Monday, April 18, 2005

PRIVATIZATION: An intriguing proposal for privatization of Pakistan Telecom Co

How the Government can start receiving immediately cash proceeds from the privatization of its telecommunication monopoly without waiting for a foreign strategic buyer

The privatization of Pakistan Telecommunication Co. Ltd (PTC) involves some very basic questions. The answers to these questions will lead to an alternative proposal that will not only expedite the process of privatization but will start bringing in proceeds almost immediately.

Some of the basic questions are:
a) Why does the Government want to privatize PTC in the first place?
b) Why should a foreign "strategic investor" be sought, and that too for only a small part of the total shares – not more than 26%? (Some related questions are: What will be the foreign buyer’s own interest and objective? What will be the likely conse­quences of the take-over by him? What will be its impact on the phone users?)
c) How to sell the Government shares not purchased by the foreign "strategic investor?" How can these shares be sold to the entire middle class in the country as a very safe and lucrative opportunity for investment?
d) How can the stock exchanges be saved from upheavals that the sale and purchase of the PTC shares often cause?
e) How can the national security interests be protected even after the privatiza­tion of PTC?
Let us take up the questions one by one and try to find their answers.

The objectives of privatization. There are two main reasons why the Gov­ernment wants to privatize Pakistan Telecommunication Co. Ltd. One objective is to make the PTC an efficient company so that it can not only meet the modern tele­communication needs of the country but also make the required investment on its own. There was some improvement after the Telephone and Telegraph Department was converted into Pakistan Telecommunication Corporation. But a bureaucratic set-up can not be turned into an efficient organization simply by giving it autonomy in some matters. Just as an elephant in the zoo will not walk away as a free animal even after its shackles are removed, the habits and the culture of the bureaucrats do not change even after they are told that they are now "autonomous" in their working.

The second objective of the Government is to get substantial funds through privatization to meet its own debt servicing obligations. The Government expects to get tens of billions of rupees with the sale of the PTC shares. Since such a huge amount may not be possible to get from our own businessmen or even through the domestic stock exchanges, the Government believes that it can do it only if some multinational corporation offers to buy its shares in the PTC (even if only a portion).

The consequences of hand-over to a foreigner buyer. What will be the con­sequences if shares are sold to a foreign strategic buyer and, at the same time, man­agement is handed over to him? It will depend on his own objectives. Obviously, the strategic investor will be primarily interested in making as much money as he can. And in as short a period as possible, before the PTC monopoly in basic telephone service is over. It is as simple as that. The interests of our country will not be his primary concern.

Savings not to be passed on to users. The foreign buyer will certainly make strenuous efforts to improve the operational efficiency of the PTC. He will not hesi­tate even in downsizing the present level of personnel as much as he can so that he gets the maximum output per employee. He will also reduce the company’s expenditure to the barest minimum level.

The improvements, however, will be entirely in his own interest. He will be extremely reluctant to pass on the benefits of efficiency and savings to the phone us­ers. And the Government will be hardly able to force him to reduce his rates and charges in the interest of the subscribers. (In fact, the PTC people are already telling their customers not to expect any "welfare or charity" from the company, even though it is still controlled by the Government.)

Higher rates for services. The foreign buyer will do his best to charge as much for the telecommunication services as possible in order to maximize his profit. If he is from a country which is a big world power, he will not hesitate in seeking his own government’s influence. (What the international investors in the independent power projects have been doing is a good example of what may happen.) Our Govern­ment will not be able to resist the pressures and will be compelled to allow increases in charges for phone calls and other services. In fact, it has already done so even though the foreign take-over of the PTC has yet to occur! The recent increase in the line rent and the phone installation charges provide a good example of the shape of things to come. (The Government was unable to resist external pressures to raise the rates of utilities like electricity and gas even though no foreign investors were in­volved.)

No new assets. The foreign buyer will not be interested in making any invest­ment that is not recovered with maximum profit before the end of the monopoly pe­riod. It takes years to expand the telecommunication infrastructure, such as construc­tion of new exchanges, laying of new cables, installation of new phone connections, and additions to net­work capacity. It will be obviously not in the foreign buyer’s interest to make long-term investments if the returns are to come after his monopoly period is over. New competitors, with better technologies and resources, will certainly reduce his rate of return.

