CHAPTER 1

INTRODUCTION
1.1 Introduction
Privatizationthe sale of state-owned enterprise to the private sector is common
throughout the developing countries. Banking, electricity, oil and gas production,
health, education and transportation services are all frequently privatized by
governments. his trend began in !"#$s in developed countries but now days it is
accepted in underdeveloped countries where natural resources are the main targets.
here are several reasons for privatization. %irst reason is to shed the enterprises
that are operating at a loss. he second is the hope that private sector will increase
its efficiency by advanced management services, better technologies and capital.
he third reason for privatization is its fiscal impact. he fourth reason in this
regard is due to privatization sale proceeds, which are used to retire debt and
eliminate losses of the public sector units. %ostering of competition and
strengthening of capital market are some other impacts of privatization. %or
e&ample if all the government cement factories were sold to different parties, there
would be healthy competition. Privatization also encourages foreign investment. 't
sometimes becomes controversial when the government is going to privatize some
essential services like water delivery and electric power provision. Private sector
may increase the enterprise efficiency, but social ob(ectives are ignored in the
bargain such as keeping the cost of water affordable or providing services in poor
areas )*ehdi!""!+.
,ome economists are of the view that privatization record looks good if
(udged from economic point of view. hey urge that it leads to greater efficiency
)*egginson and -etter .$$!+. %or e&ample electricity privatization in /nited
0ingdom had resulted in a permanent reduction of 12 per year in the cost of
electricity )-ewbery and Pollitt !""3+. 'ts need arises from the concerns over
efficiency with which the state can manage public enterprises or large and growing
!
claims of these enterprises on national budgets. 'n Pakistan its need coming from
both efficiency and managing the public enterprises. he policy of development
through private enterprise remained the mainstay of government of Pakistan since
the last four decades. Privatization policy remained clear in the !"1$s and in !"4$s
and was adopted once again in the late !"3$s.5owever the program got real
energy in !"#$s. here have been two phases of privatization in Pakistan. he first
tide is from !"". to !""6 and the second from 7uly .$$! to 8ctober .$$.. 'n the
first tied assets worth 9s!.$ billion were divested while in the second phase 9s 41
billion were divested. he consultant engaged by :sian ;evelopment Bank has
indicated that only ..2 of the privatized units were performing well than before,
662 were at the same rank and <62 worse than before. he =ovt decided to sell
.42 stake in it at a price of /,> !1 million .!$2 share were sold for /,> 34
million and realized only /,> ."!million from the sale of <42 share. ):sian
;evelopment Bank 9eport .$$<+
1.2 Problem Statement
Privatization is a significant instrument for the economic development of
any country. 't is argued that privatization leads to greater efficiency in production
and less wastage of public resources and hence leads to greater production. 5as
the privatization of public assets lead to greater efficiency? here is any change in
the revenue collection to the government due to Privatization. Privatization of
public assets led to greater responsibility and greater work attitude. 5as
privatization have some impact on the growth of the county? @as privatization
beneficial in the past and will it be in the future? @ill it stop wastage of resources
in the country? hese and some other questions are the main concern of this thesis.
his study will help both the policy makers and the research scholars working in
this field.
.
1.3 Obecti!e" o# t$e Stud%
he *ain ob(ectives of the study areA
!. o analyze the impact of privatization of banks on the Bconomic =rowth of
the country.
.. o analyze the impact of privatization of banking system on profitability
and efficiency.
<. o evaluate privatization policies and public sector reforms by =overnment
of Pakistan since !""$.
6. o impart conclusion, suggestions, and some policy implications for the
development of privatization in the country.
1.& H%'ot$e"e"
5ypotheses to be tested in this study areA
!. Privatization of Banks has a significant impact on the economic growth of
the country.
.. Bfficiency of Banks is positively related with Privatization.
1.( Re"earc$ )et$odolo*%
he research methodology is of vital importance for research because it briefly
demonstrates how to attain the ultimate goal of the study. he Present research
work is an attempt to determine the causal influence of one variable on other and
research is a way of obtaining important facts and knowledge, so this attempt is a
kind of academic research. 'n order to e&amine the relationship between =;P and
privatization, the econometric models are established and tested by 8C,
regression analysis utilizing ,P,,.
he universe of the study is all privatized banks of Pakistan economy. he data
is collected from secondary sources, including, bank records, =ovt and semi-=ovt
publications. 5owever, in some cases communication with bank officials are made
for unification and clarification of the data. :s for as, the sampling procedure is
<
considered, 9andom sampling technique is used. 8ut of the total of seven
privatized banks, only three banks purposively selected are considered for
assessing the impact of privatization on the economic =rowth.
1.+ Data Collection
o test the hypothesis, the secondary data is taken for both variables i.e.
=;P and Privatization. he data is taken for the period of !""$ to .$$1. he
amount of money of privatization is taken as a pro&y for privatization.
1., Or*ani-ation o# t$e Re"earc$
he thesis has been organized into si& chapters. Dhapter ! of the study
consists of introduction. Dhapter . comprise of the Citerature 9eview. ;etailed
review of privatization policies have been presented in chapter <. Dhapter 6
discusses ,pecification of *odels. Performance and impact of privatized banks
has been discussed in chapter-1. Donclusions and recommendations are presented
in chapter-4.

