Privatesector P U B L I C P O L I C Y F O R T H E Note No. 204 December 1999 Ada Karina Private Participation in Izaguirre Telecommunications—Recent Trends The World Bank’s The liberalization of telecommunications that The development of new technologies has facil- Private Participation in started in a few countries in the 1980s turned into itated liberalization by reducing entry costs, cre- Infrastructure (PPI) Project Database a worldwide trend in the 1990s. More than ninety ating new services (mobile phone, paging, records all developing developing economies opened their telecommu- Internet), and undermining service segmenta- country projects owned nications sector to private participation between tion. And the reforms have been strengthened by or managed by private companies in water, 1990 and 1998. These countries transferred to the such international agreements as the World energy, transport, and private sector the operating or construction risk, or Trade Organization’s Basic Telecommunications telecommunications that both, of more than 500 projects. The transactions Agreement, under which seventy-two countries, reached financial closure between 1990 involved investment commitments of US$214 bil- including forty-four developing economies, sub- and 1998. This Note lion (figure 1).1 Two-thirds of that amount has scribed binding commitments to significantly draws on the database been invested in expanding and modernizing net- expand competition. to show trends in telecommunications works; the other third has gone to governments as projects. The database divestiture revenues or license fees. Major trends covers only projects that involve basic telephone services (fixed local and Driving this liberalization has been the desire to The World Bank’s PPI Project Database shows long distance) or mobile expand and improve service. Tight public sector strong, steady growth in private participation in services (digital or budgets have prompted governments to turn to telecommunications, whether measured in pro- analog cellular and personal and digital private investment for network expansion and jects, countries, or value of investments (box 1). communications modernization, and to reform legal and regula- The data reflect three main trends: services). tory frameworks to allow private participation. ▪ Private participation takes place in increasingly competitive market structures. ▪ Latin America and the Caribbean leads in pri- vate participation in the sector. FIGURE 1 TOTAL INVESTMENT IN TELECOMMUNICATIONS ▪ Divestitures and greenfield projects outnum- PROJECTS WITH PRIVATE PARTICIPATION IN ber operations and management contracts. DEVELOPING COUNTRIES, 1990–98 1998 US$ billions Competitive market structures emerge 60 In most developing countries legal barriers to 50 entry continue to hinder competition in the sec- 40 tor. But governments are easing these barriers. By 30 1998 most developing economies with private participation in the sector had exposed mobile 20 phone services to competition, though they were 10 taking a more cautious approach to basic services. 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 Between 1990 and 1998, 311 private operators Source: PPI Project Database. started to provide mobile services on a stand- alone basis or along with basic services in ninety- The World Bank Group ▪ Finance, Private Sector, and Infrastructur e Network Private Participation in Telecommunications—Recent Trends BOX 1 PPI PROJECT DATABASE: PROJECT CRITERIA AND DATABASE TERMINOLOGY Database coverage ▪ Greenfield project. A private entity or a public-private joint venture ▪ Projects that have reached financial closure and directly or in- builds and operates a new facility. This category includes build- directly serve the public. own-transfer and build-own-operate contracts as well as mer- ▪ Projects in water, transport, electricity, telecommunications, and chant power plants. natural gas. ▪ Divestiture. A private consortium buys an equity stake in a state- ▪ The telecommunications sector includes local, national, and owned enterprise. The private stake may or may not imply private international phone services and mobile phone services. Other management of the company. services (Internet, paging, trunking, and value added services) and private networks are excluded. Definition of financial closure. For greenfield projects, and for ▪ Low- and middle-income developing countries, as defined and operations and management contracts with major capital expendi- classified by the World Bank. ture, financial closure is defined as the existence of a legally bind- ing commitment of equity holders or debt financiers to provide or Definition of private participation. The private company must assume mobilize funding for the project. The funding must account for a sig- operating risk during the operating period or assume development nificant part of the project cost, securing the construction of the and operating risk during the contract period. A foreign state-owned facility. For operations and management contracts, a lease agree- company is considered a private entity. ment or a contract authorizing the commencement of management or lease service must exist. For divestitures, the equity holders Definition of a project unit. A corporate entity created to operate must have a legally binding commitment to acquire the assets of infrastructure facilities is considered a project. When two or more the facility. physical facilities are operated by the