Financial and Operational Performance of Privatized Cement Industrial Units of Pakistan
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Financial and Operational Performance of Privatized Cement Industrial Units of Pakistan Yaseen Ghulam Portsmouth Business School Economics and Finance Subject Group University of Portsmouth Thesis Submitted in Fulfilment of the Requirements of the Degree of Doctor of Philosophy October 2012 TABLE OF CONTENTS Page Table of Contents…………………………………………………………. i List of Tables……………………….…………………………………….. v List of Figures…...………………………………………………………... vii List of Acronyms…………………………………………………………. ix Acknowledgements……………………………………………………….. x Statement of Originality…………………………………………………... xi Abstract…………………………………………………………………… xii CHAPTER 1 – INTRODUCTION……………………………………. 1 1.1 Introduction…………………………………………….………….. 2 1.2 Aims and Objectives of the Thesis………..………………………. 3 1.2.1 Objective of the Study………………………………………... 6 1.3 Layout of the Thesis……………………………………………….. 7 1.4 Originality and Contribution to Knowledge………………………. 10 CHAPTER 2 – REFORMS AND CEMENT INDUSTRY ………… 13 2.1 Deregulation and Privatization in Pakistan ………...……..…….. 14 2.1.1 Rationale of Privatization…………………………………… 16 2.1.2 Modes of Privatisation ……………………………………… 18 2.1.3 Privatization Process ……………………………………… 19 2.2 Politics and Privatization Progress in Pakistan …………………… 24 2.3 Privatization of Cement Industry in Pakistan …………………… 30 2.4 Cement Industry of Pakistan … ………………………………… 32 2.4.1 Historical Development … ………………………………… 32 2.4.2 Pricing Policy and Distribution …………………………… 36 2.4.3 Market Structure and Technology ………………………… 37 2.4.4 Entry and Exit Conditions ………………………………… 41 2.4.5 Demand and Supply Constraints …………………………… 43 2.4.6 Foreign Investment ………………………………………… 45 2.4.7 Diversification and Vertical Integration …………………… 45 2.4.8 Economic Growth and Investment ………………………… 46 i CHAPTER 3 – CHOICE OF PERFORMANCE INDICATORS …… 49 3.1 Introduction………………………………………………………... 50 3.2 Early Studies on Ownership, Deregulation and Performance…… 51 3.3 Recent Literature on Ownership, Deregulation and Performance 59 3.3.1 Manufacturing ……………………………………...…...…... 59 3.3.2 Financial Sector……………………………………………. 62 3.3.3 Transportation……………………………………………... 63 3.3.4 Utilities…………… 64 3.4 Methodological Issues…………………………..………..……….. 68 3.5 Choice of Criterion: My Preferred Methodology ………………… 73 CHAPTER 4 – QUALITATIVE ASSESSMENT…………………… 76 4.1 Introduction………………………………………………………... 77 4.1.1. Change in Operating Days…………………………….…….… 78 4.1.2. Modernization, Rehabilitation and Optimization Program … 79 4.1.3. Management of Working Capital …………………………..… 80 4.1.4. Competition………………………….…………………………… 81 4.1.5 Trade Policy and Protection……………………………………. 82 4.1.6 Capital Requirements….…………………………………….……. 82 4.1.7 Capacity Utilization………………………………………….……. 83 4.1.8 Threat of Bankruptcy ………………………………………….… 85 4.1.9 Low Cost of Excessive Employment and Extra Benefits …… 85 4.1.10 Costs and Economic Viability of the Industry ……………… 86 4.1.11 Other Exogenous Factors ……………………………………… 86 CHAPTER 5 – FINANCIAL PERFORMANCE …………………… 88 5.1 Introduction ………………………………………...……...……... 89 5.2 Testable Hypothesis ………………………………………...…… 90 5.3 Profitability Results………………………..