The Reason For Nationalization

The reason for nationalization is political as well as economic. It is an essential idea of certain brands of ‘state socialist’ policy that the means of production, distribution and exchange should be owned by the state. Socialists believe that public ownership allows people to use full democratic power over the means whereby they earn their living and provides an effective means of redistributing wealth and income more fairly.

As the nationalized industries are state owned, the government is accountable for overcoming any debts incurred by these industries. Also, the nationalized industries do not usually borrow from the domestic market other than for short-term borrowing.

Nationalization takes place with or without compensation to the former owners. If occurs without compensation that means it is a case of expropriation. Some nationalization takes place when a government seizes property acquired illegally.

The dominance of public sector banks at the beginning of the nineties was apparent with a share of 92.2 percent in total assets (Table 18) of the banking sector. The remainder belonged to foreign banks, as domestic private banks did not exist at that time. Similarly, high shares existed for deposits and equity of the public sector banks. With these characteristics, the banking sector at the end of FY90 did not provide a level playing field for competition and growth.

Table 18: Re-privatization structure of the Banking Sector (1990)

Banks

No.

Assets

Deposits

Equity

Amount

(Rs. Billions)

Share

(%)

Amount

(Rs. Billions)

Share

(%)

Amount

(Rs. Billions)

Share

(%)

State-owned

7

392.3

92.2

329.7

93

14.9

85.6

Private

–

–

–

–

–

–

Foreign

17

33.4

7.8

24.9

7

2.5

14.4

Total

24

425.6

100

354.6

100

17.4

100

Source: Financial Sector Assessment 1990-2000, State Bank of Pakistan

The nationalized commercial banks, which dominated the banking sector at the start of the nineties, were characterized by:

High Intermediation Costs

Over-staffing and over-branching

Huge portfolio of Non Performing Loans

Poor Customer Services

Under-capitalization

Poor Management / Narrow Product Range

Averse to Lending to SMEs/housing and other segments

Undue Interference in Lending, Loan Recovery and Personnel issues

2.2 PRIVATIZATION

The word Privatization is a very broad term but simply defining, it is the transferal of assets/services delivery from government to private sector. Generally used to mean the formation of a company under Companies Act and the subsequent sale of at least 50 percent of the shares to the private shareholders (Beesley & Littlechild, 1994).

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The most important argument for privatization of the publicly owned operation is the predictable increase in efficiency that can upshot from private ownership. The private owners give more importance to profit maximization through which efficiency increases as compared to government, which tends to be less concerned about profits.

Most companies get funds from small group of investors and start as private companies. As their business grows, they access the ownership transfer or equity market for financing through the sale of shares. This process is subsequently reversed in some cases, when a group of shareholders or a private organization purchases all the shares from a public organization which makes the organization private and therefore eradicate it from the stock market.

The results of privatization have been mainly reported from the economic, financial and strategic perspectives. These include the reduction of the public sector deficit and of constraints on corporate financing (Bishop Kay & Mayer, 1994), improvement of efficiency of other state activities (Goodman & Loveman, 1991), efficiency and productivity improvements deriving from market incentives to managers and workers (Bishop et al.; Parker, 1992), transference of management control to the private sector (Bishop et al.), decrease in levels of employment and relative wages (Haskel & Szymanski, 1994) and development of coherent corporate strategies and a shift towards the foal of value maximization (Megginson, Nash & Randenborgh, 1992).

Europe has provided several examples of large-scale privatization programs, namely UK and Portugal. In 1995, the Organizations for Economic Co-operation and Development cited these two countries as the first and third largest privatizing countries respectively in the Western world. While the changes in the external environment, that originate generally from introduction of competition & from deregulation, have been abundantly analyzed, the same cannot be said about the changes in the internal environment and particularly, their less tangible effects for the employees, human resource policies and organizational culture (Nelson, Jackson & Cooper, 1995).

