Privatisation and labour -management relations - III

One of the leading firms Meginnson & Nash compared the pre and post privatisation financial and operating performance of 61 companies from 18 countries and 32 industries during the period 1961 to 1990. The conclusion of its report is that countries took share issue as disinvestment technique.
THE FOUR TYPES OF SALES SHARES WERE AS FOLLOWS:
(a) Flotations, where the government initially had majority and made an initial public offering of its entire ownership stake, or of a majority-voting share;
(b) State sold enough shares in a secondary offering, to lower its stake below 50%;
(c) The government had voting control and allowed the firm to make a primary share issue, in which it did not participate and thereby losing voting control; and
(d) The government had voting control, both before and after the initial public share issue and simply sold a minority stake to private investors. The first three types of share sales were called as 'control privatisation's', and the last type as 'revenue privatisation's'.
The objectives of the government should be (1) increase the firm's profitability, (2) increase the firm's operating efficiency, (3) increase its capital investment spending, and (4) increase its output without lowering down the employee levels. A defined non-competitive industry, is one involving the sale of highly regulated product, and/or service, which does not face significant foreign or domestic product market competition.
The aforementioned research company computed the proxies of sample firms that were drawn from the World Bank, listing of privatised firms for seven years. Three years before privatisation and three years after privatisation. They used Wilcoxon signed rank test and proportion test, to test the significant changes in the variables:
1. PROFITABILITY CHANGES: Profitability is measured by return on sales, return on assets and return on equity. By either using net income or operating profit, both measures showed dramatic profitability increase after privatisation for firms operating in competitive industries for both fully and partially privatised firms, for both control and revenue privatisation's and for both OECD and developing countries firms. But for the firms divested into non-competitive industries, the increase in return on sales was insignificant.
2. EFFICIENCY CHANGES: By opening the market competition, in state owned enterprises, governments' hope that these firms will employ their human, financial and technological resources more efficiently, because shareholders (including employees) suffer most, if efficiency is not improved.
Both of the efficiency measures, inflation-adjusted sales per employee, and net income per employee, showed significant median increases following privatisation for the full sample.
Sales per employee went from mean (median) 95.6% (94.2%) during -3 to -1 year pre-privatisation period, to 106.2% (105.5%) in the post privatisation period. This median increase in inflation adjusted sales per employee, was significant for competitive industry firms, for full and partial privatisation's for control (but not for revenue) privatisation and for companies in OECD countries.
3. CHANGES IN CAPITAL INVESTMENT SPENDING: Privatized firms increase capital spending after privatisation because:
(a) After their initial public offering these firms have far greater access to public debt and especially equity markets;
(b) If deregulation and market opening accompany privatisation, the former state-owned enterprises would face very large investment spending needs, in order to become competitive with other private firms. During the 1970s for example, British Aircraft was forced to purchase British made Tridents, Concordes and other aircraft, instead of only preferred Boeing airplanes.
During the 1980s, Britain Aircraft's re-equipment plans were driven in part by the need to replace these non-competitive airplanes, with more modern aircraft;
(c) State-owned enterprises tend to stress labour over capital inputs, in their production processes, and the power of politicians, labour unions, and other interest group tend to leave state-owned enterprises' employees rich, and capital poor;
(d) Removal of government control over the state-owned enterprises also reduces, or eliminates, the government ability to force state-owned enterprise managers to overproduce politically attractive but economically wasteful goods; and;
(e) To the extent that privatisation promotes entrepreneurship, former state-owned enterprises would have the incentive and the means to invest in growth options (such as launching new products and services), both at home and abroad.
Meginnson & Nash (1994), computed investment intensity by using Capital Expenditure divided by Sales (CESA) and Capital Expenditure divided by Total Assets (CETA). Sample firms increased capital investment relative to sales from 11.69% of sales (6.68%), before privatisation, for control privatisation, and for companies in OECD countries, but this increase was smaller for firms in non-competitive industries, for partial privatisation, and for revenue privatisation.
4. CHANGE IN OUTPUT: Better incentives, more flexible financing opportunities increased competition and greater scope for entrepreneurial initiative increased real sales after privatisation. They computed -3 to -1 (pre privatisation), and compared it to the three years average level for the post privatisation period +1 to +3. Both the Wilcoxon and proportion tests showed that real sale increase after Privatisation, and that the change was significant at the 1% level under both measures.
5. EMPLOYMENT: They computed average employment levels for the three year periods -3 to -1 (pre privatisation), and +1 to +3 (post privatisation). In the analysis, employment actually increased by mean (median) 2,346 employees (276 employees).
