Performance gains through privatization and competition of Asian telecommunications.
I. Introduction
There is now a vast literature extolling the effects of privatization on the improvements of financial and operating performance in both developed and developing countries. However, there is no empirical evidence to show the effects of simultaneous adoption of privatization
Boubakri and Cosset's study (1998) examined the financial and operating performance of newly privatized firms from various industries in general. Their main findings were sales, profits, investment, and operating efficiency all increased following privatization, including employment. Likewise, Megginson, Nash, and van Randenborgh (1994) examined thirty-two industries including telecommunications and found that the main measures of financial and operating performance and employment all increased significantly after privatization. The study by Eckel, Eckel, and Vijay (1997) found that privatization of the British Airways improved economic efficiency by reducing employment and increasing productivity. These studies, however, failed to delineate the effects of competition after monopoly was eroded by market forces. Bortolloti et al. (2001) examined the privatization of thirty-one national telecommunication companies in twenty-five countries. Their findings show that financial and operating performance improved significantly after privatization due to regulatory changes than privatization itself. Some studies emphasize the privatization to be a process including change of ownership: Ariff and Iyer (1995) and Thynne and Ariff (1989).
These studies, however, examined these issues over too short a period of time: productivity gains and efficiency improvements do not occur within a few years. There are no hard statistical tests of performance and efficiency gains of Asian telecommunications (such as in Japan, Malaysia, and the Philippines) over a sufficiently long period of time to justify the long-term effects of simultaneous adoption of privatization and competition policies. The purpose of this paper is to fill a void in the literature. Sufficient time has elapsed since privatization and enough time to inject competition in the industry so that data are now available to examine the persistence of efficiency following the reforms. This study, therefore, tries to provide long-term effects of the simultaneous adoption of both privatization and competition reforms on performance and efficiency in Asian telecommunications. This is the main contribution of the research as addition of new findings to the existing studies on privatization. The study also provides new empirical evidence that competition is the effective agent of change than mere privatization as evident in the case of the Philippine telecommunications. The empirical findings of this study, moreover, could help inform the policymakers on the impact of reform changes on telecommunications in light of the ongoing debates on liberalization of trade in services.
Generally in Asia, privatization of telecommunications has come at a much slower pace and through diverse processes because governments are more cautious in their approach due to political costs. Privatization in Asia is in two ways: sell-off of assets and transfer of rights (with/without assets) (Euromoney 1993). The sell-off of assets is a market-based privatization. It operates on the premise that the private sector is a more efficient provider of services and that it can compete in the market and get funds from the capital markets. Another way of privatization is the transfer of government rights to the private sector; this is widely adopted in Asia, because it can provide quick solutions to infrastructure bottlenecks in all sectors of the national economy. Privatization, which has been followed by competition or liberalization, has taken much longer (Mody and Walton 1998). Even the otherwise free-marketer economy of Singapore has 83 per cent government ownership in Singtel shares after almost a decade of privatization.
The paper is organized as follows. Section II provides a conceptual framework and existing evidence on privatization. Section III explains phases of telecommunication reforms in the three cases. Section IV describes the data and the sample selection. Section V explains the methodology. In Sections VI and VII are the empirical results. The paper ends with the conclusions and comments in Section VIII.
II. Conceptual Framework and Existing Evidence
Telecommunications is regarded as a natural monopoly industry. Monopoly could be either a government-owned or a privately owned structural arrangement. The analytical framework of this study thus takes into account the monopolistic nature and the characteristics of the three telecommunication firms during the stage of monopoly control. Therefore, the pre-privatization period in this study refers to a phase of the natural monopoly of the firms, either as publicly owned and controlled entities (as in Japan and Malaysia) or as a privately owned and controlled entity (as in the Philippines).
Nippon Telegraph and Telephone Company (NTT) and Telekon Malaysia (TM) are examples of government-owned and controlled monopoly firms. Prior to their privatization, these entities were 100 per cent owned and controlled by their state governments. Likewise, the Philippine Long Distance Telephone Company (PLDT), though regarded as a monopoly, was under private ownership. It was awarded a monopoly franchise and protected by the Philippine Government. The PLDT also enjoyed benefits and privileges of providing telecommunication services in the entire country, until its monopoly was withdrawn in 1992 upon the introduction of competition to the telecommunications market. In this case, the PLDT is taken as a case of performance improvement after the introduction of competition in its heavily protected monopolistic industry.
Under monopoly control, efficiency and performance of the firms in the three cases were unsatisfactory. Monopoly did not promote welfare maximization. The absence of profit motives stimulated by competition in the management culture promoted inefficiency in the cases of Japan and Malaysia. Likewise, the absence of competition in the case of the PLDT was the root cause of that firm's poor performance as a private monopoly. Because monopoly was deficient in achieving improved performance (as documented in later literature review) and was unlikely to promote efficiency, structural reforms in the management of the firms were undertaken, with the aim of achieving performance and efficiency gains. Other factors that promoted telecommunication reforms and helped move the industry from monopoly to development and growth in the telecommunication sectors in the three Asian cases are examined. Therefore, research findings from this framework may help validate the reform process. The extent of the impacts of both privatization and competition reforms of the Asian telecommunications industry over a sufficiently long period is measured and statistically verified for significance.
The first step of reform was corporatizing the state-owned monopoly by duplicating its management structure based on a private sector model of the firm without the budget support of the state. This process was virtually transparent in the telecommunication firms in Japan and Malaysia, which thus undertook this structural change as a pre-condition for the privatization process. However, this change was just the initial step; it was inadequate to produce significant outcomes for the firm's performance or efficiency. This is because the firms were still under government ownership and continued to behave like bureaucracies rather than actual competitive firms. Competition via new entrants to the market is a lengthy process and is just beginning. As such, the second structural reform was the next step to privatizing the state-owned monopoly by introducing competition in the market. Privatization and competition would come together and complement each other, because privatization without competition would mean only a mere transfer of a public monopoly to a private monopoly. Categorically speaking, both reforms are two distinct and separate policies. As Vickers and Yarrow (1991, p. 116) argue, "competition, which is conceptually distinct from ownership, can greatly improve monitoring possibilities, and hence incentives for productive efficiency ... Experience in Britain shows that the legalisation of entry does not always lead to effective competition by itself. Regulation for competition may then be a desirable complement of privatisation."
Competition refers to Beesley and Littlechild's (1992) definition of "rivalry and freedom to enter a market". However, it is hard to inject rivalry without some private ownership, and some privatization may be necessary but not sufficient for substantial performance improvements (Vickers and Yarrow 1991, p. 117). In this context, privatization is taken as a means of bringing the firms to competition by allowing their free entry and promoting increased rivalry, thereby, taking monopoly out of the market.
Research on privatization shows that ownership matters for improved efficiency and performance: Kikeri, Nellis, and Shirley (1992) and Yarrow (1989). However, a critical analysis of privatization within the ownership argument reveals a general consensus: privatization per se is an inadequate tool without the accompanying market reforms, which include, beyond the full ownership transfer, such reforms as increasing competition through competition laws, mandated service quality regulations to provide for customer services as part of continuing liberalization, etc. (Yarrow 1995; Vickers and Yarrow 1991; Ure and Vivorakij 1997; Hudson 1997; and Mody, Bauer, and Straubhaar 1995).
