Impact of Privatization on Organization’s Performance

Abstract

The proposed research is intended to assess the impact of Privatization on Organization’s Performance. The main theme is to examine its impact on profitability, output, efficiency and employment. It will be analyzed to compare the performance of public and private sector organization in Pakistan.

Keywords: Privatization, profitability, output, efficiency and employment
Introduction

Despite frequent changes in the governments since 1985, five regularly elected and six care takers, there has been consensus on the continuation of privatization policy and as such it is expected to be cornerstone of all the future government policies, at least in the near future. Instead of arguing the merits or demerits of the privatization policy, we explore its impact on the levels of efficiency.
A large number of public sector units have already been divested and a number of other public enterprises including telecommunications and thermal power stations have been placed on the privatization list. Nevertheless, serious doubts have been expressed about transparency of the bidding process and the impact of privatization on efficiency, investment, production, prices, employment and fiscal deficit. Accordingly, there is a need to identify constraints in realizing various objectives of privatization with a view to suggesting concrete policy measures that may be taken to overcome the constrain and to improve the performance of the organization.

Divestiture of assets is not new to Pakistan though the motivation for divestiture has not been the same in different time periods. During the 50s and the 60s, public sector used to invest in non-traditional activities especially where the gestation period was long and private sector was reluctant to invest. While a large number of private sector units were nationalized and public sector expanded at a rapid rate in the 70s, an effort to divest public sector enterprises were made during the mid-eighties. However, the efforts to divest shares worth Rs 2 billion of various profit making public enterprises in the mid-eighties and 14 loss making industrial units for divestiture in 1988 did not succeed. Similarly, out of the six profit-making corporations identified for partial divestiture in 1990, only 10 per cent shares of Pakistan International Airlines could be divested. The slow pace of privatization led to the establishment of a Privatization Commission on January 22 1991, which offered 105 industrial units, four banks, and two development financial institutions for sale. Subsequently, initiatives were undertaken for privatization of thermal power units of the Water and Power Development Authority (WAPDA), private sector management of some sections of Pakistan Railways and partial divestiture of the Telecommunications Corporation of Pakistan (TCP). At present, as many as 46 industrial units, including all the remaining manufacturing units with the exception of Pakistan Steel, have been placed on the privatization list. Furthermore, two banks and six non-bank financial institutions; four units in the oil and gas sector; Karachi Electric Supply Corporation; six thermal power units and three area electricity boards of WAPDA; Pakistan Telecommunications; Pakistan Shipping Corporation and National Tanker Corporation; and Pakistan Railways are also on the privatization list.

Literature Review

Governments undertaking privatization have pursued a variety of objectives: to improve micro economic efficiency, to promote sustainable economic growth, to improve the fiscal position (to reduce the budgetary burden caused by inefficient state enterprises), to attract foreign direct investment, to create revenues for the government, to help develop domestic capital markets. In some developing countries, governments have embraced privatization as part of the structural conditions attaches to adjustment programs adopted under the supervision of the World Bank and the International Monetary Fund.

Privatization has emerged in the mid 1980ies as an important component of structural adjustment programs (the World Bank, 1995, p 56) and the Bretton Woods institutions increasingly made financial support, development assistance and debt relief contingent upon progress towards privatization. For countries with IMF supported programs, excluding transition countries, the average number of privatization conditions in total structural conditions increased from 4.7% for the period 87 -90 to 16.5% for the period 97-99 (IMF,2001, p 26).

There is a body of literature addressing this issue in a context of transition to a market economy. Havrylyshyn, Izvorski and van Rooden (1998), analysing growth performance for 25 transition countries between 1990 and 1997, use an index of structural reforms with a subcomponent an index for private entry in markets that includes privatization, enterprise reform and financial sector reform (indices for the year 1990-93 are due to de Melo, Deninzer and Gelb, 1996, and are updated to 1997 using the transition indicators from the EBRD transition reports. Bennett et al. (2004) analyse the role of the method of privatization in economic growth for 23 transition countries over the period 1991-2001. However, the political and economic backgrounds of transition countries are quite different from those of developing markets economies.

Palia and Phelps (2003) include in a growth regression model a private ownership variable capturing the scope of private enterprise and control commercial enterprises. They use a sample of 43 countries over the perio60-85. Their private ownership variable is from Milanovic (1989) whcompiled for a set of countries the percentage of GDP produced by stat owned firms engaged in commercial activities hence state production net government services. Palia and Phelps (2003) adopted the negative of their percentage as their private ownership variable. Their main findings is that after controlling for education, initial per capital GDP growth and economic system economic growth is positively related to private ownership and control aside from acknowledging their “data set excludes countries that Milanovi regarded as socialist, in the 1970s and the 1980s such as China and the Soviet Union” they do not give any description of their country sample.

