0115 966 7955 Today's Opening Times 10:30 - 17:00 (BST)

Impact of Privatization on Firm's Performance

Disclaimer: This dissertation has been submitted by a student. This is not an example of the work written by our professional dissertation writers. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

1.0 Introduction

Privatization throughout the 1980's has been considered to be the solutions to the problems associated State Owned Enterprise (SOE)s both in the developed and developing economies and even in the socialist economies (Vickers and Yarrow 1995). In reality privatization is an economies policy and other times a political policy that is difficult to achieve mostly when is implemented in a corrupt setting like in most developing countries. However it is wise for a competitive and well regulated business environment structure to be established before privatization takes place.

In recent times there has been a significant increase in the privatization of SOEs. Megginson et al (2004), suggest that political persuasion by government as a result of poor and unsatisfactory financial and operational results by SOEs has cause the transfer of ownership to private investor who will impact their business discipline in order to improve the level of performance for the newly privatized SOEs. While Aktan (1995) suggest that privatization goes beyond the sale of SOEs, assets or shares to individuals or private firms but in a broad meaning, it is to restrict government role and function in providing economic activities and put forward some methods or policies in order to strengthen free market economy.

Privatization is often meant to be the transfer of control and ownership of government asset or firm to private investors. It could be partial or whole, through private placement or public offer of share via the capital market as well as through the distribution of vouchers. The major purpose of privatization is to grow and develop the economic by creating competition that can bring about efficiency ***. It will be right for the logical argument of this research study to compare or examine the different view of academics on what privatization means.

Parker et al (2005) states that privatization is used to cover many arrays of different policies like liberalization, commercialization but in one of its studies, Privatization in Developing Countries: A Review of the Evidence and the Policies lessons, suggest that privatization means the transfers of productive asset from the state to the private sector, but also stressed that the most important factors to be considered is the introduction of effective competition and regulatory measures alongside with existing firms and for government to accept the political changes that occurs when privatization takes place. While, Beesley (1997) suggest that privatization is the formation of a company's act company and the subsequent sale of at least 50percent of the total shares of a company to private shareholders. However it is obvious now that privatization starts with the government transfer of its assets or a controlling share to private investors or shareholders in order to stimulate economic development.

Privatization as an inherent part of government efforts to rationalize the SOEs. It's mostly done to reduce the burden on National Budget, improve efficiency of individual enterprise and ensure wider distribution of business ownership among its citizens and other foreign investors. However in most cases it brings about the introduction of market force (Demand and Supply forces) into the economy. Privatization can be set up to achieve different objectives depending on the Political, Economy and Social condition of each individual Country. This is due to the fact that what is applicable in the UK for instance will most likely not applicable in Russia due to the differences in techniques or method of privatization, general government objectives, SOEs condition, firms sectors activities and the countries characteristics.

According to Bennett (2003) there are different methods used during privatization, either one used has its own advantage and disadvantage. The share option method is the mostly used method, it involves the sales of SOEs through the issue of shares to the public through stock market. For this method to be successfully implemented, the local country privatizing its SOEs must have an established Stock market where the trading of these shares should take place. Also there should enough public awareness to sell shares. While the private placement option which involves the sale of SOEs to the highest bidder helps government rise substantial revenue but the issues involved here, is the highest bidder will always want to get back their money back in time by exploiting the consumers. This option is mostly done in developing countries where there stock market is still very weak and there are trying to get foreign investor to invest. Lastly the voucher method which is common with Eastern European countries like, Russia, Czech Republic etc, tends towards alleviating poverty. It involves the allocation of SOEs shares to virtually all local qualified citizens of a state in order for both the poor and rich to be co-owners of the SOE. But in most case the poor ones are more likely to sell their share to the rich one who will then have a controlling stake.

1.1 Background to the Study

The telecoms industry is a sizable sector offering a wide range of products and services as well as employment opportunities across virtually all professional, skilled and unskilled discipline in the economy. However the industry has expanded and develop rapidly since late 1980's, in the 1990's and even more rapidly in most recent times due its consistency in constant need for Research and Development (R&D), technological change on both the service providers and suppliers sides respectively in other to satisfy its market and be more efficient to maximize profitability.

The telecommunication industry whether in a developed or developing economies has had its impact towards the growth and development of virtually all parts of an economy ranging from the political, social, financial, technological sectors over its 100 years of existence. However like every other service providing sector, it provides services to the local market and international market where business strategic is always aimed at gaining competitive advantage in the existence of competition and tight regulatory business environment in terms of providing service to users, expanding its economies of scale and scope and equity expansion.

Many countries grant monopoly power to their local telecoms but establish an office that will regulate their activities and in other cases some merge their postal services and telecoms services together, example is the United Kingdom (UK). The UK Telecommunication has been in existence dating back to 1879, with its first telephone exchange established in Coleman Street, London. 1896 saw the Post Office take over the private sector trunk services while in 1912, all national telephone company exchange was controlled by the Post Office as a monopoly supplier of telephone service in the UK. The Post office had two departments the postal service and telecom. As a rule as stated by Ratto-Nielsen, telephone operations, the postal service where subsidized while labor union where paid high rents to organize labor.

However in 1969, the Post office become a State Public Corporation and after the Carter Report of the Post Office Review Corporation was published, the 1981 the British Telecom's Act 1981 became law and the postal and telecoms of the Post Office became the responsibilities of two separate Corporation namely;

  1. The Post Office and British Telecom's (BT)
  2. Cable and Wireless, which was privatized.

While BT was created as a Public Corporation charged with the responsibilities for Telecommunications, Supplies, Installations and Maintenance. The first competitive rivalry in the industry was the granting of license in 1982 to Mercury Communication Limited (MCL) to operate a fixed Link network in order to compete with BT. This only made a little impact as BT has a huge competitive advantage over MCL because it already had the market share, established and experienced Skilled employees and existing contracts with leading telecoms equipments manufacturers and service providers to operate and even if a year later both where give the advantage to operate without rival firms providing fixed link networks in the UK for seven years

The Government White Paper published, proposed for the sale of 51percent of BT and the creation of a telecoms regulatory body, to be named Office of Telecommunication (Oftel) whose duties where to supervise all the activities going on in the telecoms industry and to also prosecute those who do not comply with the set rules and regulation of the industry as well as protect services users from exploitation. Two years later Oftel was signed into law and then administration of Margret Thatcher creating BT as a Limited Company wholly owned by the Government as BT Plc but was later privatized by selling off 50.2percent Shares to the Public.

