The Privatisation of European Telecommunications

Johan From, Kjell A. Eliassen

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351145589
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This international volume presents a comprehensive, comparative study of the transformation of the European telecommunications industry from 1990 to the present. The book focuses on the old incumbent operators and their dramatic change from state agencies to listed companies. It analyzes the liberalization process, as well as the corporatization and privatization of these companies. The contributors assess the conditions for the transformations taking place; the driving forces for change; the effects to management, the efforts of the EU during these processes, and ultimately, the role of the private owner. Political science publications have all but excluded analysis of the newly privatized companies; their contribution to the liberalization process both before and after privatization; and the interplay between the national political and company levels. The book redresses this shortcoming, and also features a double empirical focus in that the main national incumbents in Europe are analyzed and compared to Telenor, the Norwegian former incumbent.

Chapter 1
Introduction: Company Transformation — Corporatisation, Privatisation and Company Behaviour

Kjell A. Eliassen and Johan From

This chapter introduces the main topic of the book: the transformation of Western European telecommunications companies from state agencies to listed companies over a period of 15 years from the late 1980s on. The term transformation is utilised because the changes happening are comprehensive and far-reaching, far from being merely cosmetic changes in order to conform to standards of good organisation. At company level we see changes in organisational structure and company behaviour. Traditional centralised bureaucratic organisations are abandoned for more flexible and business-like structures (Pehrsson, 1996; Curwen, 1997; Turner, 1997; Monsen, 2004; Garnaut et al., 2005; Tossavainen, 2005). National public services strategies of securing universal affordable fixed-line services are supplemented with expansion into new areas both technologically and internationally. Ownership, regulation and competition policy give an important framework for these changes. A complicating matter is that the framework itself changes over time. Government ownership is established, professionalised and eventually diluted in the period covered. Further, old regulation is replaced with new regulation, proving once again that deregulation implies re-regulation. Finally, the significance of competition policy is eventually increasing. Albeit not an exhaustive list, these variables constitute a major part of the environment for the transformation processes. What makes them especially significant is their direct impact on how the transformation processes occur. Modelling the transformation processes in agency logic, accentuates the importance of the various roles of government; interests and strategies on company level; and the significance of the state-company relations.

In the present volume the focus is more on the changes in the telecommunications companies than on the regulatory framework of these companies, an area attracted much focus over the last years (Majone, 1990; Melody, 1997; Pelkmans and Young, 1998; Eliassen and Sjøvaag, 1999; Eliassen and Marino, 2001; Thatcher, 2004a). Identifying the role and strength of the driving forces behind these changes will be particularly emphasised. Hence, issues like the role of the owners and various shifts in ownership, the company organisational structure, and the strategies employed in the different phases of the corporatisation and privatisation process will be addressed. These issues are important not only in the telecommuniations industry but for a more general understanding of state ownership and possible consequences of institutional changes in the public sector. Similar developments of corporatisation and privatisation have taken place in sectors like railway, electricity, postal services and others. Thus, the aim is that this volume could shed some light also on the challenges and possible effects of transformation of ownership and operational rules and regulation in other parts of public services.

Most studies of telecommunications and other public sector privatisation processes have focused on regulatory issues and the British case of direct transformation from a state agency to a private company (Moon et al. 1986; Hills, 1986; Harper, 1997; Thatcher, 1999b). This volume focus more on company transformation in terms of all the different gradual steps most telecommunications companies in Europe have gone through from state agencies inside the state budget through budget independence, establishment of private subsidiaries, semi-corporate companies, fully state owned limited companies and eventually ordinary listed companies.