No new long-term investment. The foreign buyer will be fully aware that the Pakistan Telecommunication Co. Ltd will have a monopoly on basic telephone ser­vice only till 2003, as provided in the Pakistan Telecommunication (Re-organization) Act, of 1996. He can exploit his position to make maximum profit only during this period. After the monopoly period is over, others will jump in the field to compete against him and force him to lower his profits. Then the foreign buyer will find out that he can no longer make as much money as he did in the beginning. He will then reconsider his priorities and look for more profitable opportunities elsewhere in the world.

If the foreign buyer believes that he can make more money elsewhere after the end of his monopoly, he will not hesitate in making his move. And it will not be dif­ficult at all to do so. All that he will have to do will be to sell his shares to some in­terested party or unload them at the domestic stock exchanges. What will he leave behind? Nothing tangible at all. In other words, he will take his money and run!

The needs of the people. The phone users want some very basic improve­ments, and immediately:
a) They certainly expect better efficiency and service after the PTC is in pri­vate hands. And they want the savings in costs (most, if not all) to be passed on to them in the form of lower phone rates and charges.
b) They want a tremendous increase in the number of phones. (At present, there are just about two phones per 100 persons. In most developed countries, the figure is well over 50% of the population.)
c) They want improvement and expansion in the network so that phones are available also in villages, even if service in some areas has to be subsi­dized.
d) They want the same modern telecommunication services that users in more de­veloped countries enjoy.
The foreign buyer will be hardly inclined to "waste" his money on doing any of these things (not to speak of all), if he does not himself get the major benefit. Nor will be feel any compulsion to do so.

Risks to national security. Even though the Government has set up the Na­tional Telecommunication Corporation to meet its internal needs, it will still have to use the PTC network for all official calls going to non-government phones and vice versa. Then, all secrets are not in the government offices alone. Therefore, many threats to national security will inevitably come from the PTC network. The foreign buyer will have no reason to worry about it. He will not bother if the country’s tele­communication network is used by subversive elements. He will also not mind if the foreign enemies of the country tap the phone lines of important people to get access to secrets of all kinds and even blackmail the prominent citizens in key positions for their nefarious purposes. (He may even help them if it suits his interests.) The secu­rity of the entire telecommunication network is vital to protect the national interests. No wonder, the developed countries do not allow foreigners to take over their phone companies even when they decide to privatize.

A local buyer as an alternative. A local strategic buyer, if available, may have the same thinking as a foreigner and try to make as much money as he can. However, he has to live in this country and cannot afford to annoy the people and the Government beyond a certain limit. He can also be expected to have at least some consideration of the national interests. A local strategic buyer, therefore, would have been certainly preferable to a foreign one. But the purchase of even the specified minimum ratio (up to 26%) of the government shares, not to speak of all, will require a huge sum. And even the wealthiest local entrepreneur may not have that much money.

The local businessmen can, however, do it collectively if they
a) bring back their money in the safe havens abroad,
b) agree to join hands in taking over a large company like PTC,
c) hire professional management to run it properly, and
d) do not allow any one of them to dominate, if not oust, the others.
This, apparently, will be a tall order!

The third alternative. When selling to a foreign buyer is not in the national interest and a local counterpart is not available, what should be the way out? Go to the people, as the wise men say.
At present, the PTC has about three million phone users. Why not offer all of its re­maining shares to all of them? Collectively, they may have enough purchasing ca­pacity to buy all shares that are held by the Government at present. Of course, all will not get the same number of shares. Some of them may be able to buy only a small number of shares while others may be able to get big lots. How to do it?

An offer letter to all subscribers. Pakistan Telecommunication Co. Ltd may issue an offer for the sale of its shares to every one of its phone subscribers in the country. The letter, in Urdu, may explain the benefits of buying the PTC shares and the procedure for their purchase.
Special arrangement will be needed for the printing of the phone bills for the month during which the offer of shares is to be made. A letter from the PTC, offering the shares to every subscriber, may be printed by the computers immediately after a subscriber’s bill, bearing his phone number, name and address exactly as it appears on the bill. In other words, the offer letter will be a part of every phone bill be­fore the next bill is printed. Thus, the offer letter will be delivered to every subscriber along with the phone bill for the particular month.