From a broader perspective, privatization "embraces denationalization or selling-off state-owned assets, de-regulation (liberalization), competitive tendering, together with the introduction of private ownership and market arrangements" (Hartley and Parker 1991, p. 11). By opening markets through liberalization, privatization is a means of bringing in capital investments (Regli 1997; Harrington 1995) or removing barriers or reducing restrictions on new entrants (Hartley and Parker 1991). It should be noted, however, that privatization is neither an end in itself nor a panacea.
Studies show that the overall performance of state firms in infrastructure and utilities was disappointing: Kikeri, Nellis, and Shirley (1992). This poor performance was one of the driving forces that spurred governments around the world to advance privatization reforms. (1) in the early 1990s, more than eighty countries participated in some significant forms of privatization (Blasko 1998). The process of privatization had continued and the pace of sales increased due to the alleged poor performance records (Kikeri, Nellis, and Shirley 1992).
However, these privatization efforts produced mixed results. In addition to earlier cited empirical studies, Galal et al. (1994) and Galal and Shirley (1994) examined various industries in Chile, Malaysia, Mexico, and the United Kingdom. They found that following privatization, there was a net increase in wealth, economic gains due to higher investment, and managerial innovation but relative losses to employees, consumers, and taxpayers. The findings of Vickers and Yarrow (1988) showed that efficiency improved following the privatization of various industries in the United Kingdom (for example, energy, telecom, transport, and water). Likewise, Boussofiane et al. (1997) confirmed positive effects of privatization on efficiency in their study of ten U.K. industries. In contrast, Harper's (2001) study of various industries in the Czech Republic showed that efficiency and profitability decreased following privatization in a short run, and employment also declined.
Another driving force of global telecommunication reforms was the rapid technological developments and increased liberal policy environment (Horwitz 1989; Fink, Mattoo, and Rathindran 2001). Advanced services and new facilities were necessary to keep abreast of the rapid technological changes worldwide. Telecommunications could no longer be restricted to a nation's boundaries, and therefore, technological innovation made the argument for a natural monopoly less convincing. Moreover, the pressure of the World Bank and other international organizations caused the reform changes in telecommunications (Wallsten 1999).
III. Phases of Telecommunication Reforms in Three Asian Cases
Japan
The 1985 privatization policy ended the NTT's statutory monopoly over Japan's domestic telecommunications market. The NTT's high rates and lack of innovation as a protected monopoly were the impetus of the 1985 privatization (Ryan 1997). Generally, the aims of this reform were to promote competition in the market by transforming the NTT: first, it became a private corporation and then, the telecommunications market was opened to new competitors (Kagami and Tsuji 1999). Ryan (1997, p. 22) argues: "There was virtually no opposition to the privatization of NTT. NTT itself wanted to become more independent of government control; other telecommunications firms wanted the opportunity to enter the industry; makers of telecommunications equipment felt that liberalization would strengthen the market and increase sales; and consumers of telephone services (both households and businesses) hoped to benefit from lower prices as a result of improved efficiency".
The results of NTT privatization in 1985 can be summarized as follows: (1) entry of new carriers, (2) rate reduction, and (3) diversification of services (Kagami and Tsuji 1999). Privatization of the NTT introduced competition in the telecommunications market but not unlimited competition. The NTT continues to have a monopoly over the country's telecommunications market. The NTT's divestiture is widely accepted as a significant condition for competition in the local market, except the studies of Nambu (1997) and Fransman (1997). Both argue that the NTT's divestiture did not necessarily lead to increased competition. Divestiture was just one policy alternative for promoting competition. Other policy options for promoting competition in the telecommunications market are the implementation of a fair interconnection rule, technological convergence, and liberalization of markets due to pressure from the United States, the World Trade Organization (WTO), and the Asia-Pacific Economic Co-operation (APEC).
After the change of ownership, the NTT continued its privatization process in three stages of domestic public offerings. Consecutive public offerings raised US$13.85 billion (12.5 per cent of shares) (2) in 1986, US$34.4 billion (12.5 per cent of shares and 1.42 per cent of GDP) in 1987, and US$22.2 billion (9.6 per cent of shares and 0.76 per cent of GDP) in 1988. As of 2001, the government still retained a 65 per cent stake in the firm. The company had control over Japan's local loop and fixed access charges and still handled over 90 per cent of local calls in Japan (The Australian, 27 June 2001, p. 39).
Malaysia
Malaysia's experience of privatization initiatives started from the corporatization process, which served as a "platform for the telecommunications department to be placed on a corporate, legal and commercial framework in which the Malaysian Government remains the sole shareholder, but did not play a direct role in management" (Mansor 1992, p. 63). Corporatization was the first step towards privatization, which led to setting up a company that is wholly owned by the government (Onn 1989, p. 97). This process was initiated by the incorporation of Syarikat Telekom Malaysia (STM), a fully state-owned corporation in 1987. The STM is commonly called Telekom Malaysia (TM).
The second phase of the privatization process began with the flotation and listing of STM's shares on the Kuala Lumpur Stock Exchange (KLSE) on 7 November 1990, which sold 23.9 per cent of the company's shares and raised US$862 million (equivalent to 2.02 per cent of GDP). Subsequently in September 1994, it sold US$350 million of ten-year convertible bonds. The government retains 76.1 per cent stake in the company.
In the post-corporatization phase, important policy changes in terms of the provision of telecommunication services occurred. These policy changes include:
* liberalizing of supply and provision of equipment, both terminal and network equipment, wherein, restrictions were removed in 1989;
* ensuring open access conditions to networks and interworking and mandatory interconnection;
* promoting competition in the mobile services (e.g., ATUR 450, ART 900, AMPS 800, and GSM);
* promoting of value-added services;
* liberalizing public voice services and operation of basic network by the end of 1993; and
* ensuring harmonization and orderly development in parallel and complementary to the liberalization programme (APEC 1994, p. 66).
In 1989, Celcom, Malaysia's leading mobile phone operator with 70 per cent share of the mobile phone market, started to operate. The telecommunications policy of 1994 broke down the state monopoly and opened the industry to more competition--the entry of fixed-line competitors (Astbury 1994). Under the new Communications and Multimedia Act 1998, several Malaysian telecommunication operators have been granted licences. There are seven licensed domestic network operators, five international network operators, and eight cellular/ personal communications services. (3) However, the government is encouraging mergers or alliances among players to share facilities and infrastructure for providing services, given the difficulties in achieving market consolidation (Utsumi and Toure 2000, p. 12).
The Philippines
Since 1928, the major telecommunications entity in the Philippines is a privately owned monopoly, the PLDT. The PLDT has exercised monopoly power over local, national, and international telephone services. Prior to the introduction of competition, the PLDT "owned at least 85 per cent of local exchange capacity and [was] the only extensive nationwide backbone in transmission network" (Serafica 1998, p. 60).