2.2.1 TYPES AND TECHNIQUES OF PRIVATIZATION

There is a range of alternative service delivery techniques that can be used to maximize efficiency and increase service quality. Depending on the service, some methods will be more suitable than others. Few techniques are as follows searching for techniques of cutting costs and increasing/growing delivery:

Contracting Out (also called “outsourcing”): The government deals with a private company, to deliver services for profit or non-profit organizations.

Management Contracts: In this technique, the part of the job is contracted out to a private company. The type of services includes wastewater plants, convention centers, arenas and airports.

Public-Private Competition: (managed competition / market testing). This technique explains that when public services are open to competition, the in-house public companies are permitted to take part in bidding process.

Franchise: A private firm is given the exclusive right to provide a service within a certain geographical area.

Internal Markets. In house providers and outside suppliers serve departments to purchase support services such as printing, maintenance, computer repair and training. For departments business In-house contactors of support operations are required to run as independent business units challenging against outside contractors. In this way market forces are brought to stand with an organization. On the other hand internal customers can reject the offerings of internal service providers if they don’t like their quality or their rate is very high.

Vouchers. Here the government pays for the facilities. Individuals are given tradable certificates to buy the service from the open market. The private sector provides the services that promote the service. To provide greater independence of choice, vouchers gives consumer pressure to tolerate, producing incentives for customers to shop for services and also for service suppliers to provide low-cost, high-quality services.

Commercialization (service shedding). The government stops offering a facility and let the private division accept the function.

Self-Help (transfer to nonprofit organization). Neighborhood organizations and community groups’ takes over a facility or government asset for example a local park. New suppliers of the service directly benefits from the service. Governments gradually discovering that by turning non-core services for example zoos, fairs, remote parks, museums and recreational programs to nonprofit companies, they are able to certify that such institutions do not drain the budget.

Volunteers. They deliver all or part of a government facility. Their activities are conducted from government’s volunteer program or through a nonprofit organization.

Corporatization. In this technique, government organization is restructured along business lines. Usually it is mandatory to pay taxes, operate in accordance to commercial principles and raise capital on market. The government corporation focuses on increasing profits and attaining a favorable ROI (return on investment).

Long-Term Lease / Asset Sale. The government trades or gets into long-term lease for assets for example airports, real estate to private firms or gas utilities, turning physical capital in financial capital. In an arrangement of sale-leaseback, government trades the asset to private sector unit and leases it back. Employee buyout is another asset sale technique. The existing managers and employees take public unit private, purchasing the organization through ESOP (Employee Stock Ownership Plan).

Private Infrastructure Development and Operations. The private sector forms capital and manage public infrastructure for example airports and roads, recovering cost from user charges. Numerous techniques are used for privately operating and building infrastructure.

In Build-Operate-Transfer (BOT) arrangements, private sector builds, designs, finances and operates facility over the contract.

A difference of this is the BTO (Build-Transfer-Operate) model, under which title allocates to the government at the completion of construction.

Lastly, with BOO (Build-Own-Operate) arrangements, private sector maintains permanent ownership and manages the facility on contract.

2.2.2 HISTORY OF PRIVATIZATION IN PAKISTAN

In Pakistan, for the policy makers, the notion of Privatization is not new. PIDC (Pakistan Industrial Development Corporation) established in 1952. Over 50 industrial undertakings were established by this corporation and such units were shifted from public to private sector after successful management and operation.

In early 70’s, the nationalization policy amplified the size of the public sector to an uncontrollable extent and thus failed to deliver what was expected from it. The new policies were introduced by the new government in July 1977 of denationalization, disinvestment and decentralization to bring back the confidence of private investors. The government declared denationalization of around 2000 Agro-based industries and offered a number of State Owned Enterprises (SOE) on Management contract and introduced performance signaling system in order to improve their performance and bring efficiency in operation and management (Bokhari, 1998). In late 80’s the privatization of State Owned Enterprises became a significant instrument of government’s economic policy.

