NCPA - National Center for Policy Analysis

Financial Effects of Privatizing Telecoms

August 28, 2001

Telecommunications firms were state-owned enterprises in most developed countries -- with the notable exception of the United States -- and virtually all developing countries from the beginning of the electronic age.

But between October 1981 and November 1998, 31 national telecommunications companies in 25 countries were fully or partially privatized through public share offerings. In most cases, the share offerings were the largest ever in those countries, and the shares often account for 30 percent or more of total capitalization in national stock markets and an even greater share of total trading volume.

How have the privatized firms fared financially?

A recent study found that the profitability, output, operating efficiency and capital investment spending of the telecoms increased significantly after privatization, while employment and debt declined significantly.

Almost all telecoms are subjected to new regulatory regimes around the time they are privatized, and many governments retained a significant stake in the firms. These two factors affected the firms' financial performance significantly -- in addition to listing on U.S. and U.K. exchanges and opening the market to competition from other firms.

  • Competition significantly reduced profitability, employment and, surprisingly, efficiency of the former government monopolies after privatization, while creation of an independent regulatory agency significantly increased output.
  • Mandating third party access to an incumbent network is associated with a significant decrease in the incumbent firm's investment and an increase in employment.
  • But retained government ownership is associated with increased debt and decreased employment, while price controls (regulated prices) significantly increased profitability.

Thus the financial effects of privatization on national telecoms depend in large part on structure of the new market: with competition, a level playing field, market price setting and independent regulation adversely affecting the telecoms. However, consumers and the economy may benefit from these developments.

Source: Bernardo Bortolotti et al., "Sources of Performance Improvements in Privatized Firms: A Clinical Study of the Global Telecommunications Industry," FEEM Working Paper No. 26-2001, Fondazione Eni Enrico Mattei, April 2001.


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