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Performance of
Performance of telecoms telecoms
privatised under different modes
and structures
555
A comparison of New Zealand and
Australian telecoms
Mark D. Domney
Department of International Business, The University of Auckland,
Auckland, New Zealand

Abstract
Purpose – This paper aims to examine whether the mode of privatisation and the subsequent
ownership structure affects post-privatisation performance.
Design/methodology/approach – Utilising a theoretically derived sample of two matched
telecommunications firms in New Zealand and Australia, and non-parametric analysis of financial
data, the performance of two forms of privatisation are compared: full privatisation via direct sale to
foreign anchor investors versus partial privatisation via a domestic share issue restricting foreign
ownership.
Findings – Concentrated ownership through direct sales to foreign owned anchor investors is not
more efficient or profitable, nor does it result in increased capital investment; it does, however, result in
higher dividend payouts.
Research limitations/implications – These findings contradict the accepted wisdom and
dominant theory in the field that full privatisation outperforms partial privatisation, and that FDI
transfers firm-specific ownership advantages enabling the recipient to outperform domestically owned
firms. However, the findings are applicable to the two firms and countries studied and future studies
need to extend these to the wider population of privatised firms.
Practical implications – While privatisation will improve organisational performance, the choice
of whether to privatise by direct sale to anchor investors and foreign owners versus a partial share
issue privatisation and keeping a domestic focus will have post-privatisation performance
implications.
Originality/value – A more nuanced understanding is provided of the performance implications of
modes of divestiture and ownership structures in advanced economies.
Keywords Privatization, Corporate ownership, International investments, Share issues, New Zealand,
Australia
Paper type Research paper

Introduction
Privatisation is grounded on theories of market efficiency and ownership which assert
that private enterprises are more efficient than state ownership. Yet, little attention has
been paid in this literature to the location of private ownership, domestic or foreign, nor International Journal of Public Sector
to ownership structures, other than fully public or private (Omram, 2004). Moreover, Management
Vol. 22 No. 6, 2009
this dyadic concept of ownership structures fails to acknowledge the reality of pp. 555-575
continuing government involvement in privatised industries due to partial q Emerald Group Publishing Limited
0951-3558
privatisation (Bortolotti et al., 2003). This paper represents an attempt to develop a DOI 10.1108/09513550910982896
IJPSM more nuanced understanding of the performance implications of different privatisation
22,6 modes and structures.
There are two dominant modes of privatisation:
(1) direct sales to strategic investors; and
(2) public offerings or share issue privatisations (SIPs) (Sader, 1995; Mahoobi, 2002;
Megginson et al., 2004).
556
SIPs can be further distinguished by whether they are majority or minority issues. SIPs
result in mixed enterprise types (Bortolotti et al., 2003) that do not easily fit the
privatisation dichotomy, since they include public and private ownership
simultaneously (Boardman and Vining, 1989). However, the residual government
ownership typical of SIPs signals a credible commitment to the ongoing success of the
privatisation process and this, in turn, reduces investor risk (Perotti, 1995) and
improves post-privatisation organisational performance. In contrast, privatisations by
direct sale to anchor investors result in a more concentrated ownership structure
providing more effective monitoring of managers and, hence, better corporate
governance (Shleifer and Vishny, 1997).
By value, the telecommunications industry is the largest to be privatised, with 59
per cent of all privatisations by SIP and accounting for 70.4 per cent by value,
compared with 41 per cent by direct asset sale and 29.6 per cent by value (Megginson
et al., 2004). Governments also sell a lower percentage of the enterprise when
privatising via SIP (Bortolotti et al., 2003). “In the average SIP, governments sell 35 per
cent of the SOE’s capital. The average asset sale privatizes 74 per cent of the SOE, with
a median value of 90 per cent” (Megginson et al., 2004, p. 2845). A number of studies of
privatisations in developing countries and countries in transition have found that
direct sales outperform other ownership types, such as minority and majority SIPs
(Omram, 2004; Claessens and Djankov, 1999; Pivovarsky, 2003). However, McKnight
et al.’s (2003) study of privatisations in emerging markets found a positive correlation
between residual government ownership, typical of SIPs, and the subsequent
performance of these companies. We delve deeper into this issue by examining the
post-privatisation performance of two telecoms in developed markets:
(1) Telstra Australia, privatised by domestic SIP; and
(2) Telecom New Zealand, privatised by direct sale to anchor investors.

Privatisations can be further differentiated by whether they are structured to involve