The Incumbents in a Competitive Framework

The main ambition set out in this book is to present a comprehensive and comparative perspective of the transition from being a state telecommunications agency to become a listed company. Most of the former telecommunications companies went through this process over a period of eight years in the end of the 1990s/beginning of the 2000s. Despite numerous studies of telecommunication liberalisation in Europe and the functioning of the European telecommunication market, few studies have been published with an explicit focus on the transformation, or institutional adaptation of the former incumbents through processes of corporatisation and privatisation. One exemption is Monsen (2004), which focuses on the effects of regulation on ownership changes and the incumbent telecommunications companies' structure and strategy.

The company level focus on transformation is valuable in giving us insight into the challenges and obstacles faced by governments attempting to modernise and reform public service delivery. For the last 25 years the public sector has increasingly come under pressure for not being cost effective, responsive and transparent. This is accentuated for a number of different reasons. Among these are a general ideological shift in the late 1970s, as indicated by Thatcher and Reagan taking offices; the need for more flexibility for quicker adaptation to technological and economic change; a request for higher efficiency/productivity for reducing strains on state budgets; and a call for clearer roles in order to sort out issues of political accountability (Dunleavy and O'Leary, 1987; Hills, 1986; Lane, 1997; Aberbach and Christensen, 2003). The desire has been to make the service production more productive and efficient, i.e. to obtain a public sector that 'works better and costs less' (Gore, 1993) or getting more, better and cheaper services.

According to public choice theorists, monopoly production in a hierarchical bureaucratic structure creates 'agency costs'. The true costs of production are not known to the politicians and the bureaucrats can therefore engage in non-optimal strategies, pursuing self-interest instead of public interest. The solution to these agency problems is therefore to expose public services to the market. The establishment of smaller more transparent units in a competitive environment is a remedy for information problems (uncovering the real costs of production) and it aligns the interests of the bureaucrats and the politicians. This kind of reasoning is underpinning what has come to be known as the 'New Public Management' reforms in the public sector (Hood, 1991), albeit not always in a coherent way (Barzelay, 2002). What is interesting however, is the creation of new types of agency problems. The corporatisation of public service production introduces a separation of ownership and control. The traditional hierarchical organisation gives the possibility of using instructions on every aspect of the production. Separating ownership and control, as is the case in most modern corporations, means that discretion is delegated from the owners (government and/or private) to the management. Given incomplete contracts and imperfect competition, issues of 'corporate governance' arise. Interestingly, the potential managerial strategies incurring agency costs in these kinds of corporations pointed to by management scholars (e.g. Gedajlovic and Saphiro, 1998) are strikingly similar to the model of 'budget maximizing' (Niskanen, 1971) and 'bureau shaping' (Dunleavy, 1991) within the public sector. Owners face the challenges of selecting and monitoring the management. Ownership issues therefore stand out as a significant aspect of the transformation process.

We need to rethink it seems, some of the basic theories of privatisation and company transformation on the bases of the European telecommunications experience in the last decades. Ownership has largely been neglected in writings on the development of the new regulatory frameworks and the liberalisation process in European (and other) countries. What have been the mechanisms of change from state monopolies to private companies, and how should the efforts of the European Union and national regulatory agencies in this process be assessed? Political science publications have to a large extent excluded analysis of the newly privatised companies, their role in the various national liberalisation processes both before and after privatisation, and the interplay between the national political and company levels. Also in business and strategy studies there are few examples of this kind of studies (but see Monsen, 2004). This volume seeks to rectify such shortcomings with regard to political science and social science literature more in general.

Accordingly, this volume is organised thematically as shown in Figure 1.1:

• 1) Characteristics of transformation: What are the effect and the interplay of ownership, regulation and competition policy on the transformation process?
• 2) Examples of transformation: How are the processes of transformation conducted within various telecommunications companies? What are the challenges and how are they dealt with within the process?
• 3) Aspects of transformation: What are the main aspects of the transformation processes regarding company change, business strategy and internationalisation?

Studies of Telecommunication Change Processes

The focus on company transformation does not mean that we ignore the importance of external drivers for these processes, nor are we oblivious to their effects. This section will therefore introduce short overviews of what we consider the most salient drivers and effects, as shown in Figure 1.1. One should remember, however, that this book is mainly about peeking into the 'black box' of company transformation, and that the purpose of the following section is to set the discussion in context within the wider social science debate.

