The Financial Economics of Privatization

By William L. Megginson | Go to book overview
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Privatization Industry


No other industry has become more closely associated with privatization in the popular imagination than has telecommunications. Beginning with the first large, and immensely controversial, sale of British Telecom shares in 1984, governments of over 80 countries have fully or partially divested their holdings in the national telecommunications service provider (hereafter, telecom or telco), which was almost always a monopoly service provider prior to divestiture. More than 150 separate offerings have been made, and these have raised almost $450 billion for the divesting governments.

Few governments approach the telecom privatization decision lightly. Not only do these companies provide a basic service, they are invariably one of the nation’s most important industrial companies and are often the largest single employer after the government itself. Privatizing these firms successfully can yield significant political, economic, and financial benefits—not the least of which is the opportunity to massively increase the number of citizens who own shares and to dramatically improve the depth and liquidity of the country’s stock market. On the other hand, few governments survive the political fallout from a botched telecom privatization, and any economic and regulatory mistakes made during the initial sale will haunt the economy for many years thereafter. Telecom privatizations are thus the highest of all high-stakes privatization gambles.

This chapter begins by providing an overview of how state ownership of telecommunications evolved during the twentieth century, and discusses why this model has fallen out of favor over the past two decades. The next section details the key issues of regulation that must be faced whenever a government decides to privatize its telecom provider, and also offers policy recommendations based on the experience of those countries that have already privatized their telcos. We then describe the two basic methods used to divest telecom ownership stakes and detail how asset sales and public offerings of share in these companies have transformed global capital markets in the years since stock in British Telecom was first offered to the public in 1984. The fourth and fifth sections discuss the empirical evidence


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The Financial Economics of Privatization


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