domestic or foreign investors (Omram, 2004). When the privatisation is large and
involves a state monopoly, domestic firms often lack both the financial capacity and
the industry-specific skills to manage the privatised enterprise efficiently (Ramamurti,
2000). Allowing foreign investment overcomes these limitations. Indeed, many
privatising governments require foreign direct investment (FDI) in order to raise
foreign exchange, send a credible signal to the international community, and to provide
access to technological and managerial skills not possessed by domestic firms
(Ramamurti, 1996).
FDI has been particularly relevant in the privatisation of services, including
telecommunications (Sader, 1995; United Nations Conference on Trade and
Development, 2003). Therefore, we also examine the impact of the location of
ownership on the post-privatisation performance of our firms, the domestically owned Performance of
Telstra Australia and Telecom New Zealand privatised by FDI. telecoms
The rest of this paper is organised as follows. First, the paper reviews the literature
on ownership mode/structure and performance. This allows us to establish the
hypotheses for testing. Detail is then provided on the method and measures used for
the study. This is followed by the presentation of the results before concluding the
paper with the main implications and limitations of the study. 557
Literature review and hypotheses development
Ownership mode, structure and privatisation
Privatisation is a theory of ownership, whereby private ownership is argued to be more
efficient than public ownership based on theories of public choice or property rights. In
short, the arguments for privatisation can be summarised as follows. Private ownership
removes political interference (Shleifer and Vishny, 1994; Boycko et al., 1996), introduces
market based incentives, through hard budget constraints and the threat of takeovers
(Vickers and Yarrow, 1991; Sheshinski and Lopez-Calva, 1999), reduces information
asymmetries between the agent and the principal by introducing competition and
monitoring incentives (Vickers and Yarrow, 1991; Shleifer and Vishny, 1997), and places
profit maximisation as the sole incentive of both managers and owners. This results in
privatised firms pursuing efficiency in order to maximise returns to shareholders.
Yet different modes of ownership may result in differing post-privatisation
performance. Shleifer and Vishny (1997) theorise that concentrated ownership with
corresponding cash flow rights will outperform dispersed ownership. This is due to the
minimisation of agency costs, whereby concentrated owners have the incentive to
collect information and monitor management and are able to more easily enforce their
interests. The costs of concentrated ownership are that the owners may expropriate
minority owners’ and employees’ entitlements. Direct sales to anchor investors usually
involve a significantly larger proportion of the privatised enterprise than SIPs
(Bortolotti et al., 2003; Megginson et al., 2004), resulting in more concentrated
ownership. In addition, direct sales of large utilities to anchor investors often involve
FDI (Sader, 1995; Ramamurti, 2000; United Nations Conference on Trade and
Development, 2003), which itself is linked to increased performance: “It is widely held
that a precondition for [foreign owned firms] to generate spillovers is that they
outperform their local counterparts” (Buckley et al., 2004, p. 25).
Some studies in developing countries and countries in transition find support for the
hypothesis that firms privatised by direct sale to anchor investors outperform those
privatised by SIPs (Omram, 2004; Claessens and Djankov, 1999; Kocenda and Svejnar,
2003). Furthermore, studies of privatisation to foreign investors in transition countries
have also shown greater levels of restructuring and profitability (Frydman et al., 1999;
Uhlenbruck and De Castro, 2000; Rojec, 2001), increased exports and no evidence of
rent seeking or asset stripping (Mihalyi, 2001), reduction of debt, increased capital
investment and efficiency (Uminski, 2001). These studies find that the benefits
attributed to FDI were in evidence in the privatisation of SOEs to foreign owners, and
that these benefits enabled these firms to outperform those privatised to domestic
owners. The few studies that measure both mode and location of ownership find that
the greatest performance improvements accrue to firms privatised by direct sale to
foreign owners (Pivovarsky, 2003).
IJPSM On the other hand, SIPs result in dispersed ownership and often include residual
22,6 government ownership (Bortolotti et al., 2003). Residual government ownership results
in concentrated ownership rights without the corresponding cash flow rights,
encouraging bureaucrats to pursue political rather than financial objectives that result
in poorer performance (Shleifer and Vishny, 1997). Boardman and Vining (1989, p. 26)
also find that mixed enterprises, typical of SIPs, perform poorly, concluding that
558 “partial privatisation may be worse, especially in terms of profitability, than complete
privatisation or continued state ownership”. Conversely, Perotti (1995) argues that
residual government ownership, while divesting managerial control, sends a credible
commitment to the ongoing success of the privatisation process. This credible
commitment reduces investor’s uncertainty, thus minimising investor risk. McKnight
et al. (2003) find that residual government ownership is positively correlated with the
post-privatisation performance of telecoms in emerging markets, supporting Perotti’s
(1995) theoretical assertions.
In sum, theory and research, mostly from emerging and transitions countries, result
in ambiguous conclusions as to the post-privatisation performance of differing
ownership modes and structures. This study represents a modest attempt to
investigate this issue. We compare two firms, one privatised through a direct sale to
foreign strategic investors and one through a minority SIP to domestic investors, on a
range of pre- and post-privatisation performance measures over time.
This study follows previous privatisation research by examining whether a change
in ownership results in a change of performance, where performance is measured pre-
and post-privatisation against a range of financial operating data; profitability,
operating efficiency, capital investment spending, leverage, taxation, dividends and
employment (Megginson et al., 1994; Megginson and Netter, 2001; Shirley and Walsh,
2000; Kikeri and Nellis, 2002; La Porta and López-de-Silanes, 1999; Boubakri and
Cosset, 1998). However, this study is distinguished from these earlier studies in that we
examine the change in performance relative to the divestment mode and structure,
direct sales with FDI versus SIP restricting FDI. Utilising this range of performance
measures should help to develop an understanding on the performance outcomes of
privatisation under these different ownership modes and structures. The remainder of
this section develops the specific hypotheses in relation to the two ownership
modes/structures and the different performance measures.

Profitability
Privatisation to foreign owners is a form of international acquisition (Doh et al., 2004),
and studies of international acquisitions demonstrate abnormal returns (Markides and
Ittner, 1994; Gleason et al., 2002; Seth, 1990, Seth et al., 2000). Studies have found that
privatisations involving foreign owners results in greater levels of profitability
(Frydman et al., 1999; Uhlenbruck and De Castro, 2000; Rojec, 2001). In addition, the
weight of evidence falls in favour of direct sales to anchor investors outperforming SIP
privatisations due to the benefits of concentrated ownership (Omram, 2004; Claessens
and Djankov, 1999; Kocenda and Svejnar, 2003; Pivovarsky, 2003). Therefore, we take
as our starting position the following hypothesis:
H1. Privatisations by direct sale to anchor investors involving FDI will be more
profitable than privatisations by SIP restricting FDI.
Efficiency/productivity Performance of
As indicated by Sheshinski and Lopez-Calva (1999), increased profitability does not telecoms
indicate increased productivity. Increased profitability may be derived from increased
operational efficiency, decreased allocative efficiency, or both. The use of separate
measures for profitability and productivity should help to tease out this relationship.
Direct sales to anchor investors, particularly foreign investors, are encouraged by
divesting governments due to the industry-specific management and technological 559
expertise that can be brought to the privatised firm (Ramamurti, 2000). This results in
more concentrated ownership, which has been found to have higher post-privatisation
productivity (Claessens and Djankov, 1999; Omram, 2004). Empirical evidence also
indicates that foreign owned firms exhibit higher levels of productivity than domestic
firms (Haddad and Harrison, 1993; Buckley et al., 2004). At an aggregate level, a higher
level of foreign capital participation in an economy is correlated with greater
productivity, development of high technology and new products, and access to
international markets (Buckley et al., 2002). Privatisation studies from countries in
transition illustrate that privatisation to foreign owners results in greater levels of
efficiency (Uminski, 2001; Kocenda and Svejnar, 2003). Given this, we expect that direct
sales to foreign owners will result in greater levels of efficiency and productivity than
partial privatisations to domestic investors through SIP:
H2. Privatisations by direct sale to anchor investors involving FDI will be more
efficient than privatisations by SIP restricting FDI.