A. Drivers for Change

• Ideology — at both the national and the EU level

The American New Right gained popularity throughout the 1970s, resulting in the election of Ronald Reagan as president in 1981. One of the main themes of this movement was to reduce peoples' reliance upon government. The ideas had proponents also on the European side of the Atlantic, where Margaret Thatcher won the 1979 general election. The New Right wanted to reduce the scope of the state, much in line with writings from the so-called 'Chicago School of Economics', whose major tenet was that markets are more efficient than government, and therefore a superior form of management for public services as well as private business (Friedman, 1962). This line of thinking advocated deregulation, privatisation, and competition among service providers (Stigler, 1975; Demsetz, 1968; Posner, 1992). Governmental monopolies were seen as inherently inefficient, and privatisation and competition would provide efficiency gains as well as decreased pressure on state budgets.

In the UK, these ideas were central to the Conservative government's agenda after 1979 (Harper, 1997; Thatcher, 1999b). The poor condition of state finances rendered privatisation policies attractive; moreover, there was a separate political pressure to curb the power of the trade unions, which had caused much disturbance and social unrest in the 1970s. Margaret Thatcher therefore had strong political backing for her agenda when taking office.

At the EU level, the process of deregulation of the telecommunications sector started in the first half of the 1980s (Dyson and Humphreys, 1986; Eliassen, Mason and Sjøvaag, 1999), and served a double purpose. Firstly, it was regarded an arrowhead to the development of the Single European Market, which the Commission in the mid-1980s vowed should be completed by 1992 (Nugent, 1991). Telecommunications were important both because of its characteristic as infrastructure, and also because the 'new technologies' were seen as paramount to bringing new economic impetus to a politically and economically depressed Europe.

Furthermore, the telecommunications sector provided an important test of the Commission's regulatory powers. Whereas previously policy-making in the European Communities had been based on the original Treaties, telecommunications broke with this tradition, being among the states' 'special rights' that had explicitly been excluded from Community competencies. Some of the early legislative steps were taken as Commission Directives under the aegis of the then Article 90 (renamed Art 86 after the Treaty of Amsterdam), which reinforces the EU's rules on competition and permits the Commission to address directives or decisions to Member States in order to ensure compliance (Kamall, 1996: 89). The directive was contested in the European Court of Justice by France, but the Court ruled in 1991 that 'the Commission's supervisory function (...) also provide[d] it with the competence to specify the relevant obligations of the Member States under the Treaty including the specification and limitation of exclusive rights' (Scherer, 1995: 5). The path was thus largely cleared for an ambitious Commission wanting to expand its competencies.

• Politics

The European Union and its policy-making has been an important driving force in the process of liberalisation in Europe. The role of the European Commission is widely acknowledged as pivotal to the process of liberalisation both in Europe and also in the global arena (Sandholtz, 1992; Cincera, 1999; Kramer, 1992; Antonelli, 1997; Grupp and Schnöring, 1992; Schmidt, 1991). However, the great and rapidly growing importance of telecommunications and the ICT industry for the national economies means that national politics has played a central role in the transformation process over the last three decades. There is compelling evidence that the process of regulatory reform at the national level was already well under way in several EU member states, if not through actual new legislation, at least in the form of changing ideas among policy-making elites, ready to be applied to regulatory reform once the European Commission and the Council of Ministers started legislating (Marino, 2005; Werle, 1990; Witte, 1988a; 1988b; 1992; Stoffaës, 1995; Chevallier, 1989; 1996; Goldstein, 2000; Schmidt, 2001; 2002).