Methodology

The purpose of this paper is to empirically investigate the impact of privatization on performance of organization. The majority of previous study is used to examine the relationship between privatization and performance of organization. Data will be collected from both primary and secondary sources. The primary source is field surveys, while the secondary source is the “Monthly Survey of Industrial Production and Employment” published by the Punjab Bureau of Statistics. Data will be calculated of 50 privatized organizations and 50 public sector organization of Pakistan. We will compare the performance of privatized and public sector organization to determine whether privatized organizations are performing better than public sector organizations or public sector organizations are performing better than privatized organizations.

Model

To asses the relationship privatization and performance of organization, we use the model representing the following variables:

Source:

1. TiT.Ram Mohan

2. Researcher’s own effort

Variables:

Independent variable
Privatization is a independent variable.

Dependent Variables
Here performance is a dependent variable which will be measured with the help of following explanatory variables:

(i) Profitability: operating income/sales, operating income/fixed assets, net Income/sales, net income/fixed assets

ii) Operating efficiency: cost per unit, Log (sales/fixed assets), log (sales/employees),

iii) Employment: log (employees)

iv) Capital spending: log (fixed assets), investment/sales, investment/employees Investment/fixed assets, log (fixed assets/ employees)

All the variables stated above will be used to test the hypothesis. The hypothesis to be tested are listed below

Hypothesis 1: PSOs in Pakistan has low profitability compared to the private sector

Test: The above hypothesis is generally based on a comparison of profitability of the public sector Organization (PSO) in the aggregate with that in the private sector. Such comparisons often do not control for factors such as size, industrial sector, etc. We will test the hypothesis, controlling for such factors, for the period since economic liberalization began (1991-99), for a comparable period before liberalization, and for the two periods combined as well.

Hypothesis 2: PSOs are less efficient compared to the private sector

Test: We will compare measures of efficiency in the public and private sectors. This comparison will again be made for the pre- and post- liberalization periods.

Hypothesis 3: Privatization has improved profitability, efficiency, employment, capital spending, output and net taxes in the privatized firms

Tests: As this hypothesis is central to the study, we propose three different tests.

(i) First, we will examine whether key parameters under each of the heads- profitability, efficiency, employment, capital spending and net taxes- have changed significantly following privatization for our sample.

(ii) The above test is open to the criticism of selection bias: it is possible that firms best l likely to benefit from privatization were chosen in the first place. Moreover, other factors such as deregulation in the economy might have contributed to superior performance in the post-privatization period. To deal with these issues, we will first compare the performance of privatized firms with PSOs not privatized; next, the performance before privatization of the privatized firms will be compared with PSOs not privatized. We will test to see if there are any significant differences in performance post-privatization that were not there before privatization.

(iii) We will also compare performance adjusted for industries. We will do this by using a control group of listed companies in the private sector in the same industry for each privatized firm. We will estimate the difference in parameters for the PSOs and the control group before privatization and after privatization and see if the industry adjusted ratios show any difference.

Hypothesis 4: Improvement in performance after privatization depends on the degree of divestment

Test: Improvement in performance post-privatization will be compared, at different levels of divestment, with performance before privatization see whether the degree of divestment contributes to a statistically significant improvement in performance post privatization.

References

1. Adams, Christopher, Cavendish, William, and Mistry, Percy, Adjusting Privatization: Case Studies from Developing Countries, James Curry, London, 1992.

2. Bhaskar, V. (1992), “Privatization and the developing countries: the issues and the evidence Discussion Paper No.47, Geneva: UNCTAD.

3. Bishop, Mathew R., and John A. Kay, 1989, Privatization in the United Kingdom:
Lessons from experience, World Development, 643-657.

4. Boardman, A and A. Vining (1989), “Ownership and performance in competitive environments: a comparison of the performance of private mixed and state-owned enterprises”, Journal of Law and Economics, 32, April.

5. Bourbakri, Narjess and Jean-Claude Cosset (1997), “The Financial and Operating
Performance of Newly Privatized Firms: Evidence from Developing Countries,” mimeo

6. Davis, Jeffrey, Rolando Ossowski, Thomas Richardson, and Steven Barnett (2000) Fiscal and Macroeconomic Impact of Privatisation. International Monetary Fund, Washington D.C.

7. De Luca, L. (ed.) (1997) Labour and Social Dimensions of Privatisation and Restructuring—Public Utilities Water, Gas, Electricity. Geneva: International Labour Organization.

8. Estrin, S., and J. Svejnar (1998) The Effects of Output, Ownership, and Legal Form on Employment and Wages in Central European Firms. In S. Commander (ed.) Enterprise Restructuring and Unemployment in Models of Transition. Washington, D.C.: World Ba

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Privatization

Performance

Profitability

Efficiency

Employment

Capital spending