As a private monopoly, the PLDT long enjoyed special treatment and government protection from competition (East Asia Analytical Unit 1998, p. 210). Competition was totally absent in the telecommunications market prior to the introduction of market reforms in the early 1990s. Although the Philippine telecommunications industry was a private monopoly for more than half a century, there is no doubt that the industry was an epitome of inefficiency, under-investment, and unsatisfactory performance (see Serafica 1998; Wolf and Sussman 1995; and Aquino 1994). The PLDT had a poor record that featured a low number of new connections, high charges, and long waits for connection (East Asia Analytical Unit 1998, p. 210). A World Bank study reports: "To the extent that we accept that any company's economic behaviour is defined by the industry structure and regulatory environment, PLDT's failure to provide service adequate to meet demand is consistent with its position as an ineffectively regulated monopoly" (cited in Serafica 1998, p. 363). It is undeniable that telecommunications in the Philippines was among the least developed, when compared with other Asian countries two decades ago. (4)
Serafica's study (1998) concludes that under a regime of private monopoly, the Philippines telecommunications industry floundered. However, the demonopolization or the introduction of competition transformed the moribund industry into a dynamic and competitive market in the late 1980s and throughout the 1990s. The first telecommunications reform was initiated by the Aquino administration (1987-92) under an agenda of deregulation and liberalization of the telecommunications industry through the introduction of competition in the telecommunications market. New foreign licences were granted for international gateway facilities (IGF), cellular mobile telephone systems (CMTS), paging, cable television, very small aperture terminals (VSAT), and trunked mobile radio (APEC 1998, p. 183). In short, the previously monopolized telecommunications market was initially opened to competition when several operators came into the market in 1992.
The process of competition reforms was further accelerated under the Ramos administration (1992-98). It launched a massive campaign for further deregulation and liberalization of the markets. Opening the telecommunications industry to full competition, the Ramos government undertook reforms to promote investment and growth (Harrington 1995, p. 102).
Under the Ramos administration, three salient administrative policies were initiated to create a better competitive climate for the telecommunications industry. First, Executive Order (EO) 59 of 1993 prescribed the policy guidelines for compulsory interconnection (5) of authorised public telecommunication carriers. Second, EO 109 of 1993 outlined a policy designed to improve local exchange carrier service. This policy directive is fundamental for reaching the goal of universal access to basic and other telecommunication services throughout the country. Third, the Public Telecommunications Policy Act of the Philippines (RA 7925) of 1995 aimed to promote and govern the development of Philippine telecommunications and the delivery of public telecommunication services. This was considered to be the "main reason behind the rapid growth of the industry". The Act specified that a healthy, competitive environment is to be fostered in which telecommunication carriers are free to make business decisions and to interact with one another in providing telecommunication services. Under these conditions, it was expected that their financial viability would be enhanced while maintaining affordable rates for the benefit of consumers.
The Act mandated a wide public ownership of telecommunication entities through public offerings to be listed on the Philippine Stock Exchange (PSE). Each telecommunications entity was required to make a public offering of at least 30 per cent of its aggregate common stocks through stock exchanges in the PSE. Moreover, the National Telecommunications Commission (NTC), the regulatory body, was authorised to be the principal administrator of the Act, to adopt an administrative process that would facilitate the entry of qualified service providers, and to adopt a pricing policy that would generate sufficient returns. The NTC was mandated to establish rates and tariffs that provide for the economic viability of telecommunications entities and a fair return on their investment, considering the prevailing cost of capital in the domestic and international markets.
Competition policy reforms initially boosted growth in the industry by raising the level of telecommunication services in the Philippines. There is no doubt that the state of the telecommunications industry in this country has improved greatly in the last few years as a result of government policies on the liberalization of the market.
IV. Data
A crucial problem in studying telecommunication firms concerns data availability. These firms are usually reluctant to disclose important information to the public, a behaviour consistent with monopolists. This study is on three Asian firms: NTT, TM, and PLDT. The data sources that the researchers had access to during field trips to the headquarters of these firms are audited accounting data, telecommunications statistics, and country demographics. The audited accounting data consist of the usual financial statement data, of which some are relevant for this study, such as, net income, total operating revenues, depreciation, capital investments, total debts, total assets, return on equity (ROE), return on sales (ROS), total shareholders' equity, and total assets turnover, and few others. These data were obtained from the annual financial reports of the three Asian firms during the fieldwork in October to December 2000. (6) The accounting figures are expressed in the respective local currencies. To minimize any probable error, only audited accounting data are used in this study. In Japan, the financial year of the NTT ends on 31 March; the TM and PLDT both have financial year ending 31 December. Additional data were obtained from the companies' annual reports, for example, the number of employees, the total fixed lines, etc.
The telecommunications statistical data collected were: telephone lines per 100 inhabitants, waiting list for telephone lines, tariff, number of cellular' subscribers, and international outgoing traffic minutes. The major source of these data is the Telecommunication Data and Statistics Unit of the International Telecommunications Union (ITU). (7) The country demographic data consist of annual population and gross domestic product (GDP). These data are used in the calculation of per capita GDP. The data were obtained from the ITU, except in the case of Philippines for which specific information was obtained from the Philippine Statistical Yearbook (various issues).
Other minor sources are the National Telecommunications Commission (the Philippines), (8) Australian APEC Study Centre (Melbourne), Institute of Southeast Asian Studies (Singapore), Japan's Ministry of Posts and Telecommunications (Tokyo), and libraries at Monash University, the Australian National University, and the University of Melbourne.
V. Methodology
The data set is divided into two test periods: the last five years of pre-privatization period and the first seven (PLDT) to ten years (NTT and TM) of post-privatization period. The year of privatization is included in the test period of pre-privatization period, because no significant reforms appear to have taken place during the year of structural changes in the three selected firms. The entire test period covered in this paper is forty-two years in aggregate: fifteen years each for the NTT and TM, and twelve years for the PLDT. For Japan, the year of privatization (1985) is when ownership was transferred formally from the public to the private sector; for Malaysia, it was 1987 during the incorporation of the STM; for the Philippines, it was 1992, when the private monopoly of the PDLT was demonopolized as evident in the introduction of competition or the liberalization of the industry. The post-privatization period, therefore, covers a phase of transfer from the public to the private ownership as in the cases of the NTT and TM and demonopolization as the case of the PLDT.
The analysis of performance during the pre- and post-period of privatization is therefore over a sufficiently long period over which the persistence of performance can be estimated. The analysis focuses on: profitability, operating efficiency, capital expenditure, outputs, productivity and technical efficiency, and consumer welfare. The two measures reported in this paper as resulting from the impacts of privatization and competition reforms on the firms' efficiency and performance are based on accounting and economic measures of efficiency. The accounting method is used to measure the firm's profitability, operating efficiency, and capital expenditure. The overall efficiency is evaluated by measuring the outputs, productivity and technical efficiency, and consumer welfare.
In order to provide statistically robust findings concerning the firms' efficiency and performance improvement, a t-test is applied. The significance of the t-values is set as one-tailed tests at 0.05 acceptance level.
VI. Accounting-cum-Financial Performance
Profitability
After privatization, firms are expected to improve their internal efficiency by increasing their profitability as argued in Boycko, Shleifer, and Vishny (1996), Kikeri, Nellis, and Shirley (1992), and Yarrow (1995). Once privatized, subsidies of governments to state firms are withdrawn; thus, firms are encouraged to focus on maximization of profits by raising revenues. Hence, privatized firms focus their attention on increasing profitability as a safeguard from the threat of possible bankruptcy as argued by Megginson, Nash, and Randenborgh (1994).