6
CHAPTER 2
RE.IE/ O0 1ITERATURE
2.1 INTRODUCTION
his section intends to highlight different studies conducted regarding
Privatization of Banks and its impact on a&es, public sector enterprise
productivity, price stability, employment, economic growth, efficiency of banking
system and national debt. he detail of literature is given as under.
2.2 Re!ie2 o# t$e Rele!ant 1iterature
0emal )!""!+ in his EPrivatization of the public industrial enterprises in
PakistanF stated that privatization is the belief that private sector units are more
efficient than public sector units. 'n study, which made a comparison between
public industrial enterprises and private firms producing similar goods, the
conclusion was that changing the ownership of industry from public to private
sector shows enormous increase in efficiency.
:bindra )!""<+ concluded from his work that, it could be said that the
Private ,ector Bnterprises are not only playing a prominent role in our daily life in
terms of fulfilling our necessary requirements of food, clothes and shelter.
Donveyance and various other services, such as petrol and power, but also by
helping us to maintain the balance of payment position in the country through
e&port of goods and from services so, it is clear that the private sector is e&pected
to play an important role in economic growth of a country.
,aunders and ,ommariva )!""<+ analyze the difficulties of transitioning
from state control to a market system with specific reference to Bastern Burope.
hey investigate alternative approaches for restructuring troubled commercial
banks. Beginning with a pure bankruptcy approach, which they re(ect as a viable
alternative, they address various restructuring approaches including
recapitalization, Eloan hospitalsF )bad bank approach+, and various types of debt-
for-debt and equity-for-debt e&change. hey also discuss the use of some of the
1
approaches used in other countries, like the 9egional rade Dentre for the savings
and loan debacle in the /nited ,tates. heir analysis demonstrates clearly the
difficulty of managing and dealing with only one problem in the bank privatization
process, namely the troubled loan issue in the monobank systems
7omo )!""6+ pointed out that privatization can result in higher growth,
increased productivity and lower prices but only in a competitive framework. 'n a
monopolistic framework, however, producers restrict the output to ma&imize their
profits. By regulating the monopolies a producer may be forced to reduce price
and increase the level of output. he role of public sector banks and other financial
institutions in economic ;evelopment has been e&amined in many studies. here
are two broad views about =overnment involvement in financial systems around
the world, i.e., the G;evelopmentH view and the GpoliticalH view. he development
view as advocated by =erschenkron )!"4.+ states that governments could
intervene through their financial institutions to direct savings of the people
towards developmental sectors in countries where financial institutions are not
adequately developed to channel 9esources into productive sectors.
=erashchenkoHs view was part of a broader Donsensus in development economics
that favored government ownership of enterprises in strategic economic sectors.
9ealizing this importance of financial ,ector in economic development,
governments in developing countries sought to increase their ownership of banks
and other financial institutions in the !"4$s and !"3$s, in order to direct credit
towards priority sectors. Dontrary to this view, in recent years a new GpoliticalH
view of government 8wnership has evolved which asserts that state control of
finance through banks and other institutions politicizes resource allocation for the
sake of getting votes or bribes for office holders and thereby results in lower
economic efficiency.
Batra and -arinder )!""6+ have of the view that in developing economies,
most of the private enterprises are in consumer goods. *ost of the public utility
services are in public sector .hey are monopolistic in nature.hier is no system of
4
contracting out Ipublic services in these countries. Dontracting out public services
is bound to lead to decentralization. *ost of the governments in developing
countries are not in a position to lesson their grip on public enterprises for various
socio-economic and political reasons. hatHs why we found the focus on
commercial enterprises only as far as privatization is concerned in these countries.
@hile the =ovt in developed economies were in a position to offer attractive
concessions to potential buyers, the =ovt of developing economies cannot do the
same. his e&plains the pace of privatization has been very slow in developing
economies. 'n countries where private sector is under-developed, it is difficult to
find potential buyers. he third world countries should not follow the path of
privatization blindly .'n such state of affairs, a set of economic policies is of little
relevance if in the absence of a determined political movement bound together by
a cohesive and dynamic ideology, the will is lacking to implement them.
,hleifer and Jishny )!""6+ cited a number of e&amples that make it clear
that politicians used public enterprises to pursue their own political goals. 8ne
straightforward way to do this is to give redundant (obs at state-owned enterprises
to political supporters. ,tate-owned enterprises may also charge prices below
marginal cost to garner political support. =iven these benefits, it seems unlikely
that politicians would ever relinquish government control. 5owever, it may be that
not all politicians are alike. ,hleifer and Jishny suggested that privatization occurs
when politicians who benefit from low ta&es win out over those who benefit from
subsidizing supporters.
Batra and -arinder )!""4+ analyzed that privatization might be worth trying
in a few Dases as a means of shedding some unimportant or low-priority activities
which need not have been in the public sector at all in the first instanceK and that it
might also be appropriate to try privatization if possible. 'n case of loss making
enterprises for which a package of remedial measures within the fold of the public
sector is not feasible. Dlearly such instances must be very few. :s for privatization
as a solution to the public sector efficiency problem it does not really solve but
3
evades the problem. 't would be much better to try a partial privatization of style
rather than the privatization of ownership.
0emal )!""4+ studied that regulation of industry to force a competitive
solution on the monopolist is generally taken as an optimum solution along
with privatization. 5owever if regulation implies that it creates uncertainty for
the producers and the producers have even lower fle&ibility in decision-making
even as compared to public sector enterprises.
,hehzad )!""4+ e&amined the programme of state enterprise
privatization pursued by the government of Bangladesh since !"31, largely
under the influence and financial conditions of the aid agencies, has been
sub(ect to widespread debate. 'n !""!, on the suggestion of the @orld Bank,
the government of Bangladesh formed the Privatization Board to ensure better
outcomes of privatization. his article investigates whether firms privatized
under the auspices of the Privatization Board up to !""4 were adding to the
nationHs economic growth oras critics claimed to individual familiesH
pockets. *ore specifically, it e&amined whether enterprises privatized in !""!I
"4 reversed previous losses and introduced better management controls, leading
to increased investment, productivity, and overall organizational effectiveness
and efficiency. he ma(or findings are not supportive of privatization policy,
indicating that the performance of privatized enterprises has not improved
significantly. @ithout denying the economic problems of BangladeshHs public
enterprises, past and present, the author questions the performance of privatized
companies in terms of their declining profitability and productivityK
employment conditions and trade union and individual rightsK altered
distributions of value added in absolute and relative termsK and serious lack of
financial transparency and accountability.
:barbanell and *eyendorff )!""3+ describe 9ussiaHs disbanding of
Lhilotsotsbank and the subsequent creation of its private successor,
*osbusinessbank, in a way that left incumbent mangers largely in control of the
#
bankHs strategy and operations. hey describe how the 9ussian governmentHs bank
privatization and deregulation policies have engendered a system that is 31 percent
private and surprisingly innovativebut also highly unstable. %inally, ,nyder and
0ormendi )!""3+ describe the !"". voucher privatization of 0omercni Banka, the
Dzech 9epublicHs largest bank, in a way that left the state in effective control of
the companyHs operating and lending policies. hese authors show that this
decision to pass up an opportunity to create a strong private bank and to harden
budget constraints for borrowers were to have lasting, negative consequences for
the bank and the nation.
Dlarke and Dull )!""3+ found post-privatization improvements in both loan
portfolio quality and the efficiency with which they generate income. 'f provincial
policy makers were worried about the health of their financial sector and a
growing body of empirical research suggests a strong link between financial
development and economic growth.
=eorge et al )!""3+ studied the political economy of bank privatization in
:rgentina. he results strongly support the hypothesis that political incentives
affect the likelihood of privatization. 't was found that those provinces with
governors who belonged to the fiscally conservative Partido Justicialista were
more likely to privatizeK that fiscal and economic crises increased the likelihood of
privatizationK and that poorly performing banks were more likely to be privatized.
he hypotheses were tested for a specific industry in a specific country making it
possible to control for enterprise performance and institutional characteristics. 't
seems reasonable that similar results might hold in other industries and countries.
*eyendorff and ,nyder )!""3+ studied the Etransactional structuresF of
banking privatizations in Dentral and Bastern Burope, which they define as having
three elementsA )!+ antecedent actions that determine the characteristics of the unit
being privatizedK ).+ ownership transfer and governance after privatizationK and )<+
follow-on actions and ongoing government intervention. hey note that most of
"
the governments in the region made similar policy choices when they began
privatizing their banking systems, which have proven highly influential over time.
:s e&amples, most governments chose not to seriously break up the socialist
monobank system, and most severely restricted new competition particularly from
foreign banks. %or these reasons, the former monobanks retain dominant market
shares in most of the transition economies almost a decade after reforms were
initiated. %urther, none of the politically feasible ownership transfer methods
)voucher privatization, insider sales+ brought in new capital or talent, so all the
regionHs banking systems remain weak and noncompetitive. he prospect of B/
membership in the foreseeable future does, however, offer some hope that true
restructuring might begin soon.
Bonin and @achtel )!""#+ provide an e&cellent analysis of the difficulties
of achieving market based banking systems in transition economies. hey
emphasize that bank privatization is only one step in the always painful process of
disengaging the state from virtually complete control over the banking system. 'n
a later study )!"""+ Bonin and @achtel, these same authors e&amine the structure
of the banking sectors of si& transition countries in which privatization of state-
owned banks is well advanced. heir most striking finding is that foreign banks
now dominate banking in 5ungary, Poland, the Dzech republic, Droatia and
Bulgariaand are making substantial inroads in 9omania. he rise of foreign
bank ownership is at least partly a result of the essential failure of domestic
ownership to satisfactorily address the financial problems of borrowers )especially
,tate 8wned Bnterprises+ in transition countries or to impose hard budget
constraints that would force these firms to restructure. Dommander, ;utz and
,tern )!"""+ show that this failure to restructure had an especially woeful impact
on the post-privatization performance of firms in all transition economies, but
particularly the former ,oviet republics.
Dook and /chida )!""#+ decided that computing the cumulative proceeds
from the privatization as a percentage of the average =;P during that same period
!$
would be a good way to measure the magnitude of privatization. herefore, their
study is based on 4< developing countries that have the data required to compute
the magnitude of privatization. :ware of the fact that privatization variable could
possibly pick up the effects of other economic reforms, Dook and /chida test and
conclude that there is no correlation between privatization and government budget
deficit nor is there a correlation between privatization and @orld Bank ad(ustment
loans. :s Dook and /chida begin to specify the control variable used in their
study, an obvious connection becomes apparent between BasterlyHs ).$$!+ work
and theirs. he task of selecting the right control variables is of the utmost
importance since the study should control for the initial economic, political, and
social conditions in each country. ,uch variables are the typical factors that affect
economic growth. he empirical results depend heavily on the control variables
used in the regression analysis, thus specifying them correctly is essential. /sing
the investment variable as an e&ample, it is possible that investment does not
necessarily affect growth, as Basterly and others have suggested. 'nstead, it is very
possible that the causality is reversed so that economic growth affects the amount
of investment in a particular economy.
Privatization Dommission )!""#+ envisaged privatization leads to foster
competition, ensuring greater capital investment and modernanization, resulting
in enhancement of employment and provision of improved quality products and
services to the consumers and reduction in the fiscal burden.
5asan )!""#+ was of the view that privatization have two basic
outcomes, reducing the national debt or to reduce fiscal deficit. 5asan had
favored the first that is reducing the overall government debt of the country.
his would have a more permanent impact and catch in the current and future
governments. 9educing todayHs fiscal deficit with privatization receipts is only
a temporary policy.
Bertero and 9ondi ).$$$+ employed a sample of !1$ 'talian manufacturing
,tate 8wned Bnterprises ),8Bs+, with !,.3# firm-year observations, to e&amine
!!
whether imposition of a hard budget constraint can improve ,8B performance.
hey e&ploit the fact that the fiscal environment became much tighter for 'talian
state enterprises during the late !"#$s, as budget deficits became larger and the
public debt reached unsustainable levels. hey found that the ,tate 8wned
Bnterprises responses to increased debt during the hard budget constraint period,
!"##-"<, is consistent with financial pressure, but is not during the soft budget
constraint period of !"33-#3. 8nly during the later period do firms respond to
financial pressure by increasing total factor productivity and reducing
employment. 'n other words, when hard budget constraints can be credibly
imposed on ,tate 8wned Bnterprises, they do promote greater efficiency even in
the absence of 8wnership changes.
9euter -ews ,ervice ).$$$+ reported the need to meet conditions for aid
and debt relief then becomes a primary incentive for developing country
governments to privatize. :s a consequence of its connection to aid disbursement,
privatization is often rushed, with more attention focused on securing the deal than
on the interests of the end users. Dompetitive tendering may be compromised and
alternatives ignored in the rush to privatize to meet donor conditions
Barth et al ).$$!+ /sing cross country data on commercial bank regulation
and ownership from over 4$ countries found that state ownership of banks is
negatively associated with bank performance and overall financial sector
development and does not reduce the likelihood of financial crises. :nother
study MCa Porta et al ).$$.+N, based on data of government owned banks from
". countries around the world, finds that government ownership of banks is
high in countries, which are characterized by Elow levels of per capita income,
underdeveloped financial systems, interventionist and inefficient governments
and poor protection of property rightsF. he study further finds evidence that
government ownership of banks is associated with slower subsequent financial
development, lower economic growth and especially lower growth of
!.
productivity. -ow Barth et al come to the question? 5ow privatization can
improve the performance of a state owned enterprise ),8B+? =enerally, the
case for privatization of state owned enterprises could be grouped around three
main themes, i.e., competition, political intervention and corporate governance.
he competition argument states that privatization will improve the operation
of the firm and the allocation of resources in the economy, if it results in
greater competition. Privatization can improve efficiency even without
changing market structure if it hinders interventions by politicians and
bureaucrats who would like to use the ,8Bs to further their political or
personal gains. 't is also argued that corporate governance is weaker in state
owned enterprises than in private firms because of agency problems. E,8Bs
have multiple ob(ectives and many principals who have no clear responsibility
of monitoringF. :nother reason for ,tate 8wned Bnterprises ),8BHs+ to have
poorer corporate governance is the weak incentive structure for managers to
perform efficiently. hey do not face a market for their skills or the threat of
losing their (obs for non-performance. hus, Eless competition, greater political
intervention and weaker corporate governance are strong theoretical arguments
against state ownershipF.
Dlarke, Dull and Peria ).$$!+ used survey data from over 6,$$$ borrowers
in <# developing and transition countries during !""" to e&amine whether foreign
bank penetration reduces access to credit in developing countries. heir empirical
results strongly support the assertion that foreign bank penetration improves firmsH
access to credit. Borrowers in countries with high levels of foreign bank
penetration tend to rate interest rates and access to long-term loans as lesser
constraints on enterprise operations and growth than enterprises in countries with
foreign penetration. he authors also find that the benefits of enhanced credit
availability apply to small and medium sized businesses as well as large ones.
!<
Dlarke et al ).$$!+ studied the e&tant evidence on foreign bank entry in
developing countries, while Berger ).$$<+ performs a similar survey that also
includes developed economies. Dlarke, et al show that foreign ownership
increased substantially in many developing countries between !""6 and !""", and
e&ceeded <$ percent of all banking assets in Peru, Jenezuela, :rgentina, the
Dzech 9epublic, Poland, Dhile and 5ungary in !""". 'n sum, the evidence clearly
suggests that foreign bank ownership is efficiency enhancingat least in
developing countriesand may well be the default outcome for many national
bank privatization programs.
Cizal and ,ve(nar ).$$!+ e&amined strategic restructuring and new
investment performance of 6,$$$ Dzech companies during !"".-"#.hey ;evelop
and test a dynamic model of restructuring and investment, allowing them to
e&amine separable impact of private versus public and domestic versus foreign
ownership on restructuring, as well as the importance of access to credit and a soft
budget constraint on firm investment. Cizal found that )!+ foreign owned
companies invest the most and domestically owned cooperatives the leastK ).+
private firms do not invest more than state-owned firmsK )<+ cooperatives and
small firms are credit rationedK and )6+ ,tate 8wned Bnterprises operate under a
soft budget constraint.
*egginson and -etter ).$$!+ e&plained that not all commercial bank
privatizations are similarly motivated. :t least four reasons for bank privatization
can be identified in countries around the world. %irst, in formerly socialist
economies, privatization has occurred on a widespread scale in many industries. 'n
these situations, bank privatizations occur as part of the overall transitioning to a
more market-based economic system. 5owever, these countries also provide the
biggest challenge to successful privatization because so much of the credit
previously provided by the monobank systems was granted to ,tate 8wned
Bnterprises, which tend to be of very poor credit quality. :s such, banks in
!6
transition economies tend to be plagued with the greatest loan quality problems of
all bank privatizations. ,econd, in some countries there may be a program
underway to de-nationalize the limited number of sectors or firms that are state-
owned. 'n such situations, privatization is less likely to offer as great a challenge,
at least in the loan quality area. hird, in some economies there may be ongoing
efforts to deregulate the overall financial system. 'n this regard, bank
privatizations are a necessary ingredient of the overall deregulation effort. %inally,
the governments in some countries may have the primary ob(ective of raising
funds for the government itself. :s such, banks may simply be one of the vehicles
in the Erevenue privatizationF motive.
Bayliss ).$$.+ e&amined the effects on poverty privatization, an impact to
which donors have given little attention on their concern with efficiency and
markets. he analysis of the distributional impact of privatization activities draws
on empirical cases in the utilities sector in a wide range of developing economies,
particularly in :frica and Catin :merica. :fter a critical consideration of the
@orld Bank position on privatization strategies, and the arguments presented by
donors on the pro-poor effects of these economic reforms, the article turns to the
negative distributional effects. 't is argued that privatization has demonstrably
damaged the poor, whether through loss of employment and income, or through
e&clusion from, or reduced access to, basic services. his is mainly because
private firms are principally concerned with profits, prices and costs, and are
highly selective as to sectors and types of consumer. *eanwhile, the weakness of
governance and regulatory capacity in many developing countries lead to poor
control of market abuses. he article concludes by proposing that donors should
take more account of local variations in state-market relations, and be prepared to
give consideration to alternative economic strategies where privatization is not
working as intended.
Bonin, 5asan and Paul @achtel ).$$.+ e&amine the impact of ownership
structure )state, private and foreign ownership+ on bank performance in the si&
!1
transition economies of Bulgaria, Droatia, the Dzech 9epublic, 5ungary, Poland
and 9omania. heir sample has ... observations with financial and ownership
data from these si& countries for the years !""" and .$$$. :bout three-quarters of
the banks are fully private and about 6$ percent of these are completely foreign
owned. -ot surprisingly, wholly foreign-owned banks tend to be created by
=reenfield investment, while the ma(ority foreign-owned banks tend to be banks
privatized to a foreign strategic investor. :lmost 4$ percent of the banks in the
region are at least ma(ority foreign-owned, while less than !1 percent remain
ma(ority state-owned. hese authors find robust evidence that profitability
measured by return on assets and return on equityis higher for fully private
banks than for banks with some state ownership, and is the highest of all for
wholly foreign-owned banks. %oreign banks also e&perience the most rapid
increase in customer loans.
Dull, *atesova and ,hirley ).$$.+ e&amined the incentives that managers
of voucher-privatized Dzech companies have to EtunnelF )strip assets out of
companies at the e&pense of outside shareholders+ and ElootF their companies.
Cooting occurs when firms face a soft budget constraint and managers are able to
borrow heavily, e&tract funds from the firm, and then default on the debt without
penalty. hey employ a dataset with !,$!3 observations from <". companies
spread nearly evenly between !""6 and !""4. 5alf of the firms are voucher-
privatized (oint stock companies )7,Ds+ while half are limited liability companies
)CCDs+. Dontrolling for size, industry, capital intensity and initial leverage, they
find that voucher-privatized 7,Ds perform significantly worse than firms with
concentrated ownership that had to be purchased for cash. 'nvestment fund-
controlled 7,Ds under-perform all other firms, including other 7,Ds, while fund-
controlled 7,Ds also took on liabilities at a much faster rate than other firms,
indicating they were operating under a soft budget constraint. hough not able to
measure the activity directly, they concluded that the evidence indirectly shows
that looting was a widespread occurrence for many 7,Ds.
!4
,rinivason ).$$.+ presented that privatization and deregulation in ,outh
:sia has not gone far and has run into problems, many of which could have
been anticipated. 'n particular, some of the e&pectations about the benefits of
privatization were either misplaced or were based on a lack of appreciation of
the severe constraints of political economy and governance that undercut the
potential benefits of privatization
@orld Bank ).$$.+ reported the fact that proceeds from privatization is
used as a way to measure the levels of privatization in each country might
negatively impact the credibility of the empirical results. 't is possible that
developing countries with underdeveloped regulatory systems may have enhanced
proceeds from privatization. %urthermore, proceeds from privatization could
possibly be a completely inaccurate measure of the magnitude of privatization,
since different methods of privatization result in different levels of proceeds.
:dditionally, Dook and /chidaHs ).$$.+ study does not control for the method of
privatization that was used in each country, which could potentially play a large
role on the empirical results. 'n fact, a @orld Bank analysis of the privatization in
Bastern Burope suggests that the means through which privatization is
implemented has played a significant part in the potential success of privatization
in Bastern Burope.
Barth, Daprio and Cevine ).$$<+ used a new database on bank regulation
and supervision in !$3 countries to assess the relationship between specific
regulatory and supervisory practices and banking- sector development, efficiency,
and fragility. hey also e&amine the relationship between state ownership and
these measures of banking-sector development. hey find that government
ownership of banks is negatively correlated with favorable banking outcomes and
positively linked with corruption. 5owever, government ownership does not retain
an independent, robust association with bank development efficiency or stability
when other features of the regulatory and supervisory environment are controlled
!3
for. 8n the other hand, there is certainly no evidence, even in weak institutional
settings, that government-owned banks are associated with positive outcomes
*egginson ).$$<+ used empirical literature to e&amine bank privatization.
5e begin by documenting the e&tent of, theoretical rationale for, and measured
performance of state-owned banks around the world, and then assess why many
governments have chosen to privatize their often very large state owned banking
sectors. he empirical evidence clearly shows that state owned banks are far less
efficient than privately owned banks, and that state domination of banking
imposes increasingly severe penalties on those countries with the largest state
banking sectors. 8n the other hand, there is little in the empirical record to suggest
that privatization alone transforms the efficiency of divested banks, especially
when these are only partially privatized. Privatization generally improves
performance, but by far less than is typically observed in studies of non-financial
industries. :n increasingly common outcome of large-scale bank privatization
programs is foreign ownership of many nationsH banking sector, which evidence
suggests is usually positive in an economic sense, but problematic politically.
*a(noni, ,hankar and JOrheggi ).$$<+ studied the dynamics of foreign
bank ownership in 5ungary using a sample of .4 commercial banks active in the
period !""6 to .$$$. By the end of the year .$$$, foreign controlled banks
accounted for over two-thirds of total banking assets in 5ungary. hey find that,
after controlling for the nature of investment =reenfield versus acquisition,
management style and duration of ownership, foreign banks are pursuing a lending
policy that does not differ significantly from domestic banks. %oreign banks are,
however, able to achieve consistently higher profitability levels.
*eyendorff and ,nyderHs ).$$<+ presented three case studies of specific
bank privatizations in transition economies. :barbanell and Bonin )!""3+ study
the !""< privatization of PolandHs Bank ,laski in a mi&ed asset sale )to '-=+ and
public offering. hey suggest that this e&perience show the benefits of attracting a
!#
strategic foreign investor, but also highlight the drawbacks of pursuing this
strategy too obsessively.
*ohsin ).$$.+ find out in recent years, there has been an increasing
discussion in policymaking and academic circles of the respective roles of public
and private investment in the growth process in developing countries. here
appears to be a general consensus now that these two components of investment
can have a differential impact on economic growth. %or instance, public
investment in infrastructure and in human capital formation may increase the
productivity of private capital and be beneficial for growth. 't can also, however,
crowd out private investment by using scarce resources and thus have an adverse
effect on growth. hus, for policymakers in the developing world concerned with
growth, it is not only the total level of investment that matters, but also how it is
split between its public and private components. he empirical evidence on the
relative effects of public and private investment on growth has been limited. :
number of recent studies have concluded that private investment has a larger
positive impact on growth than public investment )0han and 9einhart, !""$K
Doutinhao and =allo, !""!K ,erven and ,olimano, !""$+. 5owever, since these
studies have used relatively small samples of countries and limited time periods,
how robust this conclusion is, remains an open question? *oreover, to answer the
question a number of other important issues related to differences in the two
components of investment across developing country regions or across countries
in different income groups need to be investigated. %inally, other determinants of
growth such as human capital and macroeconomic instability, which have received
considerable attention in the recent literature, have to be taken into account when
assessing this issue.
Dlarke et al ).$$<+ using a combination of country case studies and
cross-country analyses concluded that privatization of banks improves
performance as compared to continued state ownership. 5owever, continued
state ownership even in minority shares of privatized banks is found to have
!"
negative effects on their performance. Privatization of state owned banks
through public share offerings produces lower gains than direct sales to
strategic investors in countries where the institutional environment is weak.
Castly, they find that the benefits accruing are reduced if foreign banks are not
allowed to participate in the privatization process.
Dornette et al ).$$<+ e&amined performance differences between privately
owned and state-owned banks in si&teen %ar Bast countries from !"#" through
!""#. hey find that state-owned banks are significantly less profitable than
privately owned banks due to state banksH lower capital ratios, greater credit risk,
lower liquidity and lower management efficiency. @hile the performance of all
banks deteriorated significantly at the beginning of the :sian economic crisis in
!""3 and !""#, state banksH performance deteriorated more than did that of private
banks and performance differences are most acute in those countries where
government involvement in the banking system is the greatest. Bconomic growth
is also slower in these countries, and there is less financial development.
8tchere ).$$<+ presented a comprehensive analysis of the pre and post
privatization performance of privatized banks and their rival banks in low and
middle-income countries. he author does not find any significant evidence of
improvements in have a higher proportion of bad loans and appear to be
overstaffed relative to their rivals, in the post privatization period. he
continued government ownership of privatized banks is found to be responsible
for their underperformance, as it hinders managersH ability to restructure them
effectively. /sing a comprehensive data set of bank privatizations in !$!
countries during the Period !"#.-.$$$, Boehmer ).$$!+ e&amine the economic
and political factors that are likely to effect governmentHs decision to privatize
a state owned bank, in both developing and developed countries.
,apienza ).$$<+ studies the effects of government ownership on bank
lending behavior-using information on the pricing of individual loan contracts
between 'talian banks and customers over the period !""! to !""1. 5e e&ploits the
.$
fact that all 'talian banks have access to an unusually detailed and informative
database on corporate borrowers, which negates the impact of differential credit
evaluation skills on the loan pricing decision. 5e further controls for within-
sample differences by e&amining a matched set of !!$,3#4 company-bank-year
observations of lines of credit e&tended to 4,"4# companies. 11,<"< observations
refer to borrowers from state-owned banks and 11,<"< refer to borrowers from
privately owned banks. ,apienza finds that borrowers from state-owned banks pay
an average of 66 basis points less than do borrowers from private banks. 5e also
shows that the voting pattern of the region where the loan is booked and the party
of the state bankHs DB8 significantly influ&es good.
%ilipovic ).$$1+ e&plained that privatization, a method of reallocating
assets and functions from the public sector to the private sector, appears to be a
factor that could play a serious role in the quest for growth. 'n recent history,
privatization has been adopted by many different political systems and has spread
to every region of the world. he process of privatization can be an effective way
to bring about fundamental structural change by formalizing and establishing
property rights, which directly create strong individual incentives. : free market
economy largely depends on well-defined property rights in which people make
individual decisions in their own interests. he importance of property rights is
captured by economist 5ernando ;e ,oto as he states, E*odern market economies
generate growth because widespread, formal property rights permit massive, low-
cost e&change, thus fostering specialization and greater productivityF )!""4+.
:long with creating strong incentives that induce productivity, privatization may
improve efficiency, provide fiscal relief, encourage wider ownership, and increase
the availability of credit for the private sector. his paper will analyze the effects
and the influence of privatization on the rate of economic growth, stimulated by
the idea of people responding to incentives. /ltimately, the goal of this paper is to
evaluate and analyze the idea of privatization as a possible factor of economic
growth.
.!
%ilipovic ).$$1+ concluded that the quest for economic growth in hird
@orld countries has received an enormous amount of attention over the past 1$
years. he poverty problem that plagues numerous countries around the world is a
monumental challenge for which we have yet to find the solution. Basterly
powerfully captures the significance of economic growth as he states, EPoverty is
not (ust low =;PK it is dying babies, starving children, and oppression of women
and the downtrodden. he well-being of the ne&t generation in poor countries
depends on whether our quest to make poor countries rich is successful.F
)Basterly, .$$!+. heoretical analysis of privatization suggests that incentives play
a significant role in the potential success of privatization as a factor of economic
growth. 'n fact, privatization, accompanied by appropriate structural reforms,
creates incentives to improve economic efficiency, increase investment, and adopt
new technologies. %urthermore, the methods of implementing privatization play an
important role in creating the right incentives and leading the way for the
appropriate economic restructuring. 't is essential to note that the success of
privatization largely depends on the government commitment to legal and
regulatory reforms. Dook and /chidaHs ).$$.+ study suggests that the lack of
appropriate governmental reforms might be the cause for a negative relationship
between privatization and economic growth. %urther research is necessary in order
to conclusively determine the benefits and the potential role of privatization in the
construction of the future economic policies. :lthough privatization is a fairly
recent economic policy aimed at promoting economic growth, it is safe to
conclude that privatization alone will not be the magical solution to the elusive
quest for growth.
%reedman and Dlick ).$$1+ highlighted the financial systems in developing
countries fail to mobilize domestic savings adequately and to allocate them to
firms and individuals that can use the funds most productively. Banks hold
substantial liquid assets while providing only modest or minimal lending to
private sector firms. 't is very difficult for entrepreneurs to obtain a loan to
..
launch a business or for e&isting businesses to get a loan to e&pand their
operations, and productive economic activity is stifled by this widespread lack
of access to credit. 'f a modest portion of the billions in liquid assets
maintained by banks were prudently channeled to the private sector, many
developing countries could achieve substantially higher rates of return. he
primary reasons for the lack of private sector credit in developing countries
includeA )i+ high reserve requirements, )ii+ deficiencies in the legal and
regulatory environment, particularly with respect to contract enforcement, )iii+
crowding-out from fiscal deficits, )iv+ substantial asymmetric information and
)v+ the inadequate skills of financial intermediaries. he tremendous scholarly
work on finance and growth in recent years and the comprehensive data
presented in the @orld BankHs annual ;oing Business reports have painted a
clear picture of both the importance of improving financial markets and the
policy reforms that can lead to more efficient financial systems. 't is to be
hoped that this picture can spur policy-makers to undertake measures to
improve contract enforcement and collateral laws, encourage private credit
bureau& and curtail fiscal deficits. Bncouraging foreign bank entry can be
e&tremely valuable not only in improving access to credit but also in generating
support for the necessary reforms to establish effective contract enforcement,
sound collateral laws, and creditor rights and the sharing among lenders of
credit information. ,uch reforms can help unlock the untapped potential of
domestic credit markets to spur long-term growth in developing countries.
2.3 Summar% o# t$e Re!ie2
'n this chapter it is tried to introduce many concepts and issues raised by
different authors in their research studies relating privatization and itHs 'mpact on
economic growth. 't can be said that private Banks are more efficient than public
sector Banks, moreover privatization may lead to lower down prices, increase
productivity and increase revenue to =ovt.Privatization also have an important
role in reducing fiscal deficit as well in public debt.
.<
C$a'ter 3
RE.IE/ O0 PRI.ATI3ATION PO1ICIES IN PA4ISTAN
3.1 Introduction"
his chapter intends to e&plore the brief background of privatization and
nationalization along with critical evaluation of different policies adopted
by =ovt for privatization under various regimes.
3.2 5ac6*round o# Nationali-ation and Pri!ati-ation
Before the integration of 9ussian block, the whole world was divided into
two parts. 8ne was the capitalistic block headed by /,: and western Buropean
countries whereas the .
nd
block was led by the /,,9 and other Bast Buropean
countries, which followed the communist socialist philosophy of the economy.
he 9ussian framed the -ationalization policy whereas the capitalist followed the
privatization policy. 9ussia and other ,oviet /nions i.e. a(ikistan, /zbekistan,
urkmenistan, Dhechnya, Bulgaria, Poland, Pugoslavia, Bast =ermany,
Dzechoslovakia, 9omania kept the economic resources in the state hands and it
managed the Bconomic activities and their control. he capitalistic world
composed of /,:, Britain, @est =ermany, %rance, Belgium, -etherlands and
other @est Buropean countries disowned the national enterprises and were kept in
the private hands. )*ushtaq !""#+
he role of =ovt in Privatization policies developed since
independence.'ndustralizationas was considered much important for economic
growth. %or about last twenty years, industrial output was increased and economic
growth took the positive momentam.;uring !"4$ Pakistan was considered as a
model of growth for other developing economies, 5owever the e&pansion did not
lessen poverty trap. ;uring 3$Hs and #$Hs policy makers gave much attention to
distribute income equally. ;uring "$Hs =ovt took the way of privatization to uplift
the structure of the economy.)*irza !""1+
.6
:t the time of independence, =ovt locked various 'nstitutions to play an important role
in the development process.,tateownership was implemented only for military
weapons, electricity and railroad operations, telecommunication sector Ifields remained
unpleasant, during early stages of partition to private investors. he remaining sectors
were opened to private investors.
he disturbance caused by separation of the economy from 'ndia, banning of some
import items and the termination of trade with 'ndia necessitated the motivation of
private investors.
=ovt gave much attention to liberalize industrial policies in order to encourage
private investors. ,ome of the manufacturing units were established in the hand of
=ovt.he policies of =ovt during 1$Hs and 4$H has compressed the workers for
industrialization. : small group of people have dominancy on the industrial resources
of the economy, the *igrants who were largely traders and migrated to Pakistan during
time of independence. hese muha(ors initiated with trading firms, many of which got
the status of industry with the =ovt policies during 1$Hs.
By having much of capital, the *uho(ors accounted ma(or part of manufacturing
industry during early stages of independence. ;uring late of 4$Hs a debate about
considerable inequalities and income distribution of wealth and economic power
problem provide a state of dissatisfaction with economic conditions. Bconomists study
during !"4$ e&perienced that 1$ big industrial group owned 612 of the nations
industrial assets and more than 4$2 of private owned enterprises. he same industrial
group also posses seven of the eighth ma(or commercial banks. he speech delivered
by ;r.*ahboob-ul-5aq, the Dhief economist of planning commission in !"4# about the
concentration of wealth in few hands. 5e has of the opinion that the country economic
growth shown little performance to uplift the living standard of the common person and
the trickle down approach to development had only concentrated wealth in the hand of
few industrial famiies.:ccording to him interruption of =ovt. is required to correct the
tendency rather than accumulation of wealth in few hands. 'n response to his
recommendation =ovt took effective measures between !"4# and !"3! for settlement
.1
of minimum wage rates and ta& reforms. 5owever implementation was not upto the
mark. )*irza !""1+
't was !"3! when Lulfiqar :li Buhtto after coming into power made vital
developmental strategies than previous political powers. he down played economic
planning and research created many inconsistencies in decisions. 'n !"3. he publicized
a ma(or act regarding multiple e&change rate system and also devalued the rupee by
132.he act greatly encouraged e&ports and controlled prices in economy.;evalution
also caused a serious problem in terms of trade between the industrial and agriculture
sector. 5owever devaluation helped agriculture sector, particularly firms which have
ma(or market surpluses, displacing labors and tenants resulted by mechanization ,
many of whom migrated to urban areas to seek (obs in industries. 'n !"3. during
-ationalization process Butto =ovt nationalized <. ma(or manufacturing plants. 'ron Q
steel, motor vehicles, manufacturing chemicals and cement are some of the industries
which effected .Cife insurance companies,shiping companies and oil distributions
firms, private banks and cotton ginning were some others who were nationalized.
Between !"3! Q !"3< nationalization resulted a drop of 1$2 in private investment
.;uring !"3# investments were little more than one third of monitory year !"3$.Private
capital went into real estate and to manufacturing sector especially to small scales.
'ndustrial outputs slowed considerably during !"33.;uring Bhutto =ovt public sector
e&panded broadly, further more the public companies were created for diversified
operations and functions.-ationalisation policy faced a lot of hurdles from capitalists.
Brain drain worse situation was highly controlled from *iddle Bast countries by
provision of ma&.wage rate and fringe benefits to inhabitants of Pakistan. 'nvestment in
public industries arises surpassing the private investment in!"34. )*ahboob !""$+.
Bhutto supported and strengthened the long term pro(ects within country which can
cherish long term benefits in prosperity. ,ome of the pro(ects were 5ighways on west
bank of the 'ndus 9iver, 5ighway tunnel in the north, steel and iron plants. :fter !"33,
military =ovt of =en.Lia Iul- haq supported the privatization policy which goes on till
late !""$Hs for achievements of economic growth. )5assan !"".+.
.4
3.3 Pri!ati-ation trend" and de!elo'ment in Pa6i"tan
,ocio economic and political development of economy is based on privatization
policies. Cike other developing economies PakistanHs economic goals relate to
efficiency and production through better utilization and distribution of properly
allocated resources of private enterprises.Privitization is breeding competition which is
increasing the efficiency.Pakisatan policy of privatization of public companies also
embarked on the claims which urged for the return on national budget and =ovt is
giving a review to the policies of privatization of public companies due to arrival of
deficit situation and increase of demand on national resources.
3.& Pri!ati-ation 'olic% under Pa6i"tan Peo'le7" 'art% 8o!t91:;;<:=>
/nder leadership of *uhtarma Benzir Buhtto the Pakistan peopleHs party =ovt
decided to have the privatization programme in progress. 9othschild Q sons limited in
:pril !"#" commissioned by Pakistan govt. to prepare and develop privatization
programmes.'n response to their privatization report in august !"#" the govt. assigned a
committee for finance ministry in order to refine the privatization
programme.:nalytical recommendation of finance ministry recommended that public
participation and policies which are immediately converted into practical implications,
social welfare increment and management of govt transformation into regulatorK
attraction of foreign investment .%inancial analysis report took under consideration
5abib bank, *uslim commercial bank ,'nternational air lines, sui-southern gas , and
Pakistan state oil. he aim of selling these ,8Bs was to channel the saving of several
thousands private investors into capital market, which has currently an e&tremely
narrow base of capital. ;uring early, !""$ stock market established well but need
improvement. he recommendations of report were to start privatization programmes
with P': and ,ui-southern gas. 'n may !""$ , =ovt offered !$2 of P': Gs share at rate
of !..12.=ovt tried to match manifesto and policy but political powers and military
didnHt supported the policy fulfillment.)he news %eb", !""4+
.3
3.( Pri!ati-ation 'olic% under t$e re*ime o# I"lamic ?am$ori Itte$ad 9I?I>
8o!t 91::3>
'n -ovember !""$ 'slamic 7amhori ittehad came in power. he main focus was
given to privatization programme began in !""$.his was consider one of the most
important component of economic reform in the country. he ma(or focus was given to
reduce the persistent losses of state owned enterprises and to provide liberal
environment, intensely needed for economic growth.
3.(.1 Obecti!e" o# 'ri!ati-ation 'ro*ramme" under I?I 8o!t
%ollowing are the main ob(ectives of the '7' government.

