Getting privatisation right: a case study

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.

Over the last two decades, many other countries also took steps to open their telecom markets, and lower prices usually followed. So, what is special about the Guatemalan experience?

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.

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.

To their credit, over the last couple of decades most countries have used auctions as an efficient means to allocate spectrum use rights. Yet most have also employed cumbersome administrative procedures that delay when rights to use a specific band may be auctioned. In contrast, following the reform in Guatemala, rights to use the spectrum could be petitioned at any time. Unless there were serious technical concerns (e.g. interference to other users) or other parties requesting use of the same band, the spectrum would be made available in 18 days or fewer. If more than one party sought access to the same spectrum band, an auction would be held in 30 days.

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.

Reform in Guatemala was not without obstacles. The sceptics feared that privatisation would mean an abusive monopoly outside of government’s hands. Other critics fretted that a truly market-based reform - with easy access to spectrum and few restrictions on how it is used - would cause ‘chaos’ in the market. It didn’t happen.

Instead, with easy access to spectrum and clear rights to use it, competition surged, coverage expanded, and prices plummeted. Prices in Guatemala soon were among the lowest – if not the lowest – in Latin America. In the five years following reform, average minutes of use for mobile communications were considerably above the Latin American average, between 10 and 60 percent higher, depending on the type of service. Remarkably, between 1996 and 2010, the number of mobile connections increased by a factor of 275. In short, the benefits to consumers have been immense.

What were the secrets of Guatemala’s success? Firstly, the key players in the reform effort had strong principles and tremendous resolve, as well as a high degree of trust in each other.

Alfredo Guzmán, a Member of Congress, was asked by President Álvaro Arzú to head the state-run telecom monopoly and privatise it. Guzmán benefited from having friends in a Guatemalan think tank, the Center for Economic and Social Studies (CEES), and the university it spawned, Universidad Francisco Marroquín (UFM), where he had studied. Both institutions had decades-long histories of advancing market-based principles. Giancarlo Ibárgüen, a member of the Board of Directors of CEES, was an electrical engineer with a keen understanding of markets, and he developed a technically sound legal structure for spectrum rights.

In the face of opposition, Guzmán and his team, including another UFM graduate, stayed true to their principles. Trusted by President Arzú, Guzmán argued successfully to employ the usufruct titles as designed and to not allow these rights to be thwarted by those with political connections. And as head of the state telecom monopoly, Guzmán ensured its privatisation, but only after the market had been opened to competitors.

Finally, these reformers employed an effective strategy to promote market-based reform in a country that has traditionally looked sceptically on privatisation, property rights and markets. They knew that the same sceptics also hated the state-run phone company. Guzmán carefully crafted his message: reform would mean competition, and competition would benefit consumers. In the end, that’s exactly what happened. 

For more details on this reform, see the case study ‘Privatization of Telecommunications in Guatemala: A Tale Worth Telling’, available at http://bit.ly/XDC1Sz. The study is produced by the Antigua Forum, a project of Universidad Francisco Marroquín that facilitates learning about how to promote reform.

Wayne A. Leighton is executive director of the Antigua Forum and co-author, with Edward J. López of Madmen, Intellectuals, and Academic Scribblers: The Economic Engine of Political Change.

I really enjoyed this piece. I am a proponent of privatisation, but only if it results in competition. This is an interesting case and one I think we could all learn from. Have a read of this when you get a chance. Thanks. http://theconscienceblog.com/2012/11/18/privatisation-is-justified-only-...

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