Net Income. The first measure of profitability is net income. Among the three Asian cases, Malaysia shows the highest increase in average net income per year after privatization. (See Figure 1 and Table 1.) Before privatization, the firm's net income was RM199.3 million in 1983, which increased to RM1,786.4 million in 1997 after privatization. That is an annual growth rate of 15.74 per cent. In the Philippines, the PLDT's net income of PHP2,229.9 million in 1988 increased slightly to PHP2,777.9 million in 1999: a 1.85 per cent annual growth rate. In contrast, net income declined after privatization in Japan. The NTT's net income declined from [yen] 388,054 million in 1981 to [yen] 85,443 million in 1995: -9.60 per cent annual decline rate.
The mean income increased after privatization for both Malaysia and the Philippines. The mean incomes before and after privatization were RM189 versus RM1,094 million (Malaysia) and PHP3,435 versus PHP4,927 million (Philippines). The test of significance yielded a t-value of 4.696, which shows a statistically significant increase in Malaysia. The mean income after privatization is slightly higher in the Philippines: the statistical test confirms this is not a significant change. On the other hand, the NTT's mean income declined significantly with a t-value of -7.433 after privatization from [yen] 365,023 million to [yen] 190,645 million.
The insignificant increase in net income after privatization for Japan and the Philippines was attributed to the dismantling of monopoly rents. Profits may fall after government subsidies were withdrawn. Specifically, it may be due to high accumulated depreciation charges in both cases. It is expected that higher depreciation from over-investment to catch up after privatization could make income decline. For instance, the decrease in net income in Japan was due primarily to the following factors: increase in operating expenses (such as depreciation, amortization, and maintenance costs, and research and development expenses); effect of rate reductions; and the slowdown of the domestic economy (NTT Annual Reports, 1992 to 1994). Furthermore in 1995, the NTT's operating expenses increased because of the repair carried out to equipment and buildings damaged in the Great Hanshin Earthquake of 17 January 1995 (NTT Annual Report, 1995).
The net income in the Philippines decreased greatly in 1998. This decrease was due first, from the changes made to depreciation method (9) in 1998 and the estimated useful lives of property, plant, and equipment (10) (PLDT Annual Report, 1998). Moreover, a cellular subsidiary company of the PLDT, Piltel, revised its estimates of salvage values on its property, plant, and equipment, which contributed to the decrease in the PLDT's net income. The PLDT had a large minority interest in the net loss of Piltel, amounting to PHP2.1 billion. Second, the PLDT purchased substantially all its telecommunications equipments from abroad, which was financed out of foreign loans and required repayments in U.S. dollars. That could be a significant factor in the decline of its net income. Third, the decline in the PLDT's net income was also due to a decline in international long distance revenues. (11) This decline was due to the reduction in international long distance rates as part of the rate balancing, the decline in international accounting rates, and adjustments in respect of access and unbilled toll charges. Among the three cases, therefore, Telekom Malaysia has the highest increase in net income after privatization, compared with Japan and the Philippines.
Net Income per Line. The second measure of profitability is the ratio of net income to fixed lines. Telekom Malaysia had a significant increase after privatization: net income per line of RM285 in 1983 increased to RM423 in 1997: an annual growth of 2,68 per cent. However, the Philippines showed a decline in net income per line: PHP2,408 in 1988 declined to PHP1,576 in 1999, representing a -3.47 per cent fall. Likewise, Japan also had a dramatic decline in net income per line after privatization: [yen] 9,937 in 1981 to [yen] 1,434 in 1995, representing a decline of -12.11 per cent. Mean ratios of net income to lines before and after privatization were [yen] 8,801 and [yen] 3,697 (Japan); RM218 and RM418 (Malaysia); and PHP3,216 and PHP3,353 (Philippines). Among the three cases, Malaysia had a significant increase, with a t-value of 2.682. Although the mean after privatization is slightly higher than before privatization in the Philippines, it was insignificant with a t-value of 0.181. Japan also had a significant decline with a t-value of -8.403. The significant decline in Japan and the insignificant change in the Philippines are due to the decline in net income after privatization and the introduction of competition in the market. Hence, Malaysia had the highest increase in net income per line after privatization.
Return on Equity. Return on equity (ROE) is a ratio of net income to total equity, a ratio widely used in the private sector to measure the performance of firms. The ROE measures the earning power of the firm's shareholders based on book-value investment. Boycko, Shleifer, and Vishny (1996) predict that cash flow ownership of the firm's managers and outside shareholders increases following privatization.
In Japan, the ROE declined from 10.16 per cent in 1981 to 1.71 per cent after privatization in 1995. Likewise, the ROE in the Philippines also declined: 27.03 per cent in 1988 to 4.80 per cent after privatization in 1999, representing a -13.41 per cent decline. In contrast, the TM's ROE increased significantly from 11.75 per cent in 1983 to 14.20 per cent after privatization in 1997 (adjusted for inflation): an annual growth of 1.59 per cent. Malaysia has the highest growth in ROE after privatization, compared with Japan and the Philippines.
Mean ROEs before and after privatization were 8.14 and 4.56 per cent (Japan), 9.21 and 14.67 per cent (Malaysia), and 23.03 and 10.56 per cent (Philippines). The test statistics yielded t-values of -4.174 (Japan), 2.057 (Malaysia), and -4.559 (Philippines). The statistical test for Malaysia shows a significant increase after privatization; Japan and the Philippines had declines.
The ROE is further examined using the DuPont approach. In order to investigate the ROE more fully, this approach is valuable as it determines the sources of the ratio. The ROE can be measured by its three components:
ROE = Net profit margin x Total Asset Turnover x Equity Multiplier
The averages of net profit margin before and after privatization were 8.53 versus 3.22 per cent (Japan); 15.01 versus 29.04 per cent (Malaysia); and 26.51 versus 18.07 per cent (Philippines). Their t-values were -9.001 (Japan), 2.259 (Malaysia), and -2.206 (Philippines). Malaysia had a significant increase in net profit margin after privatization, compared with insignificant results for Japan and the Philippines. This suggests that costs went up in the latter two cases so that the source of decline was lack of cost control.
The averages of total asset turnover before and after privatization were 0.42 and 0.49 (Japan), 0.21 and 0.30 (Malaysia), and 0.34 and 0.24 (Philippines). Their corresponding t-values were 9.969 (Japan), 7.724 (Malaysia), and -5.114 (Philippines). Japan and Malaysia yielded significant increases in the asset turnover after privatization while there was a decline in the case of the Philippines. The latter was over-investing to produce a per unit service: alternatively, there was a sudden decline in planned sales, which made the investment in place redundant.
The equity multiplier averages before and after privatization were 2.25 and 2.90 (Japan), 3.07 and 1.76 (Malaysia), and 2.52 and 2.70 (Philippines). Japan had a significant increase after privatization, with a t-value of 6.543. Malaysia and the Philippines yielded insignificant t-values of -4.112 and 0.568, respectively. That means that the TM had applied too much capital, perhaps having borrowed too much after privatization.