At the bottom of the offer letter will be a form in which the subscriber will fill in the number of shares (in figures as well as words) that he wants to buy and enter the equivalent amount that he will pay. (The minimum number of shares to be purchased by a subscriber should be 100, worth Rs 1000 – 100 shares X Rs 10 per share – with no limit for the maximum purchase.) Then he will pay the total amount at any bank branch, post office or the PTC service center, within a specified period, say 60 days from the issue date of the offer. As a proof of payment, the subscriber will retain the counterfoil of the offer letter, duly stamped and signed by the bank, post office or the PTC service center.

The payments from the sale of shares will be deposited by the banks, Pakistan Post Office and the PTC directly with the State Bank towards the retirement of public debts because that is one of the primary objectives of the privatization.

Offer to be repeated. The PTC will offer its shares to the phone subscribers regularly, once a quarter or once in every six months. This will facilitate purchases by the small buyers, who do not have large idle funds and can buy shares from their savings only at intervals. PTC will also offer its shares, without any maximum limit, to every new subscriber when it issues a Demand Note to him for a new phone connec­tion. As a result, the paid-up capital of PTC will continue to grow while simultane­ously it will get additional interest-free funds to finance expansion and moderniza­tion. A great bonus, no doubt.

The PTC will issue a letter of allotment of shares to the subscribers immedi­ately after receiving their payments. The share certificates will be deposited with the Central Depositary Co. (It is already being done for the present shareholders so that the problems and risks of actual handling of share certificates are avoided.)

No premium on shares. The shares will be sold to the phone subscribers at face value and no premium will be charged. The reasoning is simple. The PTC is owned by the nation itself. The Government is only a representative of the people, or an attorney, so to speak, not the real owner. If the value of the PTC shares is more than its face value, it is because of the customers of the PTC. It is they whose pay­ments enable the PTC to earn a profit, which raises the value of the shares. There­fore, the Government, being only a manager of the PTC, cannot ask the nation – the real owner – to pay any premium on the shares.

Direct sale and purchase. The sale and purchase of shares will be only be­tween the PTC and its phone subscribers. If a subscriber wants to sell his shares, he will surrender his allotment letter against a receipt at the nearest PTC revenue office or service center. The PTC revenue office of the area, which issues monthly bills to the subscriber, will immediately give credit to the subscriber’s account for the total value of the surrendered shares, while sending the allotment letter to the PTC head office for cancellation. The credit amount will then be adjusted in the monthly phone bills of the subscriber.

This arrangement will have a great benefit. The subscriber will get his pay­ment for the shares while the PTC will not have to strain its cash reserves. (If the amount is too large to be adjusted within six months, keeping in view the average monthly phone bill, the PTC shall pay through a pay order or a bank draft, to be is­sued within 15 days.

Payment of dividends. The payment of dividends will also be through credit to the account of the subscriber-shareholder. As soon as the dividend is declared, whether interim or final, the amount will be credited directly to the accounts of all subscribers-shareholders. The great advantage of this arrangement will be that the PTC will not have to spend a huge amount on the preparation, issue and safe delivery of dividend vouchers to the subscribers. It will also save a similar amount on the payment of dividends through banks. The PTC will have to neither deduct this extra expenditure from the total dividend amount nor add to the company’s normal ex­penses. In either case, the subscribers will be the beneficiaries.

Benefits of being a phone user as well as a shareholder. The PTC’s sub­scribers will benefit in several ways as its shareholders:
a) They will get the entire profit that accrues to the PTC. And they will deserve it. After all, the profit will come from what they themselves pay to the PTC through their monthly phone bills.
b) They will get the benefit in the form of higher dividends in case of any savings due to improvements in the efficiency of the PTC operations and the reduction in its ex­penditure.
c) The ordinary phone services will improve tremendously because the sub­scribers will be also be the owners of the company. The employees of the PTC, therefore, will be much more attentive to their problems.
d) As the PTC network expands, more and more people will have phones and will at the same time become the shareholders of PTC. The new subscribers-shareholders too will have an attrac­tive opportunity to invest their savings.

