Private Sector Involvement in Telecommunications

After World War II and well into the 1970s, the state played an entrepreneurial role in almost every country, not only in setting the rules of the game, but in the production process itself. This role was legitimized by most theorists. At the micro-level, market failure was behind government intervention. At the macro and industrial strategy level, the government’s role was based on the import-substitution rationale. Gradually, the realization of the high cost associated with this role took hold. This, in turn, led to a shift in focus affecting the historic balance between the public and private sectors and, ultimately, to an increase in private sector participation. This came about not necessarily from an ideological perspective — although in some cases it did — but from the realization that previous policies did not fully deliver what was expected.

Even after this shift in thinking took place, within the telecommunications sector, not many countries have supported private sector participation. If reform is so desirable, why are so few countries reforming? There are mainly three reasons. The first has to do with what could be called "political worries." As reforms transfer a public monopoly to a private one, consumers are hurt by rising prices, workers lose their jobs, and the rich gain at the expense of the poor. The second is associated with the behavior of private investors in a sector characterized by "asset specificity." Unlike other sectors, where assets are less "specific," the telecommunication sector — together with infrastructure sectors in general — will only attract private investors under a reasonable assurance of a fair rate of return on their investment. The third is a historical one which has to do with the difficulty that many countries used to regulating stated-owned monopolies — a mainly administrative task — encounter when faced with the need to set up regulatory schemes affecting privately owned companies — a far more complicated and conflictive undertaking.

With regard to the role of private participation in the telecommunications sector in the Middle East and North Africa region, three comments are worth making. First, evidence suggests that the sector has done better over time. Yet, it can do even better. This is true of all the countries covered — Egypt, Jordan, Lebanon, Morocco, etc. — in terms of service availability, teledensity, the number of lines, revenue per line and the number of public phones.

Second, since there is room for improvement — both in countries that have reformed as well as in those that have not — then the question to ask is: What sort of new reform package or contract is likely to benefit society? In designing a new contract in countries that have not yet reformed, attention must be paid to the following three major deficiencies.

Functions of the parties overlap. In addition to operating and regulating the sector, the government also owns it if one considers who ultimately claims residuals and decides on the use of retained earnings; as a result, checks and balances that would ensure an efficient outcome are essentially absent.

Incentive regulations are lacking. For example, price setting is typically the result of claims of rising costs by companies followed by governments’ agreement to price increases limited to international service out of political concerns. Such "incentive" regime promotes efficiency neither in consumption nor in production. On the production side, the company can pass costs on to consumers; therefore, the pressure to be more efficient is practically inexistent. On the consumption side, cheap prices will encourage greater telephone use which society will ultimately have to subsidize.

Government credibility and commitment to reform are largely absent. The government and the operators are more or less on the same side, and therefore subject to the same range of political influences.

Third, attention must be paid to distributional implications — that is, who wins and who losses — if reforms are to succeed. To this end, reforms must be designed as a positive-sum game in which governments and buyers benefit. Even more important is to ensure that reforms ultimately benefit both consumers and workers.

The success of reforms will ultimately depend on resolving these three deficiencies. Fundamentally, the functions of the government and the operators must be separated, so that operators are not regulators, and owners are neither regulators nor operators. With regard to regulatory reforms, simply establishing a regulatory body is not enough. The right incentives must be provided. For example, not all pricing schemes have the same incentive effect: Some regulations make producers better and more efficient, while others allow new producers from the private sector to inflate their costs and add other cost elements to the regulated part of the market. And although these new producers will be making money, prices will rise and, ultimately, consumers will be paying for it. Moreover, reforms must try to resolve the tension between flexibility on the one hand, and specificity on the other. Given that technology is rapidly changing, reforms must be flexible enough to accommodate technological innovation without altering the specific regulatory regime every time there is a change in government.

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