Capital investment
The relationship between ownership and capital investment is less clear, with some
empirical findings showing that investment increases post-privatisation (Uhlenbruck
and De Castro, 2000; Megginson et al., 1994) and other studies finding that
privatisation “is not followed by the burst of investment government officials
frequently hope for” (La Porta and López-de-Silanes, 1999, p. 1212). This second study
consisted of firms sold almost exclusively through direct sales to anchor investors.
Omram (2004) finds no significant difference in capital investment between anchor
investors and majority and minority SIPs. However, Uminski (2001) finds that
privatisations to foreign owners results in increased capital investment.
In the case of direct sales to foreign anchor investors, one possible argument is that
the fear of re-contracting or expropriation results in capital underinvestment in long
lasting assets (Laffont and Tirole, 1993). This may be reinforced in situations of
acquisition, privatisation to foreign owners being a specific case of acquisition (Doh
et al., 2004), where a return is expected from the acquired existing assets. However, if
governments retain a residual share of the privatised enterprise, as is the case with
SIPs, signalling a credible commitment not to re-contract or expropriate profit (Perotti,
1995), the risk associated with long-term investment is reduced and partially privatised
enterprises would be more likely to make capital investments. On average, we
hypothesise that, after acquisition, capital expenditure decreases for privatisations
through direct sales to foreign owners and increases for partial privatisations through
SIPs:
H3. Privatisations by SIP restricting FDI will exhibit more capital investment
than privatisations by direct sale to anchor investors involving FDI.
IJPSM Leverage
22,6 Privatisation studies find that, on average, leverage decreases post privatisation.
Megginson et al. (1994) find that 70 per cent of firms decrease leverage
post-privatisation but that, in non-competitive industries and OECD countries, this
decline is relatively small. If direct sales to anchor investors include FDI, the
obsolescence bargaining model (Vernon, 1971) suggests that foreign firms minimise
560 equity and maximise debt in order to reduce the exposure to re-contracting by a
divesting government (Wells and Gleason, 1995). This would indicate that direct sales
to foreign anchor investors are likely to increase leverage post-privatisation.
For SIPs with residual government ownership, Perotti (1995) proposes a credible
commitment not to re-contract exists and, thus there is reduced risk associated with
investment. In such cases, SIPs would not need to minimise equity by maximising
debt. Some corroborating evidence is provided by Omram (2004), who finds that
minority SIPs reduce debt while concentrated anchor investors do not, and Kocenda
and Svejnar (2003), who find financial leverage declines for minority SIPs. We therefore
hypothesise that:
H4. Privatisations by direct sale to anchor investors involving FDI will increase
debt more than privatisations by SIP restricting FDI.

Dividends
The vast number of previous studies on the outcomes of privatisation which find
increased internal efficiency and profitability are largely studies of returns to owners.
While the distributional outcomes of a firm’s higher profit are not made explicit,
implicitly higher firm-level profitability is likely to be captured by shareholders and,
perhaps, management. Those studies that explicitly examine returns to shareholders
find that new owners of privatised enterprises are able to capture a significant share of
the gains of privatisation. This is made up from a number of sources. Governments
have been found to under price privatisation sales by on average 30 per cent, resulting
in large transfers of wealth from public to private owners (Jones et al., 1999). Newberry
and Pollitt (1997) find share prices of privatised firms rose by over 250 per cent and
outperformed the share market by 100 per cent. They also note that about one quarter
of the gains are transferred out of the country. Hodge’s (2000) meta-analysis finds that
privatisations are associated with high shareholder returns. The empirical evidence
strongly indicates that the purchasers of privatised enterprises are winners in the
distributional outcome.
However, these studies do not indicate whether dividends differ by ownership
structure. Shleifer and Vishny’s (1997) theory would suggest that direct sales to anchor
investors, resulting in concentrated ownership with associated cash-flow rights,
focuses the organisation’s attention on improved profitability and, accordingly, it is
logical to assume that this would result in higher dividends paid to the concentrated
owners. La Porta and López-de-Silanes (1999) find significant returns to capital for
their sample of privatisations in Mexico, where privatisation was almost exclusively
by direct asset sale. When a direct sale involves FDI, empirical findings from the
acquisition literature may shed some light on possible ownership implications. Studies
of acquisitions in domestic markets show no significant returns to acquisition.
However, studies of international acquisition show abnormal returns (Markides and
Ittner, 1994; Gleason et al., 2002; Seth, 1990, Seth et al., 2000). The obsolescence
bargaining model argues that, given the risks of re-contracting associated with foreign Performance of
acquisition, the front loading of returns is likely (Wells and Gleason, 1995), suggesting telecoms
that dividend payments would be higher to recoup investment before governments
re-contracted.
SIPs involving residual government ownership result in the organisation pursuing
political rather than financial goals (Shleifer and Vishny, 1997), thus resulting in lower
dividend payouts. However, if the divesting government utilises a SIP to create an 561
equity culture in order to broaden support for the privatisation process (Bortolotti et al.,
2002), the government may wish the firm to increase dividend payments to cement this
support. Given the above discussion, we would expect that the payout ratios of both
direct sales to anchor investors and SIPs would increase, but that the increase would be
greater in direct sales to anchor investors, particularly those involving foreign anchor
investors.
H5. Privatisations by direct sale to anchor investors involving FDI will increase
dividends more than privatisations by SIP restricting FDI.

