Sector reforms seek to improve services — more, better, newer and less expensive services — through a package of actions which mainly comprise more private participation, opening markets to new entrants and competition, and establishing a regulatory framework and institutions. The success of these reforms is measured by the extent to which they achieve sustainable growth and fundamental improvements in any particular sector.

By this measure, telecommunications sector reforms have been overall very successful, but results vary considerably from one case to another. They range from countries that have experienced great achievements, to those where serious shortfalls still remain, to those that have not taken off at all. In some countries, attempts to privatize state-owned telecommunications enterprises failed because of insufficient preparation or wrong timing. For instance, in Panama, reformers rushed to privatize, but only one bidder came forward and the process had to be restarted. Nicaragua tried to privatize the state enterprise just before a national election; given the political uncertainty at that time, no investor was interested. In another case, privatization ended with a single bidder who had a poor track record and, as a result, the government was torn between continuing the reform process with an unqualified partner or starting all over again.

Other countries — such as Argentina, Mexico and Venezuela — successfully privatized public telecommunications monopolies, but postponed opening up the sector fully to competition. As a result, they experienced slower sector growth and higher prices than countries — such as Chile — where companies were privatized without a monopoly guarantee. In the Caribbean, most countries have private telecommunications monopolies and face the same type of problems — high prices, slow innovation, limited opportunities for new entrepreneurial initiatives. Several countries opened up to new providers, but neglected certain key elements of the relationship between the new entrants and the incumbents. In Hungary and Poland, for example, local service was opened to new operators, but failed to address and resolve the issue of interconnection and revenue distribution with the incumbent providers.

When properly designed and implemented, reforms in the telecommunication sector will make significant positive difference in the sector performance. What are the factors that make reform successful? Very high on the list of success factors is the need for political will, capacity to reform and clear assignment of leadership responsibility. In Mexico, for instance, once the government decided to privatize the state-owned enterprise, TelŽfonos de MŽxico, the Minister of Finance was appointed Chairman of the Board. This appointment placed the full authority of the government behind the reform process, and led to successfully re-negotiating labor contracts and restructuring tariffs before the privatization. In contrast, in Turkey, despite tremendous pressure by some sectors of the government — and four years of negotiating new legislation — the government still lacked the ability to steer the process and move reform forward.

The second factor is the need for clear policies and basic rules of the game. The policy for licensing new entrants must be clear; all players must know what the sector structure will look like in the future. And the pricing rules must be well defined including, if possible, firm numbers and simple formulas for automatic adjustments to hold for several years. Similarly, if there is more than one player, their interrelations must be sorted out — at least, the basic principles and rules and, possibly, a default numerical rule or standard interconnection offering. Governments must also clarify where the regulatory authority will lie and what decision-making processes will be used in interactions with regulators. A new institution need not be created for this purpose, but there must be a clear locus and a basic process for discharging regulatory responsibility.

The third factor, which is clearly related to the second, is the need for credible and stable sector policies and rules. There are several elements that add to the credibility and stability. One element is a broad consensus on the reform package. The government of Ghana, for example, was able to put together a supportive constituency for its reform package, including all relevant branches of the government, major users, banks, unions and senior staff of the operating company. This consensus strengthened stability and, as a result, investors had more confidence in the reform process and its rules. Another element that adds credibility to the reform process is related to the government’s stake in its success. In Argentina, for example, the President made privatization of telecommunications (ENTel) the flagship of a much larger public enterprise reform program. With the whole program at stake, the investors knew the government would stick to the rules that it had established for telecommunications. A third element of stability is to have a good telecommunications law in place. This, however, is not always essential: Argentina and Mexico, for example, privatized the state enterprises in the context of old and antiquated laws which gave enough latitude for change. Mexico, however, found it necessary to pass a new, modern telecommunications law five years after privatization as a framework for opening the sector to competition in basic services.

The fourth success factor is the existence of an overall economic strategy and investment-friendly environment that goes beyond reforms in the telecommunication sector. In Chile, for instance, the telecommunications sector was reformed as part of a broad strategy to open up the economy to foreign investment, to competition, and to greater domestic and foreign private sector participation, as well as ready access to foreign exchange and a simplified tax regime.

The fifth factor is the keeping the process transparent. This involves putting in place open, competitive bidding rules for new licenses and for the privatization of state-owned enterprises, as well as establishing clear, transparent procedures for dispute resolution.

To conclude, I would like to add a few observations. First, the need for a clear and stable regulatory regime is not the same as establishing a regulatory agency. In fact, investors may see the presence of new regulatory agencies with unproven track records as a threat rather than a benefit. Second, competition is an essential adjunct to privatization. It places pressure on the incumbent to improve performance. In addition, it accelerates innovation, attracts new sources of entrepreneurship and capital, and makes regulation more manageable. Third, it is not practical to second-guess the market. If there is uncertainty about how many competitors can fit, let the market decide. Fourth, investors are not afraid of competition by itself, but they will not enter a market where, in addition to competition, they are subject to unreasonable service obligations, prices that do not reflect costs, and rigid employment rules. Finally, reforms, if properly designed, benefit all segments of the economy and accelerate the process of reaching out to underserved population groups. To a large extent, the social objectives of telecommunications policy can be met through a commercial approach.

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