BT is one of the world oldest telecommunication Firm and dates back to be the first ever British telecom firm which also had the sole monopoly of providing telecom services in the UK with the backup of British Government. During the period, from 1878 the UK telephone service was been provided by the private sector companies, National Telephone Company (NTC) who were also faced with competition from the General Post Office (GPO) and in 1896 the GPO took over operation of the telephone service from and became a monopoly market for the in 1912 controlling the entire telecoms market in the UK.

In 1965, some finding made by a working party was presented to the government which there found substantial enough. This lead them to split GPO into two divisions; the Post and Telecommunication which gave birth to BT and five units Post, Telecommunication, Savings, Giro and National Data Processing Services respectively. The Post Office act of 1969 made the Post Office to be controlled by the government and established as a public corporation. This gave them the sole right to run the telecoms system with listed power to authorize others to run such systems. However the Post Office retained its telecommunication monopoly.

The Carter Committee of 1977 suggest for the restructuring of the Post Office into two separate units and further renaming of the Post Office to British Telecom's but it also remained a part of the Post Office. In 1981, the introduction of British Telecommunication act transfer the provision of telecommunication from the Post Office as a resulting establishing two different corporations a bold step to create competition in the utility industry (Telecoms). This empowered the trade and industry ministry and the British Telecom's the right to grant Licenses to other telecoms operators to run telecommunication systems therefore creating competition in the sector.

However, in July 1982 the government officially announced her intention to privatize BT by selling up to 51 percent of BT shares to private investors. In 1984, more than 50 percent of BT was sold to the public through share option, then the largest ever most successful SOE privatization exercise in the history of privatization leaving the government with just forty 47.6 percent. This was about the most radical and the largest scale privatization exercise ever had in the history of Britain. However most investor where scared that it was going to fail. It was but in 1991 the government share of BT was reduced to 21.8 percent by rising up to £5 billion and creating about 750,000 new shareholders of BT.

In reality, the privatization of BT opened the telecoms market for other operates to come into the market, invest in the sector and breaking the monopoly advantage had by BT over the years by fighting for market shares through intense competitive business environment. This however forced BT into having fairer business policies, improved technology to optimize productivity as well as to raise its level of efficiency as government regulatory body would introduced a price cap system. On the other side this allowed other firms to spring up and compete with BT in the telecom sector bringing about maximum utilization of available resources, cost cutting and efficiency. Telecoms consumers where the most rewarded people as operator gave them the best deals ever in order to gain market shares. BT Plc is now run in over 170 countries all over the world and faced with about 150 other telecoms operator. This has forced them virtually to constantly to research and develop their existing technology as well as acquire new ones in order to keep pace with their consumers new and market share.

1.2 Rationale for this Study

In this research study aims to examine the impact of privatization in the telecom sector in the UK post privatization era. Also it will examine if the method of privatization contributes to both the operational and financial performance***

1.3 Objectives to the Study

My objectives will be subdivided into two sections aimed at determining to what extends privatization affected BT performance in terms of one; financial performance

  1. By looking the determinants working capital management,
  2. Share price movement and it covariance relative to the telecoms sector and FTSE 100 and
  3. Financial annual report

Secondly; operational performance

  1. Level of efficiency
  2. Market Share strategy
  3. Competition and Regulation

1.4 Limitation

There are inevitable limitation to this research study caused by the different economy situation post privatization era of BT. This can be ranging from some systematic economy problems to specific economy problems that can either be a general issue associated with all other sectors of the economy or rather that has to do alone with the telecoms sector or BT performance over time. Also political issues that arise for political interference in BT or the telecom sector which can either be from change of government.

Finally as a research study there will be minor statistical error but this research study still represent a substandard measurement of BT post privatization operational and financial performance within the very dynamic, rapid, competitive and volatile telecom sector indices and the FTSE 100 at large.

1.5 Research Questions

Why would one witness a difference in performance in terms of operational and financial factors when a firm is managed by government compared to when been managed by the private individual or investors?

1.6 Structure of the Study

In Chapter two, this study will focus on the methods of privatization while chapter three of this research is literature review which includes theoretical framework and a review of relevant literatures. The theoretical framework will look at the different theories of privatization, how those theories where applied during privatization and the impact it had in the telecoms sector. Also the literature will critically review the impact of privatization in the telecoms sector focus mainly on the operational and financial performance of SOEs before and after privatization. While Chapter four will discuss the methodology adopted to achieve this study. Chapter four will be analysis of data's and stating of findings. Finally Chapter five would be conclusion.

Chapter two

2.0 Methods of Privatization

2.1 Introduction

This chapter will focus on the different methods of privatizations ranging from share issue method to voucher or the mass method and finally the asset sales method. It will also discuss the justification why a particular method is chosen rather than the other toward the achievement of privatization exercise and finally the advantage and disadvantages of each method used.

2.2 Share Issue Method

This method of privatization involves the sale of all or part of SOE to investor through a public share offer which are similar to initial public offer (IPO) in the private sector via the stock market. This is structured to raise money for the government, divest them also from ownership and for them to achieve political objectives. However in the words of Megginson (2005) this method is the largest and most successful method to transfer SOEs to private ownership. Yet it is the most dramatic because if it turns out successfully or fails respectively it becomes the most political and economy bad or good decision depending on what happens.