After privatisation, and the proportional tests were significant at the 10% level. They plotted the path of mean and median employment for 30 sample companies, with seven full years of data, beginning three years before the year of privatisation and ending three years after privatisation. These data are graphed in Figure 2.2 and B. They found an almost continuous increase from year -3 (pre privatisation), to year +3 (post privatisation), for both mean and median employment.
THE MAJOR POLICY CHANGE WAS INITIATED IN THE INDUSTRIAL SECTOR IN INDIA IN THE EARLY 1990'S. THESE CHANGES INCLUDE:
(a) Deregulation of the licensing system;
(b) Automatic approval for technology imports;
(c) Easy access to foreign direct investment; and;
(d) Import relaxation.
SALIENT FEATURES OF REFORMS IN THE INDUSTRIAL SECTOR IN 1991 WERE:
(a) The number of items, in respect of which industrial licensing remains reduced to nine.
(b) The number of industries reserved for the public sector reduced to six, viz., defence products, atomic energy, coal and lignite, mineral oils, railway transport, minerals specified in the schedule to Atomic Energy Order, 1953. Private participation in some of these sectors was also permitted on a case-by-case basis.
(c) More and more private initiative encouraged in the development of infrastructure like power, roadways, telecommunication, shipping and ports, airports and civil aviation.
(d) The manufacture of readymade garments - an item reserved for exclusive manufacture by the ancillary/small scale industrial undertakings opened to large scale undertakings, subject to an export obligation of 50 percent and investment limit of Rs 3 crores.
(e) Automatic approval of foreign investment up to 51% and foreign technology agreements permitted for 35 priority industries, which account for about 50% value added in the manufacturing sector.
(f) Foreign investment was liberalised in many other sectors.
It is, therefore, suggested that policy makers in Pakistan should examine these changes suggested in our neighbouring country and if found feasible the same be adopted by the privatisation sector in laying down future major policy changes in privatisation. It is also suggested that a National Telecom Policy be announced by the Federal Government.
IT SHOULD INCLUDE THE FOLLOWING RANGE OF SERVICES:
1. FIXED LINE VOICE SERVICES: local, national, international, pay phones, voice mail and home direct,
2. FIXED LINE NON-VOICE: telegraph services, telex, ISDN, leased line circuits and packet switched data networks,
3. VALUE ADDED SERVICES: mobile telephony, radio paging, VSAT, internet, video conferencing, inmarsat and intelligent networks. It will be useful to reproduce the abstract of research work by Dr Poonam Mittal on Indian telecom industry in relation to employee efficiency which are reproduced with all respect as under:
"EMPLOYEE EFFICIENCY: With nearly half-million employees on its rolls, India's state-owned providers have one employee for every 50-and one engineer for every 200-subscriber, representing a very poor productivity given the low tele-density levels. In 1999-00, telecom workers were successful in extracting assurances of non-retrenchment as a precondition to the corporatization of telecom services.
THE TELECOM COMPETITIVE STRUCTURE CONSISTS OF FOUR DISTINCT PROFILE OF PLAYERS:
1 Government owned/controlled large undertakings called PSUs,
2. Integrated private service providers that are regional or national level players, including joint venture companies with foreign telecom enterprises,
3. Smaller players offering one or more value added services, but are non-integrated in the value chain, and;
4. EQUIPMENT MANUFACTURERS, INCLUDING FOREIGN COMPANIES OPERATING IN INDIA THROUGH SUBSIDIARIES AND JOINT VENTURES Indian Telecom industry was valued at Rs 630 billion and grew by 13% in 2002-03. This growth was largely attributed to mobile services and carrier equipment, both of which grew by 30%. Paging and radio trunking customers started opting for cellular services, which resulted in a negative growth for these two segments".
Labour productivity is always measured in terms of revenue per employee, expenditure per employee is to be measured as compared to revenue earned per employee and expenditure incurred on every single employee. Productivity is one of the universal standard of good management and offer all objective instruments of measuring good performance.
If the Government is to succeed, it is but essential that it must have research and statistics available, so that any decision made is not hypothetical and based on speculative consideration, whimsical in nature, but based on research and statistical data.
Attempt once made has to be adhered to and followed. Arbitrary announcement will make us not only a laughing stock in the eyes of the world, but before our own people. The Government of Pakistan has decided to undertake census. It is imperative that the scope of this census to be extended to cover labour statistics as well. Based on such statistical data, the Government can frame its policy which are in National interest that is conducive to better labour management relations.
The World Bank has compiled a report titled "Case by Case Approach to Privatisation Techniques and Example." This report was presented in the Supreme Court of Pakistan in the case Wattan Party vs Federation of Pakistan PLD 2006, SC 697 at 748 and relevant extract with emphases supplied by the Apex Court.
