Privatisation: the telecom sell-off

Most European nations have sold off at least part of their PTT, and in an open market the industry is thriving.

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By  Alex Marklew Published  September 4, 2000

Introduction|~||~||~|16 years ago the world of communications was a very different place. Mobiles were a recent innovation and were simple, chunky affairs reserved for the elite few who could afford them.

The Internet as we know it didn’t exist – there was only a handful of professors and programmers working with painfully slow modems and low-memory computers. And there were no global telecom conglomerates, just state-owned monopolies that kept themselves to themselves.

British Telecom was one such monopoly. When Margaret Thatcher came to power in 1979, the corporation was in a bad shape. It was in desperate need of investment to update its aging infrastructure, but profits were low and there was no spare capital available to fix it.

The government decided that the only way to sort it out was to sell it off. And so on December the 3rd 1984 British Telecom PLC made its first appearance on the London stock exchange, becoming the first ever national telecom company to be privatised. It made quite an impression.

“It is impossible to over estimate the impact it had. BT’s privatisation set the pattern for the rest of the industry worldwide,” says David Orr, BT’s head of communications.

The sell-off was a massive success, and just a decade and a half later BT is booming. Turnover, running at US $10.35 billion in the year before privatisation, has shot up to over $30 billion today, well ahead of inflation.

Shareholder dividends have grown by almost 30% since 1984. Pre-tax profits have climbed steadily to around the $6 billion mark, only dipping slightly when BT invests heavily in other companies, licences etc.

In 16 years the chairman’s annual income has increased eightfold to $1.1 million. The company’s assets have increased in value by 600%, and are now worth $56 billion.

Staff numbers have been cut by 100,000, the kind of fat trimming that is unheard of in the public sector but which comes naturally to business leaders.

As a private company BT has been able to expand overseas, and now has partners and subsidiaries everywhere from Malaysia to Holland. Cellnet, BT’s mobile service, was launched in January 1985. In June of that year it had 9,000 users. Today it stands at over 7.4 million.

“Could this have been achieved without privatisation?” asks Mr Orr. “No, it could not.”

Customers have benefited, too. In 1985, just 81 of BT’s 6000 exchanges were not analogue; today the UK has a fully digital telephone system, and a system of fibre-optic cables covers the whole country.

But wasn’t just the shareholders and public who did well from privatisation. The initial sell-off made $6 billion for the government, and the explosion of the mobile industry has netted even more.

||**||The Big Sell Off|~||~||~|When the licences to operate Britain’s third-generation mobile phones were auctioned in April this year, BT paid $6.1 billion for theirs.

In total the government pocketed over $33 billion in return for the five licences. The operators will have to pay out again in 20 years time when their licences expire, meaning another massive payday for the treasury.

The UK already has around 31 million mobile users (more than half the population), and the figure is expected to reach 40 million by the time Britain’s 3G network is complete.

This means that between them the mobile companies are prepared to pay about $825 for each potential customer, and that’s before they even pay to set up the technology.

There’s obviously money to be made for the operators too, as they’d be unlikely to invest such vast sums without being certain of similar returns.

“The licence represents good value for BT’s shareholders,” said Mr Orr at the time of the auction. “BT expects explosive growth in mobile data services to deliver a sound return on its investment over the 20-year lifetime of the licence.”

Egypt currently has about one million mobile subscribers. If companies like BT, Vodafone and the Deutsche Telekom-owned One2One are prepared to spend the same amount in the Middle East as in Europe (and there’s no reason to suspect that they’re not), a similar auction would net the Egyptian government $825 million.

In Turkey the figure rockets up to $6.6 billion. And that’s in a country where only 12% of the population currently own a mobile.

The free-for all auction used to allocate 3G licences in Britain is in stark contrast to the ‘beauty contest’ method used in several other European countries.

Finland, which has the highest penetration of mobile users in the world, gave away its 3G licences for free after basing the decision on the quality of service the operators will provide. The thinking behind it is that the providers will have more to spend on building a top-rate infrastructure if they haven’t already paid billions for the licence.

Mr Orr thinks that BT’s bid would still have been successful if this was the case in the UK.

“We believe we could have made a credible case,” he says. “We are already the leader in the emerging mobile Internet market, and will be the first to market with high speed mobile data.”

Most of Europe was planning to use the Finnish model to allocate licences, but after seeing how much a few private telecom companies are willing to pay for a foothold in the world of 3G, many governments are now reconsidering.

It’s not hard to see why: in return for an opportunity to make money a government gets billions of dollars in cash, plus a high-quality infrastructure thrown in free of charge. The licence holders all refuse to say what they expect to pay to build their networks, but it’s thought to be at least equal to what was spent on the licences.

||**||3G Licences|~||~||~|However, the huge amounts being spent on licences have worried some in the industry. Share prices in mobile phone manufacturers and service providers dipped in June after Kurt Hellstrom, president of Ericsson, said that the frenzied bidding could stunt overall growth in the sector.

“It's clear that growth on the mobile market risks slowing as a consequence of the high charges,” he told a Swedish magazine recently.