Taxation
While there is no theoretical or empirical evidence to suggest that tax paid would differ
by ownership structure, at least two arguments can be formulated. In general, we
would expect that taxation levels would increase post privatisation. Direct sales to
anchor investors resulting in concentrated ownership is hypothesised to result in
greater profit and payout ratios compared with SIPs. A higher profit ratio would
indicate a higher tax payment. Yet, given the hypothesis that firms privatised by direct
sale to anchor investors increase debt levels, it is feasible that taxation liabilities are
diminished in this instance. SIPs that still have residual government ownership would
have no incentive to minimise taxation. On average, we hypothesise that:
H6. Privatisations by direct sale to anchor investors involving FDI pay more tax
than privatisations by SIP restricting FDI.

Employment
The empirical findings on the effect of privatisation on employment are inconsistent.
Some studies find massive decreases in employment. For example, La Porta and
López-de-Silanes (1999) find that, for 233 Mexican privatisations, the mean number of
white collar workers declined by 53.5 per cent and blue collar workers by 53.4 per cent.
They note that these figures underestimate the employment effect, as the government
also decreased employment as part of restructuring prior to privatisation. They
attribute approximately one third of the increase in profitability to layoffs. Again
virtually this entire sample was privatised through direct sale to anchor investors.
Contrasting this finding is Megginson et al.’s (1994) study of 18 countries and 61 firms
privatised by SIPs. They find that employment actually increased in 64.1 per cent of
their cases, and this finding was statistically significant at the 10 per cent level.
Aggregate studies that do not distinguish between ownership type have less robust
findings. For instance, D’Souza and Megginson’s (1999) study of 78 firms in 25
countries finds insignificant declines in employment figures overall, but substantial
decreases for the subgroup of non-competitive firms. Hodge (2000), in his meta-analysis
utilising 93 previous empirical observations on employment, finds that employment
IJPSM declines on average, but just outside the 5 per cent level of significance (p ¼ 0:59).
22,6 Finally, Megginson and Netter (2001) summarise ten studies, finding that three result
in increases in employment, two have insignificant changes and five uncover
decreases.
Theoretically, it can be argued that concentrated ownership is more likely to reduce
employment, in order to improve both efficiency and profitability, when compared with
562 the dispersed ownership associated with SIPs. The logic of the obsolescence
bargaining model (Vernon, 1971), maximising short term returns in order to reduce
payback periods, would also lend itself to larger reductions in labour as a means of
increasing profitability in direct sales to foreign strategic investors. This is
corroborated by empirical evidence in transition countries, which indicates that
foreign owners restructure more than domestically owned firms (Frydman et al., 1999;
Uhlenbruck and De Castro, 2000).
SIPs with residual government ownership have political non-profit objectives
(Shleifer and Vishny, 1997) – for example job security and re-election – and thus SIPs
may be less likely to instigate severe reductions in employment. Omram (2004, p. 108)
finds that majority SIPs and anchor investors reduce employment more that minority
SIPs and privatisations to employees, and suggests that the result for minority SIPs
can be explained by the government “wishing to show social aspects in its
privatisation programme”. Therefore:
H7. Privatisations by direct sale to anchor investors involving FDI reduce
employment more than privatisations by SIP restricting FDI.

Sample
The choice of the telecommunications industry in New Zealand and Australia meets
the criterion for theoretical sampling. These countries provide a natural experiment by
which to investigate the impact of privatisation under different ownership modes and
structures. A single industry exploratory case study minimises industry differences,
and utilising matched firms from New Zealand and Australia minimises cultural and
political differences. Both countries have small populations relative to their
geographical size, and both are isolated island nations, limiting the potential for
cross-country competition. Telecommunications is important for the economic
competitiveness of both countries and the telecommunications firms are amongst
the largest in terms of their respective share markets. Equally, because of the dispersed
nature of the populations, particularly the rural population, exclusion from the
telecommunications network would have serious social costs.
In both countries telecommunications services were delivered by a government
monopoly as part of the broader post office. The need for greater efficiency saw both
countries move telecommunications into a separate SOE. In Australia this occurred
incrementally between 1989 and 1992, with the emergence of the Australian and
Overseas Telecommunications Corporation Ltd (AOTC), renamed Telstra in 1993. At
the same time as the AOTC was formed, Australia introduced competition into the
market place by licensing Optus (a private sector consortium) as a direct competitor.
Australia privatised the state-owned telecommunications company, Telstra, through
two tranches of public share offerings in 1997 and 1999, selling a combined 49.9 per
cent while retaining 50.1 per cent. Foreign ownership was restricted to 16.7 per cent of
the privatised shares, with no single foreign owner able to purchase more than 5 per
cent of the privatised shares or 1.67 per cent of the total company. In New Zealand, Performance of
Telecom as a SOE was formed in 1987 and its statutory monopoly was removed in telecoms
1989. New Zealand privatised 100 per cent of Telecom in 1990 by direct sale to a
consortium led by Ameritech and Bell Atlantic, which then sold on just over 50 per cent
through an international initial public offering (IPO).
Both firms are the dominant telecommunications companies in their respective
countries. Thus, both firms operate in markets with elements of natural monopoly. 563
Parts of the telecommunications industry are deemed to be non-competitive, for
example the line infrastructure and switching equipment, whereas newer technology,
such as mobile communications, is considered competitive. However, the necessity for
competitors to connect to the dominant incumbent’s network has enabled privatised
telecommunication firms to severely limit competition, and thus retain significant
monopoly power. The continued dominance of incumbents after privatisation and
liberalisation indicates a distorted competitive environment. For instance, in 2002, 12
years after privatisation, Telecom had over 96 per cent of the market share of fixed-line
telephone traffic originating in New Zealand (Howell and Obren, 2003).