o have efficient utilization of resources and reduce deficit in budget
Dreating liberalization policies
'mprovement in profit level of ,8BHs
o facilitate private sector with financial constraints.
9educe political intervention in economic affairs
o have sound capital market
o provide financial safety to employee
Provide attractive foreign investment environment.
he main areas where privatization was needed were financial institution, banks,
elecommunication and infra structural sectors. he =ovt. identified to privatized !#
,8B, and announced time to sell under the different forms of privatization. he govt.
also took the responsibility of social rehabilitation of e&ploited labors. Pellow ta&i
scheme and various other training were launched to provide self employment for those
workers who were suffering from unemployment. Jarious analysts from related
departments were hired to evaluate the agenda of privatization .*embers of
privatization commission reviewed reports of the analysts .:fter having clearness from
.#
members of privatization commission reports for final approval were placed before
cabinet.):ziz !""4+.
3.(.2 Pri!ati-ation in t$e #inancial "ector"@
*uslim commercial bank and :llied bank of Pakistan were privatized. *DB
was considered as the first bank which was privatized under '7' govt.'n response of
privatization programmme of *DB, four bids were received in !""$, and for some
technical reason the evaluation committee did not recommended the highest bid. he
evaluation committee recommended third highest bidder *R, national group for this
transaction. 9e(ection of highest bid led controversy between state bank =overnor and
'7' govt.8n :pril !""! the agreement was signed with *ansha group and subsequently
the management was transferred on :pril, !""! after necessary payment. : total share
of 9s.!!$ million was offered to public which was considered .12 of total shares.
:ccording to news papers reports the offered bid was not even covering the furniture of
the bank. he situation was different in case of :BC, the employee decided to buy it
from =ovt.'n 7uly !""$ about 31$$ employees of :BC collected a sum of 9s.1$$
million for privatization proceedes.'n addition to investment banks the =ovt. also
granted permission for eight new banks to be privitised.'n ,eptember !""6 PPP =ovt.
added three new banks to be diveseted.he purpose of privatization was to promote
savings and investments in the best interest of the economy.
)*inistry of %inance !""!-".+.
3.(.3 Pri!ate 5an6"
Bolan bank lmtd.
%irst commercial bank
%ranklink commercial bank
%irst habib bank lmtd
%irst security bank ltd.
*ehran bank ltd
."
9epublic bank ltd
,onerie bank ltd.
/nion bank ltd
*uslim commercial bank ltd.
:llied bank of Pakistan
0ashmir bank
3.(.& Pri!ati-ation o# indu"trial unit"
'7' =ovt. advertised another one hundred units in !""$ for privatizationK conditions
were rela&ed in some cases. @ith in one month of acceptance bidders were required to
pay in cash .42 of bid value..6$ bids wee received for "$ units. 'n case of 9oti plant
the bid were higher than the reference price.)*inistry of finance !".-"<+
3.(.( O##er #or "ale o# 'ublic unit" durin* ?ul% 1::1
'n case of some units no bid was received previously. 'n order to privatize these
units the =ovt. rela&ed terms and conditions in this regard. 'n table <.! we have
advertised value of units. he govt. took a bold step for economic reforms,
deregulations, liberalization and access for foreign investors. Bconomic reforms,
especially privatization programme led to boom in early !""$ because of which =ovt.
announced various form of incentive to foreign investors.

