Telecommunication Reforms in Developing Countries

1. Telecommunication Reforms in Developing Countries Emmanuelle Auriol ARQADE and IDEI New Delhi October 10-11 2005

2. INTRODUCTION • Privatization: countries that allowed private participation into their incumbent telecommunication rose from 2% in 1980 to 56% in 2001. YET: almost half of countries maintain their incumbent operator public and roughly 20% have no private operator in the industry at all. Among them we find mainly developing countries. • Liberalization: in the mobile market 78% of the countries had adopted in 2001 some competition; In Internet market the figure was 86%. YET: in fixed-line telephone operator more than 60% of countries in the world maintain a monopoly. Are poor countries lagging inefficiently behind?

3. Is there a rationale for developing countries to keep their incumbent telecommunication operator public and monopolistic? NO: specialists tend to think that the reforms have been successfulwith improvements in the financial and operating performances of divested firms, and also often with network expansion. YES: Among consumers in developing countries there is a widespread perception that the reforms have been hurting the poor, through increase in tariff and unemployment, while benefiting the powerful and wealthy. SO WHAT IS THE TRUTH?

4. Privatization and Consumers’ Surplus: Allocative Vs Productive Efficiency • Productive efficiency: privatized firms are more productive and more profitable than public firms. • Allocative efficiency: in increasing return to scale industries firms’ rent seeking behaviours hurt consumers. • Empirical studies: privatization results in lower prices and higher output in competitive industries but not in oligopolies (Nellis 1999). • Newbery and Pollitt (1997) estimate the welfare consequences of the privatization of the UK electricity sector: there were permanent gains equal to 5 percent of previous total generation costs, but the new private shareholders reaped most of the gains, and both consumers and government/taxpayers lost out. Moving from public to private ownership does not solve for the lack of competitive pressure.

5. Ownership is not the key to the allocative efficiency problem: regulation is the key. • Wallsten (2001) using a sample of 30 African and Latin American countries finds that privatization alone is negatively correlated with mainlines per capita and connection capacity. However privatization combined with a separate regulator is positively correlated with connection capacity and payphone penetration. • In industrialized countries regulation of access pricing to bottleneck facilities has been a key of successful liberalization reforms. • Governments in developing countries have not been very successful at establishing credible regulatory institutions. • In Latin America the concessions granted to private operators following the divestiture of public firms have been renegotiated after an average 2.1 years only (see Guash, Laffont and Straub 2002).

6. Privatization and Government Revenue: The Fiscal Argument • Government intervention is not anonymous: It depends on l the opportunity cost of the public funds. • l is higher in developing countries, because tax revenue as proportion of GDP is typically much lower (18.2%), than in rich countries (36.1%). • Since they cannot match OECD taxation level other sources of public funds are crucial. This includes revenue from public firms. • The fiscal argument holds everywhere. • In the US a federal excise tax on local and long distance telephone service was created in 1898: At a tax rate of 3% the tax collection reached $5.185 billion in 1999. It would be unfair and stupid to ask developing countries to focus on consumer surplus while advanced economies always relied on telecommunication for fiscal resources. W= CNS – lT

7. Auriol and Picard (2002)

8. Empirical Assessment of the Reforms: What triggers privatization? • Auriol and Tuske (2005) estimate privatization probability of fixed access and long distance telecom segment using data from ITU, WDI, and PPI. The panel data covers 153 developing countries for 1985-2003. The probability • decreases with country risk rating, with multilateral debt service, with public and publicly guaranteed debt: It declines withl. • increases with teledensity and annual investment, the percentage of digital mainlines, decreases with waiting list: Efficient firms are privatized first. • In a survey of 600 concession contracts from around the world, Guasch (2000) shows that in most cases contracts are tendered for the highest transfer or annual fee. • Using a panel of 18 developing countries Davis et al. (2000) show that budgetary privatization proceeds have been used to reduce domestic financing on a roughly one-for-one basis. => Public finance restructuring

9. Conduct of the reforms • Governments choose privatization policies susceptible to increase privatization prices • Privatizations often come with exclusivity periods. • Wallsten (2000) focusing on 20 telecom firms privatization in 15 developing countries shows that granting a monopoly in fixed local service (2/3) more than double the privatization price. It also reduces network growth. • Li & Xu (2002) cover 116 countries from 1981 to 1998: 1/3 offered investors exclusivity periods with significant negative impact on teledensity. • Privatization often come with public firms restructuring. • Chong & Galdo (2003) analyze the impact of labour policies on the sale prices in 84 telecom privatizations. • 73% of the firms experienced labour downsizing in the 3 years prior to privatization. • Restructuring before privatization is not conductive to higher net privatization prices: in the particular case of voluntary downsizing, it significantly decreases prices (i.e., by 15 percent).

10. Performance of the reforms • Li and Xu (2002) calculate on a sample of 60 countries the difference between pre- and post-privatization mean of key performance variables. Privatization is associated with • reduction in employment (i.e., nearly 50 percent) • reduction in real output (i.e., 38 percent) reflecting prices increase. • increase in labour productivity (i.e. 42 percent). • increase in investment • Firms’ owners seem to have been the main beneficiary of the productivity gains: privatization per se did not bring much benefit to the consumers. • Wallsten (2001) finds negative correlation with mainlines per capita and connection capacity. • Exclusivity periods increase sale price but reduce network growth • Chong and Galdo (2003) show that restructuring public firms before privatization was bad policy. • The biggest improvements for consumers have been driven by competition from mobile telecommunication firms (see Li and Xu 2001; McNary 2001, Petrazzini 1996; Ros 1999; Wallsten 2001).

11. Conclusion • It is important to disentangle the effect of market liberalization that occurred in response to technological change with the effect of privatization that resulted from global government restructuring. • Biggest improvements for consumers are driven by competition from mobile telecom firms, not by privatization of the incumbent operator: governments should concentrate on liberalizing the mobile and the internet segment. This concretely means • avoid allocating exclusivity periods in the mobile segment, • create an efficient regulatory authority to control pricing of bottleneck facilities, • prevent collusive behaviour from the mobile operators. • In fixed line and long distance segment, allocative inefficiency combined with critical budgetary conditions found in most developing countries favour public ownership: It is an effective way to combine regulation with a maximal level of taxation. • China and Viet Nam choose to keep the fixed line operator public and monopolistic while fostering regulated competition in the mobile: they are the 2 countries that experienced the highest change in ranking for total teledensity. They are also maximizing taxes collection.