corporate entity, all are con- sidered as one project. Recording of investments. Investments and privatization revenues generally have been recorded on a commitment basis in the year of Project types financial closure (for which data are typically readily available). ▪ Operations and management contract. A private entity takes over Actual disbursements have not been tracked. Where privatizations the management of a state-owned enterprise for a given period. and new investments are phased and data were available at finan- This category includes management contracts and leases. cial closure, they are recorded in phases. ▪ Operations and management contract with major capital expenditure. A private entity takes over the management of a state- Sources. World Wide Web, commercial databases, specialized publi- owned enterprise for a given period during which it also assumes cations, developers, sponsors, and regulatory agencies. significant investment risk. This category includes concession- type contracts such as build-transfer-operate, build-lease-operate, Contact. The database is maintained by the Private Participation in and build-rehabilitate-operate-transfer contracts as applied to Infrastructure Group of the World Bank. For more information contact existing facilities. Shokraneh Minovi at 202 473 0012 or sminovi@worldbank.org. four developing countries (table 1). Twenty- countries allowing unrestricted competition, con- eight developing countries had between three sumers have benefited from significant tariff cuts. and six competing mobile operators, and thirty- Most countries with little or no competition are eight had duopoly mobile phone markets. Many concentrating in the short term on generating a of these countries have also encouraged com- surplus to rapidly expand the network rather than petition for the market by using competitive bid- on reducing prices. ding to award mobile phone licenses. In most countries competition has benefited customers Developing economies are also beginning to by pushing down tariffs, expanding networks, introduce competition in local service. Of the and improving service. As countries award more fifty-five countries with private operators in local licenses in the coming years, competition will service, fifteen endorsed some competition by increase. 1998. Some have allowed free entry (Chile, El Salvador, Guatemala, Mexico); others have intro- Competition in long distance has started to duced controlled competition (Malaysia, Sri emerge. Of the forty-two developing countries Lanka) or transitional duopolies (Brazil, Ghana, with private involvement in long-distance services, India). The other forty countries have either twelve allowed competition by 1998—ranging awarded monopoly rights to privatized incum- from unrestricted entry (Chile, Mexico) to man- bent operators (Côte d’Ivoire, Estonia, Pakistan, aged competition (Republic of Korea, Malaysia) to Venezuela) or introduced private investment to duopoly (Brazil, Ghana). The rest awarded exclu- complement the incumbent’s (Bangladesh, sive licenses to privatized incumbent operators. In Indonesia, Thailand). TABLE 1 TOTAL INVESTMENT IN TELECOMMUNICATIONS PROJECTS WITH PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES BY TYPE OF SERVICE, 1990 – 98 Latin America leads the way Total investment Service Projects (1998 US$ millions) A regional breakdown of projects shows a marked Mobile only 262 66,023 concentration of investments in Latin America and Long distance, local, the Caribbean (52 percent). Investments are and mobile 26 54,045 smaller but still significant in East Asia and the Local and long distance 29 35,733 Pacific (20 percent), Europe and Central Asia (15 Local only 150 34,946 percent), and South Asia (9 percent; table 2). Most Long distance only 31 14,250 Latin American countries have made telecommu- Local and mobile 12 6,295 nications an entirely private activity during the Long distance and mobile 11 2,752 1990s. In East and South Asia the private sector Total 521 214,043 has begun to make inroads into a business dom- inated by state-owned enterprises. In Sub-Saharan Source: PPI Project Database. Africa private participation is still small, but FIGURE 2 TOTAL INVESTMENT IN TELECOMMUNICATIONS reflects significant advances in opening the PROJECTS WITH PRIVATE PARTICIPATION IN mobile phone market—and, in some countries, DEVELOPING COUNTRIES BY REGION the entire sector—to private investment. Private AND TYPE, 1990 – 98 participation remains nascent in the Middle East 1998 US$ billions and North Africa, with limited progress in open- 120 Operations and management contracts ing the sector to private capital and in imple- with major capital expenditure menting cost-recovering tariffs in basic services. 100 Greenfield projects 80 Although investment in projects with private par- Divestitures ticipation has been concentrated in a few coun- 60 tries, it is beginning to spread. The top ten 40 countries accounted for 99 percent of total investments in 1990, but only 81 percent in 1998. 