MILLAT TRACTORS LTD'

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MILLAT TRACTORS LTD.

• A Micro View of Privatization

Dr. Naim Sipra Sadaf Asir Hasan
(Note This case was commissioned by
LUMS-Citigroup Corporate Governance Initiative at
Centre for Management and Economic Research,
Lahore University of Management Sciences, Lahore)
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Privatisation

• The economic process of transferring assets or
  service delivery from the government to the
  private sector

Pros Cons
Policy Issues

Global Perspective
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• The Third World countries and their Governments
  did (and do) not embark on privatization and the
  concessioning of public assets for private
  operation in order to raise efficiency, reduce
  government's fiscal burden, and further social
  and environmental goals. They did (and do) it
  under compulsion placed on them by the
  conditionalities of the World Bank and the IMF.
  

K. Ashok Rao, President, National Confederation
of Officers Associations of Central Public
Sector Undertakings India
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Privatization in Pakistan
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Evaluating Privatization

• Sample of companies privatized between 1991 and
  2001
• Total 106 companies
• 3-year pre-privatization vs. 3-year
  post-privatization financial and operational
  performance

• Results .

2.54 average 5.6 median 2.1 standard
deviation ...3.5 t-test
THE TYRANNY OF NUMBERS!
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Zooming in ...
PRIVATIZATION IN PAKISTAN
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Millat Tractors Ltd. (MTL)

• Rana Tractors and Equipment Ltd. established in
  1964.
• By 1972 had accumulated Rs. 1.5 mln losses
  nationalized and renamed Millat Tractors Ltd.
• In 1981 took up indigenization of the tractor
  sector.
• In 1982 set up a tractor engine assembly plant.
• In 1984 installed manufacturing facilities for
  intricate components.
• In 1988 received a loan from IFC of US 5 mln
  for development of vendor industry for
  automotives.
• Was privatized in 1992.

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Privatization of MTL

• Date 30th January, 1992
• Buying Price Rs 306 mln (US 14.4 mln)
• Method Leveraged Employee Buyout
• Buyer MTL Employees Group
• Golden 230 employees opted total
  Handshake expense for MTL was Rs 27.13 mln

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The Employee Buyout

• Plan started four years before privatization.
• GoP required a 40 downpayment 60 payable in
  installments over 3-5 years under bank guarantee
• Created an Employee Trust
• Devised a formula on basis of grade, length of
  service and salary
• 15 personal equity 85 loans from MTL and
  institutions

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The Employee Buyout (contd.)

• Contributors of 15 equity allocated shares
  remaining shares redistributed
• Splinter group under CBA Union and few managers.
  Approx. 800/350 split

Bids for MTL on 17th Oct. 1991 Management Group
Rs. 107.86 per share Tawakkal Group
Rs. 102.00 per share Mgmt. Group Ranas Rs.
77.86 per share Associated Group Rs. 57.00
per share
Decision in Supreme Court
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Privatization of MTL

• Ownership
• Pakistan Automobile Corporation (PACO) 15
  share relinquished to members of the MTL Employee
  Trust
• Management
• Chairman PACO replaced

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Pre-Privatisation1988-89 to 1990-91
versus

• Post-Privatisation1992-93 to 1994-95

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Pre-Privatisation Scenario
MTL
Tractor Industry

• Started construction of new assembly plant
• Investment in quality department and MIS
• Extensive training and staff welfare programs
• Uplift of dealers and workshops
• Disruption in productions by CBA while
  negotiating 1989-91 charter of demands
• Agreement with Perkins Engine

• Disruptive lending policies of ADBP
• Sales price stagnant for two years

• Exports to Uganda
• Plans to diversify MTL into a multi-product
  company
• Developed tractor based vehicles for PIA

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Post-Privatisation Scenario
MTL
Tractor Industry

• Agreement with CBA Union workers benefits
  partially linked with companys profitability
• Rs 31 mln loan to employees and executives for
  share purchase
• Sales of generator sets, engines and forklifts
• Investment in quality control equipment
• Acquired 41 stake in Bolan Casting Ltd.

• Awami Tractor Scheme
• Disruptive ADBP lending

• Approved formation of Millat Equipment Pvt. Ltd.
• Employee Welfare Trust formed

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How did MTL Fare?
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Sales
Tractors
Yr P
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Sales
Rs 000
Yr P
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Equity
Rs 000
Yr P
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Efficiency
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Leverage
2.762222
3.46
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Capital Investment
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Payout
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Profitability
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Evaluation

• The aim of privatization
• Efficiency gains
• Output gains
• Profitability gains

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MTL on Before After
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Millat did well
and so did the industry
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Al-Ghazi Tractors Ltd. (AGTL)
Millat Tractors Ltd. (MTL)
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Sales Value
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Sales Units
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Profit Before Tax
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Some Ratios ...
MTL
AGTL
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Cost of Goods Sold
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Cost of Goods Sold( of Sale)
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Foreign ownership where allowed, is associated
with greater post-privatization performance
improvement than is purely domestic ownership.
(Megginson and Netter, 2000)
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What does MTL say?
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"Privatisation can also have a ripple effect on
local economies. State owned enterprises can be
obliged to patronise national or local suppliers.
Privatised companies don't have that restriction,
hence shift purchasing elsewhere. Claessens
Djankov, 1996
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Conclusion
Share Price as of May 29, 2004
AGTL
180.00
299.00
MTL