The impact of privatisation of Telecommunication Incumbents on competition JUCONOMY Consulting AG May 2008
Dec 22, 2015
The impact of privatisation of Telecommunication Incumbents on
competition
JUCONOMY Consulting AG
May 2008
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.
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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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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)
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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
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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
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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:
Competition indicator Number of observations
Spearman‘s correlation
(7-year-average / 3-year-average)
Average monthly expenditure (composite basket)
15 Residential: -0,18 / -0,19
Business: -0,32 / -0,37
Incumbent market shares 15* 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 rates 15 0,23 / 0,31
* Fixed telephony markets = 14
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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:
Competition indicator Number of observations
Spearman‘s correlation
(7-year-average / 3-year-average)
Average monthly expenditure (composite basket)
10 Residential: -0,50 / -0,43
Business: -0,19 / -0,12
Incumbent market shares 10* 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 rates 10 0,02 / 0,04
* Fixed telephony markets = 9
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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
Descriptive analysis (selection)
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
Descriptive analysis (selection)
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
State Ownership (8-Year)
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Empirical study
Descriptive analysis (selection)
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
State Ownership (8-Year)
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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
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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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Contact
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