20 These countries include Argentina, Brazil, 0 Latin East Asia Europe South Sub-Saharan Middle Hungary, Indonesia, Malaysia, Mexico, and America and and the and Asia Africa East and Thailand, which also account for a significant the Caribbean Pacific Central Asia North Africa share of developing country income. Source: PPI Project Database. Divestitures and greenfield projects on top munications. Only eight such projects had been Divestitures and greenfield projects are the awarded by 1998, five in Thailand and one each dominant form of private participation in telecom- in Indonesia, the Lao People’s Democratic munications, similar to the pattern in other infra- Republic, and Ukraine. Management contracts structure sectors such as electricity and natural gas. without investment commitments were limited Of the US$214 billion committed to telecommuni- to two projects (Kiribati and Mongolia). cations projects with private participation, about US$79 billion has gone to 350 greenfield projects Regional approaches differ. Latin America and and US$126 billion to 161 divestitures. The Europe and Central Asia emphasize divestitures to resources captured by divestitures have been transfer basic service operations to the private sec- directed to network expansion and modernization tor (figure 2). Most of these divestitures include (50 percent) and divestiture revenues (50 percent). transitional monopolies in basic services to ensure rapid expansion of the local network. In Latin Operations and management contracts with America 77 percent of the investment in projects major capital expenditure are rare in telecom- with private participation went to divestitures, and Private Participation in Telecommunications—Recent Trends TABLE 2 TELECOMMUNICATIONS PROJECTS WITH PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES BY REGION, 1990 – 98 Total investment Region Countries Projects (1998 US$ millions) East Asia and the Pacific 14 64 42,269 Europe and Central Asia 24 254 32,382 Latin America and the Caribbean 22 99 110,919 Middle East and North Africa 6 13 2,979 South Asia 4 41 19,073 Sub-Saharan Africa 24 50 6,420 Total 94 521 214,043 Source: PPI Project Database. in Europe and Central Asia 58 percent. Greenfield reforms centered on competition. Most of the projects, which accounted for 23 percent of the region’s countries are following the Chilean mar- investment in Latin America and 42 percent in ket-oriented approach to creating competition, Europe and Central Asia, are relied on mainly to setting the ground rules by establishing pro- introduce mobile phone services. competitive entry policies, price structures, inter- connection rules, and universal access strategies. East and South Asia have opted primarily for greenfield projects, aimed at complementing the In Europe and Central Asia reforms in the incumbent’s investments, introducing some European Union have underscored the need to competition in basic services, and creating com- accelerate liberalization. And the European Viewpoint is an open petitive mobile phone markets. Greenfield pro- Union has required countries applying for mem- forum intended to jects accounted for 47 percent of the investment bership to align their telecommunications sector encourage dissemination of and in East Asia and 88 percent in South Asia. with its pro-competitive policy. debate on ideas, Divestitures, which capture 35 percent of the innovations, and best investment in East Asia and 12 percent in South In Asia the 1997 financial crisis spotlighted the practices for expanding the private sector. The Asia, are used mainly to raise capital for state- need to deepen reforms. China and India plan views published are owned enterprises through public offerings. reforms that will expand the roles of competition those of the authors and and the private sector. Other major Asian should not be attributed to the World Bank or Sub-Saharan Africa and the Middle East and North economies are revising their approaches to pri- any of its affiliated Africa also prefer greenfield projects, as a way to vate participation to create more sustainable organizations. Nor do obtain mobile phone services. Greenfield pro- environments. any of the conclusions represent official policy jects accounted for 52 percent of the investment of the World Bank or of in Sub-Saharan Africa and 64 percent in the Sub-Saharan Africa and the Middle East and its Executive Directors Middle East and North Africa. In Sub-Saharan North Africa too are beginning to embrace pri- or the countries they represent. Africa divestitures, capturing 48 percent of vate involvement. At least twelve countries in To order additional regional investment, follow the Latin American these regions are set to liberalize their mobile copies please call approach. In the Middle East and North Africa the phone markets by the end of 2000, and many 202 458 1111 or contact only divestiture was for mobile phone services. others are analyzing strategies for privatizing Suzanne Smith, editor, Room F11K 208, their incumbent operators. The World Bank, Looking ahead 1818 H Street, NW, 1 All dollar amounts are in 1998 U.S. dollars. The PPI Project Washington, D.C. 20433, or Internet address More and more governments recognize that Database records total investment in infrastructure projects with introducing competitive markets is the best way private participation, not private investment alone. Investments in ssmith7@worldbank.org. telecommunications projects include expenditures on network The series is also to increase access to telecommunications ser- expansion, divestiture revenues, and license fees (see box 1). available on line (www.worldbank.org/ vices and improve their quality and affordability. html/fpd/notes/). Ada Karina Izaguirre (aizaguirre@ Printed on recycled In Latin America the end of transitional monop- worldbank.org), Private Participation paper. olies in basic services is bringing a new wave of in Infrastructure Group