1. The impact of privatisation of Telecommunication Incumbents on competition JUCONOMY Consulting AG May 2008

2. 2 Executive Summary  Privatisation is generally seen as a means to increase competition and efficiency.  Independent and neutral regulation  Fairer treatment of competitors (regulatory balance)  Better corporate governance and requirements of return on investments  increased efficiency  The empirical results so far are heterogeneous, though.  In this study, an empirical analysis has been carried through, measuring the outcome of privatization on competition in different EU countries  The empirical results show no correlation between state ownership and competition  Hence, the conclusion of this study is, that the state ownership in countries with sufficient competition regulation does not have any influence on competition  Therefore, a privatisation of the incumbents should be preceded by the implementation of a sufficient regulatory framework in order to safeguard competition ex-ante.

3. 3 Content  Introduction  Theory on privatisation and competition  Empirical study  Results and analysis

4. 4 Introduction “ most aspects of privatization debate are highly polarized and controversial, beginning with the pros and cons with privatization itself” (J. Bang, „The Role of „Institutions“ in Privatization: Is Efficiency Attainable?“, University of Illinois Urbana-Champaign, 26th of September 2005, p. 7)

5. 5 Theory on privatisation and competition - Background  During the last century, most incumbents were state monopolies:  As an outgrowth of royal power  As a mean to overcome obstacles of high fixed costs, developing expensive technologies or to develop vital industries  As a bailout of the global depression in the 1930ies  Ideological reasons (protect jobs, universal services etc)  Several felt problems identified with state owned incumbents:  Raise funds for the government or for necessary investments of the incumbent itself  Increasing efficiency of the incumbent (service provision and quality)  Increase competition  S. Wallsten: Privatisation has been carried through with the purpose to increase service provision, quality and efficiency, but also stemming the flow of public subsidies, which represents scarce public resources

6. 6 Theory on privatisation and competition  Parallel to the decision to privatise, governments will have to decide upon:  How to restructure (commercialisation, financial / operational restructuring)?  How to regulate / competition situation?  The sequence and design of the sales process  The focus of our study regards the competition (second bullet point)

7. 7 Theory on privatisation and competition  Selection of previous results regarding the outcomes of privatisations: Pros - Corporate governance / increased return on capital requirement - Increased penetration rates and shorter waiting times for new access lines - Increased labour productivity - Lower fault rates - Innovation / new services Pros - Corporate governance / increased return on capital requirement - Increased penetration rates and shorter waiting times for new access lines - Increased labour productivity - Lower fault rates - Innovation / new services Cons - Higher access charges - Higher usage prices Cons - Higher access charges - Higher usage prices  Privatisation preceded by competition regulation  lower costs, efficient pricing, higher rates of investments, less durable market power Sources: Megginson, Nash, Radenbourg; Ross; J.M. Bauer; Noll among others

8. 8 Theory on privatisation and competition Considerations regarding the coexistence of regulation, competition and privatised incumbents:  In case of state ownership: the ownership of the largest market player and the regulator both lies in the hands of the government  Independence of the regulator not guaranteed / information and decision processes may be highly intransparent.  The state acts as a lender-of-last-resort for the incumbent  competitive advantages for the incumbent  The problems of an excessive regulation of the incumbent  Protection of (privatised) incumbent to avoid staff reductions and negative regional outcomes

9. 9 Empirical study Empirical study – objectives and methods  Hypothesis: The less state ownership of the incumbent, the more intensive the competition in the fixed telecommunication markets that one will see.  Focus on homogeneous countries – EU-25:  Similar regulatory environment according to the EU framework  Similar technological environment  Due to different initial situations („start configurations“), the analysis is made for EU-25, EU-15 and EU-10 separately  Time frame of the study: 1999 – 2006  Calculation of the Spearman rank correlation for the state ownership on the one hand, and several competition indicators on the other.  The study derives on statistics mainly from the implementation reports of the EU Commission  Homogeneous and consistent input data

10. 10 Empirical study Empirical study – objectives and methods  The state ownership of the incumbents was examined for the period between 1999-2006.  The average state ownership was calculated for each operator for the period 1999-2006 (8-Year-Average) and for the period 2004-2006 (3-Year- Average)  According to these two averages, two rankings were calculated and compared with the competition indicators for 2006.  8-Year-Average showing the impact of the state ownership situation for the last 8 years on the competition situation  3-Year-Average focusing on the last 3 years  Thereby, delayed outcomes on the competition through the ownership situation are internalised in the results

11. 11 Empirical study Ranking of the 25 incumbents included in the study:

12. 12 Empirical study Competition indicators: Price levels  Assumption: competition puts pressure on the price levels and hence, more competition leads to lower prices  Lack of monopoly/oligopoly pricing  More efficient incumbents  lower costs Competition indicators: Market shares  Very high market shares are a typical indicator for significant market power / lack of competition  The lower the market shares of the incumbent, the more likely is a sufficient competition Competition indicators: penetration rates of innovative services  Assumption: more intense competition leads to more pressure on the market players to introduce new services  More competition leads to more innovation

13. 13 Empirical study Competition indicators Price levels - Average monthly expenditure (composite basket) – residential users -Average monthly expenditure (composite basket) – business users Price levels - Average monthly expenditure (composite basket) – residential users -Average monthly expenditure (composite basket) – business users Market shares -%-age of subscribers using an alternative operator for direct access -Incumbent market shares in the fixed telephony markets -Fixed broadband retail lines market shares by the incumbents - DSL retail lines market shares by the incumbent Market shares -%-age of subscribers using an alternative operator for direct access -Incumbent market shares in the fixed telephony markets -Fixed broadband retail lines market shares by the incumbents - DSL retail lines market shares by the incumbent Penetration rates -Broadband penetration rates Penetration rates -Broadband penetration rates

14. 14 Empirical study Results of the empirical study based on the Spearman rank correlation (EU-25)  At the 95 % confidence level, the there is an impact to be found on the fixed telephony markets  More state ownership leads to less competition but no results regarding prices and the newer broadband markets Competition indicatorNumber of observations Spearman‘s correlation (7-year-average / 3-year- average) Average monthly expenditure (composite basket) 25Residential: -0,35 / -0,32 Business: -0,31 / -0,32 Incumbent market shares25*Broadband retail lines: 0,07 / 0,10 DSL retail lines: 0,22 / 0,23 Fixed telephony: 0,47 / 0,42 %-age of subscribers using alternative operator for direct access 21-0,66 / -0,62 Broadband penetration rates25-0,01 / -0,04 * Fixed telephony markets = 23

15. 15 Empirical study Results of the empirical study based on the Spearman rank correlation (EU-15)  Regarding the EU-15 (EU member states prior to year 2004) the impact of ownership on competition is found, but only for the fixed access markets: Competition indicatorNumber of observations Spearman‘s correlation (7-year-average / 3-year- average) Average monthly expenditure (composite basket) 15Residential: -0,18 / -0,19 Business: -0,32 / -0,37 Incumbent market shares15*Broadband retail lines: 0,07 / 0,10 DSL retail lines: 0,20 / 0,15 Fixed telephony: -0,25 / -0,21 %-age of subscribers using alternative operator for direct access 13-0,75 / -0,73 Broadband penetration rates150,23 / 0,31 * Fixed telephony markets = 14

16. 16 Empirical study Results of the empirical study based on the Spearman rank correlation (EU-10)  Regarding the EU-10 (member states joining EU in year 2004) no results are significant at the 95 % significance level: Competition indicatorNumber of observations Spearman‘s correlation (7-year-average / 3-year- average) Average monthly expenditure (composite basket) 10Residential: -0,50 / -0,43 Business: -0,19 / -0,12 Incumbent market shares10*Broadband retail lines: 0,02 / 0,04 DSL retail lines: 0,15 / 0,29 Fixed telephony: 0,50 / 0,48 %-age of subscribers using alternative operator for direct access 8-0,61 / -0,61 Broadband penetration rates100,02 / 0,04 * Fixed telephony markets = 9

17. 17 Empirical study Descriptive analysis (selection)

18. 18 Empirical study Descriptive analysis (selection)

19. 19 Empirical study Descriptive analysis (selection)

20. 20 Empirical study Descriptive analysis (selection)

21. 21 Results and analysis  The results of the study show that there is a correlation between privatisation and the development of competition in mature markets (fixed telephony markets)  There is no correlation between privatisation and price levels or developments in dynamic broadband markets  In the first empirical study covering 1999 to 2005, there was no correlation found, implying that the outcomes are rather increasing than decreasing over time  The overall results are consistent with previous research that has shown that other factors than state ownership are most important for welfare derived from telecommunications, especially an independent and efficient regulation

22. 22 Results and analysis  The fears existing in the 1990ies that privatisation would be harmful has not turned out to hold true in an environment with regulation  Based on results in previous studies, it is important to first introduce effective competition before privatisation is made  Not significant, but with a certain correlation is the relationship between privatisation and prices  There is a suspicion that privatisation leads to higher prices. Explanations could be:  „High price countries“ have gone further with their privatisation  Countries with less state ownership have gone further with rebalancing  In countries with more state ownership, the state influences prices to lower these for the consumers

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