However, the process of using this method involves the passing through three steps;

How to transfer control: This involves whether to sell the whole SOEs strategically to the public once or step by step. If the last option is chosen then government will have to determine what percent should be sold initially and subsequently but the most important thing here is for the government to put up tight regulation to control corporate decisions after the privatization exercise.

How to price the offer: The pricing decision requires whether government should do the pricing by tender offer, a booking-building exercise or a fixed price but whatever the decision government makes it must be in advance. However the government always issue out SOEs share below the true market value as an incentive to encourage investors to buy shares.

Finally, how to allocate the shares: This depends on who the government intends to favor most, it could be the employees, labor unions or potential investors and even foreign investors. Also it could make use an investment banker as lead underwriter or favor national champion.

Meanwhile this method of privatization needs the existence of a capital market and also has some comparative advantage over the other methods which is rationale behind why it can be used in some situation rather than the others. In most case SOEs share prices are underpriced relative to the market price, hence foregone government revenue that will make investor make a premium on top of there investment

The needs to expand the stock market operational capacity to accommodate new issued equities


  1. Can raise huge amount of revenue for the government
  2. The strategy employed can be use to create wealth evenly for local investors by allocating a set percentage of share to every region within the country. This usually occurs in situation where there is less inequality of income
  3. The use of share option, most likely develops the capital market.
  4. It is also used when the SOE to be privatized is large and profitable. For example BT,
  5. It also transforms the size and efficiency of both the nations' investment banking sector and its capital market.


  1. It is time consuming to organize
  2. It is extremely expensive to coordinate due to the fact that before the share are put to sale the government have to hire and pay consultants

3. Transaction cost is another issue. It include cost of sales, advertising, underwriting.

2.3 Asset Sales Method

This method involve the sale of the whole or part of SOE clearly for cash to individual investors, group of investors or an existing corporation with or without experience in that sector (Meggison 2005).

Vuylsteke et al (1995), suggest that transaction here can occur in different forms from direct acquisition by a similar corporate firm or private placement to targeting various institutional investors. However there are different procedures to follow in this method of privatization exercise. This includes; firstly the full competitive process which involves a privatization process of pre-qualification of bidders to win the final bid to take-over the said SOE. While the second procedure involves the use of direct negotiations between investors and government representatives to take-over the said SOE which usually involve the search for a larger number of investors.

Both process would usually involve the investor who are either new or have an excellent record of both operational and financial performance in the past. This though is not a major concern for the government or standard to win the bid but can only be as confidence booster for both the government, SOE labor unions and management. However the governments have strict interest in the bidders that can meet their financial requirements as well as all other agreement without violating.


  1. It brings about a speedy and flexible negotiation towards the sales of SOE between the individual or group of investors and the government body that is interested in the transfer of the SOE to private hands.
  2. It can yield more revenue for the government as the highest bidder wins the ownership of SOE to be privatized
  3. It is the most reliable method of privatization in economies where the stock market is underdeveloped as well as encourage to a great extend property right theory.
  4. It attracts Foreign Direct Investment (FDI) cash flow income into the economies of the local country.
  5. It can also bring about innovation in technology, management skills and expertise especially when these SOE are bought over by foreigners.


  1. It is the least transparent method of privatization as the government might only target to sell to the group of investor that favors they own political objectives.
  2. It can bring about exploitation as the new investor might be under pressure to pay back loans and t the same time maximums profit within a short period of time.
  3. The group of investors or individual investor might not have the required technical expertise or skill and experience to run the new privatized SOE. These are mostly common with local investors favored by the government or are new in business.

2.4 Voucher Method

This is also known as mass privatization, usually common in Eastern Europe. It is a method whereby eligible citizens of a nation can use vouchers that are distributed free or at nominal cost. This gives holders the right to bid for stake for SOE's or other assets been privatized. This method is mostly used in transition economies like in the Central and especially Eastern economies respectively to bring about fundamental change in the ownership of business asset in these economies, although not always change in effective control (Meggison 2005).

However, low income distribution level prompted most nations in Eastern Europe to adopt this method of privatization as it became clear that the only viable way to privatize and maintain significant domestic ownership was the voucher method if not only individuals with the wealth to acquire shares which were communist, criminal and foreigners would buy up everything. (Parker and Saal 2003)

This method of privatization as suggested by Boycko, Shleifer and Vishny (1994) shows that the reason to purse and specifically design the program is largely dictated by politics. This involves the divestment of SOE through the distribution of vouchers to a nation's citizenry that people can use to bid for the SOEs on offer. This method has been used in mass privatization exercise programs mostly in transaction economies in the Czech Republic, Russia and other Eastern and Central Europe countries. However this method has been really successful in the past but most recently are failing because there do not attract new capital or management to the privatized SOEs. Experience has also shown that it do not provide effective ownership structure for the new privatized SOE instead insiders end up controlling most of the more valuable companies and ordinary investors receive claims of the weakest and least promising SOEs.


  1. It ensures a wide share of shares ownership, where as a lot of people would have been too poor to buy and own a share.


  1. It yielded no cash inflow to the government or firms and thus there were no transfers of technology, capital and expertise from foreign investors or multinational companies to the privatized companies.
  2. It also gave the new owners of the privatized who where existing managers and employee little incentives to effectively restructure the firms operation and reduce the amount of staff needed in order to cut cost.
  3. In most cases, government never gave up the full control of important privatized companies to private owners other than managers because government still heard a majority shareholding and thus felt that the firms will be too strategic to be left unsupervised. This was because government wanted to ensure that no serious staff cut which would have impact on operational restructuring as the exercise was politically rational but economically deliberate.
  4. Government allowed the politicization of credit extension also made the newly privatized firms continue to enjoy soft budget constraint for an infinite amount of time also contributed to one of the weakness of voucher privatization.

