Emmanuelle Auriol ARQADE and IDEI Annamária Tüske Rochester University What Triggers Privatization? An Empirical Analysis of Fixed line Telecommunication Privatization in Developing Countries Emmanuelle Auriol ARQADE and IDEI Annamária Tüske Rochester University

Are poor countries lagging inefficiently behind? INTRODUCTION Privatization: countries that allowed private participation into their incumbent telecommunication rose from 2% in 1980 to 56% in 2001. YET: almost half of countries maintain their incumbent operator public and roughly 20% have no private operator in the industry at all. Among them we find mainly developing countries. Liberalization: in the mobile market 78% of the countries had adopted in 2001 some competition; In Internet market the figure was 86%. YET: in fixed-line telephone operator more than 60% of countries in the world maintain a monopoly. Are poor countries lagging inefficiently behind?

Privatization and Consumer Surplus: Allocative Vs Productive Efficiency Productive efficiency: privatized firms are more productive and more profitable than public firms Theory: Kornai 1980, Kornai and Weibull 1983, Dewatripont and Maskin 1995, Shleifer and Vishny 1996, Schmidt 1996, Debande and Friebel 2003. Empirical studies: Megginston and Netter (2001) covering 61 empirical studies at a company level (both within and across countries) conclude that privately managed firms tend to be more productive and profitable than public firms in both developed and developing countries. Allocative efficiency: in increasing return to scale industries firms’ rent seeking behaviors hurt consumers. Empirical studies: privatization results in lower prices and higher output in competitive industries but not in oligopolies (Nellis 1999). Wallsten (2001) using a sample of 30 African and Latin American countries finds that privatization alone is negatively correlated with mainlines per capita and connection capacity. However privatization combined with a separate regulator is positively correlated with connection capacity and payphone penetration. Moving from public to private ownership does not solve for the lack of competitive pressure.

Privatization and Government Budget Constraint: Macro-Fiscal Argument Government intervention depends on l the opportunity cost of public funds: W= CS – l T Since developing countries cannot match OECD taxation level (their revenue as proportion of GDP is much lower, 18.2%, than in rich countries, 36.1%) other sources of public funds are crucial. This includes revenue from public firms. The fiscal argument holds everywhere in the world: In the US a federal excise tax on local and long distance telephone service was created in 1898: At a tax rate of 3% the tax collection reached $5.185 billion in 1999. It would be unfair and stupid to ask developing countries to focus on consumer surplus while advanced economies always relied on telecommunication for fiscal resources.

Auriol & Picard (2002)

Empirical Assessment of the Reforms: We Need: Profitable natural monopoly Industry level data Macro level data => Fixed Line Telecom

Empirical methodology The null hypothesis: In developing countries, the probability of fixed line segment privatization decreases with the shadow cost of public funds l. Survival models: As we work with grouped duration data, we include countries from 1988 to the year of privatization. Only those countries remain in the dataset up to 2003 which do not experience privatization in the whole sample period.    

Variables capturing each important channel of interest: Privatization Country risk Indebtedness measures Corruption Perceptions Index l Tax measures Level of infrastructure (teledensity, main tel line, main tel line in big cities) Profitability (tel service revenue, tel subscribers) Other country characteristics (GDP/capita, Population, Transition)

Datasets: We build a panel dataset using four sources Private Participation in Infrastructure database (PPI): information on private projects in infrastructure in low and middle-income countries. The binary dependant variable privatization is calculated using the financial closure year of the projects. The dataset includes observations from 1988 to 2003. During this 16 years, 64 developing countries carried out privatization projects in fixed access segment. ITU World Telecommunication Indicators 2004 provides detailed data on the telecom industry. Final sample includes 145 countries. WDI World Development Indicators 2004 database which incorporates several macro level time-series indicators, including measures of indebtedness & taxation, as well as controls. Country Risk Ratings as proxies for the opportunity cost of public funds from two sources: short time series from the OECD, and recent categories of country risk from Coface webpage.

Table 1. Determinants of privatization in the fixed access segment using complementary log-log, and random effects complementary log-log regressions in odd- and even-numbered columns, respectively. Each model consists of macro and micro level variables.

Table 2. Determinants of privatization in the fixed access segment using complementary log-log, and random effects complementary log-log regressions in odd- and even-numbered columns, respectively. Each model consists of macro and micro level variables.

Results: The probability of privatization decreases with country risk rating, with multilateral debt service, with corruption level and increases with tax revenues: Probability decreases with l. increases with telephone service revenue, teledensity, the number of main telephone lines and of telephone subscribers : Efficient firms are privatized first. Transition countries privatize more.

Figure 2. Predicted survival times

Conclusion: Empirical results are consistents with the macro-fiscal balancing argument. Endogeneity of reforms => countries fixed effects. We observe rivatization, not the decision => What if the government is eager to privatize but cannot ?