Mar 19 - 25, 20

In Pakistan state owned enterprises eat up around Rs300 billion of taxpayers' money annually. Some of the experts influenced by the west consider privatization of these entities a solution of the ills. However, others believe that in any developing country, the government has to play a major role in the creation of new business enterprises and private-public partnership provides a sustainable solution for accelerating GDP growth of the country.

Some of the experts term Pakistan Telecommunication Company (PTCL) a landmark achievement of this philosophy as Etisalat has been transferred management control after acquisition of its 26 per cent shares. However, the transaction has been attracting a lot of criticism because Etisalat has not paid US$800 million as yet. Profitability of the company has also plunged. One of the often asked questions is why the management control was transferred to Etisalat after agreeing to pay for 26 per cent shares only?

The whisper is getting louder that PTCL's privatization was a scam. Had it been done honestly, the results would have been different. Some of the quarters say since Etisalat has failed in discharging its contractual liability, quality of service has deteriorated and above all its franchised value declined considerably, it may be appropriate to renationalize the strategically important entity. While it may not be appropriate to reverse the transaction, it is certainly important to analyze what really went wrong. Once the factors responsible for ailment have been identified, taking corrective steps will be much easier.

The way PTCL was sold still attracts a lot of criticism, especially because Etisalat has not paid US$800 million. Critics also do not agree with the basic premise that PTCL was inefficient and incompetent. However, they still wonder why its progress has been bogged down. Even prior to privatization, the entity was one of the leading telecom players of Asia. It had a large pool of experts, many of whom had even been deputed for short periods to foreign countries to help lay telecommunication networks. Within South Asia, it had been the first to introduce several value added services and had an elaborate copper and fibre optic network. To maintain its world-class performance, it had several schools that imparted training to fresh recruits and existing employees.

Financially too, PTCL's performance was enviable. In 2005, the year of its privatization, PTCL posted revenues of Rs84 billion and net profit of Rs27 billion. The sector boomed worldwide and companies in other countries bought licenses in foreign markets and acquired newer technologies to retain and gain subscribers. However, myopic policies of the government prevented PTCL from using these earnings to make strategic investments abroad.

Six years after privatization, not only has the government failed to recover the full price from Etisalat ($800 million is still outstanding), but in various payments and opportunity cost, it has paid back almost all the amount it received from Etisalat (technical fee, opportunity cost of delayed payments, redundancy payments).

PTCL's fortunes have declined rather than improved. Four years prior to privatization, profits after tax grew from about 18 billion to over Rs27 billion rupees, a rate equivalent to 11 per cent per annum. In the six years post-privatization, earnings fell to almost Rs8 billion (at a negative growth of 18 per cent per annum). Similarly, the profit margin declined from an average of 71 to 47 per cent during this period and continues to fall. This magnitude of change is unprecedented in the global telecommunication sector but Etisalat does not seem too worried.

There might be macroeconomic developments as well as recent industry related factors that might have contributed to some of this significant decline in value rather than firm strategy/operations alone. Etisalat cannot blame the decline on the reduction in fixed line operations. PTCL's performance does not compare unfavorably with international peers.

While PTCL and Etisalat like to trumpet the success of Ufone, it has lost its position as number two in the mobile market to Telenor, which despite launching nearly five years after Ufone, is 20 per cent larger in revenue terms than Ufone (based on 12 months data as of June 2011).

Six years after privatization, the market value of PTCL shares has declined from Rs358 billion in June 2005 to Rs53 billion rupees in December 2011, a massive decline of Rs225 billion. The government of Pakistan and the minority investors still own 74 per cent of the shares of PTCL. The share trades far below its book value indicating the low faith that the market has in the current management.

Despite the sharp decline in profitability, the CEO of PTCL and top and middle management draw fabulous salary/perks. PTCL, whose talented engineers helped set up networks for several global companies (including Etisalat), is now simply an insignificant part of a foreign company's global business, Pakistan does not have a single national operator. Regrettably, PTCL's service continues to plumb new depths. Its maintenance and operation, as well as customer care has suffered severely and hundreds of thousands of connections have been lost as a result and many are non-functional. It seems the Etisalat is least interested in maintaining 'landlines' and simply focusing on 'Ufone'.

While there is a growing consensus in Pakistan that it should be made very clear to Etisalat that it pays Pakistan US$800 at the earliest or get ready for forfeiture of its holding in PTCL. It is true that government should not be in managing business but once interest of 74 per cent shareholders is at stake and quality of services is on the decline, the government should have the right to repossess defaulter's stake. Either Etisalat performs or gets ready to face the music. That said it is also imperative that government resolves the litigation going on since privatization of PTCL. It is only bringing bad name to Pakistan. PTCL was not the last entity to be privatized. Many other entities must be privatized at the earliest.