Process and impact of commercialisation/privatisation:

Worldwide trendsDr Tim Kelly, ITU

Tuesday Session 2CTO Senior management

seminar: Telecoms restructuring and business

changeMalta, 17-21 May, 1999

The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Kelly can be contacted at Tim.Kelly@itu.int.

AgendaAgendaPrivatisation / Corporatisation: Trends

Why? Where? When? How much?

Case studies: Telkom South Africa, TelMex (Mexico)

Developing country concerns Universal service obligations Loss of strategic control over sector Repatriation of profits to foreign country

Identifying and avoiding pitfallsDoes privatisation bring the expected benefits?

Privatisation of PTO Privatisation of PTO incumbents worldwideincumbents worldwide

%private-owned>95%

50-95%

35-50%

1-35%

0%

Source: ITU Telecommunication Regulatory Database. Note: For India and some Caribbean countries, the international services operator is shown.

State-owned, 105 countries (56%)

Partially-private, 67 countries (36%)

Fully-private, 16 countries (9%)

Privatisation status of 188 ITU Privatisation status of 188 ITU Member StatesMember States

Source: ITU Telecommunication Regulatory Database.

0

20

40

60

80

100

120

140

160

1991 1993 1995 1998

Private State-ownedCountries

Ownership status of the incumbentOwnership status of the incumbent

Source: ITU Telecommunication Regulatory Database.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Africa Americas ArabStates

Asia-Pacific

Europe

State owned

Private

Ownership status of the incumbent, Ownership status of the incumbent, by region, 1998by region, 1998

Source: ITU Telecommunication Regulatory Database.

Why corporatise the incumbent Why corporatise the incumbent operator?operator?

To separate regulatory, policy-making and operational functions

To provide greater financial autonomy to the incumbent operator Outside of the government’s annual budget Outside of civil service pay scales Outside of public sector borrowing requirement

To clarify operator’s financial situation To replace ‘profits tax’ with sales tax To create separate pension scheme

To prepare the way for eventual privatisation and sector reform

Why privatise the incumbent Why privatise the incumbent operator?operator?

To introduce fresh investment and/or foreign investment into the Sector To rid company/country of accumulated debts To initiate new network roll-out programme

To introduce new management or technology transfer into the Sector

To create level playing field for other, privately-owned operators in the Sector

To raise capital for government by selling assetsTo create obligations and incentives for the

incumbent

But: Conflicting objectives can But: Conflicting objectives can create conflicting policies ...create conflicting policies ...

If the objective is achieving maximum asset value...Grant an exclusivity period before the introduction of competitionDon’t limit foreign investmentMinimise the obligations on the incumbent (e.g., for network roll-out, price cap tariff control)Sell the company in several stages including and IPO (timing is important)

If the objective is maximising consumer welfare ...Introduce competition at the earliest opportunity in all parts of the SectorSell the company as quickly as possible, including employee share optionsPut Universal Service Obligations into license of incumbent and its competitorsPro-competition regulation during early years

Telecom privatisations per yearTelecom privatisations per year

Source: ITU Telecommunication Regulatory Database.

0

5

10

15

20

25

30

35

40

45

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

US$billion

0

2

4

6

8

10

12

14

16

18

Total annual value of privatisation transactions (left)

Numbers of privatisation transactions (right)

Transactions

Recent privatisation transactionsRecent privatisation transactions

Source: ITU Telecommunication Regulatory Database.

Note: Some countries made sales in several tranches (e.g., Spain)

1995 1996 1997 1998Bolivia Belgium Armenia BrazilCape Verde Germany Australia Denmark (2)Cuba Ghana Cote d'Ivoire FranceCzech Rep. Greece France El SalvadorIndonesia Guinea Greece FinlandMongolia Hungary Hungary GuatemalaPortugal Indonesia India (MTNL) LithuaniaSpain Ireland India (VSNL) Malta

Korea Israel PolandPeru Italy Puerto RicoPortugal Kazakhstan RomaniaSingapore Panama SwitzerlandVenezuela Portugal

SenegalSerbiaSouth AfricaSri LankaSpain

Value of privatisations by region, Value of privatisations by region, 1981-981981-98

Source: ITU Telecommunication Regulatory Database.