………………………… 95 5.3.1 Net Profit Margin (NPM)……………………………………….… 96 5.3.2 Return on Equity (ROE)………………………………………… 100 5.3.3 Return on Assets (ROA) ………………………………………..… 101 5.4 Efficiency…………………………………………………………… 105 5.4.1 Labour Efficiency………………………………………………… 105 5.4.2 Capacity Utilization ……………………………………………… 108 5.4.3 Interval Measure…………………………………………………… 111 5.4.4 Average Collection Period (ACP)………………... …………… 111 5.4.5 Inventory Turn Over (ITO) ……………………………………… 112 5.5 Output …………………………..…………………………………… 114 5.6 Capital Investment Spending ………………………………………… 116 5.7 Financial Leverage and Solvency …………………………………… 118 5.8 Dividend Payout ……………………………………………………… 121 5.9 Modelling Determinant of Performance …………………………… 124 ii 5.10 Conclusion …………………………………………………………… 129 CHAPTER 6 – SOCIAL COST BENEFIT ANALYSIS……………… 130 6.1 Economic Performance Evaluation ……………………………… 131 6.2 Real Public Profitability and Productivity ……………………… 132 6.3 Calculation of Public and Private Profit …………………………… 135 6.4 Conclusion………………………..……………………………… 144 CHAPTER 7 – ESTIMATION OF EFFICIENCY AND 145 PRODUCTIVITY 7.1 Introduction ……………………………………………………….. 146 7.2 Literature Review - Reforms and Efficiency……………………… 147 7.3 Measurement of Technical Efficiency – Stochastic Frontier……… 148 7.3.1 Determinants of Efficiency and Pakistani Cement Industry … 155 7.3.2 Model Specification …….………………………………….. 159 7.3.3 Efficiency Prediction …….………………………………….. 163 7.4 Data and Empirical Results …………………………………………… 164 7.5 Technical Efficiency Estimation – Data Envelopment Analysis… 172 7.6 Estimating Change in Total Factor Productivity (TFP)………… … 179 7.7 Measurement of Cost Efficiency…………………………………… 181 7.8 Conclusion…………………………………………………………… 186 CHAPTER 8 – DECOMPOSITION OF TOTAL FACTOR 188 PRODUCTIVITY CHANGE (TFP) AND INPUT BIASES 8.1 Introduction ……………………………………………………….. 189 8.2 Literature Review – Estimation of TFP and Components …… … 190 8.3 Measurement of Decomposition of Productivity ………………… 193 8.3.1 Parametric Approaches to Measure TFP ……………………… 193 8.3.2 The Specification of the Production Function…….………… 195 8.3.3 Derivation of Firms’ Performance Statistics…….…………… 196 8.4 Data ……………………………………………………………………… 199 8.5 Estimation and Explanation …………………………………………… 199 8.5.1 Returns to scale …………………………………………………… 200 8.5.2 Technical Change (TC) …….………………………………… 205 8.5.3 Total Factor Productivity Change (TFP) …….……………… 209 8.5.4 Scale Effects …….…………… 213 8.5.5 Elasticities and Factor Input Biases …….…………………… 216 8.5.6 Firm Size and Performance …….……………………………… 220 8.6 Conclusion…………………………………………………………… 222 iii CHAPTER 9 – LABOUR USE EFFICIENCY ESTIMATION 224 9.1 Introduction ……………………………………………………….. 225 9.2 Estimation of Labour Demand Function - Methodology…… …… 226 9.3 Data ……………………………………………………………………… 228 9.4 Estimation and Explanation …………………………………………… 232 9.4.1 Labour Demand Elasticities, Variances and Efficiencies …… 234 9.4.2 Elasticities and Efficiencies by Ownerships…….…………… 243 9.4.3 Determinants of Labour Use Efficiency…….