The British firm M/s N.M. Rothschild was appointed as the consultants in 1989 by the new government to carry out a research on privatization strategies and potential candidates’ selection. The report “Privatization and Public Perception in Pakistan” was submitted by the consultants that recommended privatization on widespread ownership source as a suitable strategy for Pakistan. Following are the seven companies got short listed after analysis of 50 companies, as potential first candidates for prevalent offers:

Habib Bank

Pakistan National Shipping Corporation (PNSC)

Muslim Commercial Bank (MCB)

Pakistan State Oil (PSO)

Pakistan International Airlines Corporation (PIAC)

Sui Northern Gas Pipeline Ltd (SNGPL)

Sui Southern Gas Company (SSGC)

SSGC was recommended as the first candidate for offer and for further companies the report recommended a minority stake could be divested during the five year program to the consortia of workers and private sector parties.

In 1991, the privatization process became effective and the government announced the agenda of privatization that covered a wide range of fields like banks, industries, infrastructure facilities, development finance institutions and telecommunications.

2.2.3 PRIVATIZATION PROCESS IN PAKISTAN

The privatization process is an open and transparent way that is aimed at selling government property with a vision of obtaining the best possible price depends on the nature/type of the asset which is being privatized, on the amount of shares that is offered for privatization and whether a transfer of management/employees are involved. The Board of PC (Privatization Commission) chooses as to what type of process to be followed. The process of Privatization in Pakistan is:

Identification

The first step towards identification of an individual to get himself privatized. The contract requires the Privatization Commission to submit a document of the proposed transaction to the Board and the document has to justify the importance of privatization of the property, outlines the possible way of privatization, and sometimes look for guidance on problems related to such matters as restructuring, legal, pricing, the regulatory framework and considerations. Once validated by the Board, it is submitted for approval to the Cabinet or subcommittee “The Cabinet Committee on Privatization” (CCOP).

Hiring of Financial Advisor (FA)

In main dealings, the Board approves the FA and the hiring process is done by transaction manager. Then the terms of reference for FA is settled, expressions of interest from potential FAs are asked, an evaluation team is constituted and the firm that are short listed are asked to submit the technical and financial plans in a corporate layout/format. The evaluation team then sums the proposals and then maximum ranked companies are invited for agreement (contract) signing and negotiations. In 2001, the rules and regulations of hiring a financial advisor got approved by the Board to create transparent procedures that were mostly followed over the last decade.

Due Diligence

The next step, after hiring of FA is to carry out financial, legal and technical due diligence. This helps in recognizing any legal hindrances, assessing the condition of assets and investigating the accounts of the firm so as to place a price on the company. For main privatizations in infrastructure, utilities or banking, the FA is responsible for this function. After due diligence, the FA confirms the privatization plan. The plan includes recommendations on any required restructuring, to specifying the total of assets or shares to be privatized. For major privatizations or when the proposed privatization method is different from initial plan and the plan is submitted to the Board, CCOP or full Cabinet for acceptance / approval.

Enacting needed Regulatory and Sectorial Reform

For several main transactions, the capacity to privatize and the quantity of proceeds realizable depends on the level of regulated price for public enterprise inputs or outputs and sectorial / regulatory policies.

Property Valuation

To obtain independent assessment of the price of property being privatized, Privatization Commission depends primarily on external companies. To obtain a reference price for property, the FA carries out the assessment. In most cases, the commission contracts with an outside valuation organization or accounting firm. The techniques used for the valuation depends on the type of business and usually more than one technique is used in determining the value. These techniques are: the discounted cash flow method, stock market valuation and asset valuation at book / market value. The correct value is reliant on several difficult to quantify variables for example country risk, perceptions of future macroeconomic performance, and corporate psychology and strategy. The true value can be determined only from the market. Thus it is essential to focus on designing proper transaction structures, advertising in relevant media, in choosing and applying suitable pre-qualification standards for bidders and following a suitable bidding procedure to obtain a fair price for the privatization.

