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Telecommunications Privatization in Developing Countries: The Real Effects of Exclusivity Periods

May 2000
Working Paper
99-021
By  Scott Wallsten
The telecommunication sector around the world has been undergoing dramatic reforms since the 1980s. Developing countries have been privatizing state-owned firms and slowly introducing competition into the telecom sector. We have a good theoretical understanding of the effects of telecom privatization and some empirical work is beginning to emerge, as well. In general, privatization, especially when combined with effective regulatory institutions, improves telecom service. However, we have almost no empirical information on the real effects of the details of the privatization transaction. In particular, many countries grant the privatized telecom firm a multi-year exclusivity period; that is, the government allows the newly-privatized firm to operate as a monopoly for some number of years. The exclusivity period is typically granted to increase the sale price of the firm and thus government revenues. While private investors are almost certainly willing to pay more for firms that can earn monopoly profits, a monopoly is less likely to improve service than is a firm operating in a competitive environment. As a result, the exclusivity period may boost government revenues at the cost of delaying improvements in telecom services to the population. Largely because data is scarce, to date no empirical studies have attempted to systematically estimate the effects of these exclusivity periods. In this paper I use an original, new dataset to explore the real effects of exclusivity periods. The Infrastructure Privatization Database is jointly sponsored by Stanford University and The World Bank to analyze the impact of regulatory institutions and privatization policies on utility performance. Using this combination of firm- and country-level cross-section and panel data, I estimate the effect of exclusivity periods on firms’ sale prices and also on sector performance in terms of network penetration.