<$
Table 3.1
Sale o# Public Unit
Public unit" Earne"t )one% 0loor Price
Bala Bngineering Ctd. ..$$ million 9s..6 per share
Bolan casting Ctd. ..$$ 9s..6
*ustekam Dement. 1.$$ 9s !1$
: Q B 8il industries !.$$ 9s."$
Drescent %actory !.$$ 9s.#4.1
*ubarikpur 9ice mills !.$$ 9s.!#
-aya ;aur *otors Ctd. 1.$$ 9s. !.$
hatta Dement 1.$$ 9s. .1
,wat Blutriation Plant !.$$ 9s. .1
assets
,wat ceramics !.$$ 9s. !$
B Q * oil mills 0arachi !.$$ 9s. 3$
;ir %orest industries !.$$ 9s. .$$
),ourceA he watan weekly, Condon 7uly .1, !"".+
3.(.+ Ac$ie!ement" o# I?I 8o!t.
't were about 4" public units which were privitized.:l-=hazi tractors, Pak
,uzuki motors , *DB, Pak-Dhina fertilizers, and 0hyber vegetables =ee mills are
successful e&amples of privatization programme, in term of profit. )@ahab !""1+.
<!
*DB has increased 9s.4.. million cash deposits over the first si& months after the bank
was privitised.:BC is another e&ample of improvement after privatization
proceedes.he chairman of :BC announced that the bank deposits increased by .$$2
after privatization.),tate bank report !""6+.
he achievements were due to the following factors
%acilitated provision of efficient services and awareness about the
customers.
BmployeeHs ownership plan has resorted efficient utilization of staff.
*otivational forces and team work has achieved profitability.
3.(., Pri!ati-ation trend" to2ard" 'ublic utilitie"
he PPP =ovt. succeeded in privatization a !$2 share of P':.he intention of
'slamic 7amhori 'ttehad =ovt. was to sell Pakistan ele communication corporation,
@ater empower development authority, Pakistan railways ,which were four leading
monoplolies.he =ovt. provided friendly environment for foreign investments. Build
lease and transferred scheme was launched to attract foreign investors.
elecommunication was also developed by privatization process.Prvitization of
9ailways also contributed in Pakistan development policies. ,ome of the best routes of
railways were already sold and which other are in loss are also about to sold. %our
private airlines :ero :sia, ,aheen international, Bow(a, and 5a(weri were licensed for
operations. )he -ews, :igust, !""3+.
3.+ Pri!ati-ation Polic% o# PPP 8o!t.91::3<:+>
Banzir Bhutto re-pledged the privatization commission on -ov, !""<,the cabinet
committee on privatization, in order to proceed the economic reform program. he
commission decided on the following categories for privtisation.Datagery ):+ small
scale industries, Dategory )B+ Carge scale industries and Dategory)D+ /tilities and
sevices.he scheduled was
Dategory ):+ through bidding
<.
Dategory )B+ through stock market
Dategory ) D+ through strategic investors.
'n case of large scales industries, it was announced that .42 would retain managerial
control. 5owever in some specific enterprises they will be offered to private investors.
%ollowing are the main principles which were constituted by the privatization
commission which must be followed for privatization progrmme and policies.
Process of privatization must be transparent.
;iscourage monopoly control
Process of prequalification in case of Banks privatization.
%inancial analysts will participate in the process.
Dompetition arrival in privatized enterprises
Privatization must be beneficial for ma(or portion of the economy.
hermal generation will serve during privatization in power generation.
he overall ob(ectives of the programme were
!. 'mprovement in efficiency and competition in entities propose to be
privatized.
.. o decrease financial burden on the state.
<. ,tock market must get strength by increased numbers of share holders.
/ntil 8ct., !""< about !!# state owned enterprises were identified by the commission
and 4" among those were sold through bidding. he first !# units offered for sale were
as followA
!. 5azara fertilizers
.. ,@: elutriation plant
<. ,argohda vegetable ghee
6. B and * oil mills
1. *arafco 'ndustries ltd.
4. P-P rice mills.
3. Burma oil mills 0arachi
<<
#. hatta cement Do.ltd.
". :ssociated cement Do ltd.
!$. =eneral refectories.
!!. -owshehra chemicals.
!.. -owshehra PJD ltd.
!<. Bela Bngg. Ctd.
!6. 9epublic motors.
!1. ,pinning machinery
!4. e&tile wending
!3. Cylpur chemicals and fertilizers
!#. 5arnai @oolen mills.
)Privatization commission report !""6+.
3., Pri!ati-ation 'olic% o# )ilitar% 8o!t. 91:::<2==(>
President 9afiq arar promulgated privatization commission ordinance on .# -ov
.$$$.%ollowing are the salient feature of the promulgationK
!. Proceeds of privatization are e&pected to meet =ovt. debt for reduction of
poverty.
.. B&peditorHs mechanism is required for resolution of disputes.
<. Previously established privatization commission was dissolved.
6. Dommission is responsible for assets ,rights ,power, authorities and privileges ,
own property movable or immovable, bank balance ,reserves, investments and
other interest and rights, in or arising out of such property , liabilities and
obligations.
1. Dhairman ,,ecretary members and other staff of previous commission were
allowed to continue under the new ordinance ,.$$$
4. Dommission shallA
Provide guidelines on privatization policies to the cabinet.
: comprehensive privatization programme for approval of the cabinet.
<6
:pproval management, planning and implementation is done by cabinet.
%acilitate legislation, which is approved by cabinet, on behalf of
concerned ministry in connection with privatization.
Provide channels of implementation of privatization activities including
restructuring deregulation and post privatizations matters.
8perational decision e&ercise on privatization matters.
;eregulation, regulatory issues including of licensing and tariff rules and
other related issues pertaining to privatization programmes approved by
ancient.
Provide directions and instructions to the privatized managements.
Publicized privatization programmes activities.
Proposed a regulatory frame work including strengthening of regulatory
authorities, to the cabinet for fair and independent regulations of each
sectors falling weighing the preview of privatization programmes.
:dvised the federal =ovt and selection process of the chairman of
regulatory authority.
:dvised the federal =ovt to discourage monopolies in process of
privatization
:ppoint consultants, advisors, lawyers in other staff.
:pprove and take decisions to implement pre-privatization restructuring.
'nvite application for the privatization and ensured why its possible for
participation.
Bvaluations of bids according to criteria.H
:dvised measures to the federal =ovt for improvement of public
enterprises till their privatization
<1
:ssist in the implementation of federal =ovt. policies on deregulation and
advise the federal =ovt on deregulating the economy to ma&imum
possible e&tent.
he general management and administration of the affairs of commission
shall vest in the board of commission. 't shall consist of chairman,
secretary and si& other members. )Privatization commission ordinance
.$$$+.
3.; Di"cu""ion on di##erent 'olicie"
he basic aim of different privatization policies under various regimes is to
achieve economic and social development .he main economic goals are
increasing productivity and efficiency through effective utilization of available
resources by private sector. *ost of the difficulties faced by the public sector
enterprises are beyond their control. :lmost all of these are heavily overstaffed
because of political compulsions. o provide more (obs can be met easily in public
corporations decisions to e&pand or modernize the machinery or technology of the
enterprise are difficult to push through the bureaucratic channels and the price
policy is seldom within the control of the enterprise or in line with market
condition. ,ales and marketing strategies are naturally limited due to procedural
limitations of the public sector. 'n order to solve these problems privatization was
considered a serious solution.
/nder Pakistan Peoples Party =ovt )!"##-"$+ according to privatization
committee report privatization should be done through public participation,
offered opportunities to reduce borrowing requirement of =ovt and to attract
foreign 'nvestors. he report for privatization program recommended starting
privatization with ,ui ,outhern and Pakistan 'nternational :irlines. he =ovt tried
her level best to start privatization program but constraints didnHt allow the policy
to implement.
<4
'n !""$ 'slamic 7amhore 'ttehad =ovt headed by -awaz ,harif to accelerate the
pace of economic development start privatization of state owned enterprises.
/nder the agenda for privatization the main targeted areas were 'ndustries, Banks
and telecommunication sector. he =ovt also intended to undertake labor
rehabilitation program for surplus labours. he process for valuation of units to be
privatized was done by independent consultants and by charted accountants. :fter
clearing the report from commission that was placed before the cabinet for
approval. he report assigned !!1 units for privatization and the e&pected income
from these units was pro(ected about 9s <$ billion, but only 4" units were
privatized which resulted an amount of 9s <."1 billion.
:fter the ending period of '7' =ovt, the newly elected =ovt of PPP headed
by Benazir Bhutto reconstituted the privatization commission )PD+ and the
cabinet committee on privatization )DDP+ in order to recognize and accelerate the
economic reform program. he newly constituted PD and DDP decided that
privatization should be transparent, efficient and for the benefit of all people. :
total of <! units were offered for privatization out of which !< were privatized.
'ncome received after selling these units was 9s #4<." million
/nder military =ovt run by =eneral Perviz *usharaf gave the same tempo
to privatization program, in order to enhance economic growth and alleviate
poverty. /ptil .$$1 the Privatization commission have worked successfully and
privatized about 63 /nits in various sectors and received 9s .6$1"<.3 million.
his enormous figure showed that privatization in Pakistan is on increasing
magnitude and will lead the economy towards boom and prosperity in the future.


