By Dr. Nayyer Ali

July 01, 2005

PTCL and the Privatization Roller-coaster

On June 18, Pakistan finally conducted the bidding for a controlling stake in PTCL, the Pakistan Tele-Communications Limited company. The winner was Etisalat, an Emirates-based telecom firm, who offered 2.5 billion dollars for 26% of PTCL and management control. The Pakistani government retains ownership of 66% of the shares of PTCL and the rest are publicly traded.
PTCL is the major phone company in Pakistan. It operates about 4.4 million fixed lines and has a cellular arm that has a significant share of the cell phone market. Up till about 4 years ago, it had a monopoly on all phone services, but the telephone industry has been gradually deregulated. Privatizing PTCL has been a goal of Shaukat Aziz since he first became Finance Minister in 1999, and with the recent bidding he has finally reached this historic point.

The purpose of privatizing PTCL, and the purpose of privatization in general, is to increase the efficiency of the economy and the expansion of industry by removing the dead hand of government from the major sectors of business where it has no role to play. Pakistan since the nationalization of Zulfikar Ali Bhutto in the early 1970’s, has had a state-dominated economy. The government controlled all the main banks, telecommunications, oil and gas, power, airlines, steel, railroads, fertilizer and cement factories, life insurance, and a host of smaller firms such as individual hotels. This has resulted in a patronage state where political power meant control of these industries and lack of professional profit-driven management meant slow growth.

Aziz has pushed privatization, and over half of the state-owned companies have been sold. PTCL was supposed to have been auctioned off 4 years ago but the sale kept being delayed. The downturn in the global tech sector in 2000 reduced interest in a Pakistani firm and then 9/11 made the sale impossible. In 2003, the government was deregulating the telecom sector and had not decided whether to sell PTCL as a single company or to break it up into several smaller firms. By last year the decision was taken to sell it as a single company. There was substantial global interest in the firm as 16 companies, all foreign, pre-qualified to bid.

But before the bidding could be held on June 10, the workers of PTCL went on strike, threatening to destroy company assets if there demand that there be no privatization was not met. The government backed down and canceled the bidding. But when negotiations with the unions faltered, it reacted very strongly by moving in army troops to guard installations and announcing the bidding for June 18. The unions initially wanted to strike again, but then backed down in exchange for a very generous incentive package from the government.

The reason for the union opposition was mainly self-serving. PTCL, compared to other companies around the world, has twice as many employees for the number of phone lines it has. A private owner may be tempted to cut staff to bring things into line. But in reality, an aggressive private owner would rather double business and not fire anyone. If the workers of PTCL are willing to be as productive as private sector workers need to be, then there will not be job losses. For a nation of 155 million to have only 4.4 million fixed phone lines is a pathetic performance, and shows clearly why government control of PTCL has been a failure. It has nothing to do with whether PTCL is profitable, and everything to do with how many phones are working in the homes of Pakistanis.

Besides PTCL the government had two other recent sales successes. National Refinery Limited, the major oil refiner in Pakistan, was sold to a local firm. Pak-Arab Fertilizer, the largest industrial employer in Pakistan, was also sold in May. The government in addition held an initial public offering for 10% of United Bank Limited. The bank was already privatized a few years ago but the government was now selling shares to individual shareholders. Because of the tight restrictions on the quantity of shares any single person could purchase, the sale was a partial success, but some of the stake remained unsold.

The major setback in this policy was the failure of Kanooz Al-Watan, the Saudi consortium that won the bid for the loss-making Karachi Electric Supply Corporation last February, to make payment on its bid. The government has finally accepted that they no longer are interested. The second bidder has been offered the chance to match the Saudi bid, but they are declining. It looks like KESC will have to be re-bid. It is going to be very difficult to sell the power companies because they are so troubled by inefficiency and electricity theft that any owner would have a tough time getting a return.

The next six months could see a number of major transactions if all goes well. Hopefully we will have sales in the power sector. In addition there are plans to sell Pakistan State Oil, Oil and Gas Development Corporation, Pakistan Steel Mills, and others.

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