Conclusion. On the whole, the implementation of this proposal will have the following main benefits:
a) The process of privatization can be started immediately. There will be no need to waste time in making any preparations.
b) The privatization will be done on "as is" basis, without any need for any detailed studies. Nor any structural changes will be required.
c) The PTC will have the widest possible ownership base, with no individual or group becoming the majority shareholder. As a result, there will be no pressures to increase profits at the cost of the phone users.
d) The capital base of the company will continue to expand, allowing it to have interest-free funds to invest in the expansion of its infrastructure. In other words, the expansion and its financing will occur simultaneously.
e) The middle class investors will get an opportunity for a very safe and profitable investment.
f) Despite the huge volume of the PTC shares, there will be no volatile effect on the stock exchanges because the shares will be sold and purchased directly by the PTC.
g) In a unique situation, the shareholders will also be the customers of the PTC and will be the direct beneficiaries of both lower costs and higher profits.
h) With the entire management being Pakistani, the security of the telecommu­nications and protection of national interests will be ensured.
i) The Government may retain a small minority share in order to benefit from the profitability of the PTC and keep the management from taking any steps that may be against the national interest.

The final way out. Despite very solid reasons and overwhelming benefits, the Government may still not be able to adopt the present proposal in full. The affairs of state, unfortunately, do not always follow the straight logical path. Pressures of all kinds come from vested interests, here or abroad, and cannot be always resisted suc­cessfully. Compromises have to be made because of unavoidable expediencies. Therefore, the Government may still not be able to abandon the plan to involve a for­eign strategic investor. But, in the national interest, it can certainly improve the con­ditions for the deal.

The prospective strategic investor is being offered up to 26% of the total shares. In addition to the payment for these shares, he may also be required to guar­antee that he will invest an equivalent amount within three years of taking over in the improvement and expansion of the physical infrastructure of the PTC. (The im­provements will include the construction of new telephone exchanges, the replace­ment of the worn-out equipment in present exchanges and the setting up of new net­works, etc.). In order to enhance his stake, the new investment in the physical assets will be from the investor’s own sources, not a loan taken on behalf of PTC.
Irrespective of when the foreign strategic investor takes over, the Government can offer right away its own shares to the phone subscribers, as suggested in this proposal, because there is no bar of any kind in implementing it immediately. (After all, it has to sell its own remaining shares even after a strategic foreign buyer does come along.) In fact, promptness will be in the Government’s own interest because proceeds in cash will start flowing in immediately and will help in meeting its short-term debt obligations.

Waiting in vain for a white knight. There is another and a very fundamental reason why the Government should not keep on waiting for a foreign strategic buyer. For several years now (since 1990), every successive Government has been waiting for him. But, like all one-sided love affairs, the ardent desires of the Government remained unre­quited. There has been no positive response, only false promises at the most. It may take some more time before the Government finally realizes that its pursuit of a for­eign prince charming is in vain.
Why a foreign strategic investor has not been com­ing forth? The reasons are not hard to find out. According to media reports and some other indications, the prospective strategic investors see many negative factors:
a) A proper and comprehensive evaluation of the PTC assets and liabilities is not available.
b) There are huge liabilities in the form of outstanding dues that PTC has been unable to recover from the influential defaulters.
c) The employee unions are strong enough to cause serious problems for the new management.
d) There are far too many employees to run the operations efficiently and eco­nomically.
e) The prospects for profitability are not rosy because the local phone call rates are too low for good profits.
f) The earnings from international calls, about half of PTC’s revenue, may soon evaporate due to (a) strong international pressures, especially from the US Fed­eral Communications Commission, to reduce the accounting rates, and (b) the shift­ing of normal phone calls to the Internet despite desperate attempts to prevent it.

The Government may continue to wait for a foreign strategic investor, if it has to, but it can start selling its shares to its own people without wasting any more time. (After all, the foreign buyer will pay, in any case, for not more than 26% of the shares.) Excluding the shares already sold, that will still leave more than half of the total. There is no reason not to start selling them right now.

March 03, 2003

No comments:

Post a Comment