Bid Process and Pre-bid

EOI (Expressions of Interest) is invited by publicity in the related media. The PC Ordinance 2000 implies few advertising processes. Depending on the types of transactions, Expressions of Interest describes broad qualifications that prospective bidders must have. Bidders who submit an EOI and meet the requirements of broad qualifications are provided with the Request for Proposals (RFP) package containing the detailed pre-qualification criteria, directions to bidders, draft sales contract and other related documents. Interested parties then submit a Statement of Qualifications (SOQ), which is assessed to decide whether interested party fulfills the necessary qualifications requirements. Then Pre-qualified bidders are given a definite time period to carry out their private due diligence, after which they are invited in a pre-bid conference where their queries and concerns are addressed. This meeting is beneficial for the potential bidders to determine the bidding procedure to be followed (for example, open auction, sealed bids, or some combination). Bidding is conducted openly, where all bidders and media are invited for transparency.

Post-bid Issues

After the bidding and identification of uppermost bidder, the Privatization Commission Board makes a commendation to the CCOP regarding accepting or rejecting the bid. Reference amount is a key determinant in the commendation, although the PC Board recommends the sale no matter if the proposed price is below the reference amount. Once the price of bid and bidder are accepted, the PC issues a letter of acceptance or a letter of intent to the winning bidder, specifying terms and conditions of sale. The PC then completes the sale purchase agreement, collects the sale proceeds and transfers the property. The PC issues the summary facts of the transaction in the official newsletter, within 30 days of the sale.

The privatization process is long for major transactions, mainly to assure transparency. After getting CCOP approval for privatization, it usually takes about 18 months for closing a main transaction, although when no main restructuring of the organization is required. This take in about six or seven months to appoint a FA and another three or four months for the Financial Advisor to complete its technical, financial and legal due diligence and to propose a privatization strategy. Following agreement of the plan, the bidding and marketing process takes another five or six months, while it takes another 2 months following bidding to get approvals, settle sale documents and close transactions. Additional delays in privatization are often caused by waiting for the necessary regulatory framework and sectoral policies to be put in place and for any needed restructuring to occur.

2.2.4 PRE-PRIVATIZATION ACTIVITIES

To prepare the public sector banks for privatization, the following steps were taken in the Pakistani banking sector (Hussain, 2004):

Amendment in Banks (Nationalization) Act 1974.

This Act, under which the banking sector in the country was nationalized during the seventies, was amended in 1990, to pave the way for privatization of the nationalized commercial banks.

Abolition of the Pakistan Banking Council

The Pakistan Banking Council, established subsequent to nationalization of the banking sector in the seventies, was abolished in 1997.

Downsizing in NCBs

In order to reduce the surplus staff in the nationalized commercial banks, voluntary separation packages were offered to employees. This resulted in downsizing of the work force of the three big NCBs (HBL, NBP and UBL) by 11,101 staffers out of a total of 39,277.

Closing of unprofitable branches

As part of the downsizing exercise, 1,646 branches of NCBs were closed down.

Recapitalization of NCBs

The balance sheets of public sector banks were cleaned up and their accumulated losses wiped off by the injection of new equity in Habib Bank and United Bank. A total of Rs. 46.6 billion was injected as equity in these two banks prior to their privatization.

Establishment of CIRC

The Corporate and Industrial Restructuring Corporation (CIRC) was established in 2000 for acquiring Non-Performing Loans of NCBs. Non-Performing Loans (NPL) worth Rs. 47.4 billion have been transferred to CIRC at a discount so far for disposal.

Resolution of non-performing loan problem

An incentive scheme for settling long outstanding non-performing loans was designed under the guidelines of SBP to clean up the balance sheets of NCBs.

Issuance of tax refund bonds to NCBs

Tax refund bonds amounting to Rs. 6.5 billion have been issued to NCBs.

Installation of professional management in NCBs

In order to streamline the working of NCBs, the State Bank put in place professional management in HBL, NBP and UBL. The Boards of Directors were reconstituted with private sector individuals of integrity and eminence.

Promulgation of Privatization Ordinance

To further strengthen the privatization process, the government promulgated the Privatization Ordinance in 2000. The Ordinance strives to ensure that privatization is carried out in a fair and transparent manner.

Revival Committee for Sick Units

CRSIU (Committee for the Revival of Sick Industrial Units) was formed by Government of Pakistan. Purpose of this committee was to restructure loans of sick industrial units, in order to make them viable.