A DuPont approach to the ROE therefore shows that the very low net profit margin of Japan pulled its ROE down, although its total asset turnover and equity multiplier were higher after privatization. This suggests that Japan's higher costs relative to the revenues made its net profit decline, and that resulted in a lower ROE. Lower net profit margin and lower total asset turnover for the Philippines were the root causes of its ROE decline, in spite of a marginal increase in its equity multiplier. In Malaysia, its high profit margin and high total assets turnover resulted in a higher ROE, thereby outweighing its low equity multiplier. In the three cases, Malaysia thus had a significant increase in the ROE after privatization, compared with Japan and the Philippines. The significant increase in the ROE in Malaysia suggests poor financial performance of the firm during the years of government monopoly.
Operating Efficiency
Theories suggest that public enterprises are chronically inefficient, because they are more concerned with the objectives of politicians (such as excess employment to garner votes) than maximization of efficiency (Boycko, Shleifer, and Vishny 1996). Privatization, along with competition, changes the objective of an entity from public interest to profit maximisation and also has substituted shareholders for a government's management control: see Yarrow (1995) and Vickers and Yarrow (1991). Privatization of state-owned enterprises (SOEs) and the resulting exposure to market competition ultimately leads to the privatized entity to employ its human, financial, and technological resources more efficiently.
A firm's operating efficiency can be evaluated by using three variables: total operating revenues, total operating revenues per line, and depreciation. These data show that operating efficiency measures--such as the total operating revenues, total operating revenues per line, and depreciation--have all gone up significantly after privatization (Figure 2 and Table 1).
Total Operating Revenues. The first measure of operating efficiency is total operating revenue. In Japan, the NTT's operating revenues before privatization were [yen] 3,952,841 million in 1981, which increased to [yen] 7,043,822 million after privatization in 1995: a 3.93 per cent growth. The positive growth was primarily due to the solid performances by the NTT's non-telephone operations, including digital data exchange revenues, pocket pager services, and other services. Furthermore, the growing demand for mobile/ cellular services as well as the NTT's rate reductions for these services contributed largely to the increase in its revenues. Japan's domestic telecommunications market, thus, benefited from the growing demands, spurred by an increased dependence on information for economic and social activities (NTT Annual Reports, 1986 to 1995).
Telekom Malaysia's operating revenues increased from RM970.9 million in 1983 to RM6,796 million after privatization in 1997, representing a 13.85 per cent growth. Likewise, the PLDT's total operating revenues also increased significantly from PHP7,734.3 million in 1988 to PHP41,723.4 million in 1999: a 15.08 per cent growth. This increase was due to the installation of more fixed lines, higher volume of international and national long distance calls due to the improvement of the PLDT's service capability. The Philippines, therefore, has the highest growth in operating revenues after privatization; Malaysia has the second highest.
Mean figures per total operating revenues before and after privatization were [yen] 4,302,771 versus [yen] 6,085,595 million (Japan); RM1,343 versus RM3,933 million (Malaysia); and PHP12,799 versus PHP30,946 million (Philippines). The increases are statistically significant. The tests of significance yielded t-values of 7.655 (Japan), 4.769 (Malaysia), and 4.615 (Philippines).
The significant increases in operating revenues after privatization suggest low profits during the years of monopoly, because profit-making was not the main interest of SOEs. After firms are privatized, their revenues go up significantly, perhaps, due to a fear of possible bankruptcy by shareholders; privatized firms no longer receive subsidies from the government. For survival purposes, privatized firms must focus more on maximization of profits and on lowering costs.
Total Operating Revenues per Line. The second measure of operating efficiency is the ratio of total operating revenues to lines. Before privatization in Japan, revenues per line were [yen] 101,220 in 1981, increasing to [yen] 118,225 after privatization in 1995: a growth rate of 1.05 per cent. Revenues per line in Malaysia also increased from RM1,387 in 1983 to RM1,609 after privatization in 1997, representing a 1 per cent growth. In the Philippines, the corresponding figures were PHP8,352 in 1988 to PHP23,673 in 1999: a 9.07 per cent growth. The Philippines, therefore, has the highest growth rate in revenues per line, compared with Japan and Malaysia.
Mean ratios of operating revenues per line before and after privatization were [yen] 103,290 versus [yen] 115,020 (Japan); RM1,434 versus RM1,585 (Malaysia); and PHP12,023 versus PHP20,241 (Philippines). T-values are statistically significant: 11.207 (Japan), 4.581 (Malaysia), and 3.860 (Philippines). The significant increases in operating revenues per line suggest poor capital productivity during the period of monopoly control. Following privatization, revenues per line increased significantly, suggesting that more capital has been employed.
Depreciation. The third measure of efficiency is total depreciation, which is an indicator of capital usage. Before privatization in 1981, the NTT incurred [yen] 1,709,000 million in depreciation, (12) which increased to [yen] 2,624,199 million after privatization in 1995; a 5.74 per cent growth. In Malaysia, this measure increased from RM336.4 million in 1983 to RM1,564.6 million after privatization in 1997: a 10.79 per cent growth. The corresponding figures in the Philippines were from PHP904.6 million in 1988 to PHP9,187.8 million after privatization in 1999, representing a 21.31 per cent growth.
The mean depreciation before and after privatization were [yen] 1,227,910 versus [yen] 1,748,296 million (Japan); RM394 versus RM924 million (Malaysia); and PHP1,265 versus PHP5,375 million (Philippines). The mean after privatization increased significantly in the three cases. The tests of significance in the last column of Table 1 yielded the following t-values: 3.474 (Japan), 4.338 (Malaysia), and 3.654 (Philippines). Statistical tests show significant increases in the three cases. Furthermore, the average annual change in depreciation before and after privatization were 3.82 versus 7.82 per cent (Japan); 9.72 versus 12.83 per cent (Malaysia); and 17.73 versus 28.40 per cent (Philippines). The significant increases in depreciation may suggest merely that more capital was employed after privatization than before privatization.
Capital Expenditure
Yarrow (1995) argues that privatization would improve efficiency by increasing competition and allowing firms to borrow from the capital market. After privatization, privatized firms have more access to private debt and equity markets (Boubakri and Cosset 1998 and Megginson, Nash, and Randenborgh 1994). Furthermore, more capital is raised after the initial public offering (IPO) of the privatized firms both from domestic and foreign investors. The IPO method of privatization helps encourage widespread share ownership from employees of the firms as well as outside shareholders that may contribute to raising more capital.
Capital Investment. The first measure of capital expenditure is capital investment. In Japan, capital investment before privatization was [yen] 1,709,000 million in 1981, increasing to [yen] 2,338,372 million after privatization in 1995: growth rate of 2.11 per cent (Figure 3). The capital investment in Malaysia increased from RM1,036.8 million in 1983 to RM5,126.5 million after privatization in 1997, representing an 11.24 per cent growth. Likewise in the Philippines, capital investment of PHP2,198.8 million in 1988 increased to PHP17,877.4 million after privatization in 1999, at an annual rate of 19.08 per cent, the highest growth compared with Japan and Malaysia.