The Privatisation Commission, under Privatisation Commission Ordinance 2000, had completed task of disinvestment of Government owned shares in National Bank of Pakistan and in this connection a report was also published in the Financial Gazette.
The above report, therefore, shows that where the Government has transparency, it adopts a policy of publishing reports in official gazette, preceding privatisation publishing its policies. The Government, in brief, should make an effort for transfer aimed at privatisation on the basis of which fair market values of this aspect can be achieved.
If privatisation is effected initially in a very arbitrary despotic and whimsical manner with ulterior motives, the end results will be the decision of the Apex Court in PLD 2006 SC 697. The fallout of this judgement was reflected in the present judicial crisis in the country which has led to paralysis of the economic activity of the country.
The Government of Pakistan, in its Trade Policy 2008-09, has encouraged Trade with India. This is a welcome sign. There is no earthly reason why reports and recommendations on various problems, including labour, links with privatisation be not considered.
In India, Arjun Sen Gupta Committee Report has been submitted to review the policy for public enterprises privatisation. Similarly another report of the Committee of disinvestment of shares in Public Sector Enterprises known as Rangarajan Committee has also submitted its report making certain recommendations.
There is also a report of the Comptroller and Auditor General of India in connection with disinvestment shareholding in selected public sector enterprises. Relevant extracts of this report and it salient features can be obtained by the Federal Government through its embassy in India. Some abstracts of these reports have been published in "Privatisation" - Evolution to Indian Thought by R.K. Mishra. Even ILO has published "Privatisation of Telecommunication in Mexico".
Lessons from privatisation; Labour Issues in Developing and Transitional Countries have also been published by ILO. The Employers Federation of Pakistan in this connection can be contacted for the report which must surely be in their possession. If not, the ILO Mission at Islamabad may be contacted for the report.
There is also a study undertaken in Bangladesh and a report published titled "Privatisation in Bangladesh" by M.U. Ahmed. The sum and substance of this report is minimising social effect through restructuring following privatisation. Yet another study "Privatisation in UK; Policy and Performance" by P. Cook and "Privatisation in the European Union - Theory and Perspective " by Routpledge, Privatising Bus Transport" in Sri Lanka has also been published by ILO. Likewise ILO has also published "Privatisation and Labour Issues" by Hoeven.
Workshop was also held in Kathmandu, Nepal and Report of the Sub-Regional Workshop on Privatisation in South Asia can also be obtained which will provide useful guidelines to the Privatisation Commission of Pakistan. The Organisation for Social Science Research in Australia, in Africa publication "Privatisation in Africa Promises and Prospects" by Oyugi is also available.
ILO HAS ALSO PUBLISHED "PRIVATIZATION: Labour Issues in Developing and Transitional Countries". Likewise the publication of ILO titled "Management for Privatisation: Licence from Industry and Public Services" by Prokopenko be obtained. Yet another work "Adjustment and Privatisation in India" by Ratnam can provide successful guidance to the Privatisation Commission in dealing with labour problems.
Useful international journals have published various articles pertaining to their experience in privatisation, including post privatisation work. It is imperative that Pakistan Embassy in all major countries should be asked to provide to the Ministry of Privatisation all reports and journals which deal with privatisation, its effects and remedial measures for improvement.
World Bank has also conducted a survey in this behalf and has produced reports time and again. This can be obtained from the World Bank. Discussions and also papers on privatisation in so far as employees are concerned should likewise be obtained.
This author is prepared, as a National duty, to provide details of such discussions and policy papers as available with him. Seminars and conferences have been held in which discussions and papers have been read on matters pertaining to privatisation and its impact on labour etc.
Newspapers and magazines have published periodically articles pertaining to privatisation and their experiences have been mentioned. There are even Websites on privatisation in some of the major countries of the world, where experience on privatisation in different countries have been discussed. Impact of slow Privatisation in certain industries have been examined.
All these suggestions are being made as following the privatisation of the Pakistan Telecommunication Company Limited, and the recent labour unrest, the Federal Cabinet had to spend its valuable time to find out ways and means of avoiding labour unrest. Needless to mention, once privatisation is effected then the role of the Government could be minimised.
However, before any privatisation is effected, it is imperative that due diligence of labour is made by the prospective buyers. A Cell in Privatisation Commission be established on Labour which should conduct a survey and prepare a report and only circulate it amongst prospective bidders. No doubt, this may discourage certain bidders from entering the ring. However, it is far better to go with clean hands rather than face labour unrest, as Pakistan Telecommunication Company is facing currently requiring State interference to resolve the same.
(Concluded)
(The writer is Advocate, Supreme Court of Pakistan)