The other important point is that fortunately, Pakistan had a very able cadre of bankers working in international banks. Citibank, ABN-Amro, Bank of America, to name a few, have many Pakistani bankers at senior and middle management positions. These persons were brought in and inducted to take over the management of the three big banks. Whether, in absence of such a readily available pool of banking professionals it would have been possible to restructure these state-owned banks can only be conjectured.

2.2.5 POST PRIVATIZATION SCENARIO

Banks privatized so far: So far, 6 banks have been privatized while shares of the National Bank of Pakistan have been floated through an Initial Public Offering (Table 19). Details of the privatized units are given below:

1. Muslim Commercial Bank Ltd – Fully divested and now owned and controlled by a domestic private group.

2. Allied Bank of Pakistan Ltd – 51 percent shares sold to the Allied Management Group (AMG) representing employees of the ABL.

3. Bankers Equity Ltd – 51 percent shares were sold to a domestic private Consortium but eventually the entity was forced into liquidation. An unsuccessful privatization episode.

4. Bank Al Falah Ltd – Fully divested, controlled and owned by a foreign group

5. United Bank Ltd – 51 percent shares sold and management transferred to a group of private foreign investor and expatriate Pakistani.

6. Habib Bank Ltd – 51 percent shares sold and management transferred to a private foreign group.

7. National Bank of Pakistan – 23.2 percent shares divested through Stock Exchange.

Rupees in Billion

Table 19: Units privatized to date

1991 – June 2002

July 2002 – June 2003

July 2003 – Jan 2004

To Date

Sector

No.

Amount Realized

No.

Amount Realized

No.

Amount Realized

No.

Amount Realized

Banking

4

5.6

2

12.9

1

22.4

7

41.0

US $ 710 million

Source: Privatization Commission

By March 2004, the share of the assets of state owned banks in the banking system of Pakistan had declined to only 18.6 percent (Table 20). On the other hand, private sector banks, whose share was nil back in 1990, now own 76 percent of assets of the entire banking sector. This includes the share of foreign banks, which increased, from 7.8 percent in 1990, to 10 percent in 2004. Similarly, the share of public sector banks in total deposits and equity also declined while that of private and foreign banks rose over this period of 14 years.

Table 20: Post-privatization structure of the Banking Sector (March 2004)

Banks

No.

Assets

Deposits

Equity

Amount

(Rs. Billions)

Share

(%)

Amount

(Rs. Billions)

Share

(%)

Amount

(Rs. Billions)

Share

(%)

State-owned1

4

518.8

18.6

379.3

20.1

22.5

17.2

Domestic private

20

1840.3

66.0

1292.3

68.5

92.8

70.9

Foreign

13

278.4

10.0

198.0

10.5

26.7

20.4

Specialized2

3

149.8

5.4

16.1

0.9

-11.1

-8.5

Total

40

2787.2

100

1885.6

100

130.9

100

Source: Banking Supervision department, State Bank of Pakistan

1 three small new banks were set up in the public sector during the 1990s. These include the First Women Bank, set up to provide credit to women entrepreneurs; and two provincial banks; the Bank of Punjab and the Bank of Khyber.

2 These include: Zari Tarqiati Bank Ltd., Industrial Development Bank of Pakistan and Punjab Provincial Co-operative Bank Limited.

2.3 JOB SATISFACTION

Job satisfaction has been defined by Locke (1976) as how employees feel about their work, and low job satisfaction has been linked to undesirable outcomes in the workplace. The undesirable outcomes come in many forms. For example, higher levels of turnover are related to dis-satisfied workers. Low job satisfaction has been linked to lower worker productivity and performance. Higher levels of job satisfaction have shown to be related to positive outcomes. Spector (1997) commented that among managers, job satisfaction is considered as important influence on employee behavior and organizational effectiveness. Spector believes that job satisfaction “can be considered as a global feeling about the job or as a related constellation of attitudes about various aspects or facets of the job”. Increase in job commitment also leads to increase in employee satisfaction. By selectively designing jobs to include substantial levels of autonomy, verity and feedback, employee’s level of commitment and satisfaction to the organization should increase.