<3
C$a'ter &
SPECI0ICATION O0 )ODE1S
&.1 Introduction
his chapter is related with the specification of models for the analysis of
the study. %ocus has been made to present details about specification, data
collection and definitions of variables.
&.2 E"timation S'eci#ication
&.2.1 )ea"urement o# C$an*e" in 5an6 E##icienc%
%inancial sector reforms during !"##-". had affected banking sector
significantly. he establishment of newly private sector banks and eliminating
restrictions on the banking operations give institutions greater scope and
incentives to reduce cost and enhance revenue, might lead to monopoly rent. he
e&pectations may be that banking sector improves by these reforms. he important
thing is to identify the effect on already e&isting and state owned institutions,
remained very important and had to face different constraints as compared to
newly entrants. ;ifferent allowances must be provided to change the e&isting
macroeconomic aspects for the estimation of banking sector reforms, one needs
first to be able to estimate the frontier of most efficient practices prevalent at each
point in time as a function of relevant e&ogenous variables, and how far from this
frontier are the efficiency levels of different institutions or categories of
institutions. 8ne can then measure how the frontier shifts over time )due to
structural changes or movements in the e&ogenous variables+, and how the
position of institutions relative to the frontier evolves. hese reforms produce
<#
different affects on cost efficiencyK revenue efficiency, and profitability, similar
e&ercises need to be undertaken for each of these three concepts. )Berger !""<+
he particular approach used here is to specify a relationship between
profits, costs or revenue and input and output prices that reflects optimizing
behavior at the frontier of efficient practices, and then to add terms that capture
deviations from best practices. 8ne can then estimate how this frontier relationship
is affected by the financial sector reforms, and how these deviations, or measures
of relative ST-inefficiency,S vary across institutions and over time. )Berger !""<+
%or e&ample, the standard profit function can be augmented and written in
logarithmic form as
ln )At U B+ V f )Pt, @t, Lt, Jt+ U ln /t U ln t U ln Bt )6.!+
@here
At V Profit of the bank
B C Donstant )o ensure that argument is positive+
Pt V Prices of fi&ed inputs at time t.
@t V Prices of variable inputs at time t.
Lt V Prices of net outputs at time t.
Jt V Bnvironmental Q structural Jariables.
/t V Donstant represent that reduction in bank profit due to
Persistent T- inefficiency.
Bt V 9andom error
Based on this standard profit function, the relative inefficiency of bank b
can be measured as the ratio of the predicted profits of that bank to the predicted
profits of a best-practice bank facing the same prices, using the same netputs, and
under the same environmental conditions, net of random error. ,pecificallyA
<"
'nefficiency V
( )
( )

+
=

ma&
W
, , , e&p
W
, , , e&p
U l V Z W P f
U l V Z W P f
n t t t t
t n t t t t
Max
t
)6..+
@here
=
t
W
Bstimate of t

ma&
W
V Bstimate of ma&

t
U
W
V Bstimate of t
U
ma&
W
U V Bstimate of ma& U
his measure of relative inefficiency can then be averaged across banks or a subset
of banks. )Berger !""<+
his measure of profitability assumes that the frontier and relative
efficiency are constant over time. Pet profitability and absolute profit efficiency
will inevitably change, in part because the financial sector reforms could shift the
frontier and affect efficiency in the banking sector. o address this issue, the
relative T-inefficiency of different banks or groups of banks can be measured by
evaluating equation )6..+ in various sub-periods. 'n addition, one can compare the
position of the whole frontier across periods. ;enoting two periods of interest by s
and t. one can start by from the definition of the change in average productivity in
terms of the efficiency frontier asA
( )
( )
s s
t t
X
X

W
W
=
@here
=
t
W
estimated profit at time t
s
W
V estimated profit at time s
t
X
V e&planatory variable at time t
s
X
V e&planatory variable at time s
his change in profitability will reflect in part variation in the e&ogenous
variables, which might be termed business conditions. he change will also reflect
shifts in structural conditions, such as productivity and the nature of market
6$
competition, which will be captured in the functional form of the profit function.
o this end the change in profitability can usefully be broken down asA
( )
( )
( )
( )
s s
s t
s t
t t
X
X
X
X

W
W
W
W
=
)6.<+
in equation 6.< right hand side shows proportional change in profits due
(ust to changes in the e&ogenous variables, and assuming that the banking sector
had continued with the same practices, regulations, and so forth, as captured in the
estimated parameters of the profit equation. his term thus reflects the effect on
profitability of changes in business conditions from period s to period t, keeping
structural features fi&ed. he second term reflects the changes in technology and
market structure, keeping prices and other elements of business conditions fi&ed.
:ny effects on profitability of the financial sector reforms should appear primarily
through this term. o obtain an overall measure of the changes, the various profit
terms in equation )6.<+ are pro(ected for all the banks in each sub-sample and then
averaged. he standard profit function is applicable if firms have to follow the
market price and output is changing and measurable, then the standard profit
function is applicable. :n alternate profit function should be considered if the
above mentioned conditions are not fulfilled. his will be asK
( ) ( )
t t t t t t t
U V Z W Y f + + = + ln ln , , , ln )6.6+
@here
t
Y
V output of the bank at time t
: measure of relative efficiency can be defined analogous to that for the standard
profit function, and the change in profitably over time can again be broken down
into the effects of changes in structural and business conditions. )Berger and
*ester, !""3+.
6!
hese reforms might affect significantly the profitability of the banking
sector. hese reforms resulted in greater benefits to customers rather then the share
holders. 'ts affect should be considered on both cost and revenue. he cost
functionA
( ) c U V Z W Y f C
C t t t t t
+ + = ln ln , , , ln
)6.1+
@here
t
C
V Dost at time t.
has been the focus of numerous studies of bank efficiency. he cost function can
be estimated similarly to the profit function, efficiency can be measured in terms
of best practices to minimize cost. ,pecificallyA
( )
( )
t
c
ct n t t t t
n t t t t
t
t
U
U
U l V Z W P f
U l V Z W P f
C
C
CEf
W
W
W
, , , e&p
W
, , , e&p
W
W
min
min
min
=

+
= =

@here
DBf
t
V Dost efficiency
min
W
C V minimum estimated cost
,imilarly, the indirect revenue functionsA
( )
R R t t t t t
U V Z W Y f R + + = ln ln , , , ln )6.4+

for estimation of relative efficiency and to find change in revenue, the above
equation must be used. )Berger!""<+
&.3 Sam'le Data and .ariable"
he data on various variables related to assets and liabilities of banks in
Pakistan must be obtained from related sources of ,tate Bank. he whole sample
is divided into two sub-sample periods. 8ne period ranges from !"#! to !"".. he
6.
second period, when ma(or reforms should have begun to take effect covered a
time period from !"". to .$$1. he data was collected from << commercial banks
for which time series data was available. 8n the basis of their operation and
sub(ectivity to different regulations, some banks were e&cluded. hese include 3
public sector banks, .. foreign banks, and 6 private sector banks. he data set is
used to define the needed variables, namely, profits, revenue and costsK a measure
of bank outputK relevant pricesK and certain control variables. he variables used
are summarized in able 6.!.
able 6.!
Jariable ;efinitions and summary statistics !R
*ean ,tandard *inimum *a&imum
deviation
PRO0 ProfitsR otal assets ...3 !.1# -..$1 ".!"
COST DostsR otal assets 1.11 !."$ !.43 !..!
RE.S 9evenuesRotal assets 3.#. ..63 ..4. !4.1#
OUTP Barning assetsRotal assets 11.1" !<.!< !6."< "<.<.
INTR 'nterest receiptsRBarning assets !!.<6 $."4 ".#4 !<.1<
INTC 'nterest costsRearning liabilities 4.<4 $.3< 1.<# #.6<
OTHC 8ther costsRBarning liabilities ..34 $..4 ..!# <.$"
CPRS Dapital and reservesRotal assets <."! ..!< $.41 !3.66
DEP5 'nterbank borrowingR;eposits .!..4 .".$1 $.$$ .<1.63

!R Based on full sample.
able 6.! shows abbreviations of the related variables and summary
statistics which is considered as a standard for comparison of estimated regression
of the present research work. he mean values of various variables which range
between ..!3 and 41.1" shows that the bank should be considered efficient one of
the mean values preserve within the same brackets. ,imilarly standard errors are
also given for the same purpose. 5owever, to have more simplification for
decision makers minimum and ma&imum values of standard errors are also given.
6<
%or identification of bank output, bank transaction services must be considered as
a standard. Pet the identification of bank inputs and output is not fully answerable
is shown by its earning assets which is the combination of =overnment securities,
advances, discounted bills, and other forms of investment. '-9 shows total
income obtained from interest transactions divided by earnings. ,imilarly '-D
provided informationHs regarding e&penses of interest divided by liabilities of
banks. -o data were available on the number of employees or the volume of fi&ed
assets, so it was not possible to measure labor costs per employee or facility costs
per unit of property, which might in any case vary between banks due to variations
in quality. *oreover, non-interest operating costs may be incurred mainly in
providing no remunerated services to depositors, that is, in obtaining funds as
inputs.
85, shows other costs which are not mentioned in above e&planation.
%or analysis of ,@- DP9, is abbreviated which is considered an alternate
function for deposits and inter-bank borrowings. he unit prices of inputs and
outputs are assumed to be the same for all banks )consistent with the assumption
that banks are price takers, at least in the market for inputs+ and are therefore
measured on an aggregate basis, that is, by dividing aggregate receipts or e&penses
by aggregate quantities.
: number of variables were included to capture relevant environmental or
structural factors. ,ome e&perimentation suggested that the ratio of funds
borrowed from other banks )termed Sdue banksS in the data source+ to deposits,
which will be denoted by ;BPB, frequently added to the e&planatory power of the
model. his variable captures differences between banks in the degree of
specialization in retail businessK ;BPB will tend to be low for a bankA with an
e&tensive branch network from which it can gather deposits and high for banks
that concentrate on wholesale business. @hen the model is estimated across the
full sample, it was also useful to include a dummy variable taking on the value of
one during the second sub-period ),P.+, which allows at least the intercept to vary
66
over time. 8ther candidate variables that might pro&y for environmental or
structural factors include banksX market share, their loan to deposit ratios, the real
rate of growth of =;P, and official interest rates. 9esults show that the estimated
coefficients on above e&plained variables are statistically significant.
o evaluate some variables through time series data shown in figure 6.!,
the average unit of cost and average unit of output are relatively stable at 42 and
!!2, respectively, during reforms but shows a positive momentum thereafter. he
role of non-interest cost was highly un-predictable to show the influence on cost,
revenue and on profit variables.
%igure 6.!
:verage unit Prices and Dosts
Percent