Method and measures

Megginson and Netter’s (2001) review of privatisation studies shows that the dominant
methodology in the privatisation field is that initially developed by Megginson et al.
(1994), where the effect of privatisation is estimated by comparing the same
organisation’s performance pre- and post-privatisation on a range of financial ratios,
using a non-parametric Wilcoxon rank sign test to determine significance. Following
previous research (Megginson et al., 1994; La Porta and López-de-Silanes, 1999;
Boubakri and Cosset, 1998, D’Souza and Megginson, 1999; Dewenter and Malatesta,
1997), we utilise and extend this method by comparing the pre- and post-privatisation
performance both within and between firms in order to determine whether the
divestment mode and structure, direct sales to FDI or domestic SIPS, results in
differences in post-privatisation performance. Following the previous literature,
performance is determined across a range of measures.
Data were collected from annual reports and from Datastream. Financial ratios were
computed for both firms for the three years preceding privatisation and for six years
post-privatisation, excluding the year of privatisation. For Telecom, data
pre-privatisation data were collected from 1987 to 1990, and post-privatisation data
from 1991 to 1997. For Telstra, pre-privatisation data were from 1993 to 1996, and
post-privatisation from 1997 to 2003. Following La Porta and López-de-Silanes(1999),
profitability is measured by return on assets (ROA, net income/sales), return on sales
(ROS, net income/assets), operating income/sales and operating income/fixed assets.
“Net income, but not operating income, is affected by the changes in leverage that often
accompany privatisation. Evaluating changes in operating income offers a superior
measure of efficiency gains” (La Porta and López-de-Silanes, 1999, p. 1202). We
measure operating efficiency by two ratios, net income/employees and sales/employee.
We compute ratios for capital expenditure by first determining capital investment per
annum, taking the net fixed assets in year n and subtracting the net fixed assets in year
n 2 1. We then utilise this figure to determine capital expenditure/sales, capital
expenditure/total assets and capital expenditure/employees. We utilise three measures
of leverage:
IJPSM (1) long-term debt/equity;
22,6 (2) total debt/total assets; and
(3) liabilities/assets.

We measure payout as dividends per share/net earnings per share. Taxation is

represented by net tax/sales. Finally, employment is measured by the per annum
564 percentage change in total employment. Utilising ratios negates the need to control for
organisational size, as the ratios can be compared directly. Although Telstra is
significantly larger than Telecom, we do not expect these size differences to influence
the results.
In order to test our assumption that these are a matched pair of firms, confirmatory
analysis was undertaken in order to test the assumption of homogeneity of the
performance measures of both firms pre-privatisation. The investigative Wilcoxon
signed rank analysis confirmed that there were no differences between the two firms
for all performance measures pre-privatisation at the 10 per cent level of significance
(Table I).
Following Megginson et al. (1994), we test our hypotheses by investigating the
within-firm performance pre- and post-privatisation, as well as comparing the
performance of both firms on all of the variables for each year post-privatisation, again
using the Wilcoxon signed-rank test. Measuring both pre- and post-privatisation
performance is appropriate for two reasons. First, studies indicate that many of the
performance improvements associated with privatisation precede actual sale. This is
due to governments restructuring SOEs in order to make them attractive or saleable.
Second, using the same set of tests allows us to be confident that any subsequent
changes in performance were not the result of existing differences but due to the
change of ownership and/or different ownership modes/structures.

Results
Given the small size of the sample, and the non-parametric statistical analysis, a 10 per
cent significance level is applied. The within-firm analyses in Table I reveal that there
are statistically significant increases in performance post-privatisation for both firms.
There are, however, some interesting differences. Telecom’s increases were in
efficiency, leverage and dividend payouts but, interestingly, not profitability.
Post-privatisation decreases were found in capital expenditure and employment,
with no significant change in taxation. These findings are largely consistent with the
extant privatisation literature, with the notable exception of profitability. For Telstra,
significant increases were found for profitability, efficiency, leverage and taxation. A
decrease in employment eventuated post-privatisation, with no significant changes to
capital expenditure or dividends. Again, these tests of within-firm changes
post-privatisation largely accord with previous privatisation studies.
However, it is the between-firm post-privatisation performance comparisons that
are most interesting. Rejecting H1, we find no evidence that the foreign owned anchor
investor Telecom is more profitable than Telstra, the domestic SIP. None of the four
measures of profitability were significant, but three of the measures were in the
expected direction. We also hypothesised that, due to the firm-specific ownership
advantages of FDI, and the concentrated ownership deriving from direct sales, that a
direct sale to foreign owned anchor investors would be more efficient than a domestic
 Between-firm pre- Telecom pre- and post- Telstra pre- and post- Between-firm post-
privatisation privatisation privatisation privatisation
Z p (two-tailed) Z p (one-tailed) Z p (one-tailed) Z p (one-tailed)

Profitability
Return on sales 0.000 1.000d 0.535 0.296a 1.826 0.034 a 0.105 0.458c
Return on assets 0.000 1.000d 0.535 0.296a 1.826 0.034 a 0.105 0.458d
Operating income/sales 0.000 1.000d 0.535 0.296a 1.826 0.034 a 0.734 0.231c
Operating income/assets 0.000 1.000d 0.000 0.500b 1.826 0.034 a 0.524 0.30c

Efficiency
Net income/employees 1.604 0.109d 1.604 0.054 a 1.461 0.072 a 2.201 0.014d
Sales/employees 1.604 0.109d 1.604 0.054 a 1.826 0.034 a 2.201 0.014d

Capital investment
Capital expenditure/sales 1.342 0.180c 1.604 0.054 a 0.730 0.235b 1.572 0.058 d
Capital expenditure/assets 1.342 0.180c 1.604 0.054 a 0.730 0.235b 1.572 0.058 d
Capital expenditure/employees 0.447 0.655e 1.604 0.054 a 0.000 1.000e 2.201 0.014 d