Even though EU legislation is the same for all affected countries, the actual implementation into national law has been left to each government, and leeway has been left within which political choices have had to be made. For example, EU legislation does not specify any organisational model for regulation of the sector; it only stipulates that the regulator must be independent from the service provider (Eyre and Sitter, 1999). This has in most countries been met by an independent regulatory authority, but detailed guidelines have been issued by national legislators, making of the national political arena an important battlefield for diverging interests, but also giving Member States the possibility to accommodate EU directives within their own political traditions ( see Marino, 2005; Thatcher, 2004b).

• The role of technology — digitalisation

Technology has had a major impact on the development of the regulatory regimes in telecommunications for two separate reasons. Firstly, new technologies make existing regulation redundant in that it is often rapidly not covering the actual technical possibilities. For example, national voice telephony monopolies became practically impossible to maintain when satellite communications provided opportunities for call-back solutions from countries not covered by the national telephone service monopoly (Hills, 1986). More generally, the convergence between telephone services (fixed-line or mobile) and data services blurred the distinction between two previously separate areas of regulation, necessitating some form of regulatory change (Clements, 1998; Blackman, 1998).

Secondly, the ICT industry has important ramifications for both the economy and the political system. Telecommunications have traditionally been seen as closely related to national security, both for political and economic reasons (Rosanvallon, 1986; Marino, 2005; Holcombe, 1911). Ensuring safe transmission of communications is crucial for any state administration, but more important for the late twentieth and the twenty-first centuries, a healthy telecommunications sector is paramount to infrastructure and economic growth. It can play the role of 'locomotive' for the economy, through off-spins to smaller technological firms and through providing central infrastructure (OECD, 1997; Kiessling and Blondeel, 1999). Telecommunication policies can be seen within an economic context, where the focus will be on the services' role as infrastructure for the economy in general, or on the economics internal to the sector (Wenders, 1987; Cave, Sumit, Majumdar, and Vogelsang, 2002; Gruber, 2005). In the political system, technological possibilities open up for new channels of influence and participation as well as provision of public services (Mansell and Steinmueller, 2000; Mansell and Tang, 1996). Therefore, it became doubly important for governments to rapidly create a free market for telecommunications (and later ICT) services in Europe.

• Globalisation

Globalisation of trade and industry in general goes hand in hand with globalisation in telecommunications. Global firms demand global telecommunications services, and telecoms enterprises themselves become global players. The operators demand (ideally ) similar regulations of all markets, and the WTO has provided a general framework for free trade in telecommunications services through the Uruguay round. Regional organisations (e.g., EU, ASEAN, NAFTA) also provide a supra-national arena in which enterprises and member states can negotiate and co-ordinate development of national regulatory systems. Globalisation therefore adds another factor to telecommunication organisations' environment; namely regional and global regulations.

The concept of 'one-stop-shop', where telecommunications services are delivered by one operator to multinational organisations regardless of national frontiers, has been a tantalising goal for telecommunications operators. In order to reach this goal, the operators needed to be present in all markets, and the 1990s saw a frenzy of global alliance building and mergers and acquisitions (Curwen, 1999; Amesse et al., 2004; Shearer, 2004). Such formation of new extended organisations entailed serious issues of corporate governance. Now, organisations that for decades, often more than a century, remained national monopolies are expected to integrate with new cultures and traditions, as well as meeting new business challenges under reformed regulatory systems in competition with other players. The process of adaptation and change is necessarily compelx, mostly difficult, and a...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Figures and Tables
• Contributors
• Preface
• 1 Introduction: Company Transformation – Corporatisation, Privatisation and Company Behaviour
• 2 Modelling the Transformation Process
• PART I: LIBERALISATION AS CONTEXT FOR COMPANY TRANSFORMATION
• PART II: THE TRANSFORMATION OF TELECOMMUNICATIONS COMPANIES: SOME CONTRASTING WEST-EUROPEAN EXAMPLES
• PART III: THE TRANSFORMATION OF STATE MONOPOLIES
• Bibliography
• Index