Without deregulation and the removal of PTT monopolies, the competition that forces the price of licences up and the price of calls down could simply not have happened.

In BT and Vodafone, the UK has two of the biggest telecom companies in the world. Vodafone alone is worth $300 billion. This goes hand in hand with one of the most advanced telephone systems in the world, with relatively low prices to boot.

Even Oftel (the industry’s UK regulator), so often ready to attack companies for the slightest transgression, seem pleased with the current situation.

“UK consumers continue to benefit from a dynamic and flourishing telecoms market,” says David Edmonds, director general of telecommunications at Oftel. “The number of companies providing services has increased, the range of services has continued to expand, and prices in a number of markets have fallen dramatically - as a result overall use of telecoms services has grown.”

Privatisation is beginning to creep into the Middle Eastern market. State-owned telecom companies in Egypt, Turkey, Jordan and Oman have all been at least partially sold off recently.

||**||Losing Control|~||~||~|Many governments in the region seem wary of losing control, and so the idea of holding onto at least 51% of the company seems to appeal. This can sometimes put off investors, but the tactic has been a huge success at Deutsche Telekom, the largest telecom group in Europe.

When it was floated in November 1996 the German government retained a controlling share in DT, the aim being that the company will have all the benefits of a private industry while ensuring that public service remains a priority. It also guarantees that no foreign company can buy them out altogether.

DT is now the third largest telecom company in the world, with a turnover in excess of $33 billion. Recent acquisitions include several companies in South-East Asia, Hungary’s MATV and Austrian mobile operator max.mobil.

In the summer of 1999 DT paid $12.7 billion for Britain’s One2One, who gave the world the first GSM1800 all digital network when it launched in 1993.

However, it hasn’t all been plain sailing for the German giant. Chief Executive Ron Sommer has made it clear that he wants DT to dominate the US market, but he’s currently struggling to reach his goal.

DT ran into trouble in March when it tried to buy out Sprint, a US mobile operator that has attracted the interest of a number of rivals. American politicians objected to the move, questioning whether a company that is part owned by a foreign government should have access to a mobile licence in America.

In addition, US law forbids the transfer of FCC licences to companies that are more than 25% owned by overseas governments. If DT was sold off completely it would allow further US expansion, but the Bundestag are not willing to sacrifice the public ownership of the company.

Meanwhile the privately owned Vodafone has started to moved into the American market instead.

France Telecom is still state-run, but its directors have obviously seen the potential benefits of privatisation. Wanadoo, the French company’s Internet subsidiary, is being floated on the stock exchange for $18 billion. The French company’s lack of financial clout was shown up during the UK 3G licence auction.

NTL Mobile, formed by FT and the cable company NTL, was forced to pull out of the race after the level of bids got too high for them. They are now having difficulty catching up with their European rivals, who have between five and 15 years of private finance behind them.

||**||Profits versus Customer Benefits|~||~||~|But full privatisation isn’t necessarily the answer to all the problems in the telecom world. Although services have improved greatly as a result of extra investment and competition, many users complain that a private company will always think of its shareholders first and its customers second.

When Comms MEA asked Mr Orr if he thought $6.1 billion was too much to pay for a 3G mobile licence, he said:

“No. This was good value for shareholders.” No mention was made of BT’s customers.

BT has taken a lot of criticism for not listening to what its customers have been saying, and for focusing too much on the balance sheet.

Repairs are notoriously slow, and bills are steadily creeping higher and higher. Britain is one of the few countries in the world where local phone calls are not free, something that is slowing the growth of Internet use.

It often appears that customer care is not a priority for the former corporation, although people rarely change their phone company, especially when they’re with such a well-known and trusted firm as BT.

It’s all too easy for a private company to take this for granted, and so lose sight of what it’s there for in the first place: to provide a service for the public.

The average customer certainly hasn’t forgotten this, and they want the phone companies to know about it. Telephone industry regulator Oftel recently published figures showing a 58% rise in complaints in 1999 alone. 78,900 complained to Oftel last year, over 200 a day. This compares to 36,000 just four years earlier.

Out of the top three reasons for complaining to the regulator, two were directly linked to customer relations (difficulty in contacting the company and no action being taken after a complaint was made). The third, failure to repair faults, also points to a lack of focus on the part of the company.

This problem is obviously something that should be addressed before selling off a public telecom provider, though it could be argued that breaking up a monopoly and introducing competition to the market forces companies to take better care of their customers.

||**||Bright Future Ahead|~||~||~|But on the whole things look bright for the privatised telecom companies. Following the path first trod by BT, more and more governments are turning to private finance as a means of modernising their networks.

Turnover and profits rise and more capital is available for investment. The brains behind private companies can help to make things more efficient and introduce new working practices. Governments, shareholders and senior staff all benefit financially.

There can be problems with customer service, but this is true of any large company or corporation. With the telecom industry currently worth more than ever before and European companies happy to invest billions around the world, it looks like there’s never been a better time to go private.||**||

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