Leverage
Total debt/equity 1.069 0.285d 1.604 0.054 a 1.095 0.136a 1.572 0.058 d
Total debt/total assets 1.604 0.109d 1.604 0.054 a 0.365 0.357b 0.105 0.458c
Liabilities/assets 0.000 1.000d 0.000 1.000a 1.826 0.034 a 0.314 0.376d

Dividend payout
Dividends/earnings 0.000 1.000c 1.604 0.054 a 0.730 0.232a 2.201 0.014 c

Taxation
Taxation/sales 0.000 1.000d 0.000 1.000a 1.826 0.034 a 0.105 0.458d

Employment 1.342 0.180d 1.604 0.054 b 1.826 0.034 b 2.201 0.028 d

Notes: aIncreased post-privatisation; bdecreased post-privatisation; cTelecom New Zealand is greater than Telstra Australia; dTelstra Australia is greater
than Telecom New Zealand; eno difference

post-privatisation
Between- and within-firm
performance pre- and
telecoms

565

Table I.
Performance of
IJPSM SIP. The data lead us to reject H2. Telstra was more efficient than Telecom on both
22,6 measures of efficiency at the 5 per cent level of significance, despite there being no
statistical difference in efficiency between the two firms pre-privatisation. This is
contrary to the extant literature.
Neither theory nor empirical evidence provided a strong rationale as to whether
capital expenditure would br higher for foreign or domestically acquired firms. On
566 average, we hypothesised that it was likely that privatisation by direct sales to foreign
anchor investors would result in less investment so as to minimise risk. H3 was
supported by the data at the 5 and 10 per cent levels, with Telstra investing more than
Telecom. H4 argued that foreign anchor investors would increase leverage, for which
we find no support. Only one of our three measures, total debt to equity, was
significant at the 10 per cent level for Telstra, the majority domestically owned SIP.
We hypothesised that direct sales to foreign anchor investors would result in a
higher dividend ratio than for SIP involving domestic ownership. This was supported
by the data, with Telecom having a significantly higher payout ratio than Telstra
Australia at the 5 per cent level of significance, confirming H5. This is despite not
demonstrating higher profitability, efficiency or capital expenditure. We also
hypothesised that the expected higher profits of firms privatised to anchor investors
would equate to higher tax paid. We found no evidence to support H6. This is probably
due to the fact that we found no evidence of higher profitability in Telecom. Finally, we
hypothesised that concentrated foreign anchor investors were more likely to reduce
labour than firms privatised by domestic SIPs. We reject H7, since Telstra reduced
employment to a greater extent than Telecom.

