Elaborate on the theories of privatization. Discuss with example the impact of Downsizing on the Telecommunication sector of Pakistan.


CSS Solved Business Administration Past Papers | Elaborate on the theories of privatization. Discuss with example the impact of Downsizing on the Telecommunication sector of Pakistan.

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Topic Breakdown:
Corporate finance is incomplete without the concept of privatization. State-owned enterprises around the world have gone through this process. In Pakistan, the telecommunication sector has flourished since its privatization.
Subject: Finance
Chapter: Economic Systems.


Privatization has emerged as the biggest reality in the world of globalized economies. Governments in recent years have adopted the policy of privatizing state-owned enterprises. Different theories have emerged that justify the trend of privation in the economy. Interestingly, privatization is a long-standing debate in Pakistan, with stakeholders for and against it. Realistically, Pakistan will ultimately have to privatise its state-owned enterprises like steel mills, PIA etc. due to their staggering losses in the past decade. Moreover, the success story of privatizing the telecom sector in Pakistan also gives credible support towards the privatization theory.

Definition of Privatization

“Privatization, the process of converting government enterprises into privately owned companies.”


“Privatization is the process of transferring ownership or control of public assets, services or industries to private entities.”


“Privatization refers to the process by which market logic and structures are used to change control or ownership from the public sphere to the private.”

Objectives of privatization

  • To overcome public debt/deficit
  • Source of financing
  • To increase the efficiency of enterprise
  • To strengthen stock market

Theories of Privatization

  • Neoliberalism
    Neo-liberalism is a political and economic approach that focuses on a free market economy, reduced government spending and, above all, deregulation. It advocates for privatization of state-owned enterprises to increase efficiency, competition and promote economic growth. This school of thought believes that the private sector is better equipped to manage such assets.
  • Principal Agent Theory:
    This theory emerged in the 1970s that advocates the conflict that arises when one person (agent) represents the other person (principal). According to this theory state-owned enterprises are mostly subject to conflict of objectives mainly due to political interferences and diverging motives. Therefore, privatization can be a useful tool to align the objectives of both the principal and agent.
  • Public choice theory:
    This theory explains how the government’s spending decisions often contradict the preferences of the general public. This theory opposes bureaucracy, lack of accountability and hierarchical hurdles that make it difficult for organizations to perform. This theory suggests that privatization can lead to optimal allocation of resources, reduced costs and better quality.
  • Political economy theory:
    This school of thought studies the relationship between politics and economy. This theory analyzes how economic policies change with the change in government, as political parties bring about their own ideologies. Moreover, this theory discusses the impact of the political environment on the state-owned environment and how it results in inefficiency and corruption.

Impact of Downsizing on the telecommunication sector of Pakistan

The telecommunication sector in Pakistan has seen a steady downfall in the past decade, owing mainly to the economic conditions. The telecommunication sector has gone through the phase of downsizing on frequent occasions as a restructuring and reorganizing policy. Beyond doubt, downsizing can yield positive results but at a considerable cost, especially for the nation’s economy.

Positive impacts of downsizing

  • Cost reduction:
    One of the major reasons behind downsizing is cost reduction for the organization. In Pakistan, recently, Telenor went for downsizing laying off around 32000 of its employees. The main reason behind this decision to lay off was the consistent losses that the company suffered in the past financial years.
  • Improved efficiency:
    Downsizing can result in improved efficiency and competitiveness, especially when the organization has excessive manpower. As in the case of PTCL, it had excessive manpower; therefore went for downsizing immediately after privatization. Downsizing results in streamlining of processes, thus, better customer service and satisfaction.

Negative impacts of downsizing

  1. Reduced technology and innovation:
    One of the major impacts of downsizing the telecommunication industry in Pakistan has been a reluctance to invest further in technology. For this very reason, Pakistan, unfortunately, was the last country in this region to shift towards the 4g technology. Moreover, while the world adopted 5g technology years ago, the telecom industry in Pakistan is still unwilling to invest in this technology.
  • Reduced Operations:
    Telenor and Warid once considered giants in Pakistan’s telecom industry, have quietly reduced operations, with the latter exiting the market.  Downsizing in Pakistan’s telecom industry has ultimately resulted in reduced operations.
  • Reduced employee morale:
    Another drawback of downsizing is dissatisfaction and low morale among the remaining employees in the telecom industry. Job security has been a real concern in Pakistan as its economic conditions wobble further towards bankruptcy.


The trend of privatization has been on a steady rise since the wave of globalization in the 1990s. Beyond doubt, privatization can help the economy to flourish, but it can only be possible when the state adopts a credible and long-term economic policy. Privatization can yield positives like foreign direct investment, improved technology and organizational efficiency but it also has a considerable cost. For an economy like Pakistan, downsizing leading to unemployment is a massive challenge. Moreover, privatization results in increased service costs, thus, a burden for the masses.

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