The Impact of Telecommunications Privatization in Peru on the Welfare of Urban Consumers

The Peruvian government privatized Compañía Peruana de Teléfonos (CPT) and Empresa Nacional de Telecomunicaciones (ENTEL) in 1994. Both enterprises were purchased by Telefónica de España. The record of the telecommunications sector under state management was very poor. By 1993 Peru had strikingly low telephone coverage, with lines concentrated in the capital of Lima and in wealthy households. In comparison with international coverage and based on its level of per capita gross domestic product (GDP), Peru should have had eleven lines for every 100 inhabitants. However, Peru's telephone density was a mere 2.6 lines in 1992, one of the lowest of the region. The waiting time for a new line in 1993 was 118 months, whereas customers in Colombia were waiting seventeen months and those in Mexico, eleven months.

Service quality was below international standards. In 1992, only 40 percent of all phone calls were actually completed, partly as a result of the small size and obsolete technology of the network, which easily became congested. Inadequate maintenance also affected communications quality. Telephone cables have a useful life of fifteen years, but in 1993 some of the cables in use were over sixty years old. Only 33 percent of the network was digital.

CPT and ENTEL both had an excessive number of employees, which resulted in low productivity and a distorted structure of operating costs. Another distinctive feature of the Peruvian telecommunications sector during this time was a skewed tariff structure. Installation charges were quite high by international standards (close to U.S.$1,000 per residential telephone line in 1993), while the flat monthly charge was relatively low. In contrast, tariffs for long-distance and local calls were quite high. This tariff structure was based on the idea that only rich consumers with inelastic demand used the international long-distance service, which led to a cross subsidy between that service and local telephone calls. Because this distorted tariff structure failed to finance universal service, only rich households enjoyed telephone service in Peru in the early 1990s.

Privatization was designed to increase coverage, boost efficiency, and encourage a competitive market in the medium term. The privatization contract set specific investment goals to relax the existing supply constraint. To foster competition, the contract also established a five-year "rebalancing" period, so that tariffs would reflect their long-term marginal costs. Adjusting tariffs immediately was considered too harsh for consumer welfare.

The resulting improvements in telecommunications were impressive. Between 1993 and 1998, the number of lines installed increased by 167 percent. Thus, Telefónica amply met the concession contract's coverage goals. By 1998, the entire market for basic telephone service was covered and the waiting list was eliminated. Service quality also improved substantially. Fully 90 percent of the network was digital, and 99 percent of local and international long-distance calls were completed. Tariff balance was achieved and the sector was open to free competition several months ahead of schedule.

Table 1 presents two tests comparing pre- and postprivatization firm performance indicators. The first test is a first-difference analysis using firm and year fixed effects to analyze the difference between the pre- and postprivatization information. The second is a difference-in-differences test. The difference-in-differences statistic not only tests for a change in the firm's performance relative to the preprivatization period, but it also takes into account performance relative to a control group that didn't go through the privatization process. The control group used is the main Peruvian water and sanitation firm (SEDAPAL), which was not privatized but which went through a reform process similar to that of the telecommunications

TABLE 1.

Performance Changes in the Telecommunications Sector after Privatization^a

firm in the preprivatization period. The specific sectoral per capita gross national product (GNP) is also included to control for the size of the two different sectors.

As shown in the table, all the performance indicators with the exception of...