The mean numbers per capital investment before and after privatization were [yen] 1,721,840 versus [yen] 1,795,777 million (Japan); RM2,346 versus RM2,180 million (Malaysia); and PHP6,617 versus PHP19,271 million (Philippines). The mean after privatization in the Philippines increased significantly; this is confirmed by a significant t-value of 4.886. In Japan, the mean after privatization increased slightly, which yielded an insignificant t-value of 0.750. On the other hand, Malaysia had also an insignificant t-value of -0.124. The average annual change in capital investment after privatization were 0.23 versus 3.64 per cent (Japan); 108.46 versus 22.94 per cent (Malaysia); and 51.43 versus 15.49 per cent (Philippines).
The significant increase of capital investments in the Philippines after full competition took place may suggest that monopoly control did not attract more capital flows, because the PLDT had received government protection from competition (East Asia Analytical Unit 1998). Dismantling monopoly and introducing competitive market forces attract more capital investments from private investors. The significant increase in this measure is a result of increased competition in the market.
In addition, the debt-to-total assets ratio shows the capital structure of a firm. This ratio shows the extent of the firm's assets that are financed with debt. In Japan, the average ratio before privatization was 0.55 increasing to 0.65 after privatization. This means that before privatization, 55 per cent of the NTT's assets were financed with debt and the remaining 45 per cent of the financing came from the shareholders' equity. After privatization, this ratio increased to 65 per cent and the remaining 35 per cent of the NTT's total assets were from shareholders' equity. The corresponding average ratios before and after privatization were 0.85 versus 0.42 (Malaysia) and 0.60 versus 0.66 (Philippines). In Malaysia, the percentage of the ratio decreased from 85 to 42 per cent after privatization; it increased slightly from 60 to 66 per cent for the Philippines. These figures suggest that the total assets owned by shareholders after privatization were 58 per cent (Malaysia) and 44 per cent (Philippines).
The corresponding t-values of the ratio were 6.146 (Japan), -2.279 (Malaysia), and 0.820 (Philippines). The debt-to-total assets ratio, therefore, increased significantly in Japan after privatization, which suggests greater financial risk. Moreover, it may suggest that Japan had access to private debt financing after privatization. In contrast, the insignificant results for Malaysia and the Philippines simply suggest that the leverage ratio of the firms decreased after privatization, compared with during monopoly control.
Capital Investment per Line. The second measure of capital expenditure is the ratio of capital investment to lines. In Japan, capital investment per line before privatization was [yen] 43,762 in 1981, which declined to [yen] 39,248 after privatization in 1995. The corresponding ratio increased in the Philippines from PHP2,374 in 1988 to PHP10,143 after privatization in 1999. In Malaysia, capital investment per line declined slightly from RM1,481 in 1983 to RM1,214 after privatization in 1997. The annual growth rates were -0.72 per cent (Japan), -1.32 per cent (Malaysia), and 12.86 per cent (Philippines). Among the three cases, hence, the Philippines has the highest growth in capital investment per line after liberalization of the market as a consequence of rapid technological innovation and more private capital invested in network lines.
Mean ratios before and after privatization were [yen] 41,454 and [yen] 33,776 (Japan); RM2,289 and RM782 (Malaysia); and PHP6,153 and PHP12,758 (Philippines). The tests of significance yielded t-values of -5.393 (Japan), -1.429 (Malaysia), and 3.584 (Philippines). The statistical tests show a significant increase in the Philippines after privatization and insignificant results for both Japan and Malaysia.
The significant increase in capital investment per line in the Philippines after liberalization of the industry suggests that during the period of monopoly, less capital had been invested in network lines. When full competition was injected, more capital was applied, perhaps, due to the capacity of the firm in competitive markets than non-competitive markets to attract investments.
Depreciation per Line. The third measure of capital expenditure is the ratio of depreciation per line. In Japan, depreciation per line increased from [yen] 29,088 in 1981 to [yen] 44,045 after privatization in 1995: growth rate of 2.80 per cent. However, the ratio decreased in Malaysia from RM481 in 1983 to RM370 in 1997, representing a decline of -1.72 per cent. In contrast, depreciation per line in the Philippines increased from PHP977 in 1988 to PHP5,213 during post-privatization in 1999: a 14.98 per cent growth. The Philippines has the highest growth in depreciation per line after the introduction of competition; Japan has the second highest.
Mean ratios of depreciation per line before and after privatization were [yen] 29,489 and [yen] 32,727 (Japan); RM422 and RM379 (Malaysia); and PHPl,193 and PHP3,443 (Philippines). Although the mean after privatization in Japan increased slightly, the statistical test yielded a t-value of 1.701: an insignificant increase after privatization. Malaysia also had an insignificant increase: a t-value of-1.984. However, the test of significance in the Philippines yielded a t-value of 3.679, which shows a statistically proven increase after the introduction of competition.
VII. Efficiency Improvements
Outputs
Studies have shown that output increases significantly after privatization: see Megginson. Nash, and Randenborgh (1994), Boubakri and Cosset (1998), and Kikeri, Nellis, and Shirley (1992). The statistics show increases in output measures: total fixed lines, number of cellular subscribers, lines per employee, and international outgoing traffic, all of which have gone up significantly in the three cases.
Total Fixed Lines. Generally, the total fixed lines show increases in Japan, Malaysia, and the Philippines over the test periods. Before privatization of Japan's telephone entity, its total fixed lines were 39 million in 1981, which increased to 60 million after privatization in 1995. Fixed lines increased at an annual growth rate of 2.86 per cent (Figure 4 and Table 1). Likewise, privatization of Telekom Malaysia led to a dramatic increase in fixed lines installed: 700,000 lines installed in 1983 increased to 4,233,000 lines in 1997. This is an annual growth rate of 12.73 per cent. The total fixed lines in the Philippines of 926,000 in 1988 increased to 1,762,000 in 1999, representing a 5.51 per cent growth. Thus, a total fixed line installed has the highest growth in Malaysia, followed by the Philippines and Japan. The high growth in the first two countries represents unfulfilled demand for services during the years of monopoly over the provision of services. A statistical test shows that the mean after privatization is bigger than the mean before privatization for the three cases. Mean numbers of fixed lines before and after privatization in the respective countries were 42 versus 53 million (Japan); 1 versus 2 million (Malaysia); and 1 versus 2 million (Philippines). The tests of significance yielded t-values of 6.193 for Japan, 5.616 for the Philippines and 4.566 for Malaysia.
Number of Employees. Employment has declined after privatization, which is as predicted by the theoretical work of Boycko, Shleifer, and Vishny (1996). Managers seeking to maximize profits will reduce employment, because a profit-maximizing firm will stop employing labour when the marginal labour product is zero. Such a result is also consistent with outsourcing of low-level production activities by privatized firms, and can be argued as a norm in the private sector. Transfer of control of a firm to managers from politicians is often referred to as corporatization. The outputs increases as well as labour reduction are consistent with profit maximization of corporation.
A decline in the number of employees is observed in the three cases. In Japan, the number of employees of the NTT declined from 327,000 in 1981 to 235,000 in 1995. Telekom Malaysia had a decline from 30,311 in 1983 to 27,484 in 1997; labour reduced from 14,856 in 1988 to 13,179 in 1999 in the Philippines. Their respective annual decline in the number of employees were the NTT, -2.18 per cent; Telekom Malaysia, -0.65 per cent; and PLDT, -0.99 per cent. Among them, Japan had the biggest rate of reduction in employment after privatization; Malaysia had the second highest.