%igures 6.. and 6.< are depicted to show costs and benefits of the various
banks. %inancial market reforms showed a positive trend in costs and revenues for
all banks. Before reforms private banks and public sector banks both shows the
same level of performance. 5owever, banks privatized during !""< shows low
level of performance from revenue point of view. But quickly caught up more
61
revenue per unit when time proceeds. %igure 6.< shows low level of capital for
state-owned banks. Cast sub-periods shows that foreign banks have increased
amount of capital as compared to public sector and private sector local banks. 'n
this tendency privatized banks are not related for active participation perhaps their
assets are too bad. : lower risk rating than those of the other public sector banks,
and therefore they needed less capital and reserves. %igure 6.6 illustrates the path
of the variables ;BPB for the various bank categories. 'n the pre-reform period the
foreign banks were clearly heavily dependent on inter-bank funding, but increased
their access to deposits thereafter. he public sector banks usually undertook little
inter-bank borrowingK they presumably could collect ample deposits from
householdHs and. enterprises and were the source of funds for other banks. he
private banks were, at least initially, moderately active borrowers in the inter-bank
market.
%igure 6..
Dosts to otal :ssets 9atios
64
%igure 6.<
Dapital and 9eserves to otal :sset 9atios )'n percent+
%igure 6.6
E;ue BanksF to ;eposits 9atios )'n percent+
63
&.& )odel S'eci#ication and E"timation
he available data is sufficient to allow the estimation of the various
measures of efficiency described above and the changes in these measures. he
two profit functions and the revenue and cost functions that form the basis for
these measures are made operational by adopting a translog functional form. he
profit function Dt Vf )Pt, @t, Lt, Jt+ is used in equation )<.!+ is assumed to take
the formA
@here
YtV Profit at time t
'-9V 'nterest-:sset 9atio
'-DV 'nterest Dost liability ratio
85D V 8ther Dosts-Ciabilities ratio
DP9, V Dapital Q 9eserves-:sset ratio
;BPB V Borrowed funds to ;eposit ratio
,P. V ,econd sub-period .
@hich includes one output price, the two input prices, one netput, and all the cross
products, plus two variables capturing structural and environmental factors. %or
alternate profit function revenue and costs are similar, shown on the right hand
side of the equation. @hen estimating over sub-periods, a more parsimonious
specification is needed, because the unit price terms are constant across banks in
each year, and therefore only a limited number of individual, industry-wide
coefficients can be identified. @hen the sample covers only a small number of
years. 5ence, for this purpose the quadratic terms in unit prices )with coefficients
6#
P., Z6, and P4 in the profit function+ were dropped. Bven when the profit is
negative but we are taking logs of e as its value is <.$6.
here are various approaches to estimation of efficiency frontiers and T-
efficiency )Bauer, Berger, %errier, and 5umphrey )!""#+ provide a recent
overview+, the choice of technique used here was dictated by the available data set,
which consists of a panel with relatively few observations in some years. he
variables that are measured comprise mostly financial stocks and flows, rather
than quantities )such as number of employees+, yet the possibility of errors in
measurement must be recognized. he Edistribution freeS approach seemed most
suited to these circumstances. ,pecifically, for each bank we take a dummy to
capture the effect of bank-specific deviations from optimizing behavior, and the
equation is estimated using a panel of data from a sub samples for which is
assumed to be more stable.
'n addition, it is interesting to trace the average behavior of some sub-set of
banks )say, those that are state-owned+ over time. o this end, it is possible to find
the :verage deviation from available informationHs on significance test by
assigning a dummy variable.
Bquation )6.!+ )or the other analogous equations+ represents an efficiency
frontier. %urthermore, a preliminary e&amination of the data suggested that the
distribution of residuals generally displayed leptokurtosis and, especially for the
profit functions, skewness. Because of the strong possibility that the errors will be
non-normally distributed, the least absolute deviation )C:;+ estimator was used.
B&amples of results obtained by 8rdinary Ceast ,quares )8C,+ are reported for
comparison purposes.
6"
C$a'ter (
ESTI)ATION O0 )ODE1S
(.1 Introduction
his chapter reviews the analysis of the data sampled using econometric
techniques.
(.2 5ac6*round o# 5an6in* Sector and Pri!ati-ation in Pa6i"tan
'n process of early privatization period two banks relatively of small size were
privatized. 'n Pakistan various local and foreign are working in competitive
environment to provide better facilities to customers. 5owever, it is e&pected that
privatize banks should be in better position from performance point of view.
*uslim Dommercial Bank and :llied Bank of Pakistan are among others which
are privatized earlier. o compare the performance of *DB with that of :BC,
*DB is some what better. Paid-up capital of *DB increased from 9s. 134 million
in !""! to 9s. !#.$ million up till !""3. @hile during the same period the paid-up
capital of :BC increased from 9s. .3. million to 9s. !$4< million. %rom deposits
point of view *DB also shows a considerable progress as compared to that of
:BC. ,imilarly profit of *DB- was estimated about 9s. 1<! million in !""1
while that of :BC was 9s. !.1$ during the same period. %or both banks this is
higher if compare with pre-privatization era. Privatization of thermal unit was
about .42 of total shares. Profit of thermal sector increased but one thing must be
noted that this is due to price hike. he increase in prices of electricity was a
question mark on the welfare policy of the government. 5owever, sale of shares of
P': and telecommunications without any disturbance in management system
provide no improvement in level of efficiency in the said organization.
'n case of :BC, it was transferred to the bank management team resulting no
problem of unemployment. 8n the other hand side, *DB also suggested that no
worker must be displaced during privatization. 'n !""3 the salaries record of *DB
1$
showed an amount of 9s. .$!3 million while that of :BC was 9s. !$6# million
which was about 1$2 high as compared to pre-privatized year !""!.
(.3 E"timation o# EEuation"
o review profit, cost and revenue functions table 1.! is depicted. Dolumn !
of the table shows estimation procedure and abbreviation of various related
variables to find efficiency of banks. ,imilarly column . suggests profit function.
o analyze alternate profit functions column < is drawn. Dolumn 6 and 1 shows
cost functions and revenue functions respectively, in first sub-periods. 5igher
value of 9
.
statistics is observed in case of cost and revenue as compared with that
of profit function. 5owever, the overall model is statistically significant. he
fi&ed effects, which provide a measure of relative efficiency, are always (ointly
highly significant. 'n the first sub-period, banks with higher capitalization tend to
be more profitable, primarily due to lower costs )DP9, enters with a negative
coefficient in the cost function+, and banks that rely on a large deposit base tend to
be less profitable, as shown by the negative coefficient on ;BPB, perhaps because
they are more heavily committed to retail banking, where margins are lower,
hese effects seem to dissipate in the second sub-period.
he third section of the table presents the results of 8C, estimation for the
second sub-period. he 9
.
statistics )which 8C, effectively ma&imizes+ are only
slightly higher than those of the C:; estimates, while the 7arque-Bera and
,hapiro-@ilk test statistics for the normality of the error terms are all highly
significant, which suggests that C:; estimation is more appropriate for this data
set than is 8C, estimation. he estimated coefficients usually have the same sign
as the C:; coefficients, but tend to be larger in absolute magnitude, and the
standard errors are also larger, so slightly fewer significant coefficients are found.
:n indication of the robustness of the estimates is provided by the results
for the alternative profit function obtained under different specifications or
samples, which are reported in able 1.! )similar results were obtained for the
1!
other dependent variables+. he results obtained from the full sample resemble
those from the first sub-sample. Bstimating the full specification including all the
quadratic terms )which is possible only with the added degrees of freedom in the
full sample+ yields a number of additional significant estimated coefficients, but
increases the 9
.
statistic only slightly, so the parsimonious specification used
generally in this paper seems satisfactory for our purposes.


1.
able 1.!
Bstimated Doefficients of Bfficiency %rontier
%irst ,ub-Period
%unction
;ependent variable
Bstimation procedure
Profit %unction
'nP98%
C:;
:lternate Profit
%unction
'nP98%
C:;
Dost %unction
'nDost
C:;
9evenue %unction
'n9BJ,
C:;
Donstant #.<!#
)!".##6+
-"."!6
)!#.!$6+
4.43$
)!#.4"!+
-# .313
)!#."11+
Cn'-9 ..$#<
)$."!.+[
\\ \\ \\
Cn'-9
.
\\ \\ \\ \\
Cn8/P \\ -6.1<!
)..$!4+[
6.!6"
)..$#!+[
-!."!6
)..!!$+
Cn8/P
.
\\ $.$!1
)$.!.$+
-$.$3"
)$.!.6+
-$...3
)$.!.1+[[[
Cn'-D ..<<3
)4.#1"+
-".4<$
)4.<!.+
!.3#4
)4.1!4+
-".4$3
)4.4$#+
Cn'-D
.
\\ \\ \\ \\
Cn85D !.$!"
)1.<!"+
..33<
)6.3$6+
1.<#!
)6.#14+
-$.$!!
)6.".1+
Cn85D
.
\\ \\ \\ \\
CnDP9, !..6#
)!.6!!+
<.$1#
)!.<41+[
-..4$!
)!.6!!+[[[
!..31
)!.6<!+
CnDP9,
.
-$.$$1
)$.$<#+
$.$<.
)$.$61+
$.$36
)$.$63+
$.$$#
)$.$63+
Cn'-9.CnDP9, -!.!!#
)$.314+
\\ \\ \\
Cn8/P.Cn'-D \\ $.$$4
)$.1.1+
!.<$"
-$.16.[
$.4#6
-$.16"
Cn8/P.Cn85D \\ -!.<<"
)$.<##+[[
-$.!6!
)$.6$$+
-!.44$
)$.6$4+[[
Cn8/P.CnDP9, \\ -$....
)$.!6!+
)$.$<$+
)$.!64+
$.$#<
)$.!6#+
Cn'-D.Cn85D $.33"
)!.#3.+
-..434
)!.4!1+[[[
!.4<1
)!.443+
-..!.3
)!.4"!+
Cn'-D.CnDP9, -$.64.
)$.6#1+
-$.4.6
)$.<$#+[
-$.$3"
)$.<!#+
-$.6<3
)$.<.<+
Cn85D.CnDP9, !.<6.
)$..#"+[[
!.$""
)$..1$+[[
-$.3$.
)$..1#+[[
$.3<4
)$..4.+[[
Cn;BPB -$.$34
)$.$!6+[[
-$.$<1
)$.$!<+[[
-$.$.6
)$.$!<+[[[
-$.$13
)$.$!<+[[
9
.
$.411 $.433 $.3!1 $.466
:d(usted 9
.
$.1"6 $.4!1 $.44! $.134
,,9 1..$4 6.#!4 ..".$ ..46$
,; dependent variable $.<.6 $.<.6 $.<<< $.<!#
,B of regression $...3 $...< $.!3< $.!46
*ean absolute residuals $.$"3 $.$"1 $.$3# $.$#<
-o. of observations !6$ !6$ !6$ !6$
% test fi&ed effectsV$ 6.6<$ 6.1#$ ..!1$ 6.6##
% )<..<#"+ $.$$$ $.$$$ $.$$$ $.$$$
[ denotes significance at least at the 1 percent levelK[[ denotes significance at least the ! percent levelK
1<
[[[ denotes significance at least the !$ percent level. ,tandard errors in parenthesisK
able 1.! )Dontinued+
Bstimated Doefficients of Bfficiency %rontiers
%irst ,ub-Period
%unction
;ependent variable
Bstimation procedure
Profit %unction
'nP98%
C:;
:lternate Profit
%unction
'nP98%
C:;
Dost %unction
'nDost
C:;
9evenue %unction
'n9BJ,
C:;
Donstant -.#.!4< -.<6.<!4 -#!.3"# .4.34"
!<6.$44 )#4.63!+ )3$."14+ )31.#6<+
CnINTR 6.1#. \. \. \.
)..13.+[[[
CnINTR
2
\ \. \. \.
CnOUTP \ -1.<$4 !.6$" -<.#33
)".#6#+ )#.$#!+ )#.4<#+
CnOUTP
2
\. $.$3# -$.<3. -$.!."
)$.!!6+ )$.$46+[[ )$.!$$+
CnINTC -.$.6.3 -"3."1< -.3.443 ..6!<
)6#.14"+ ).3.1#$+[[ )...4<.+ ).6.!"$+
CnINTC
2
\. \. \. \.
CnOTC -!$.14$ -4#.#"< -.!.11! ".63"
)<3.6"1+ ).6.61.+[[ ).$.$11+ ).!.66"+
CnOTC
2
\. \. \ \.
CnCPR! -3.1#! -4.1#. !<.<4. 1.<#.
)4.$11+ 6.6!# )1.6!.+[[ )<.463+
CnCPR!
2
$.$11 $.$<1 -$.$#4 $.$!6
)$.$1$+ )$.$6#+ )$.$<"+[ )$.$6.+
CnINTR.CnCPR! -$."4< \. \ \
)!..3#+
CnOUTP.CnINTC \ -$.1<! $.$!$ $..3<
)$.444+ )$.164+ )$.1#6+
CnOUPT.CnOTC \. -!.$$! -$.1!! -!.#6$
)..6.6+ )!."#"+ )..<.4+
CnOUPT.CnCPR! \. $.$!6 $.$.1 -$.!#4
)$.$!1+ )$.$#4+ )$.$".+[
CnINTC.CnOTC -1.4.1 -.#.13" -3.3"6 !.443
)!<."<#+ )#.$."+[[ )4.1##+ )<.$6.+
CnINTC.CnCPR! -$.$4< -$.633 !.<#1 $.63.
)$.<"!+ )#.#.#+ )$..<#+[[ )$..1<+[
CnOTC.CnCPR! -!.1.3 -!.6.6 ..43" $."46
)!...6+ )!.$..+ )$.#<"+[[ )$.#"4+
Cn"EP# $.$!! -$.$." $.$.< -$.$.!
)$.$.!+ )$.$..+ )$.$!3+ )$.$!"+
9
.
$.46" $.4#$ $.#!< $.#!1
:d(usted 9
.
$.1!3 $.164 $.3<1 $.3<3
,,9 1..$4 6.#!4 ..".$ ..46$
,; dependent variable $.<.6 $.".6 $.<<< $.<!#
,B of regression $...3 $...< $.!3< $.!46
*ean absolute residuals $.$"3 $.$"1 $.$3# $.4#<
-o of observation !6$ !6$ !6$ !6$
16
% test fi&ed effects-$ 6.6<$ 6.1#$ <.!1$ 6.6##
% )<..<#"+ $.$$$ $.$$$ $.$$$ $.$$$