2.3.1 IS JOB SATISFACTION IMPORTANT?

Initially, this question may seem to have an obvious answer. After all, it seems eminently logical that a happy employee is a “better” employee, which is often defined as a “more productive” employee. However, thousands of studies have been carried out seeking to establish a positive and unmistakable correlation between high job satisfaction and high productivity with nothing conclusive being proven. Researchers have attempted to correlate job satisfaction with efficiency, absenteeism, turnover, and various other aspects of performance with decidedly mixed results. Blackburn & Bruce (1992) explain, “Managers and workers alike pursue job satisfaction in the often naive belief that it leads directly and surely to that other workplace ideal – high performance. The fact is, however, that sometimes satisfied employees perform better, and sometimes they do not”.

Recent trends towards more holistic views of psychology make clear the importance of work in the individual’s overall enjoyment of life. A miserable employee cannot leave the dissatisfactions of an unhappy job at the office at the end of the day. While earlier generations may have viewed their jobs predominantly as a source of income, today’s employees see their careers as more. Blackburn & Bruce (1992) write, “Most of today’s workers expect to derive much more satisfaction from their work then their grandparents ever dreamed was possible”.

Blackburn & Bruce explain, “Whether or not satisfaction and performance are directly and strongly correlated is not the issue. The issue is that in order to attract and retain qualified employees in the upcoming tight labor market, employers will have to treat people as their most important asset”.

CHAPTER 3: RESEARCH METHODS

3.1 DATA COLLECTION

There are two types of sources available for data collection regarding research purpose i.e. primary and secondary data. In this research study, both primary and secondary sources are used. Secondary data is obtained from the books, journal/articles and internet while primary source is dependent on the questionnaire survey. The researcher depends on both the sources for theoretical and empirical data. As there is very scarce published material available about the impact of privatization on job satisfaction, so researcher had to rely on questionnaire survey results for empirical data.

3.2 RESEARCH & TESTING INSTRUMENTS

The instruments used for collecting data for this research consisted of questionnaire for surveys and SPSS as testing tool.

3.3 QUESTIONNAIRE

For this research, a questionnaire based on the design of Wood, Chonko & Hunt (1986) survey was used as the measuring instrument to determine employees’ job satisfaction before and after privatization. The job satisfaction measures consists of 14 items scored on a Likert-type format (with 1 = Strongly Disagree and 5 = Strongly Agree). Seven of the job satisfaction items were developed by Wood et al., from pre-tested responses and they focused on various elements of the respondents jobs. Additionally, seven items were selected from the Job Characteristic Inventory (Sims, Szilagyi & Keller, 1976). These 14 items were then grouped into four basic factors namely, Information, Skill Variety, Closure and Pay, replicating the approach taken by Wood et al. Researcher has added two informative questions about respondent i.e. Age and Tenure.

3.3.1 PILOT TEST QUESTIONNAIRE

A pilot test was conducted to detect weakness in design and instruments. Pre-testing refers to the testing of the questionnaire on a small sample of respondents in order to identify and eliminate potential problem. Here, the researcher intended to conduct a pretest to evaluate the questionnaire for clarity, bias, ambiguous questions, and relevance to organizational setting of HBL and UBL. For this reason, the researcher distributed 6 questionnaires among 6 professionals. Pre-test of 5-10 representative respondents is usually sufficient to identify problems with a questionnaire.

3.4 SAMPLING

A self-administered questionnaire was filled out by 50 respondents (25 in each bank). A total of 48 usable questionnaires were returned. Not every respondent got equal chance to become the part of this research and the research is conducted on the basis of convenience i.e. Convenience Sampling Technique. Convenience sampling technique is a method of non-probability sampling in which a particular group of people are selected but it does not come close to sampling all of the population. The researcher used this technique because it is fast, inexpensive, easy and the subjects are readily available. .

3.5 SAMPLE SIZE

The sample size for my research is 48 responden