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

The impact of privatisation of Telecommunication Incumbents on

competition

JUCONOMY Consulting AG

May 2008

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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.

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Content

Introduction

Theory on privatisation and competition

Empirical study

Results and analysis

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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)

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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

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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)

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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

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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

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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

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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

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Empirical studyRanking of the 25 incumbents included in the study:

Country Operator

State Ownership (8-

Year average)

Ranking8-Years

State Ownership (3-

Year average)

Ranking3-Years

Austria Telekom Austria 49,5% 16 34,9% 13Belgium Belgacom 50,4% 17 51,2% 20Denmark TDC 0,0% 1 0,0% 1France France telecom 48,7% 15 36,6% 15Germany Deutsche Telekom 45,6% 14 37,5% 16Greece OTE 40,1% 12 36,2% 14Ireland Eircom 0,2% 5 0,0% 1Italy Telekom Italia 2,3% 6 0,0% 1Luxembourg P&T 100,0% 24 100,0% 24Netherlands KPN 30,4% 11 14,0% 10Portugal PT 7,3% 7 4,5% 9Spain Telefonica 0,2% 4 0,0% 1Sweden Telia 69,7% 23 59,0% 21Finland Sonera 58,4% 21 59,0% 21UK BT 0,0% 1 0,0% 1Czech Cesky Telekom 44,6% 13 34,0% 12Estonia Eesti Telekom 27,1% 10 27,2% 11Cyprus Cyta 100,0% 24 100,0% 24Latvia Lattelekom 51,0% 18 51,0% 19Lithuania Lietuvos Telekomas 11,7% 8 3,2% 7Hungary Matav 0,0% 1 0,0% 1Malta Maltacom 52,5% 19 40,0% 17Poland TPSA 20,6% 9 3,6% 8Slovenia Telekom Slovenije 66,1% 22 65,4% 23Slovakia Slovak Telecom 55,4% 20 49,0% 18

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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

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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

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Empirical studyResults 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 indicator Number of observations

Spearman‘s correlation

(7-year-average / 3-year-average)

Average monthly expenditure (composite basket)

25 Residential: -0,35 / -0,32

Business: -0,31 / -0,32

Incumbent market shares 25* 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 rates 25 -0,01 / -0,04

* Fixed telephony markets = 23

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Empirical studyResults 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:





15 Residential: -0,18 / -0,19

Business: -0,32 / -0,37



Fixed telephony: -0,25 / -0,21


13 -0,75 / -0,73

Broadband penetration rates 15 0,23 / 0,31


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Empirical studyResults 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:





10 Residential: -0,50 / -0,43

Business: -0,19 / -0,12



Fixed telephony: 0,50 / 0,48


8 -0,61 / -0,61

Broadband penetration rates 10 0,02 / 0,04


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Empirical study

Descriptive analysis (selection)

State ownership and the incumbent market shares in the voice markets

0

20

40

60

80

100

120

Denm

ark

UK

Hunga

ry

Spain

Irela

nd Italy

Portu

gal

Lith

uani

a

Polan

d

Nethe

rland

s

Gre

ece

Czech

Ger

man

y

Franc

e

Austri

a

Belgiu

mLa

tvia

Malt

a

Slova

kia

Finlan

d

Slove

nia

Luxe

mbo

urg

Cypru

s

Ma

rke

t sh

are

s o

f th

e in

cum

be

nt.

0%

20%

40%

60%

80%

100%

120%

De

gre

e o

f sta

te o

wn

ers

hip

Voice-MS-06 State Ownership (8-Year)

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Empirical study


State ownership and the customers using an alternative operator for direct access

0

5

10

15

20

25

30

Denm

ark

UK

Hunga

ry

Spain

Italy

Portu

gal

Lith

uani

a

Polan

d

Estoni

a

Gre

ece

Ger

many

Franc

e

Austri

a

Belgiu

mM

alta

% C

ust

om

ers

usi

ng

an

alte

rna

tive

. o

pe

rato

r

0%

10%

20%

30%

40%

50%

60%

De

gre

e o

f sta

te o

wn

ers

hip

Direct Access

State Ownership (8-Year)

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Empirical study


State ownership and the market shares in the DSL markets

0

20

40

60

80

100

120

Denm

ark

UK

Hunga

ry

Spain

Irela

nd Italy

Portu

gal

Lith

uani

a

Polan

d

Estoni

a

Nethe

rland

s

Gre

ece

Czech

Ger

man

y

Franc

e

Austri

a

Belgiu

mLa

tvia

Mal

ta

Slova

kia

Finlan

d

Slove

nia

Sweden

Luxe

mbo

urg

Cypru

s

Incu

mb

en

t ma

rke

t sh

are

s in

the

DS

L.

reta

il m

ark

ets

0%

20%

40%

60%

80%

100%

120%

De

gre

e o

f sta

te o

wn

ers

hip

Composite-Res


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Empirical study


State ownership and the residential price levels

0

5

10

15

20

25

30

35

40

45

50

Denm

ark

UK

Hunga

ry

Spain

Irelan

dIta

ly

Portug

al

Lithu

ania

Poland

Estonia

Nethe

rland

s

Greec

e

Czech

German

y

Franc

e

Austri

a

Belgium

Latvi

aM

alta

Slovak

ia

Finlan

d

Sloven

ia

Sweden

Luxe

mbo

urg

Cypru

s

OE

CD

ba

ske

t (re

sid

en

tial)

0%

20%

40%

60%

80%

100%

120%

De

gre

e o

f sta

te o

wn

ers

hip

Composite-Res


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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

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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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Contact

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