………………… 246 9.5 Conclusion…………………………………………………………… 249 CHAPTER 10 – REFORMS AND COMPETITION IN THE 251 CEMENT INDUSTRY 10.1 Introduction ……………………………………………………… 252 10.2 Competition in the Pakistani Cement Industry …… …………… 255 10.3 Deregulation and Competition- Review of Literature…………… 257 10.3 Methodology …………………………………………………… 261 10.3.1 Estimation of Competition Index () by Demand and Supply 261 10.3.2 Estimation of Lerner Index: Conjectural Variation (CV) … 265 10.3.3 Estimation of Lerner Index: Stochastic Frontier (SF) …….… 267 10.3.4 Relative Profit: Estimation of Boone β …….……….……….… 270 10.4 Data …………………………………………………………………… 271 10.5 Estimation and Explanation ………………………………………… 274 10.6 Conclusion…………………………………………………………… 283 CHAPTER 11 – SUMMARY & CONCLUSIONS …………………… 284 11.1 Introduction………………………………………………………. 285 11.2 Summarising the Discussion…………………………………… 286 11.3 Contributions and Limitation of the Study……………………… 293 11.4 Areas of Future Research………………………………………… 295 REFERENCES………………………………………….………………. 297 iv LIST OF TABLES Page TABLE 2.1: Chronology of the Main Developments in the Privatization 15 Process TABLE 2.2: First Round of Privatization Process in Pakistan 26 TABLE 2.3: Details of Privatized Cement Industrial Units 31 TABLE 2.4: Pre Reforms Historical Development of Cement Industry of 35 Pakistan TABLE 2.5: Installed Production Capacity (As on April 2012) 39 TABLE 3.1: Early Stage Studies Focusing on Public-Private and Pre- 57 and Post-Privatization Efficiency TABLE 5.1: Summary of Testable Hypothesis 94 TABLE 5.2: Summary of Profitability Results 104 TABLE 5.3: Summary of Efficiency Results 113 TABLE 5.4: Output: Real Sales 115 TABLE 5.5: Capital Investment Spending 118 TABLE 5.6: Summary of Financial Leverage Results 120 TABLE 5.7: Determinant of Profitability, Net income Efficiency, 128 Output, and Capital Expenditures TABLE 6.1: Firms Privatized in 1992: Cumulative Return to Capital at 140 Current Market TABLE 7.1: Technical Data Description 157 TABLE 7.2: Technical Efficiency Indicators in the Initial Periods 159 TABLE 7.3: Descriptive Statistics of Input Output Data 165 TABLE 7.4: MLE Parameters of the Stochastic Frontier Production 168 Function TABLE 7.5: Translog Production Function: Median Technical 171 Efficiency Estimates TABLE 7.6: DEA Order-m Efficiency Estimates 176 v TABLE 7.7: Total Factor Productivity by Period, Ownership and Size 180 TABLE 7.8: Maximum Likelihood Estimates for the Parameters of the 182 Stochastic Costs Frontier TABLE 7.9: Predicted Cost Efficiency Estimates 185 TABLE 8.1: Returns to Scale (RTS) by Ownerships 204 TABLE 8.2: Rate of Technical Change (TC) by Ownerships 208 TABLE 8.3: Total Factor Productivity Growth (TFP) by Ownerships 212 TABLE 8.4: Scale Effects by Ownerships 215 TABLE 8.5: Industry: Input Elasticities and Biases 218 TABLE 8.6: Returns to Scale, TFP and Components by Firm Size 221 TABLE 9.1: Descriptive Statistics 229 TABLE 9.2: Construction of „Size‟ Variable 230 TABLE 9.3: GLS Nonlinear Parameter Estimates of the Labour Demand 233 Function TABLE9. 4: Median Input and Output Elasticities by Year, Size and 235 Type of Ownership TABLE 9.5: Frequency distribution of efficiency score 240 TABLE 9.6: Median Input and Output Elasticities and Efficiency by 245 Year, Size and Type of Ownerships TABLE9.7: Random Effect Regression Results: Dependent Variable: 248 Efficiency Scores TABLE 10.1: Concentration Ratios for the Top 3 Firms 257