Discussion and conclusions

The within firm post-privatisation results support the general privatisation literature:
privatisation is associated with improved organisational performance. Both Telecom
New Zealand and Telstra Australia increased efficiency while decreasing employment
and capital investment, with some evidence that both increased leverage. There are
also some interesting differences. Telecom increased dividend payouts, notably
without a corresponding increase in profitability and while decreasing capital
expenditure. Telstra increased profitability, did not significantly increase dividends
and saw a corresponding increase in taxation.
More interestingly, however, the between firm analyses of post-privatisation
performance do not support the dominant position in the literature – that full private
concentrated ownership (Shleifer and Vishny, 1997) and FDI (Dunning, 1977; Buckley
et al., 2002) will result in better performance than that of partial privatisation with
residual government ownership (Boardman and Vining, 1989) and dispersed investors.
Telecom New Zealand, privatised through direct sale to strategic foreign investors was
neither more profitable nor more efficient than Telstra Australia, the comparator firm.
As both efficiency ratios used number of employees as the denominator,
improvement in efficiency could be the result of decreasing labour, increasing net
income or sales, or both. It is apparent that both firms decreased labour
post-privatisation; however, contrary to expectations, this was greater within the
domestically owned partially privatised Telstra. This finding, rejecting H7, is contrary
to previous findings where foreign owners restructure more (Frydman et al., 1999;
Uhlenbruck and De Castro, 2000), and studies that find residual government ownership
results in fewer reductions in employment (Omram, 2004). Our results are, however, Performance of
consistent with Rushdi (2000), who found that Telstra’s post-privatisation total factor telecoms
productivity gains were the result of significant labour reductions, where 17,000 full
time equivalent staff were retrenched between 1992 and 1998. Therefore, residual
government ownership is not necessarily an impediment to restructuring, nor is
private foreign ownership associated with greater downsizing.
Our results also show that both firms decreased capital investment, perhaps 567
indicating that they were utilising existing resources more efficiently. This decrease
was greater in the fully privatised foreign-owned Telecom, and this could be
interpreted as providing support for the FDI hypothesis that FDI transfers
firm-specific skills that increase the productivity of the recipient firm. However,
overall post-privatisation between-firm comparisons indicate that Telstra was
significantly more efficient than Telecom. This implies that reducing labour had a
greater impact on post-privatisation efficiency than reducing capital expenditure.
Thus, there is no evidence to indicate that foreign ownership results in increased
efficiency, nor that concentrated private ownership results in more efficiency than
partial privatisations through SIPs to domestic citizens. Nor is there any evidence to
suggest that residual government ownership results in less organisational
restructuring.
We found no statistical difference in profitability between firms post-privatisation;
however, the direction of the sign indicated that Telecom was more profitable on three
of the four measures. Property rights theorists propose that concentrated ownership
resulting from direct sales ameliorates information asymmetries, aligning the interests
of the owners with the organisation’s financial performance. At best, there is only weak
evidence that the fully divested private and foreign owned firm was more profitable.
Thus, we find little support for either the FDI or property rights hypotheses for both
efficiency and profitability.
One fear expressed in the literature is that the privatisation of services to foreign
owners may result in losses to the domestic economy (United Nations Conference on
Trade and Development, 2003). Our results are unable to refute these concerns.
Telecom New Zealand was found to have significantly higher dividends, and these
dividends were not the result of significantly higher efficiency, capital investment or
profitability. We surmise that the higher dividend ratio was a function not of a return
to efficiency, but of recouping investment on a foreign acquisition as quickly as
possible. This interpretation is consistent with the predictions of the obsolescence
bargaining model (Vernon, 1971; Wells and Gleason, 1995). However, this finding is
inconsistent with studies of FDI in transition economies, which found greater levels of
restructuring and profitability (Frydman et al., 1999; Uhlenbruck and De Castro, 2000;
Rojec, 2001). This may be explained by two different arguments. Either FDI transfers
less technology to developed rather than transition nations, or the transition economies
start from an inherently less competitive position.
Our results also show that privatisation in general, and direct sales to strategic
anchor investors in particular, did not result in increased capital expenditure. The
within-firm results show that both Telecom and Telstra decreased capital investment
post-privatisation; however, this is only significant for Telecom. The between-firm
results show that Telstra invested relatively more than Telecom post-privatisation.
These findings are consistent with La Porta and López-de-Silanes (1999), who found
IJPSM that privatisation did not result in increased capital expenditure, and Omram (2004),
22,6 who found lower levels of capital investment in privatisations divested to anchor
investors.
Like McKnight et al. (2003), we find little support for the property rights thesis
dominating privatisation studies, nor do our findings concur with previous empirical
studies conducted in developing and transition economies, which found that both
568 direct sales and foreign ownership outperformed domestic SIPS (Frydman et al., 1999;
Uhlenbruck and De Castro, 2000; Rojec, 2001; Omram, 2004). We proceed by offering
several possible explanations for these findings.
It is possible that, for the telecommunications industry in developed markets, an
international market exists for both technology and managerial expertise, which
enables efficiency irrespective of the degree of private ownership or whether or not
foreign ownership is involved. If both technology and managerial expertise are
available in the market, then the benefits of privatisation to foreign strategic investors
are reduced, as are the costs of domestic ownership. Furthermore, concentrated
ownership is expected to improve performance by minimising information
asymmetries due to monitoring costs, which are higher for dispersed owners.
However, if the privatised firm is one of the largest listed on the respective share
market, as is the case with telecommunications privatisations, the monitoring cost is
absorbed by market analysts reducing information asymmetries and reducing the
costs of dispersed ownership. And, if government ownership divests managerial
control, then professional managers devoid of government interference are able to
manage a partially privatised organisation to maximise efficiency.
A further explanation, not examined in this study but suggested by the literature, is
that a change of ownership, irrespective of mode or structure, is less important than
industry-specific regulation for increasing the performance of privatised enterprises
(Wallsten, 2001; Saal and Parker, 2001; Parker, 2003; Domney et al., 2005). Applications
of institutional theory to telecommunications privatisations have found that regulatory
governance and incentives affect post-privatisation performance outcomes (Levy and
Spiller, 1994; Abdala, 2000). Both countries in this study derive their parliamentary and
legal systems from the UK, and therefore can be considered to have similar and
effective regulatory governance structures. That said, the difference is in the detail and
both adopted differing post-privatisation regulatory regimes. New Zealand utilised a
light-handed regulatory approach influenced by theories of contestability (Baumol
et al., 1988) and by a belief in the limited role of the state in controlling economic
activity (Boston, 1991). Australia, however, adopted significant industry-specific
regulation, such as price controls; the “objective was to increase Telstra’s incentive to
make and share productivity gains with customers” (Telstra, 2005, p. 33). If
improvement in efficiency is positively associated with industry-specific regulation
(Wallsten, 2001; Saal and Parker, 2001; Parker, 2003; Domney et al., 2005), and
industry-specific regulation combined with an independent judiciary reduces investor
uncertainty (Spiller, 1993), then an absence of industry-specific regulation may
increase investors’ uncertainty that, in turn, encourages them to front-load returns
before future governments renegotiate, as suggested by the international bargaining
models (Vernon, 1971; Wells and Gleason, 1995). Such a rationale may explain why the
fully privatised and foreign owned but unregulated Telecom underperformed on
efficiency when compared to the regulated and domestically owned Telstra.
 Support for this position can be drawn from Spiller and Cardilli (1997) who, in a Performance of
similar comparative study, find that New Zealand’s light-handed regulatory policy telecoms
resulted in extensive and prolonged litigation (see Ahdar, 1995, for extensive coverage),
limiting effective competition and resulting in the highest prices in their
