Saturday, 30 March 2013

A case study in privatisation

At the IEA blog Wayne A. Leighton discusses the telecom reforms undertaken in Guatemala. He writes,
In 1996, Guatemala adopted one of the most market-oriented telecom reforms in the world. The benefits to the country followed quickly as coverage expanded, competition surged, and prices plummeted.
He then asks the question, So, what is special about the Guatemalan experience? His answer:
Firstly, Guatemala’s reform was based solidly on market principles. Secondly, it was a huge success, providing greater consumer benefits than reforms in most other countries.

One of the most significant aspects of the Guatemalan experience is that the market was opened to competitors before the state-run telecom monopoly was privatised. Most countries did the opposite, selling the government’s monopoly phone company at a high price and promising to open the market at a later date. While such an approach put a lot of funds in these governments’ treasuries, it also created a private monopoly with the incentive to lobby for slow and cautious market liberalisation. By contrast, in Guatemala the buyer of the state phone company would have no special privileges and its competitors would face no special restrictions.
An interesting point here is that opening the telecom market to competition before privatisation highlights the importance of a point I have made before that getting the highest possible price when selling an SOE isn't always the best policy. Selling the SOE as a monopoly would have generated more money for the government but would have, as Leighton notes, slowed, or even stopped, the liberalisation of the telecom market and thus stopped the benefits that flowed to consumers from the privatisation and liberalisation.

In addition,
The other key aspect of reform is that it fostered a free market in the airwaves (electromagnetic spectrum). Guatemala created what are essentially property rights to the spectrum. This matters greatly, because access to spectrum is needed for wireless communications, and in low-income countries wireless is the most cost-effective way to extend service.
Significantly, the right to use spectrum in Guatemala for commercial purposes was not defined as a licence, as is the case in many other countries. Rather, usufruct titles were issued, which grant much more flexibility to determine how the spectrum will be used, subject to very basic restrictions on interference and international agreements. This closely approximates a property right. It creates greater certainty for wireless providers and greater potential for the spectrum to be put to its highest valued use.
The message here: getting property rights right matters.

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