3.0 Theoretical Framework and Literature Review

3.1 Introduction

The privatization of SOEs has over time been a big and important issue in the growth and development of the economy. This has lead to the development of many theories which explains the ideas behind what is expected in principle and practice in privatization exercise.

This chapter will however discuss the relevant theoretical and empirical literatures of this research study objectives and rationale. This involves critically examining the theories that have been developed over time by different authors and how their impact privatization as regards the objectives of this study. This will also state why privatization is vital for the growth and development of some sectors and why, it will not in some other sectors within the economy. Finally, analysis on how privatization affects the performance of a firm will also be discussed.

3.2 Factors Determining Privatization

SOE were highly inefficient and grow at a very slow pace, too much bureaucratic issue can cause no room for quick decision making, innovative changes. Also constant government political intervention as well as administration changes is an issue. It is also over dominated by the power of Labor Trade Union (Veljnovski 1987). However after the successful privatization of BT in 1984 by the Thatcher's administration, it became an economic policy that can be used to reduce the financial pressure on government budget as well as the concern to prevent SOEs from failing in terms of its inefficient use of financial and operational resources. But could this be a means to wealth creation for investors, who through the spread and acquisition of shares ownership, restructuring and refocusing of SOEs economic objectives as well as cutting of trade labor unions influence and power will see SOE to maximize both there operational and financial performances.

An argument that must be stressed here is that of the difficulty in interpreting the indictors of both operational and financial performance of SOEs post privatization within and outside the business environment economy. Take for example; poor financial performance may be consistent with high rate of internal efficiency if the formal is as a result of government policy of price control. However, since SOEs frequently respond to anticipated market failures, profit maximization and similar related measures might not necessary, be a reliable indicator for their poor performances over time (Ramanadham 1993). Rather this study will support that failure of SOEs, could be as a result of rapid demand for their goods and services faced by their steady but slow growth to reach maximum productivity movement rather than to totally shift production function to meet all demands and avoid poor operational and financial performance.

Yarrow (1986), however argued against privatization stating that competition and more forceful accountability will even be better than privatization in promoting both financial and operational efficiency but his argument has a limitation, it only focused on a small number of company within UK. Ramanadham (1993) pointed out that the objective of privatization is realized more if it becomes successful within a short period of time either by stock market price rise or increase in the level of efficiency or productivity bringing about instance economic growth and development. But when reverse is the case (if it fails), which happens some time it even makes privatization more undesirable. So it is best re-engineer SOE by over hauling it, as well s to set up a transparent regulatory frame work to remedy what might be a failure when the objectives of privatization are not met as anticipated in order to level the firms operational and financial performance post privatization.

In a further argument by Megginson et al (1994) whose strong support from recent theoretical and empirical perspective, that private firms will always outperform SOEs stating that privatization itself will always increase both the financial and operational efficiency of firms irrespective of the business environment. While another view by Moore (1992) who argued that the act of privatization promotes economic efficiency and public confidence (one of the major objectives of property right theory) in the system of industrial capitalism and thus SOEs should be sold off before efficiency gains can be realized. He also argued that the success of privatization transforms business attitude towards ownership, economic responsibility and towards the improvement of corporate performances. It also allows government play an important role of regulation the business environment leaving the ownership of firms in the hand of investors and individuals who will perform better as there are faced with scare resource and market forces.

It is clear now that different factors can lead to privatization especially when SOEs has underperform operationally and financially causing political pressure, budget deficit and waste of scare resource for the government and even to the extent of administrative failure.

3.4 Evaluation of the theories of Privatization

Principal Agent Theory

Vickers and Yarrow (1995) points out that a problem exist in the principal agent theory as the principal interest greatly lies in profit maximization and high return for investment therefore this aim might conflict with that of the agent who might pursue other objectives apart from profitability. Further stating that since the formal do not have full information concerning what is happening within the SOE and cannot fully control the attitude of the agents who might be over ambitious and purse his own objectives, this will certainly create monitoring problems for the principal. This in fact creates both financial and operational problems directly or indirectly.**

However when shareholders can influence the behaviors of agents (management) through vote as the only way to keep them in check, the agent might however work at a more efficient level and focus on a set objective towards profit maximization. On the other hand when the rate of efficiency increases, it leads to higher revenue which is mostly one of the objectives, to brings about higher income and dividend for its shareholders.**

Property Right Theory

This is a set of right to control assets. It is a consequently grants of authority made to an investor or a group of investors through right of issue of share or control either public or private and acknowledged by other persons or organizations (Lindblom, 1977)

De Soto (2006) argues that lack of formal property right is what has kept developing economies from been developed stating that it limits the amount of goods and services that can be exchanged in the market in order to have a sustainable long term economy growth. While Easterly (2001) opinion is quite similar to the views of Soto, Easterly suggests that property right is a significant factor for long term economy growth. This is due to the fact that property right creates a very strong incentive for investors to even invest since there are certain about the ownership of such properties. As a matter of fact in most case it is true that mangers of most SOE are more concerned with their salaries, the growth and development, and reputation of the organization rather profitability.

The property right theory has an objective of promoting work incentive within SOEs solving employee's careless attitude towards work. However, lack of competition and monopoly power contributes a major factor to why this employee's are careless towards work which is a major fact to why most SOE perform absolutely poor and a leading factor to privatization. The major focus of this theory is that it gives control right to manage asset in order to achieve a set objectives which is mainly to create employment and basic amenities for its citizens for SOEs while for private firm is profit maximization.

However a standard property right approach to public and private ownership acknowledges that there are agency problems in all forms of ownership, but because ownership is transferable through a competitive capital market in the private sector, a better use of resource will result. However this theory claims that managing by the shareholders would be more efficient than monitoring through political process. It further emphasizes upon the reduction of property right both where public ownership exists and explores the sequences of property right for efficiency.