telecommunications sample. However, Australia established an industry specific
regulator at the time of privatisation, AUSTEL, which Spiller and Cardilli (1997, p. 131)
maintain delivered “both competitive interconnection rates and a smooth 569
implementation of equal access”. The objective of Australia’s regulation was to
share productivity gains between producers and consumers, and this may also explain
why Telstra paid out lower dividend payments than Telecom.
Further examination of both firms and the environment within which they operate
helps us to contextualise these findings. For New Zealand, early assessments of the
impact of privatisation were generally favourable (Evans et al., 1996). In the specific
case of Telecom, Boles de Boer and Evans (1996) find considerable productivity gains
that increased consumer’s surplus and also increased returns to investors through
increased share price. However, the time period for this study included gains that
accrued under corporatisation preceding privatisation, where, as they note, “The
investment carried out as a SOE was massive” (Boles de Boer and Evans, 1996, p. 26),
and later that “Investment increased until 1991 since when it has steadily declined”
(Boles de Boer and Evans, 1996, p. 32). As Telecom was privatised in 1990,
post-privatisation investment was substantially below pre-privatisation investment,
and this is consistent with our findings. More recent studies of Telecom corroborate
our findings for both decreased capital investment and increased dividend payments.
The Centre for Research in Network Economics and Communications noted that
“Telecom’s rate of investment has fallen significantly [. . .] as a very large fraction of
net revenue has been paid out as dividends” (Centre for Research in Network
Economics and Communications, 2000, p. 21). In contrast, our results show that the
partially privatised and domestically owned Telstra demonstrated significantly higher
relative levels of capital investment and efficiency, and these gains did not result in
higher dividends. This corroborates Rushdi’s (2000) findings, where Telstra’s total
factor productivity increased post-privatisation and that these productivity gains were
shared with consumers.
The period following the data utilised for this study has seen both New Zealand and
Australia further restructure their respective telecommunications markets. In 2006, the
Australian government proceeded with the final transfer of Telstra shares (T3), thus
fully privatising the company. The allocation of T3 shares was approximately 60 per
cent to small domestic investors, 28 per cent to Australian institutional shareholders,
and the remaining 12 per cent to international investors. Overall, the government sold
approximately 34 per cent and transferred its remaining 17 per cent to the Australian
“Future Fund” (Hogan, 2006). The effect of T3 was to fully privatise Telstra while
retaining majority Australian ownership. In New Zealand, after 20 years of
light-handed regulation, the New Zealand government announced the enforced
operational separation of Telecom New Zealand into three separate business units in
order “to remove or limit the incentives and ability of Telecom to engage in
discriminatory behaviours that lessen, damage or exclude competition in downstream
markets” (Cunliffe, 2007, p. 2). Importantly, the network and wholesale businesses are
IJPSM mandated to act on the basis of an equivalence of inputs, removing Telecom’s ability to
22,6 prevent competition.
Our findings suggest some implications for these developments. In Australia’s case,
full private ownership, as denoted by the 100 per cent divestment of Telstra shares, is
unlikely to alter organisational performance for several reasons. First, the
proportionality of the final tranche of shares is reflective of Telstra’s earlier
570 privatisation and ensures that the shares are widely held by small Australian
investors, thus maintaining a dispersed domestic shareholding. Second, while the
“Future Fund” holds approximately 8.5 per cent, it is a passive rather than an active
manager of its portfolio. Third, the sale and transfer of shares precludes a significant
foreign strategic investor. Thus, there is no ability for FDI to transfer technology to
improve performance. However, our results would suggest that, as Telstra’s
performance has not been hindered relative to its comparator firm, the professional
management in place will continue to increase efficiency and performance. One
counter-argument is that the removal of residual government ownership may increase
investor risk. However, the nature of share ownership amongst small domestic citizens
should preclude any expropriation of profits by future Australian governments.
In New Zealand, the operational separation of Telecom New Zealand is an active
refutation of the light-handed policy followed since the privatisation of Telecom in
1987. The post-privatisation performance of Telecom, while exceeding its public
predecessor, underperformed against Telstra, the Australian comparator, and
light-handed regulation is likely to have contributed to this relatively poor
performance. This conclusion is the opposite to that reached by Boles de Boer and
Evans (1996), but it is in line with Spiller and Cardilli (1997) and more recent studies of
Telecom and the regulatory environment, which have conservatively estimated that
regulation would increase pure welfare gains of $NZ43.9 million with an additional
sustainable benefit to consumers of $NZ328 million (Centre for Research in Network
Economics and Communications, 2000). Our results indicate that Telecom has
increased dividends while decreasing employment and capital expenditure,
underperforming its comparator firm on efficiency. Our results therefore suggest
that the government’s regulatory changes may improve the performance of Telecom in
terms of efficiency and pricing, but not in terms of increased capital investment. It is
also logical to infer that dividend payments may be constrained in a regulatory
environment that fosters competition. Investors would seem to concur with these
assertions because, since the announcement in 2006 of intended regulation separating
Telecom and the date of its enforcement in March 2008, Telecom’s share price has
fallen by 24 per cent (Griffin, 2008).
This study has important policy implications for governments in choosing a
privatisation process. While privatisation will improve organisational performance,
the choice of whether to privatise by direct sale to anchor investors and foreign owners
versus privatising by SIPs and keeping a domestic focus will have post-privatisation
performance implications. The results of this study suggest that, contrary to some
theory, SIPs involving residual government ownership do not a priori result in inferior
post-privatisation performance when compared to complete privatisation through
direct sales to anchor investors.
Theory and evidence also suggest that direct sales to foreign investors will not
result in significant capital investment. If increased capital investment is an objective
of the divesting government, two options seem viable. First, privatisation by SIP Performance of
enables a significant proportion of ownership to be retained by the government in telecoms
order to ensure the pursuit of investment objectives. Second, if privatisation by direct
sale is preferred, investment levels can be contractually specified as part of the sale
process. Privatisation by direct sale, particularly to foreign owners, is likely to result in
significant increases in dividend payments that may, in turn, fuel domestic fears of
excess profits at the expense of the domestic economy. One way to negate these fears is 571
to require the purchaser to on-sell a proportion of the ownership to domestic investors,
or to include industry-specific regulation in the privatisation process.
This study answers calls from the United Nations Conference on Trade and
Development (2003) for research investigating the impact of FDI and privatisation in
different countries. It contributes to the limited research on the impact of different
ownership structures on post-privatisation performance, and extends the context by
comparing the performance of firms in developed rather than in developing and
transition economies (Omram, 2004; Claessens and Djankov, 1999; Kocenda and
Svejnar, 2003; Pivovarsky, 2003). This study also differs from previous studies that
examine firms in competitive industries, typically manufacturing; the sample for this
study is derived from firms in the service industry, which operate in markets that are
not purely competitive (Shirley and Walsh, 2000).
The major limitation of this study is its generalisability. The findings from this
study are applicable to the two firms and countries studied and may not be
generalisable to the wider population of privatised firms. The second limitation of this
study, inherent in the methodology, is that firm performance is measured over time and
does not control for the business cycle (Villalonga, 2000). Furthermore, the pre- and
post-privatisation periods for the two firms do not coincide, again allowing for changes
in the business cycle to influence the results. Our results differ from previous studies in
developing and transition countries, and further studies in both developed and
developing countries are needed to analyse the impact of different ownership modes
and structures on post-privatisation performance.

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Further reading
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Corresponding author
Mark D. Domney can be contacted at: m.domney@auckland.ac.nz

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