1. Process and impact of commercialisation/privatisation: Worldwide trends Dr Tim Kelly, ITU Tuesday Session 2 CTO Senior management seminar: Telecoms restructuring and business change Malta, 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.

2. Agenda Privatisation / 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 pitfalls Does privatisation bring the expected benefits?

3. Privatisation of PTO incumbents worldwide Source: ITU Telecommunication Regulatory Database. Note: For India and some Caribbean countries, the international services operator is shown.

4. State-owned, 105 countries (56%) Partially-private, 67 countries (36%) Fully-private, 16 countries (9%) Privatisation status of 188 ITU Member States Source: ITU Telecommunication Regulatory Database.

5. 0 20 40 60 80 100 120 140 160 1991199319951998 PrivateState-owned Countries Ownership status of the incumbent Source: ITU Telecommunication Regulatory Database.

6. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% AfricaAmericasArab States Asia- Pacific Europe State owned Private Ownership status of the incumbent, by region, 1998 Source: ITU Telecommunication Regulatory Database.

7. Why corporatise the incumbent operator? To separate regulatory, policy-making and operational functions To provide greater financial autonomy to the incumbent operator Outside of the governments annual budget Outside of civil service pay scales Outside of public sector borrowing requirement To clarify operators financial situation To replace profits tax with sales tax To create separate pension scheme To prepare the way for eventual privatisation and sector reform

8. Why privatise the incumbent 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 assets To create obligations and incentives for the incumbent

9. But: Conflicting objectives can create conflicting policies... If the objective is achieving maximum asset value... Grant an exclusivity period before the introduction of competition Dont limit foreign investment Minimise 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 Sector Sell the company as quickly as possible, including employee share options Put Universal Service Obligations into license of incumbent and its competitors Pro-competition regulation during early years

10. Telecom privatisations per year Source: ITU Telecommunication Regulatory Database. 0 5 10 15 20 25 30 35 40 45 848586878889909192939495969798 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

11. Recent privatisation transactions Source: ITU Telecommunication Regulatory Database. Note: Some countries made sales in several tranches (e.g., Spain)

12. Value of privatisations by region, 1981-98 Source: ITU Telecommunication Regulatory Database. Asia- Pacific (40.3%) Western Europe (39.4%) Other (0.7%) Americas (16.8 %) C&E Europe (2.8%) Total: US$ 247 billion Privatisation in 62 countries NTT

13. Top ten privatisations by value, 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.

14. Telecom Privatisations in Africa Source: ITU Telecommunication Regulatory Database.

15. Case study example: Telkom 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 incentive Plans for later IPO plus sale to employees

16. Telkom SA: Key facts and 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 = 61255 employees; 1998 = 57813 Increase in pre-tax profitability 1994 = 12.5% of revenue; 1998 = 17.6%

17. Case study example: TelMex (Mexico) In 1990, 4.4% was sold to employees and 20.4% was sold to consortium including 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 shares Exclusivity period for long-distance and international ended in 1997. Interconnection issues partially resolved.

18. Price paid and valuation in different sales of TelMex 0 5 10 15 20 25 30 35 40 1990 1991 1992199319941995* 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

19. Pre & post-privatisation performance of TelMex - 2 4 6 8 10 12 87888990919293949596 0 2 4 6 8 10 12 Pre- privatisation Post- privatisation Teledensity Millions of main telephone lines Teledensity per 100 inhabitants Source: ITU World Telecommunication Development Report 1998: Universal Access

20. Evolution of TelMexs investment (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 198819901992199419961997 Privatisation phase (1990 - 94) Introduction of competition in 1997 Regulated objectives met; profit-taking (1994-96)

21. Developing country concerns (1) Universal 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

22. 0 500 1'000 1'500 2'000 2'500 1984198619881999199219941996 Pre-privatisationPost-privatisation Impact of Privatisation in Chile Telephone lines installed (thousands) Source: ITU World Telecommunication Indicators Database

23. 50 70 90 110 130 150 170 190 210 230 P-5P-4P-3P-2P-1PP+1P+2P+3P+4P+5 Chile Malaysia World Mexico Post-privatisationPre-privatisation Teledensity before and after privatisation: Year of privatisation = 100 Source: ITU World Telecom Indicators Database

24. Quality of service after privatisation: Telefonica de Argentina 0 20 40 60 80 100 19901991199219931994 0% 1% 2% 3% 4% 5% 6% Pending faults (000s) As % of main lines Note: Privatisation took place between 1990 and 1991. Source: ITU World Telecommunication Indicators Database

25. Developing country concerns (2) Loss 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

26. Privatisation and telecom employment: Latin America CountryCAGR (%)lines/ 1990/96 empl. 96 Argentina-6.5224 Chile 0.9184 Bolivia 6.4119 Peru -14.3228 (36/90) Venezuela-3.1161 Source: ITU World Telecommunication Indicators Database.

27. Telecoms employment in Latin American countries not privatised in 1996 CountryCAGR (%)lines/ 1990/96 empl. 96 Brazil-3.2169 Costa Rica 6.7228 Guatemala 3.9 56 Paraguay-1.6 28 Uruguay-5.7117 Source: ITU World Telecommunication Indicators Database.

28. Price per line of privatised African PTOs (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

29. Price per inhabitant of privatised 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

30. Developing country concerns (3) Repatriation 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

31. 0% 10% 20% 30% 40% 50% 60% 70% 1985198619871988198919901991199219931994 Regional average Argentina Venezuela Mexico Privatisation Privatisation and investment Telecom investment as % of revenue Source: ITU World Telecommunication Indicators Database.

32. Conclusions: Getting the recipe right 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