However property right theory can contribute to the growth and development of the nation economy through the stock market if a formal structured and transparent legal frame work or intuitional policies are adopted and established to protect property right as well as an effective regulatory body to monitor each transaction.

The Maximizing Privatization Revenue Theory

This theory sets out the assumption about the information between the government and the buyers on the true value of the firm to be privatized assuming that the investor (Buyer) do not have enough information about the firm profitability. However the theory predicts that the government sale off of existing SOEs will see to a continuous performance of the function of profit maximization of such firm.

Since the SOE management reports to the relevant government ministry about its financial and operational performance, the government will be able to extract all the information it gets to obtain a reasonable sales price that will equally reflect the true value of the existing SOE before it is privatized. The bottom line is that as buyer observes the sale of the first SOE, their reaction towards investing in the second SOEs will so much depend upon what premium was made from the first SOE sale or the opportunity that can be made from the second transaction.

Public Choice Theory

This theory is more concerned directly with actual behavior in the public sector. The core argument is that politicians and state bureaucrats purse their own objectives rather than the public interest. (Downs, 1967; Niskanen, 1971; Buchanan, 1972; Blankart, 1983). Here policies are arranged to maximize government public political objectives such as votes to retain political power and SOE's are given extensive Budgets so that bureaucrats will benefit from better jobs and higher salaries (Migue and Belanger, 1974).

Also public monitoring of spending is inhabited to create some sort of comfort for it citizenry in order to have strong confidence in the existing government and show support.

Benefit and Cost Theory

This theory argues that privatization will increase market share because privately owned enterprises have better incentives to produce goods and services in whatever quality and quantity to satisfy consumers would desire more. However in this case the companies who tend to succeed are the ones that will be able to meet consumers needs (market demand and supply forces). Also it is believed that the discipline of the capital market creates an avenue for additional resources and growth to an extent, depends on the past operational and financial performances.

This theory then believes that with privatization, the consumers will dictate what should be produced rather than the government choosing. This mostly reflects short term political pressure for the government as their only produce with the resources that they have causing problems for the management of public sector.

3.5 Empirical Evaluation of Privatization

In an the work of Boardman and Vining (1989), the 1983 empirical examination of a sample size of 500 largest mining and manufacturing firms based on sales per employee and per asset after controlling for regulation and competition within the business environment concluded that private firms are more efficient and profitable compared to SOEs. This could also be as a result of the pressure from the market environment competition and possible takeover as a result underperformance especially when the government is running on a huge budget deficits. While in another empirical study by Steven et al (1999) proved an empirical evidence on how political factor impact the offer of shares pricing, allocation. After examining a sample of 630 Share option privatization from about 53 countries, it became clear that even when government do not longer interfere with the daily administration (operating activities) after its initial share offer to private investors, it still have veto powers through the golden share strategy to reject or accept some policy change that might occur in order to protect national interest.

Megginson et al (1994), further explained that the restructuring that occurs prior to the privatization exercise takes place to motivates employees to work towards attaining efficiency by cutting cost, maximizing productivity and profitability to increase both financial and operational performances. However BT share issues as suggest by Redwood (1988) did more than just to enable Britain to establish the world's first largest scale privatization program but it also led to the intervention of part of popular capitalism in the country. The ideas of seeking a large new generation of small savers came out of immediate need of a marketing campaign to sell the world's largest ever equity offering to individuals or investors to own a direct stake of SOE's. This made the use of privatization program as a means of extending share ownership among work force of SOE's and to the public as it became clear that the privatization exercise is an economic policy for growth and development.

However this method of privatizations of BT, was more than every other thing politically motivated by the Thatcher's administration in order to retain political powers in the coming elections.

However Boycko et al (2003) examined and discovered that SOE are often persistently unprofitable because their objective is to maximize employment and create quality goods and services for its local citizens rather that maximization of profit to create wealth for its shareholders. But this is also attributed to political interference by the government and the incentive subsides to SOEs managers to reduce input prices and implicit guarantees to cover operating losses and the constant demand from labor unions.

Megginson et al 2003 suggest in terms of efficiency, when SOEs are privatized and then competition sets in, the government would expect a trade off. This will result into the cancellation of non economic objectives from the privatized SOEs rather a force from the new investors to employ all their resources more efficiently because when efficiency is not applied to the existing resources there would be no further improvement and therefore a failure in the operating and financial performance. However when the opposite is done there will be a positive growth level over short term and long term both in the return on capital employed and employee performances in productivity.

However in term of capitals structure most articles (ref) has argued that because privatized firms have more access to public fund through the capital market, this can become a possibility to increase capital base for them to spend in the restructuring of the privatized SOEs in order to meet up with the already existing privatized firms in the industry or if it is the first privatized firm in the industry as at then, to meet up with restructuring and innovation as it might face competition soon enough. This is also due to the fact that most privatization exercise will come with deregulation. Furthermore, knowing now that there will be pressure on using rationally the available resources especially financial resources politically attractive goods and service will be cut off to produce economic goods and services that will boast return on capital employed as well as innovative new products that will expand market coverage and increase market share will be encouraged.

3.6 Impacts of Privatization on Company's Performance

The impact of privatization is a direct result that is linked to the method of privatization. The problem identified with it is that in some cases it is hard to identify such result differently from the result which may be associated from other economic circumstances like a more liberal regulatory policies, change in management policies or sudden use of idle capacities that may have contributed to improved performance rather than the privatization exercise itself.

