Privatisation of PTCL: A lesson for policymakers

What is common among Temasek (which also controls majority shares in Singapore Airlines and SingTel), China National Offshore Oil Corporation (CNOOC), Haier, Emirates airlines, Dubai Ports, and Petronas (Malaysia), apart from the fact that they are all highly successful global companies? The answer: all of them are either wholly owned by the state or have significant state ownership.

The development of all these companies was guided by states that harboured strong ambitions to produce national champions. In Pakistan, any such ambition has been conspicuous by its very absence. Particularly, in the case of state-owned enterprises there has been no intention to develop them along the lines of the organisations mentioned above. Rather, selling them off as soon as possible and pocketing the proceeds has been the norm. This is easily illustrated through the case of PTCL which was privatised on the pretext that it was an inefficient, incompetent, out-of-date behemoth which was blocking the progress of telecommunication in Pakistan. Former president General Pervez Musharraf’s private banker knew only one way forward. And so, PTCL was sold off to the Dubai-based Etisalat (26 per cent stake with full managerial control).

The fact is that PTCL was anything but incompetent! Few realise that PTCL was, before its privatisation, one of the leading telecom players in Asia. It had a large pool of expert technicians, 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 telecomm and had an extensive 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 privatisation, PTCL posted revenues of 84 billion rupees, with earnings before interest, tax and depreciation of 54 billion rupees and a net profit of 27 billion rupees. While the sector boomed worldwide and companies in other countries bought licenses in foreign markets and acquired newer technologies to retain and gain subscribers, due to the government’s short-sighted policies, PTCL was prevented from using these earnings to make strategic investments abroad.

Six years after privatisation, 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).

As for the predictions that were made six years ago of a glorious future under Etisalat, unfortunately PTCL’s fortunes have declined rather than improve. In the four years prior to privatisation, profits after tax grew from about 18 billion to over 27 billion rupees, a rate equivalent to 11 per cent per annum. In the six years post-privatisation, earnings fell to almost eight billion rupees (at a negative growth of 18 per cent per annum). Similarly, the profit margin declined from an average of 71 per cent over the four years prior to privatisation, to 47 per cent over the six years since (based on an average EBITDA of 50 billion versus 43 billion) and continues to fall. This magnitude of change is unprecedented in the telecommunication sector, whether in Pakistan or internationally. Etisalat does not seem too worried, perhaps because the parent company can always skim the top line rather than the bottom when one has control of the board.

Etisalat cannot blame the decline on the reduction in fixed line operations. While this trend is real, however, fixed line customers for Pakistani competitors such as NTC and WorldCall grew over the same period. Moreover, PTCL’s financial performance has compared unfavourably with international peers. Also, 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).

No wonder, then, that six years after privatisation, the market value of PTCL shares has declined from 358 billion rupees in June 2005 to 53 billion rupees in December 2011 — a loss of 225-billion-rupee to the government of Pakistan and the minority investors of PTCL, who together still own 74 per cent of the shares. The share has dipped below its Rs10 par value and also trades well below its book value of Rs19.27 per share, indicating the low faith that the market places on the current management.

These losses incurred by the shareholders are in sharp contrast to Etisalat and its employees based in Pakistan, who have awarded themselves excessive financial packages. Despite the sharp decline in profitability, the CEO of PTCL (an Etisalat appointee) increased his financial package to Rs 96m per annum — one of the highest in the country.

Meanwhile, PTCL’s service continues to plumb new depths. Network maintenance and operation, as well as customer care, have suffered severely. Many of the best linesmen and other technical hands took up the offer of golden handshakes and left. Hundreds of thousands of connections have been lost as a result and many are non-functional. As a result, getting your telephone line repaired can take forever.

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 — the strategy is simply to milk PTCL to pay for itself. In its own huge market, Pakistan does not have a single national operator.

It is almost certain that if PTCL was given the necessary autonomy and told to take a route similar to other state-owned corporations such as SingTel, Etisalat or Telekom Malaysia, it would have become a regional giant by acquiring licenses in South Asian, African and Middle-Eastern countries. But then that would have required much bigger ambitions than those one has come to expect in Islamabad.

Published in The Express Tribune, March 14^th, 2012.