able 1.! )Dontinued+
Bstimated Doefficients of Bfficiency %rontiers
%irst ,ub-Period
%unction
;ependent variable
Bstimation procedure
Profit %unction
'nP98%
C:;
:lternate Profit %unction
'nP98%
C:;
Dost %unction
'nDost
C:;
9evenue %unction
'n9BJ,
C:;
Donstant -.!$."4. -<6$.!!# !14...4 -1..4"4
).<!.1.1+ )!34.$"$+[[[ !66.331 )!63.3$"+
CnINTR 6.$4. \ \ \
)6.#4#+ \ \ \.
CnINTR
2
\ \. \ \
CnOUTP \ -1.### ".!#3 -$.$!.
\ )!..146+ )!$.3!!+ )!..!3<+
CnOUTP
2
\ -$.$66 -$.611 -$.<$#
\ )$.!44+ )$.!36+[[ )$.!#!+[[[
CnINTC -"6.!6! -!6<.<3. 43..33 -.6.446
)#6..61+ )4..$.!+[ )6#..41+ )63."34+
CnINTC
2
\
CnOTC -4..""$ -"".#$# 6".4"$ -!..3<3
)46.#14+ )1$.14!+[[[ )6...#6+ )6..!4.+
CnOTC
2
\ \ \ \
CnCPR! -.!.$<" -!3.!66 !$.4.1 ..3"!
)!$.#6!+[[[ )!6.$!!+ )1..$#+[ )1.446+
CnCPR!
2
$.$63 $.$41 -$.!44 -$.$33
)$.!!$+ )$.!$$+ )$.$3#+[ )$.$36+
CnINTR.CnCPR! -!.!$# \ \ \
).."3$+ \ \. \.
CnOUTP.CnINTC \ -$.411 !.$#! $.<64
\ )$."1!+ )!.$4#+ )$.""3+
CnOUPT.CnOTC \ -!..1! $.4". -!.$33
\ )<.$"$+ )..114+ ).."6.+
CnOUPT.CnCPR! \ -$.$#6 $.$## $.$!3
\ )$..1!+ )$.!"6+ )$.!#6+
CnINTC.CnOTC -.4.#3$ -6!.##. .$.<"# -4.4"<
).6.!!#+ )!#.!6$+[ )!6..14+ )!<.###+
CnINTC.CnCPR! -$.3#4 -!.$#< !.!44 $.61!
)!..##+ )$.".4+ )$.1."+[ )$.6#3+
CnOTC.CnCPR! -6.3<$ -<.#"# ..$<" $.<66
)..4!#+[[[ )<.!#$+ )!.!"<+[[[ )!.<..+
Cn"EP# -$.$#4 -$.$"6 -$.$$# -$.$<4
)$.$43+ )$.$3.+ )$.$<1+ )$.$<"+
9
.
$.3<$ $.3<4 $.#1" $.#<"
:d(usted 9
.
$.4.# $.4.4 $.#$$ $.33!
,,9 <."1< <.#1" ..!33 ...3!
,; dependent variable $.<.6 $.#1" $.<<< $.<!#
,B of regression $.!"# $.<.6 $.!6" $.!1.
-o.of observations !6$ !6$ !6$ !6$
% test fi&ed effects V $ 4.66" [[ 4.$4" [[ <.3.3 [[ 1.."3 [[
11
%)<., <#"+ $.$$$ $.$$$ $.$$$ $.$$$
7arque- Bera test 4#3.1!4 [[ 141.<.3 [[ !$$.1!. <<.343 [[
,hapiro-@iik test $.##1 [[ $.### [[ $."6. [[ $."46 [[
able 1.! )Dontinued+
Bstimated Doefficients of Bfficiency %rontiers
%ull ,ample ,econd ,ub-Period
:lternative Profit %unction :lternative Profit %unction
%unction
;ependent variable
Bstimation procedure
,hort
,pecification

'nP98%
C:;
%ull
,pecification
'nP98%
C:;
-o fi&ed
effects
'n P98%
C:;
Bank
,pecification
Cn P98%
C:;
8nly public
sector banks
Cn P98%
C:;
Donstant -!4.!"" -!<.!61 -646.4!6 !.1.4 -<3..!4"
)!..13<+ )!6.!.1+ )!4..1"#+ )6.!14+ ).<#.111+
CnINTR \ \ \ \ \
CnINTR
2
\ \ \ \ \
CnOUTP ..4!# -!.4#$ -!4."<" -$.1!3 6.$<$
)!..#3+ [ )!..#"+ )!".6.<+ )!.<!<+ )<".633+
CnOUTP
2
-$.$36 -$.!<< -$.$44 $.$4" -$.#<6
)$.$4"+ )$.$4"+[[[ )$.!46+ -$.."6 )$."!!+
CnINTC -3.<$4 6.<"" -!"..<3" )$.##.+ -!6<.<$<
)6..$<+[[[ )6.4"3+ )1$.1<1+ [[ )4!."#<+ [
CnINTC
2
\. <.14. \. !...1
)$.4".+ [[ )$.46.+ [
CnOTC -$.<"" -!..6<< -!6<.!#. -!$!.#!!
)<.<$<+ )4.4$43+ )61.3".+ [[ )46.3$1+
CnOTC
2
-$.314 ..44!
)!.$<<+ )$.3!3+ [[
CnCPR! !.##< !.#<$ 1.#"4 $.$$# $.4.4
)$.36!+ [ )$.3.3+ [ )#.!.3+ )$.$63+ )4.636+
CnCPR!
2
-$.$.$ $.$!$ -$.!64 -$.<$"
)$.$.<+ )$.$.<+ )$.$1$+ [[ )$.!!#+ [
CnINTR.CnCPR! $.$"6
)$.!4$+
CnOUTP.CnINTC !.!<$ $.<<< -<.$3$ -$..!4 $.!64
)$..1.+ [[ )$..#"+ )!.."1+ [ )$.!$3+ [ )..##6+
CnOUPT.CnOTC -$.<#3 -!.$44 ..6"# -$.<$1 -$."#3
)$.<!"+ )$.<!!+ [[ )6.363+ )$.!!! + [[ )#.<!$+
CnOUPT.CnCPR! -$.$1$ $.$.$ $.661 $..!3 -$...4
)$.$4!+ )$.$4$+ )$.!#<+ [ )$.!46+ )$....+
CnINTC.CnOTC -$.41" -<.#1. -1#.46" $.6." -6$.344
)!.$4"+ )$.1$4+ [ )!6.3$3+ [[ )$.!..+ [[ )!#.664+ [
CnINTC.CnCPR! -$.$61 -<.<"4 -$.34< $.$11 -$.<6$
)$.!6$+ $.!6#+[[ )$.161+ )$.$#1+ )$.6$#+
CnOTC.CnCPR! $.6"$ )$.#1. -$.33! -$.$$< $.$#$
)$.!3.+ [[ )$.!3$ + [[ )..$$<+ )$.$.<+ )!.3$"+
Cn"EP# -$.$1! -$.$<< $.$$3 $.$4!
)$.$!!+ [[ ) $.$!!+ [[ )$.$.#+ )$.$4"+
,P. $.$!$ $.$6<
)$.$<!+ )$.$<<+
9
.
$.4.. $.4.6 $..1. $.1#4 $.311
14
:d(usted 9
.
$.13! $.13! $.!31 $.6!. $.<"3
,,9 !<.1$4 !<..." !!.!"< 4.!1" $.63.
,; dependent variable $.<$$ $.<$$ $.!.6 $.<.6 $..66
,B of regression !.!"" $.!" $.."# $..1! $.!"$
*ean absolute
residuals
$.!!# $.!! $.!"! $.!$. $.$4.
-o. of observations <#" <#" !6$ !6$ <<
% test fi&ed effects V $ 44.4## !$.13# [[ ..4<1 [[ ...43 [
% )<., <#"+ $.$$$ $.$$$ $.$$$ $.$66
@hen the fi&ed effects for the individual banks are e&cluded, the remaining
estimated coefficients tend to be larger in absolute terms and more significantK the
9 statistic is cut by more than half. 'n contrast, when the alternative profit function
is estimated using bank specific prices, that is, unit costs based on the ratio of
costs to payable liabilities for each bank individually, many of the estimated
coefficients are smaller in absolute magnitude and less significant, while the
overall 9
.
statistic is reduced modestly. 'ncluding only public sector banks in the
sample does not yield qualitative very different estimated coefficients, e&cept that
the fi&ed effects are (ointly much less significant. ,uggesting that these groups of
banks are relatively homogeneous )although some individual coefficient estimates
are significant+.
(.& E"timation o# Relati!e E##icienc%
%rom above e&planation we can guess about cost, revenue and profit efficiency in
average deviation form. he results in table 1.. suggest that the average deviations
in case of cost functions are less than that of profit functions. :verage deviation
values suggest that these values remained fi&ed within banking system but vary
outside banks. %rom both revenue and cost side relative efficiency is persistent.
%rom profitability point of view public sector banks shows less achievements.
,imilarly, cost efficiency is shown better in public sector banks rather than all
banks in second sub-period. %or public sector banks level of profit from efficiency
point of view is less than general banking system. 5owever, public sector banks
achieved their mile stone of profits over time, but their relative profit efficiency
was disturbed by increased costs. 'n second sub-period the efficiency measures
13
suggests that their standard errors are less than that of first sub-period, because
some of the banks were more successful in adoption of new circumstances.
able 1..
Bstimated :verage Profitability, Dost and 9evenue T-inefficiency
),tandard errors in parentheses+
Profit %unction :lternative Dost function 9evenue
Profit function function
1AD E"timate"
0ir"t "ub<'eriod
:ll banks $.14$ $.4$$ $.6#1 $.3<4
+ $.."6 + ) $.<$< + ) $.$#! + ) $.!$# )
Public sector banks $.!3$ $.!3$ $.<"6 $.46!
+ $.$1" + ) $.$4. + ) $.$<$ + ) $.$<# )
Second "ub<'eriod
:ll banks $.6!. $.6!< $.3.# $.4#!
)$...1+ )$...1+ )$.!.$+ $.!<!+ Public sector banks
$.!"3 $.!#$ $.4$" $.4$#
)$.!<#+ )$.!6.+ )$.$#!+ )$.!$4+
%rom the above table, it can be concluded that the results for ordinary least
square estimates and least square average deviation both are about similar.
5owever, in absolute terms profitability and efficiency considered to be lower in
case of C:; estimates. 'n case of 8C, the standard errors are also high. Between
the first and second sub periodHs public sector banks revenue situation is not good,
while efficiency is achieved in terms of cost suggested by 8C, estimates.
9esults provided information that the financial sector reforms and in case of new
entrantHs banks have no concrete influence on performance level. Public sector
banks utilizing low level of technology while privatized banks approaches to
achieve advanced technology and more technical workers for operations. o test
1#
this average relative efficiency of public sector and private sector banks must be
analyzed.
able 1.< provides a confirmation that public sector banks suffered from revenue
as well cost in-efficiencies. Bven before financial sector reforms banks which are
privatized showed a considerable level of profits but the situations was the
opposite in case of cost. 8ne of the main reasons for ma&imization of cost was that
these banks prepare plans which were mostly profit oriented. 5owever, in case of
foreign and private local banks the profit level was somehow similar. he 8C,
and C:; values are also similar in case of private and foreign banks.
(.( E##ect o# Structural 0actor" and )ar6et Condition"
he results obtained in above tables showed an indication of profit and loss
of various private and public banks over time. he performance of banking system
should not be blamed only for privatization but also for some other financial
reforms, which may be technology, new marketing channels, and changes in rate
of interest etc. table 1.6 shows effects of various market reforms on different
variables separately, for private as well for public owned banks. Between the first
and second sub-periods the average profitability of banks increased enormously.
he effect of structural changes is also positive in profitability level of banking
system, while results are too weak in case of market conditions.
1"
able 1.<
ests of significance of ,ectoral ;ummy variables
Profit %unction :lternative Dost function 9evenue
Profit function function
1AD E"timate"
Public banks -$.6<# -$.1<$ $.!"# -$.<$1
)$.$<1+[[ )$.$<3+[[ )$.$<.+[[ )$.$<1+[[
Public banks in $.!3! $.!<3 -$.$6< $.!4<
Cast sub-period )$.$13+[ )$.$14+[ )$.$6"+ )$.$16+[[