However this study focuses on only the circumstances induced as a result of the privatization exercise which in some cases are almost immediate and other case may take a longer time. For instance this could be from lay off of labor forces to increase in share prices or restructuring of the existing management style. The best way to examine the impact of privatization could be to divide it into two aspects, one from the inside angle (how this has changed the financial and operational performance) and the other the outside angle (how this has changed the company's performance in relation to other firms in the sector and the economy at large)

Privatization can affect the performance of a company based on an assumption that once a firm start existing in a private setting it will be subject to strong, constant and challenging pressure to perform more efficiently because it is now faced with a rapid, changing and very competitive business environment where it has to struggle for resource and market share to survive.

Under ownership effect, Shapiro and willig (1990) suggest that SOE are managed by the government bureaucrats who look to achieve a balance between providing social welfare for the people and at the same time achieving their own objectives such as patronage, nepotism. This contrast what happens in the private sector that is only run for profit maximization. However the effect of profit maximization can be deduced by the government even in a privatized firm setting because the government requires them as to run some certain service that are non-commercialized but will only be subsidized by the government as those services cannot but be provided, an example is transport, the railway services.

Another issue is that privatization corrects monitoring of managers behaviors especially when the privatized firms are has been privatized through the sales of shares in the capital market. Vickers and Yarrow (1991), suggest that the transfer of private ownership can reveal information through share prices that can capitalize on the consequences of current action for future actions if the capital market is efficient.

Moreover, competition is a major threat that can greatly improve the incentive to productivity efficiency. An empirical study conducted by Caves and Christensen (1980) on Canadian state owned rail services operator compared to the private sector concluded that the management of SOE were not essentially less efficient to private operator but, the effectiveness of a competitive environment force the private sector to be more commercial and productive.

Posner (1971) states that privatization can be a significant instrument for the redistribution of a firms asset and income but first it is important to identify the group of investors privatization will affect. This is to an extent why the government during privatization exercise target a set of investor it wants to favor. However, take for example the Russia privatization exercise where the existing government sold out SOE asset through asset sale method at discounted price to a set of individuals in order to get political support.********

Privatization can be an effective way to bring about fundamental structural change by formalizing and establishing property right which directly creates strong individual incentives (Filipovic 2005). The processes of privatization that involves sale of shares to employees, labor unions, local investors make this investor to work more efficiently to cut cost and make more profit which will reflect in dividends or share prices and owning also to the fact that it is now their resources. However privatization will promote competition and increase efficiency especially in situation where the government relevant regulatory authorities cap the pricing of a service of product. Littlechild (**)

However economist like Vickers and Yarrow (1998), suggest that privatization may not increase efficiency without competition. This is tribute to the fact that some privatized industries like the telecoms, are usually now oligopolistic, rather than going into price wars that will increase their levels of efficiency will rather agree to fix price within themselves. They argue that cost reduction may be too small to outweigh the benefits of competition. Moreover Martin and Parker (1997), believes that being exposed to competition does not necessary make privatization in the UK more successful stating that another issue that leads to privatization is the response to the failures associated with SOEs (Parker and Saal, 2003).

Megginson and Netter (2001), outlined some of the theoretical arguments on the advantage of private ownerships compared to SOEs stating first that contracting ability affects the efficiency of SOE's, then there is an advantage to the goal of shareholders wealth maximization and it provides a well defined goal that guides a firm policy. On the other side government has many objectives other than profit. These objectives can change from one administration to another hence the inability of government to be committed credibly can significantly reduce the efficiency of SOE's operations and administrations. In addition the government goals can be inconsistent with efficiency, maximizing social welfare or even malicious.

However Littlechild (1997) in his argument believes that they could be a danger associated with identifying what objectives should be achieved in this new business environment (Post Privatization) clearly focusing on defined objectives. He further went ahead to induce a price cap method that can encourage efficiency by putting a cap on profit margin to encourage minimization of production cost and increase in efficiency in order to make more profit. This was going to be reviewed from time to time to ensure that it goes with economic situation within the business environment. The weakness associated with this was that there were no incentives for the manager to work more efficiently. The impact of privatization on a firm can also range from productive efficiency, competition allocative efficiency (Kay et al 1986). Manne (1965) argues that the incentive for productive efficiency comes with the aim to maximize profit and stay in business within the strong hold of competition in the business environment and corporate control.

After much analyzes and this study can argue that in most cases one can believe that it might be that privatized firm will not perform better than SOE expect for the fact that due to the competition created as a result of privatization that leads to market pressure, private firms will then strive to survive within the market environment in order not to be taken over or been bankrupted or even die off (Pryke 1982)

However the performance of company as a result of privatization can be affected either by the controlling share, the new investor have because some vital sectors been privatized by the government can not be totally left in the hands of private investors because the vital role it might play in the economy. In this situation, both parties most agree to a set objective or any policy change that can lead to improving the financial or operational performance of a firm. Thus the distinguishing feature of the different methods and objectives of privatization, in comparison with a firms performance post privatization will determine to a greater extend the performance of a said firm. For instance the full or partial privatization of a firm through share option method, can see different investors or group investors with different objective to invest which in some case can lead failure depending on what percentage each investor has or the lobby power or even voting right one investor or groups of investor can have to bring about a policy change through restructuring the production resources or reduction of work force.

This is the more reason why in most privatization exercise the government tries and owns the majority share in order to still be in control of deciding what objectives to achieve. However the problem with this is that it become too political as government will only vote for policies that will only serve their own purpose without considering the investor entrepreneur skill and objectives of wealth maximization

Chapter Four

4.0 Research Methodology

4.1 Introduction

This is important to determine the most appropriate research strategy, data collection and methods to analyze the objective of this study. This study however will focus on the use of case study analysis through secondary data and information to analyze BT's operational and financial performances. Research methodology, case study approach, gives an insight in depth knowledge on what is been researched upon by stating how the researcher aims to arrive at a conclusion of what has been researched upon in the past.

The goal of this chapter is to put into practice and examine the methods of accessing the necessary data and information relevant to this study as well as the justification and limitation of using the methods in this research study.

