Regulation, institutions, and commitment : privatization and regulation in the Argentine telecommunications sector

In 1990, Argentina privatized its state-owned telephone company, ENTel. Shifting telecommunications to the private sector was one of the first actions taken under the reform program of the new president, Carlos Saul Menem. In privatizing ENTel, the government focused on privatization as a way of establishing its reform credentials. Establishing a post-privatization regulatory regime was given lower priority. A well-defined regulatory regime was not in place before the sale, but privatization took place nonetheless. The authors find that despite the delay in implementing a regulatory regime, ENTel's privatization appears to have had a net positive impact, both on Argentina's reputation and on welfare. The reform program had its own virtuous cycle, creating and reinforcing credibility in the short run. But the neglect of the regulatory regime appears to have been costly in terms of the sale price that the government received and the tariff levels that investors demanded. In the long run, this neglect, if it persists, may have a negative impact on the telecommunications sector's performance. Regulation plays an important role in the private provision of telecommunications. Many argue that competition should be limited to allow economies of scale. But limited competition can lead to abuses of monopoly power and to demands from customers and suppliers for a regulatory regime to protect them from such abuses. In addition, the sector requires high sunk costs and asset specificity and the assets' owners are particularly exposed to the risks of expropriation - either outright (through nationalization) or gradual (through service requirements or low tariffs). A stable, credible regulatory environment reduces the risk of investment in this sector and reduces the expected rate of return that private investors would require to participate. Establishing a stable, credible regulatory regime before privatization increases the value of a privatized telecommunications firm to potential purchasers by reducing the risk associated with the purchase. This in turn affects the price generated by the selling government. By failing to establish such a regime in advance, the Argentine government received a lower sale price and increased the probability that buyers would capture windfall profits.