Mean numbers of employees before and after privatization were 322,000 and 270,000 (Japan); 29,265 and 28,627 (Malaysia); and 16,813 and 17,211 (Philippines). On the other hand, the mean number of employees after privatization slightly increased in the Philippines; however, the increase was statistically insignificant, with a t-value of 0.320.
The test of significance yielded a t-value of -6.661, which shows a statistically proven decline in Japan. Malaysia's decline shows a statistically insignificant increase: -1.151. This is perhaps due to the very high growth in fixed lines, which may have led to some gains in employment for this case. The model by Boycko, Shleifer, and Vishny (1996) predicts privatization as reducing employment to maximize profits: the prediction is affirmed by this study.
This study confirms a proven decline in employment in the two apparent cases of Japan and Malaysia, and not statistically significant increase in the case of Philippines. The results are anomalous to the findings in Megginson, Nash, and Randenborgh (1994) and Boubakri and Cosset (1998). Indeed, the present evidence strongly suggests that reform changes in telecommunications are accompanied by a reduction in employment, perhaps by halting the tendency of government agencies to be used as points to reduce unemployment in the countries.
Number of Cellular Subscribers. Technological innovation in wireless technology was brought by increased competition (Horwitz 1989; Fink, Mattoo, and Rathindran 2001). The exponential growth of mobile/cellular subscribers in the three Asian cases was due to the liberalization of the markets; first liberalizing the supply and provision of equipment and then, allowing entry of other service operators for the provision of mobile services. It is important to note that cellular subscribers are not company subscribers of the NTT, TM, and PLDT, but cumulative country totals of various telephone companies (telcos). The results confirm the significant increases in mobile subscribers after competition took place in the market.
Before privatization, cellular subscribers in Japan were 13,000 in 1985, which increased to 11,712,000 after privatization in 1995. The cellular subscribers in Malaysia also increased after privatization: 11,000 in 1986 to 2,000,000 in 1997; and it rose from 35,000 subscribers in 1988 to 2,850,000 in 1999 in the Philippines.
Statistical tests show that mean numbers of cellular subscribers in the three cases increased during the post-privatization period. Mean numbers of cellular subscribers before and after privatization were 32,400 and 2,311,200 (Japan); 7,000 and 592,100 (Malaysia); and 18,200 and 1,093,571 (Philippines). Thus, the number of cellular subscribers increased significantly in the post-privatization period in three cases.
The t-values are statistically significant as well: 2.034 (Japan), 2.669 (Malaysia), and 2.900 (Philippines). These tests suggest that rapid growth of wireless technology is a convincing evidence of liberalization of the industry.
Lines per Employee. Lines per employee is calculated as the ratio of total fixed lines to the number of employees (full-time staff) in telecommunications entities. This measure gives an indication of labour productivity in relation to the construction, maintenance, and operation of the network: Madden and Savage (1999, p. 67).
In the three cases, the measure of lines per employee shows significant increases. Before privatization, lines per employee in Japan were 119 in 1981, increasing to 254 after privatization in 1995: a 5.15 per cent annual growth. Lines per employee in Malaysia increased from 23 in 1983 to 154 in 1997; 62 in 1988 to 134 in 1999 in the Philippines. The annual growth rates were 13.47 and 6.57 per cent for Malaysia and the Philippines, respectively. Malaysia had the highest annual growth in lines per employee following privatization; the Philippines had the second highest.
Mean ratios of lines to employees before and after privatization were 32 and 87 (Malaysia); 129 and 199 (Japan), 62 and 92 (Philippines). The increases are statistically significant. These tests of significance yielded t-values of 5.911 (Japan), 4.452 (Malaysia), and 2.988 (Philippines). The significant increases in lines per employee may suggest low labour productivity during the period of monopoly, because firms did not ration labour inputs at marginal revenue product equal to zero (MRPL = w). After privatization, firms have faced adjustments in their labour and wages. Improvement in the said ratio is due to the decline in employment after privatization, based on market price for labour. Also, part of this efficiency gain is due to increased capital inputs.
International Outgoing Telephone Traffic (Minutes). International outgoing telephone traffic covers the completed traffic originating in one country and directed to destinations outside that country (ITU 2000). Before privatization, Japan's international outgoing telephone traffic was 15 million in 1981, which increased to 1,631,000,000 after privatization in 1995. This is an annual growth rate of 36.7 per cent. For Malaysia, the increase was from 9 million in 1983 to 589 million in 1997: growth rate of 32.15 per cent. In the Philippines, it increased from 66 million in 1988 to 129 million in 1999; a 3.67 per cent growth. Japan has the highest annual growth rate, followed by Malaysia and the Philippines.
Mean numbers of international outgoing telephone traffic before and after privatization were 31 versus 894 million (Japan); 36 versus 287 million (Malaysia); 101 versus 195 million (Philippines). The tests of significance yielded t-values of 4.457 (Japan), 4.313 (Malaysia), and 3.673 (Philippines). Positive improvements in international outgoing telephone traffic may suggest that market reforms (i.e., substantial tariff cuts), following privatization, encouraged greater traffic. It could also be due to the income effect from growth of the national economy. Furthermore, the significant increase may also be due to the increased competition in the international long distance (ILD) and to the accounting rate reform initiated in the 1990s.
In sum, there were significant increases in four output measures, and employment declined. Significant increases in the main outputs, therefore, indicate efficiency gains after privatization but heavily due to the effects of competition.
Productivity and Technical Efficiency
This measure is investigated by using the total operating revenues per employee, total operating revenues after privatization per line, capital investment per employee, and faults per 100 fixed lines (percentage).
Total Operating Revenues Per Employee. The first productivity and technical efficiency measure is total operating revenues per employee. This is calculated as the ratio of total operating revenues to employees in each privatized entity in the three cases. Before privatization, total operating revenue per employee in Japan was [yen] 12,088,199 in 1981, which increased to [yen] 29,973,711 after privatization in 1995: an annual growth of 6.24 per cent (Figure 5). In Malaysia, the ratio increased from RM32,031 in 1983 to RM247,271 in 1997, representing a 14.6 per cent growth. Revenues per employee in the Philippines increased from PHP520,618 in 1988 to PHP3,165,900 in 1999: a growth rate of 16.23 per cent. The Philippines had the highest growth in operating revenues per employee; Malaysia had the second. The reason for the latter could be the demand for services, which were suppressed, being met by the privatized services.
Mean ratios of operating revenues to employee before and after privatization were [yen] 13,387,045 versus [yen] 22,864,864 (Japan); RM46,145 versus RM137,907 (Malaysia); PHP749,256 versus PHP1,925,350 (Philippines). T-values shown in Table 1 are statistically significant: 6.624 (Japan), 4.599 (Malaysia), and 3.349 (Philippines). The significant increases in total operating revenues per employee may imply low labour productivity during the years of government control. Labour productivity improved significantly, following privatization. However, this measure does not take into account increased labour productivity from changes in capital as the privatized firms employ more capital (except in Japan).
