the company’s assets were estimated on the basis of old records instead of current value

of the assets. The major officials of the company concealed the factual conditions and

information regarding the financial health and prospects of the company. The sale of PTCL

is considered one of the major failures of corporate governance in the corporate transfers in

Pakistan.

Financial Performance: The pre–privatization execution of PTCL was exceptionally solid

and honorable in contrast with any remaining financial areas in Pakistan. It was contributing

huge sums to public exchequer. Before the privatization in 2005, PTCL created Rs 84

billion with a net benefit of Rs 27 billion. The organization was likewise experiencing

debasement, nepotism and botch from the officials and staff. The public authority official,

lawmakers assumed negative part by politically inspired postings and recruiting, the abuse

of organization's assets like, rest houses and vehicles. In 2004, the public authority official

compressed PTCL to deliver Rs 25 billion as profit from net benefit of Rs 30 billion, being

the significant investor; the huge sum was gathered by government. Because of these

conditions, the organization legged behind in gaining new and most recent advancements in

contrast with organizations of different organizations which were making vital speculations.

Rather than developing the organizations fortitude, ability and making it more serious in

worldwide market, the organization was questionably sold.

Lower Profit Margins: Under the new organization, the monetary exhibition of PTCL

declined significantly. In the four years of pre privatization, the benefits developed from Rs

18 billion to Rs 27 billion at a normal pace of 11% every year. In the four years of
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privatization, the benefits retreated and came to at Rs 11 billion at 21% negative

development rate. The monetary development of PTCL in contrast with provincial

contenders was deterring as the development rate for the companions during 2005 to 2009

was 6% and for 2% PTCL in a similar period.

Impact of Share value:

The post privatization stock value of PTCL depicted a dismal picture. The market value of

PTCL share decreased significantly. The value of share in 2005 was Rs 358 billion which

reached at Rs 88 billion in 2009. This abnormal recession in the share value of PTCL caused

a loss of Rs 200 billion to government and small shareholders.

HR Crisis:

After the privatization, the company went through the process of rightsizing and downsizing

of employees. 32000 employees from various sections left PTCL through voluntary

separation program; the Government has to bear $256 million as the payment to employees.

Soon the loss of large number of experienced and trained workers began to hurt the

performance of PTCL. The network maintenance, customer care and operations suffered

abruptly; consequently, thousands of connections were lost.

Transparency of deal:

The offer of PTCL at a loss of Rs 23 billion [11] with discounted share cost from unique

cost at $1.96 to $1.66 per share left might question marks on the straightforwardness of the

arrangement. The authorities of the organization prevented any botch during the interaction

from getting privatization. The effective bidder was given excessive concession in the

arrangement which made deficiency of billion public exchequer. PTCL was most
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noteworthy benefit procuring organization in the country with enormous number of business

square, rest houses, private settlements and trades worth of billions. There is narrative

evidence that the arrangement supported a misfortune when effective bidder lost interest in

the arrangement because of some specialized issues. To make the exchange fruitful,

authorities of PTCL offered admission to the champ. All the while, SingTel and China

Mobile were likewise reached for new offering process yet both of the organizations

rejected quickly. Government, the greater part investor with 66% offer gave up the

administration control in the blessing of Etisalat to make exchange fruitful. The resources of

the organization were underestimated and Government likewise shared half expense on the

installment for brilliant handshake proposed to workers.

Undue concessions:

The privatization of PTCL was likewise absolved from domain of Public Procurement

administrative Authority Ordinance 2002 in the government spending plan. With this

significant sacred concession, the Etisalat was given free hand for selling and buying of

resources disregarding the mandate. Following are a portion of the excessive concessions in

the privatization exchange.

• The acquirer of the PTCL was permitted to pay measure of exchange in long term

simple

portions.

• Government was persuaded to pay half of the cutback charges with respect to the

representative's willful partition program.

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• The privatization understanding by and large keep the acquirer from selling the

properties of the organization yet in PTCL case the acquirer need to deal and involve the

resources of PTCL for the reason other than these was gained for.

• The acquirer additionally got $50 million as specialized help charges for giving

administration administrations and skill.

Impact of failure: The PTCL privatization was the biggest advancement movement in the

financial history of Pakistan. The carefully hidden amended privatization concurrence with

acquirer supposedly incurred a further deficiency of billions of rupees to the public

exchequer other than extraordinary concessions presented in the long haul, in direct clash

with Article 30 of the Public Procurement Rules 2004. The PTCL has been the most

elevated benefit acquiring state-claimed organization with land resources worth billions of

rupees the nation over including business squares, private provinces and trades. As per the

authority archives, the Share Purchase Agreement (SPA) of the PTCL with acquirer slipped

by in September 2005 later the non-installment of contribution by the triumphant bidder; the

public authority ought to have additionally relinquished the sincere cash presented by the

defaulting winning bidder. However, rather than making a move, later thorough

conversations with the administration of acquirer, the public authority consented to offer

extra concessions and adjustments to the exchange structure. The PTCL top managerial

staff, with 62% offers and greater part portrayal, has been made innocuous in the

privatization interaction

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2. Conclusions

Being state owned enterprise, it was Government‘s vital liability to determine the scope and

feasibility of privatization of PTCL through professional financial analyst and auditors.

Before privatization, PTCL was major corporate enterprise and revenue contributor to

Government. The key purpose of any enterprise is to generate revenue and create

employment opportunities; PTCL was doing excellent job in compliance to revenue earning

and providing employment to skilled and non skilled persons. Through various training

institutes, PTCL was producing large number of highly skilled telecom engineers and

technicians. One wonders, why the privatization commission and BoG of PTCL decided to

offer it for privatization. Since the privatization of PTCL, no major change in corporate

structure is carried out to improve the services even new management could not lay off

20,000 employees which was one of the major elements of transaction.

The strategies with regard to corporate level, business level and marketing are still not

revised and transformed. The study clearly elucidate that there was no need for the hasty

privatization of PTCL. What PTCL needed was just proper corporate governance through

accountability, transparency, integrity, corporate ethics and executive control.

References
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[1] Adam, C., Cavendish, W., & Mistry, P. S. (1992). Adjusting privatization: Case

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Journal of International Business Studies, 23, 93}125.

[3] Wellenius, B., & Stern, P. (1994). Implementing reforms in the telecommunications

sector: Lessons from experience. Washington, DC: World Bank.

[4] Pakistan Telecommunication Authority. Annual Report 2006.

[5] Pakistan Telecommunication Authority. Annual Report 2006.

[6] Privatization Commission of Pakistan.

[7] Private Sector Assessment Pakistan 2008.

[8] Wallsten, Scott. (2001a). “An Empirical Analysis of Competition, Privatization, and

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[9] Wallsten, Scott. (2001b). “Ringing in the 20th Century: The Effects of State

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Europe, 1892- 1914,” SIEPR discussion paper No. 00-37, Stanford University.

[10] Securities and Exchange Commission of Pakistan. Impact Assessment of the

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[11] Pakistan Telecommunication Authority. Annual Report 2006.