Asia-Pacific(40.3%)

WesternEurope

(39.4%)Other (0.7%)

Americas (16.8%)

C&E Europe (2.8%)

Total: US$ 247 billionPrivatisation in 62

countries

NTT

Top ten privatisations by value, Top ten privatisations by value, in US$in US$

70'469

22'931

18'966

15'902

13'360

12'000

10'882

7'769

7'693

5'580

NTT

BT

Telebras

FT

DT

Telecom Italia

Telstra

TelMex

TeleDanmark

SwissCom

Source: ITU Telecommunication Regulatory Database.

Telecom Privatisations in AfricaTelecom Privatisations in Africa

Country Year % PriceUS$m

Partner

Cape Verde 1995 40% 40 Portugal Telecom

Côte d’Ivoire 1997 51% 210 France Telecom

Ghana 1996 30% 38 Telekom Malaysia

Guinea 1996 60% 45 Telekom Malaysia

Guinea-Bissau

1989 51% 3 Portugal Telecom

Sao Tomé &Principe

1989 51% 1 Portugal Telecom

Senegal 1997 33% 90 FT-led consortium

South Africa 1997 30% 1’260 SBC/TelekomMalaysia

Source: ITU Telecommunication Regulatory Database.

Case study example: Case study example: Telkom South AfricaTelkom South Africa

Telkom SA became public company on 1 October 1991

Following a period of consultation (White Paper, Green Paper), a process for the privatisation of Telkom SA was set into law

A strategic equity partner was selected through an international tender 5 March 1997, sale of 30% to Thintnana Consortium (60%

SBC (US), 40% Telekom Malaysia) for US$1.261 billion

Five year exclusivity plus one year incentivePlans for later IPO plus sale to employees

Telkom SA: Key facts Telkom SA: Key facts and figuresand figures

Revenue growth = 21.8% p.a. 1994 = 9.1 m Rand; 1998 = 20.2 m Rand

Line Growth = 6.6 % 1994 = 3.6 million; 1998 = 4.6 million

Significant fall in debt-equity ratio 1994 = 1.8; 1998 = 0.4

Small decline in employment = -1.4% p.a. 1994 = 61’255 employees; 1998 = 57’813

Increase in pre-tax profitability 1994 = 12.5% of revenue; 1998 = 17.6%

Case study example:Case study example:TelMex (Mexico)TelMex (Mexico)

In 1990, 4.4% was sold to employeesand 20.4% was sold to consortiumincluding Grupo Carso (Mexico), SBC (US) and France Telecom

1991, 15.7% sold to public (local and foreign)1991, SBC exercised option to buy 5.1%1992, 1993, 1994, further sales of remaining sharesExclusivity period for long-distance and

international ended in 1997. Interconnection issues partially resolved.

Price paid and valuation in Price paid and valuation in different sales of TelMexdifferent sales of TelMex

0

5

10

15

20

25

30

35

40

1990 1990 1991 1991 1992 1993 1994 1995*

0

1000

2000

3000

4000

5000

Valuation (based on the price paid, left)

Market Capitalisation (left)

Price per line (US$, right)

US$ billion US$

Source: ITU “World Telecommunication Development Report 1996/97: Trade in telecommunications”

Pre & post-privatisation Pre & post-privatisation performance of TelMex performance of TelMex

-

2

4

6

8

10

12

87 88 89 90 91 92 93 94 95 96

0

2

4

6

8

10

12Pre-

privatisation

Post-

privatisation

Teledensity

Mill

ion

s o

f m

ain

tel

ep

ho

ne

lin

es

Te

led

ens

ity

pe

r 10

0 in

hab

ita

nts

Source: ITU “World Telecommunication Development Report 1998: Universal Access”

Evolution of TelMex’s investment Evolution of TelMex’s investment (Millions of Mexican Pesos)(Millions of Mexican Pesos)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

1988 1990 1992 1994 1996 1997

Privatisation phase (1990 - 94)

Introduction of competition in 1997

Regulated objectives met;

profit-taking (1994-96)

Developing country concerns (1)Developing country concerns (1)Universal Service ObligationsUniversal Service Obligations