4.2 Background to the Case Study

This research will focus on the use of case study method to collect and analyze data and information. Case study is a research approach design and defined by what you collect data and information about rather than the method for collecting or analyzing that data and information. It also involves a detailed study, research, investigation and analysis of existing data and information from a list of many literatures and financial data online from yahoo finance, British Telecom's online resources, BT published annual financial statements, textbook with the aim to expand and contribute to this study area of research. This could be a study carried out on a single organization or lots of organizations but in this case it will be on BT, Telecoms sector and the FTSE 100.

In this study however, the Shares price of BT will be collected and compared with the sectors share indices and FTSE 100 monthly for a period of 69 months and 269 months respectively using BETA as a measure. BETA measures the systematic risky of a financial security. It however measures the sensitivity of the market (FTSE 100 indices and the telecom sector indices) movement to a financial security (BT) returns in a way to analyze BTs performance post privatization within the sector and the economy (FTSE 100) (Arnold 2008). BETA comes from a measure by the covariance between returns on the firm's asset and returns from the market divided by the variance of the market. Covariance is the extent to which two variables are together while variance is a measure of volatility (riskiness) around an average value. This study will measure only the riskiness of a firm share price compares to the sector and the FTSE 100 indices. This is based on the believe that any one time the good news about one share is offset to some extend by the bad news about another, use of articles on how the market performance over time and the use of annual reports from BT will be accessed as well.

The use of accounting figures, to be more specify share prices of BT and the telecoms sector indices will be used to examine how volatile (Risky) the telecoms sector can be due the high rate of innovation, competition, dynamism and new entrants as well as the use of FTSE 100 indices to determine BT contribution to the overall growth of the stock market post privatization respectively in term of financial and operational performances.

4.3 Collection Method of Data

This study will focus on the use of secondary data. The method will be based on both qualitative and quantitative research data collection. Secondary data is the use of other researcher's data and information for a secondary analyzes, (Bryman and Bell 2007).


Qualitative research methodology is concerned with developing explanation of social phenomena, the studied use and collection of a variety of empirical materials. Beverly (1998) also assumed that it is more concerned about how people are affected by the event that happens and peoples opinion attitude towards events that are happening. In this research study the method of data and information collection will be from the financial annual report of BT.

This will be based on reports from different literatures, reports and analyze from different authors and BT's financial annual reports (operational and financial review) over time on the performances of BT post privatization and the impacts it has over BT performance both operational and financial.


According to Ismail (2005), quantitative research methodology can be used for the purpose of improving the existing knowledge in an area of interest but in doing so, the research problem should not be too long or short. However quantitative research methodology can be sometimes time consuming and needs sufficient knowledge appropriate to the research question itself.

While the quantitative analysis will come from BT's share performances over time from 1984 the year it was privatized, compared to the FSTE 100 all share indices from 1984 and the telecoms sector indices from 2003 respectively

4.4 Validity and Reliability

The case study approach provides a channel through which many qualitative ate and quantitative methods can be combined, in this study the combination of BT annual financial report (more focus on operational and financial annual reviews), reports and literatures on the performances of BT shares in relation to the sector and FTSE. This however make the study more valid and reliable by avoiding conclusion from a biased mind or from one angle.

Validity measures whether a research method design procedures describes what is suppose to or rather leaves many question unanswered. According to Sapsford and Jupp (1996) validity means the design of research to provide a credible conclusion. This examines whether the evidence which the research offers can bear weight of the interpretation that is put on it or by measuring if the data and information do measure what the study claims.

While in terms of data and information reliability, it states to what extent will the used method provide the similar conclusion when put into test under constant condition on all occasions. Yin, (2003) suggests that the objective is to be sure that if a later researcher follows the same procedures as described by the formal, it should arrive at the same conclusion. More so the goal of this chosen methodology is to minimize the error or bias conclusion in this research study.

However the fundament point to prove here about the use of BETA to measure BT performance in terms of its riskiness in the telecoms sector and FTSE 100 indices and the face that investors will demand a higher return on shares that are more relative to the market indices (Arnold 2008). Simply put that BT shares prices would be more affected by the intense competition, rapid technological growth in the sector and the level of new entrant coming into the sector. (E.g. BT chairman statement 1995/06 shows that about 150 telecoms license operator exist in the sector)

4.5 Benefits

Case study combines the use of both qualitative and quantitative use of data and information to reach a conclusion. The formal can be used for interpretation and theory building while the later for evidence base, statistical analysis and theory testing.

4.6 Limitation

It is based on an already existing knowledge which dependent on some knowledge which at the same time might be biased view.

Since the case study method for this research was based on a single case it limits the research to just a single view rather than a multiple view


Aktan, C. (1995). An Introduction to the theory of Privatisation. Journal of Social Political and Economic Studies .

Arnold, G. (2008). Corporate Financial Management. Harlow: FT Prentice Hall.

Beesley, M. a. (1997). Principle, problems and priorities. In B. M.E, Privatization, Regulation and Deregulation (pp. 26-42). London: Routledge.

Beesley, M. (1997). Privatization, Regulation and Deregulation. USA: Routlegde.

Beverley, H. (1998). An Introduction to Qualitative Research. London: Trent Focus Group.

Boycko, M. S. (1993). A theory of Privatization. Harvard University .

Bryman, A. a. (2007). Business Research Method. oxford: Oxford University Press.

Burns, P. (1999). Yardstick Competition in UK Regulatory Processes. In P. Vass, Regulatory Review (pp. 183-202). London: The Chartered Institute of Public Finance and Accountancy.

Easterly, W. (2001). The Elusive Quest for Growth. Cambridge: MIT Press.

Ernest, J. (1994). Whose Utility? The Social Impact of Public Utility Privatization and Regulation in Britain. Suffolk: St Edmunds Press.

Fernandaz J.E., D. C. (1999). Port Privatisation in Developing Countries: The Case of Container Terminals. International Journal of Transport Economics. , 293-314.

