Academic journal article The McKinsey Quarterly

Getting Telecoms Privatization Right

Academic journal article The McKinsey Quarterly

Getting Telecoms Privatization Right

Article excerpt

Nowhere is the privatization debate more robust and activity more dynamic than in the area of telecommunications. In the past few years, privatizations in this sector have taken off, with more than 20 countries selling stakes totalling over US$140 billion (Exhibit 1). In the European Union alone, Denmark, France, Germany, the United Kingdom, Greece, Belgium, the Netherlands, Italy, and Portugal either have already privatized or expect to privatize their state-owned telephone companies and liberalize their telecoms sectors by 1998 - a radical shift given that all were state-owned monopolies just fifteen years ago.

Privatization has helped telcos and governments address an unavoidable issue: improving telecommunications infrastructure is extremely expensive, and frequently outstrips the state's ability to provide funds. At about US$1,000 per new line, China and India are each hoping to spend more than US$100 billion over the next decade on switching and transmission equipment and local loop telephony plant.

Similarly, UN estimates place telecom investment needs for the Czech Republic, Poland, and Hungary at US$70 billion through the year 2000 to reach a density of 30 lines per 100 people, similar to that enjoyed by Spain. Simply improving all of the world's telecommunications infrastructure to the level of one phone for every ten people - Mexico's position today - would involve investments of around US$300 billion. Building out just India and China to Western European density levels would require an almost inconceivable sum of over a trillion dollars. These startling figures, coupled with shortages of domestic capital and pressures to balance public accounts, are increasingly convincing governments of the need for private-sector funding.

Another reason for the popularity of telco privatization is its positive impact on infrastructure development. In eight cases that we examined, all the privatized phone companies had a much faster network growth rate than they had enjoyed as state-owned enterprises (Exhibit 2).

Getting it right

Successful privatizations of telcos have qualities of their own. Governments need to think beyond the mere question of ownership and form a view of how they would like the entire sector to develop over the next, say, five to ten years. Dramatic differences in starting points, pressures for change, and priorities mean that each country must determine its own objectives.

Meeting these objectives in an industry with such complex dynamics calls for a clear vision of how the telecommunications environment should evolve. The challenge is to get both the regulatory environment and the details of the privatization process right. Governments seeking to create the climate for a satisfactory privatization can learn from actions that have proved effective for others.

Set clear objectives

There is no single "right" set of objectives for a telco privatization. Rather, objectives must be tailored to local cultural, legal, political, and economic conditions. Some countries need to extend their basic telecommunications services and raise quality standards to minimally acceptable levels. Others have a solid infrastructure already in place and can focus on modernizing their network, providing leading-edge services, and boosting the competitiveness of their telecom providers to world-class standards.

The vast majority of countries fall into the first category. Of the 132 tracked by the International Telecommunications Union, more than 75 percent have only one telephone line per ten people. More than half the world's population live in countries with not even one telephone to a hundred citizens. Yet there is often strong pent-up demand from consumers and businesses ready to pay cash for telecom services.

Privatizations in India, Mexico, Chile, and Venezuela, and recent initiatives in India and elsewhere, have focused on the urgent need to obtain investment capital for upgrading basic infrastructure. …

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