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MILLAT TRACTORS LTD'

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Title: MILLAT TRACTORS LTD'


1
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)
2
Privatisation
  • The economic process of transferring assets or
    service delivery from the government to the
    private sector

Pros Cons
Policy Issues

Global Perspective
3
  • 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
4
Privatization in Pakistan
5
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!
6
Zooming in ...
PRIVATIZATION IN PAKISTAN
7
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.

8
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


9
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

10
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
11
Privatization of MTL
  • Ownership
  • Pakistan Automobile Corporation (PACO) 15
    share relinquished to members of the MTL Employee
    Trust
  • Management
  • Chairman PACO replaced

12
Pre-Privatisation1988-89 to 1990-91
versus
  • Post-Privatisation1992-93 to 1994-95

13
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

14
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

15
How did MTL Fare?
16
Sales
Tractors
Yr P
17
Sales
Rs 000
Yr P
18
Equity
Rs 000
Yr P
19
Efficiency
20
Leverage
2.762222
3.46
21
Capital Investment
22
Payout
23
Profitability
24
Evaluation
  • The aim of privatization
  • Efficiency gains
  • Output gains
  • Profitability gains

25
MTL on Before After
26
Millat did well
and so did the industry
27
Al-Ghazi Tractors Ltd. (AGTL)
Millat Tractors Ltd. (MTL)
28
Sales Value
29
Sales Units
30
Profit Before Tax
31
Some Ratios ...
MTL
AGTL
32
Cost of Goods Sold
33
Cost of Goods Sold( of Sale)
34
Foreign ownership where allowed, is associated
with greater post-privatization performance
improvement than is purely domestic ownership.
(Megginson and Netter, 2000)
35
What does MTL say?
36
"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
37
Conclusion
Share Price as of May 29, 2004
AGTL
180.00
299.00
MTL
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