Filipovic. (2005). Impact of Privatisation on Economic growth. issues in political economy, furman University .

G, V. J. (1995). Privatization: An Economic Analysis. London: MIT Press.

Igbuzor, O. (2003). Privatization in Nigeria: A Critical Issues of concern to Civil Society. Lagos: Centre for Democracy and Development.

Ismail, M. (2005). Quantitative Research Methodology. www.Scribd.com .

Kay, J. a. (1986). Privatization: A Policy in Search of Rationale. Economic Journal , 18-32.

Makonnen, D. (1999). broading Local participation in Privatization of Public Asset in African. United Nations Economic Commission for Africa, Economic and Social Policy Division.

Manne, H. (1965). Merger and Market for Corporate Controls. Journal of Political Economics .

Martin, S. a. (1997). The impact of Privatization: Ownership and Corporate Performances in the UK. London: Routledge.

Megginson, W. N. (1994). The Financial and Operating Performance of Newly Privatized Firms: An International EmpiricalAnalysis. The Journal of Finance , 403-452.

Parker, D. K. (2005). Privatization in Developing Countries:A review of the Evidence and the Policy Lessons. Journal of Development Studies , 513-541.

Posner, R. (1971). Taxation by Regulation. Bell Journal of Economics , 22-50.

Pryke, R. (1982). The Competitive Performance of Public and Private Enterprizes. Fiscal Studies .

Ramanadham, V. (1993). Constraints and Impacts of Privatization. London: Routledge.

Redwood, J. (1988). Popular Capitalism. London: Routledge.

Sader, F. (1995). Privatizating public enterprise and Foreign investment in Developing World. New York.

Sapsford, R. a. (1996). Data collection and analysis. London: Sage Publication Limited.

Shapiro. C, a. W. (1990). Economic Rationales for the Scope of Privtization. Princeton University.

Steven. J, M. W. (1999). Share Issues Privtization as Financial Means to Political Economics Ends. Journal of Financial Economics , 217-253.

Vass, P. (1995). Regulatory Review. London: Chartered Institute of Public Finance and Accountancy.

Veljanovski. (1987). Selling the State. London: Weidenfeld and Nicolson.

Yin, R. (2003). Case Study Research: Design and Methods. London: Sage Publication Limited.


Aktan, C. (1995). An Introduction to the theory of Privatisation. Journal of Social Political and Economic Studies .

Arnold, G. (2008). Corporate Financial Management. Harlow: FT Prentice Hall.

Beesley, M. a. (1997). Principle, problems and priorities. In B. M.E, Privatization, Regulation and Deregulation (pp. 26-42). London: Routledge.

Beesley, M. (1997). Privatization, Regulation and Deregulation. USA: Routlegde.

Beverley, H. (1998). An Introduction to Qualitative Research. London: Trent Focus Group.

Boycko, M. S. (1993). A theory of Privatization. Harvard University .

Bryman, A. a. (2007). Business Research Method. oxford: Oxford University Press.

Burns, P. (1999). Yardstick Competition in UK Regulatory Processes. In P. Vass, Regulatory Review (pp. 183-202). London: The Chartered Institute of Public Finance and Accountancy.

Easterly, W. (2001). The Elusive Quest for Growth. Cambridge: MIT Press.

Ernest, J. (1994). Whose Utility? The Social Impact of Public Utility Privatization and Regulation in Britain. Suffolk: St Edmunds Press.

Fernandaz J.E., D. C. (1999). Port Privatisation in Developing Countries: The Case of Container Terminals. International Journal of Transport Economics. , 293-314.

Filipovic. (2005). Impact of Privatisation on Economic growth. issues in political economy, furman University .

G, V. J. (1995). Privatization: An Economic Analysis. London: MIT Press.

Igbuzor, O. (2003). Privatization in Nigeria: A Critical Issues of concern to Civil Society. Lagos: Centre for Democracy and Development.

Ismail, M. (2005). Quantitative Research Methodology. www.Scribd.com .

Kay, J. a. (1986). Privatization: A Policy in Search of Rationale. Economic Journal , 18-32.

Makonnen, D. (1999). broading Local participation in Privatization of Public Asset in African. United Nations Economic Commission for Africa, Economic and Social Policy Division.

Manne, H. (1965). Merger and Market for Corporate Controls. Journal of Political Economics .

Martin, S. a. (1997). The impact of Privatization: Ownership and Corporate Performances in the UK. London: Routledge.

Megginson, W. N. (1994). The Financial and Operating Performance of Newly Privatized Firms: An International EmpiricalAnalysis. The Journal of Finance , 403-452.

Parker, D. K. (2005). Privatization in Developing Countries:A review of the Evidence and the Policy Lessons. Journal of Development Studies , 513-541.

Posner, R. (1971). Taxation by Regulation. Bell Journal of Economics , 22-50.

Pryke, R. (1982). The Competitive Performance of Public and Private Enterprizes. Fiscal Studies .

Ramanadham, V. (1993). Constraints and Impacts of Privatization. London: Routledge.

Redwood, J. (1988). Popular Capitalism. London: Routledge.

Sader, F. (1995). Privatizating public enterprise and Foreign investment in Developing World. New York.

Sapsford, R. a. (1996). Data collection and analysis. London: Sage Publication Limited.

Shapiro. C, a. W. (1990). Economic Rationales for the Scope of Privtization. Princeton University.

Steven. J, M. W. (1999). Share Issues Privtization as Financial Means to Political Economics Ends. Journal of Financial Economics , 217-253.

Vass, P. (1995). Regulatory Review. London: Chartered Institute of Public Fin

To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Request Removal

If you are the original writer of this dissertation and no longer wish to have the dissertation published on the UK Essays website then please click on the link below to request removal:

More from UK Essays

Get help with your dissertation
Find out more