Privatized banks $.$13 $.$64 $.$11 $.!!!
)$.$6.+ )$.$6$+ )$.$<1+ )$.$<#+[[
Privatized banks $..11 $.<!! $..#. $.<6!
in last sub-period )$.$""+[ )$.$"$+[[ )$.$#$+[[ )$.$#3+[[

Private banks -$.$$3 $.$!" -$...3 -$.!!6
)$.$6!+ )$.$<#+ )$.$<<+[[ )$.$<4+[[

O1S E"timate"
Public banks -$.6<4 -$.166 $..!1 -$..<.
)$.$6.+[[ )$.$1.+[[ )$.$64+[[ )$.$4!+[[
Public banks in last $.!$" $.!#1 -$.$!!! $.!$4
,ub-period )$.$#<+ )$.$"6+[ )$.$44+U )$.$#6+
Privatized banks $.$33 $.$6# $.$3. $.$"$
)$.$<$+[ )$.$.#+[[[ )$.$<<+[ )$.$<6+[[
Privatized banks in $..44 $..1< $.<$$ $.<4$
Cast sub-period )$.!44+ )$.!41+ )$.$4"+[[ )$.$"#+[[
Private banks $.$6! $.$<" -$.!#! -$.!.!
)$.$46+ )$.$4!+ )$.$6#+[[ )$.$1!+[
,tandard errors in parentheses [[denotes significance at !2 level,
[ denotes significance at 12 levelK [[[ denotes significance at !$2level,

4$
able 1.6
;ecomposition of changes in profitability, Dosts, and 9evenue
Profit :lternative Dost 9evenue
function profit function function function

1AD E"timate"
All ban6"
otal change !.!.# !.!#" !.<"3 !..#$
:ttribute to market technology !.<6< !..$3 !.!.3 !.!."
and market structure
:ttribute to market conditions $.#6$ $."#1 !..6$ !.!<6
Public "ector ban6"
otal change !.14< !.1#" !..!! !..!"
:ttribute to market technology $.#4< !.44" !.6<. !.6#1
and market structure
:ttribute to market conditions !.#!! $."1. $.#46 $.#.!

O1S E"timate"
All ban6"
otal change !.!<! !.!<$ !.<#< !.<!.
:ttribute to market technology $.#1. !.$4. !.!4# !.!3.
and market structure
:ttribute to market conditions !.<.3 !.$46 !.!#6 !.!.$
Public "ector ban6"
otal change !.6.4 !.6<3 !.!#" !..!#
:ttribute to market technology $.".# !.3$" !..3< !.<."
and market structure
:ttribute to market conditions !.1<# $.#6! $."<6 $."!#
,tandard errors in parentheses [[denotes significance at !2 level
denotes significance at 12 levelK [[[ denotes significance at !$2level

Cevel of profit is not up to the mark because costs to generate revenues also
increased. Bven when market conditions remain constant financial sector reforms
leads increase average cost. ,imilarly structural changes have the same positive
impact on revenue on banking sector. 'n this case too results of 8C, and C:; are
near to similar. 5owever 8C, suggests that change in market structure will lead to
increase in costs despite fact that revenue also increases. @hile alternate profit
function suggest that profit is efficient due to structural changes in market.
4!
(.+ De#icit 5ud*et and Pri!ati-ation
Privatization has also played its role in deficit budget. ;ebt servicing is also
an important problem of modern economies, so privatization is assumed to solve
this problem upto some e&tent. 'nternational monetary fund sarts with structural
ad(ustment programs in !"##-#"to reduce deficit in budget through efficie6nt
utilization of resources. ,o decrease in fiscal deficit in past privatization period is
not due to privatization only. @hen Pakistan signed three years structural
ad(ustment programe )!"#3-"$+, the deficit in budget increased upto #2 of gross
domestic product. 'n first two years of the programe deficit was about 42 of
=;P.5owever in subsequent years deficit in budget rises to 4.12 despite that
during !"<< ma(or transactions of privatization took palce.privatization of banks
and telecommunication sector influence significantly deficit in budget.
)Privatization Dommission, .$$4+.
(.,
Pri!ati-ation and E##icienc%
Privatization leads to higher level of efficiency but the situation cannot be
observed always.0emal and -aqvi)!""6+ have conclusion from their research
work that privatization didnHt lead to improvement in level of efficiency. 5owever,
kikeri and -ellis)!"".+ have of the opinion that privatization lead to improve level
of efficiency, but in .12 cases the situation was against efficiency. %rom studies
relating to efficiency it can be concluded that privatization leads to reduce average
cost, if applicable in competitive framework. Privatization in competitive
environment leads to increase employment, production and decrease costs.
5owever in a monopolistic framework producer are taking decisions to control
output to the level where marginal cost e&ceed price. )Baumol !""4+
(.; E##icienc% and manu#acturin*
@hile comparing private sector enterprises and public sector enterprises in
Pakistan both sectors should low level of efficiency in competitive framework.
4.
'nvestment efficiency employment, wages when compared in privatization and
post privatization era produce a complicated result because of the '*% structural
ad(ustment programme also implemented during the same period-pre privatization
era was taken from !"#4 to !""! while post privatization period )!"".-!""3+ was
taken for comparison during the two time periods growth rate in =;P was about
1.62 and 4.<2 respectively. he result in decrease in growth rate is attributed to
fiscal and monetary policies, rather than privatization programme.'n case of
'nvestment the result is too much different. 'nvestment falls from 1.12 to !.#2 in
average term during the same period. :nalysis made by 0emal )!""4+ through
regression line suggest that return on fi&ed assets and efficiency are not co-related,
the co-efficient was significant in case of few industries while in rest )fertilizers,
switchgears, motorcycles and (eeps+ the co-efficient were not significant. Dommon
man would benefit from privatization if price falls, besides if production decreases
and price increases it should be attributed that producers are using their monopoly
power. )Bconomic ,urvey of Pakistan .$$1+
(.: Pri!ati-ation and Em'lo%ment
Privatization leads to increase productivity which on other hand side produce
increase in employment, price and wages.@hile taking decision to privatize
@:P;: and elecommunication sector would lead unemployment for about 1$$
thousand labours.Praivatization may affect labour class from four different ways
!. 'n privatization e&cess labour should be send for home
.. 'n 8ligopolistic market when privatization is applicable it will lead to
reduce the demand for labours
<. Private sector will use capital intensive technology
6. 'n some cases if more workers are hired but they may be on fi&ed contract.
he restructuring policy of 5abib Bank and united Bank resulted
unemployment for a thousand of workers )0emal !""<+
4<
'n post privatization period growth rate of employment was about !.<2 which
was about ..<2 in pre-privatization era while in case of large scale industries
the rate of unemployment was quite low when compared with small scale
industries. )Bconomic survey of Pakistan, .$$1+
he data available on employment for large scale industries suggest that
privatization shows a decline in employment in all sectors e&cept fertilizers,
where employment raises by about !.2.'n te&tile industry about 442 workers
entered to the bracket of unemployment because of privatization, while in ghee
'ndustry about 612 workers lost their employment status.
he govt. and labour union signed an agreement in !""1 which states
!. here should be no disturbance in employment during first year of
privatization.
.. @orkers who opting for golden handshake will be provided gratuity equals
to their four months salary.
<. 9e-habilitation programme should be continued for unemployed workers.
6. en percent of the shares should be offered to the employees of the same
organization and
1. 'n case of bidding preference should be given to already e&isting labours.
:s a result of the above agreement workers got (ob for one year and 4<2
workers opted for golden handshake.
)Privatization Dommission, .$$1+.
46
C$a'ter +
CONC1USION AND RECO))ENDATIONS
+.1 Introduction
he conclusions of the study are given in this chapter. he chapter also provides
some suggestions and policy implication based on the results of the study.
+.2 Conclu"ion" o# t$e "tud%
! *ain economic goals of different policies were to increase productivity and
efficiency through effective utilization of available resources by private
sector. Cots of problems were created by overstaffing because of political
compulsions. o solve these problems, privatization was considered as a
remedy.
. 'n !""$ a report of privatization was placed before the cabinet for approval.
he report assigned !!1 units for privatization and the e&pected income
from these units was pro(ected about 9s. <$ billion, but only 4" units were
privatized which resulted an amount of 9s. <."1 billion
< ;uring the period !""<-"4, the =ovt of PPP decided to privatize <!
units .8ut of which !< were privatized. 'ncome received by selling these
units was 9s. #4<." million.
6 'n order to enhance economic growth and alleviate poverty the present =ovt
led by =eneral *usharraf gave the same tempo to the process of
privatization. Privatization commission has privatized about 63 units
which resulted an amount of 9s. .6$1"<.3 million.
1 ;ue to privatization, Paid up capital of :llied Bank Cimited increases up to
9s.!$4< million, while in case of *uslim Dommercial Bank the increase
was about 9s.!#.$ million.
41
4 ;ue to Privatization Profit level of *DB increased up to 9s.1<! million in
!""4 while that was only 9s.!$$ in !""! in pre-privatization period.
,imilar was the case for :BC too, where Profit has increased from 9s..!$
million to 9s.!.<$ million during the same period.
3 9esults suggested that due to privatization, privatized banks can e&ercise
the latest technology. 5owever, there is a catching up in term of Dosts.
# Public sector banks suffer in cost as well in revenue inefficiencies although
they improved their market credibility in the post-reform sub period. he
banks that privatized showed greater efficiency from revenue point of view.
" ,tructural features positively change the profitability of banks where
changes in market condition lowered it only in privatized banks.
!$ 8C, and C:; results are mainly similar. 5owever 8C, suggested that
changes in technological and market structure were harmful for efficiency.
!! ;ue to privatization fiscal deficit reduces. he fiscal deficit was #.1 2 of
=ross ;omestic Product )=;P+ in!"#3-##. ;ue to structural ad(ustment
program deficit declined to 4.1 2 in the subsequent periods.
!. Privatization resulted high level of Productivity and low level of Prices if
applied in competitive framework and also had a positive effect on
employment.
!< he private sector investment increase up to ".6 2 in !""3-"# but this is
not sufficient to fill the gap of ,tat 'nvestment. ,harp fluctuation in post
privatization period needs to be noted.
!6 he fruits from privatization for a common man must be noticed if the price
falls but if enterprises using their monopolies then prices increases and
output falls.
!1 ;ue to privatization improvement in productivity is achieved which leads
to high level of employment and wages.
!4 ,tructural reforms related to Privatization lead a positive effect on banking
system for many economies especially in case of Pakistan.
44
!3 Privatization showed a considerable increase in case of 'nvestment. 't was
estimated abut 6.3 2 of =;P during !""<.%rom Production point of view it
showed relative importance in case of Dhemicals, %ertilizers and =hee
industries.
+.3 Recommendation"
Being so important in creating employment, increasing production,
improvement in education, improvement in wages and salaries, the following
measures are suggested for further improvement in privatization.
!. Privatization should provide its results in true sense if there is no political
compulsion in e&ternal as well in internal affairs of privatized enterprises.
.. :mount of privatized enterprises should be utilized in such a way to enhance
economic development.
<. Privatization of commercial banks resulted increase in costs so must need to
apply such policies, which reduce costs of such transactions.
6. Privatization should not be applied in case of monopoly in order to have a
positive impact on employment.
1. o meet the mission of economic growth efficiently, Privatization should be
used as a strategy.
4. o ma&imize performance of various enterprises, Privatization should be
applied in competitive framework.
3 'n case of Privatization some people are loosing their 7obs. heir must be some
enterprises where these e&ploited labour force might get their livelihood.
#. @hen various enterprises undergone process of Privatization they must have to
ensure the health protection and restoration of the environment.
". o manage newly Privatize enterprise efficiently the =ovt must have to develop
new ways of thinking.
!$. Privatization transaction must be of the form to balance costs and rewards.
43
!!. ,takeholders should be involved in privatization process as it will add value
and improve outcomes.
!.. Privatization affectees should be given alternative (obs so that productivity
and employment could be improved.
!<. 'n case of Pakistan Privatization Dommission should envisage various
polices to uplift the development status of the economy.
4#
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