Concern

Private capital only interested in “profitable” customers

Private capital not interested in rural areas

Quality of service could decline following privatisation

Response

Where private capital has been introduced, teledensity has risen markedly

International and mobile licences can be linked with rural

Experience shows quality of service improves after privatisation

0

500

1'000

1'500

2'000

2'500

1984 1986 1988 1999 1992 1994 1996

Pre-privatisation Post-privatisation

Impact of Privatisation in ChileImpact of Privatisation in ChileTelephone lines installed (thousands)Telephone lines installed (thousands)

Source: ITU “World Telecommunication Indicators Database”

50

70

90

110

130

150

170

190

210

230

P-5 P-4 P-3 P-2 P-1 P P+1 P+2 P+3 P+4 P+5

Chile

Malaysia

World

Mexico

Post-privatisationPre-privatisation

Teledensity before and after Teledensity before and after privatisation: Year of privatisation = 100privatisation: Year of privatisation = 100

Source: ITU “World Telecom Indicators Database”

Quality of service after privatisation:Quality of service after privatisation:Telefonica de ArgentinaTelefonica de Argentina

0

20

40

60

80

100

1990 1991 1992 1993 19940%

1%

2%

3%

4%

5%

6%Pendingfaults(000s)

As % ofmain lines

Note: Privatisation took place between 1990 and 1991.

Source: ITU “World Telecommunication Indicators Database”

Developing country concerns (2)Developing country concerns (2)Loss of strategic control over sectorLoss of strategic control over sector

Concern

Inviting in foreign investors means loss of control

Foreign owners will dictate investment

Large-scale job losses may follow privatisation

Foreign investors acquire cheap assets

Response

Government can retain a “golden share” (e.g., UK)

Market signals direct investment strategy

Employment loss can be counteracted by growth in new areas

Telecom shares trade at a premium

Privatisation and telecom Privatisation and telecom employment: Latin Americaemployment: Latin America

Country CAGR (%) lines / 1990/96 empl. 96

Argentina -6.5 224

Chile 0.9 184

Bolivia 6.4 119

Peru -14.3 228 (36/90)

Venezuela -3.1 161

Source: ITU World Telecommunication Indicators Database.

Telecoms employment in Latin Telecoms employment in Latin American countries not American countries not privatised in 1996privatised in 1996

Country CAGR (%) lines / 1990/96 empl. 96

Brazil -3.2 169

Costa Rica 6.7 228

Guatemala 3.9 56

Paraguay -1.6 28

Uruguay -5.7 117

Source: ITU World Telecommunication Indicators Database.

Price per line of privatised African PTOs Price per line of privatised African PTOs (US$)(US$)

Note: Calculation based on number of lines in year before privatisation took place.Source: ITU “World Telecommunication Indicators Database”.

6'909

5'386

4'953

2'112

1'072

1'070

875

Guinea

Cape Verde

Senegal

Ghana

South Africa

Guinea-Bissau

Sao Tomé

Price per inhabitant of privatised Price per inhabitant of privatised African PTOs (US$)African PTOs (US$)

Note: Calculation based on population in year before privatisation took place.Source: ITU “World Telecommunication Indicators Database”.

262

101

49

18

11

7

6

Cape Verde

South Africa

Senegal

Sao Tomé

Guinea

Ghana

Guinea-Bissau

Developing country concerns (3)Developing country concerns (3)Repatriation of profits to home countryRepatriation of profits to home country

Concern

Foreign investor will “asset strip” the local PTO

Prices will rise after privatisation as the investor seeks return

Level of investment will fall after initial wave

Government loses potential revenue

Response

Many developing country PTOs have few assets but big opportunities

Some rebalancing is necessary but prices can be regulated

Investment targets can be set by regulator

Government gains higher tax revenue

0%

10%

20%

30%

40%

50%

60%

70%

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Regional average

Argentina

Venezuela

Mexico

Privatisation

Privatisation and investmentPrivatisation and investmentTelecom investment as % of revenueTelecom investment as % of revenue

Source: ITU World Telecommunication Indicators Database.

Conclusions: Getting the recipe Conclusions: Getting the recipe rightright

Define policy objectives first Avoid possible conflicting objectives

Plan a long-term strategy Implement privatisation in several stages

Privatisation is not an end in itself Must be backed up by independent regulation Should be part of a path towards liberalisation Privatisation without competition creates private

monopolies

Choose partners carefully Strategic Equity Partners, or alliances