The Impact of the Privatisation of Traditional Fixed-Line Operators

In theory, whether the privatisation of fixed-line telecommunication operator leads to improvements in network expansion or quality depends on the institutional and political context in which it is applied. Governments have often perceived full privatization as a trade-off between benefiting from one shot licence fees while abandoning the future stream of revenues generated by the operator1.# In any case, privatisation typically leads to higher local tariffs to fully cover costs including a rate of return on investment. Recently, Gasmi, Noumba Um and Recuero Virto (2009) reported on the main findings of an analysis of 1985-1999 data across different world regions classified by geography and wealth2.# The developed countries included in the sample had all partially or totally privatized their historical state-owned operator during the period considered. As to the developing countries, 15 from Latin America and 13 from Africa had privatized during the period. Hence, 60 per cent of the Latin American countries in the sample had privatised their operators; this figure comes down to 30 per cent for the African countries. African countries were therefore at their early stages of privatisation during the period under study.

The difference in the results between the developed and the developing countries mainly reflect the extent to which there was excess supply in developed countries and hence no perceptible effect on network expansion in the former. The existence of unmet demand in developing countries, instead did lead to network expansion and greater labour productivity. The network expansion in developing countries followed increases in local tariffs. Indeed, the population in developing countries is willing to pay a price for communications that is often reported to be higher than state-owned subsidised prices. However, privatisation of the fixed-line operator in developed countries lead to decreases in the prices of fixed-line services due to increased competition in well supplied markets.

Once the developing countries sample is disaggregated interesting regional differences were found. Latin American and African resource scarce coastal countries show very similar results to those of the overall developing countries sample, with increases in both output and prices. In contrast, in African resource scarce landlocked countries, privatisation was associated with increases in tariffs which did not translate into network expansion. In these countries, privatisation was also associated with lower labour efficiency. In African resource rich countries, privatisation has no impact on any performance measure.

The extent to which these results can be explained by institutional quality is subject to further research. For the time being, according to the ICRG indices, while Latin American and African resource scarce coastal countries in the sample have very similar institutional endowments, African resource scarce landlocked and resource rich countries both lag behind.

Source: Farid Gasmi, Professor, Toulouse School of Economics and author.