Total Operating Revenues-Depreciation per Line. The second measure is the ratio of total operating revenues after depreciation to fixed lines. Before privatization, Japan's operating revenues after depreciation per line were [yen] 72,132 in 1981, which increased to [yen] 74,179 after privatization in 1995; a 0.19 per cent annual growth. In Malaysia, this ratio increased from RM906 in 1983 to RM1,239 in 1997, a 2.10 per cent annual growth. The corresponding figures for the Philippines were PHP7,375 in 1988 to PHP18,460 in 1999, an annual growth of 7.95 per cent, and the highest rate, compared with Japan and Malaysia.
Mean ratios of operating revenues after depreciation per line before and after privatization were [yen] 73,801 versus [yen] 82,293 (Japan); RM1,012 versus RM1,206 (Malaysia); and PHP10,829 versus PHP16,798 (Philippines). The mean after privatization is bigger than before privatization. The t-values show significant increases: 4.068 (Japan), 4.236 (Malaysia), and 3.597 (Philippines). Thus, significant increases in total operating revenues after depreciation per line may suggest improved efficiency after privatization.
Capital Investment per Employee. The third measure of efficiency is capital investment per employee. This ratio measures total capital investment per employee. Before privatization, capital investment per employee in Japan was [yen] 5,226,300 in 1981, which increased to [yen] 9,950,519 after privatization in 1995. In Malaysia, likewise, capital investment per employee increased from RM34,205 in 1983 to RM186,527 in 1997. Capital investment per employee in the Philippines increased from PHP148,008 in 1988 to PHP1,356,507 in 1999. Annual growth rates for the three cases were 4.39 per cent (Japan), 11.97 per cent (Malaysia), and 20.28 per cent (Philippines). Among them, the Philippines had the highest rate in capital investment per employee; Malaysia had the second.
The statistical tests show that the mean after privatization for Japan and the Philippines increased significantly. Mean ratios of capital investment to employee before and after privatization were [yen] 5,351,506 versus [yen] 6,778,611 (Japan), and PHP383,048 versus PHP1,170,725 (Philippines). The tests of significance yielded t-values of 2.588 for Japan, and 4.219 for Philippines.
In contrast, the increase was not statistically significant in Malaysia, with a t-value of-0.115. Before privatization, the mean ratio was RM81,826, which decreased to RM76,354 after privatization. However, an adjusted computation, which thus included the year of privatization within the post-privatization period, yielded a t-value of 1.934. This suggests a significant increase in capital investment per employee after privatization. Statistical tests, therefore, show significant increases in capital investment per employee for Japan and the Philippines and also for Malaysia, based on the adjusted figure. Henceforth, while faults were declining, the other three measures increased significantly. Statistical test results confirm efficiency improvement following privatization.
Consumer Welfare
Three main consumer welfare indicators are used to measure efficiency improvement: telephone lines per 100 inhabitants, waiting list for fixed lines, and tariff per capita income in Table 1.
Telephone Lines per 100 Inhabitants. The first measure of consumer welfare is telephone lines per 100 inhabitants or teledensity. Generally, the three cases show significant increases in teledensity over the test periods. Before privatization, teledensity in Japan was 34.23 in 1981, which increased to 48.66 after privatization in 1995, at an annual rate of 2.37 per cent. Malaysia showed a dramatic increase in teledensity: 4.72 in 1983 to 19.49 in 1997, representing 9.92 per cent growth. The teledensity in Philippines of 0.98 in 1988 increased to 9.12 in 1999, representing a 2.99 per cent growth. Teledensity, thus, has the highest growth in Malaysia, followed by the Philippines.
Mean numbers of telephone lines per 100 inhabitants before and after privatization were 35.874 versus 44.134 (Japan); 5.962 versus 12.635 (Malaysia); and 1.348 versus 5.267 (Philippines). Generally, mean numbers in the three cases increased significantly after privatization. T-values are statistically significant: 6.537 (Japan), 4.742 (Malaysia), and 2.991 (Philippines). The significant increases in telephone lines per 100 inhabitants is, perhaps, due to unmet demand for services and failed access to telephone lines during the period of monopoly over the provision of services. Privatization based on market signals enabled improved services.
Waiting List for Telephone Lines. The second measure of consumer welfare is waiting list for telephone lines.
This refers to unmet applications for connection to the public station telephone network (PSTN), owing to a lack of technical facilities, i.e., equipment, lines, etc. (ITU 2000) or simply due to delays in processing orders to completion.
The statistics show a decline in size of the waiting list. Before privatization, the mean number of a waiting list for telephone lines in Japan was 39,000, which declined dramatically to zero after privatization. This result may suggest that no further test is needed; it is apparent that Japan has no waiting list. As such, a complete elimination of the waiting list for telephone lines in Japan indicates the highest efficiency gains. In Malaysia, mean numbers of waiting list before and after privatization were 157,000 and 128,000. The mean after privatization is smaller than the mean before privatization. However, the mean numbers in waiting list in the Philippines increased significantly after privatization: 559,000 increased to 829,000, perhaps, due to too high unmet demand.
The tests of significance yielded t-values of -1.173 (Malaysia) and 2.834 (Philippines). The test result for Malaysia was not significant, while a significant result was obtained for the Philippines. The decline in size of the waiting list for telephone lines in Japan and Malaysia may suggest improved performance after privatization. This decline is not observed in the Philippines; the same findings made by a previous study (East Asia Analytical Unit 1998) on long waits of connections. This decline may be due to the PLDT's non-compliance with the government's mandatory interconnection rule (under EO 59), which is currently a controversial issue. The Philippine Government also has no regulatory law, which may impose criminal sanctions for non-compliance with the interconnection rule. This loophole in the interconnection rule in the Philippines may have led to a lack of instruments in regulating the full competitive behaviour of the market.
Tariff. The third measure of consumer welfare is tariff. The statistics show a reduction in tariff levels for the three Asian cases. Mean numbers of tariff levels before and after privatization were 0.031 versus 0.024 (Japan); 0.209 versus 0.149 (Malaysia); 0.607 versus 0.553 (Philippines). As such, the mean after privatization is smaller than the mean before privatization. The tests of significance yielded t-values of -4.518 (Japan), -4.074 (Malaysia), and -1.441 (Philippines); these confirm a statistically proven decline in tariffs after privatization. A decline in all the three cases suggests that both privatization and competition reforms may have led to a reduction in tariff, which perhaps came partly from tariff reduction as well as partly from improved per capita incomes. It may also be due to international commitments by these countries to further liberalization in trade services.
VIII. Conclusions
The findings of this study show evidence that performance and efficiency improved after simultaneous adoption of privatization and competition reforms in Asian telecommunications. First, the profitability measure of performance increased significantly in Malaysia but not in Japan or the Philippines. Second, operating efficiency rose significantly in the three cases; this shows a robust improvement in operating performance of the firms during post-privatization, compared with the period under monopoly control. Third, capital expenditure also increased significantly in the Philippines (but not Japan and Malaysia) as a result of and response to increased competition (full liberalization) in the market. The three main measures of efficiency improvement were output productivity, technical efficiency, and consumer welfare. The empirical tests suggest that after privatization of the firms, the main outputs increased significantly (without raising employment), while productivity, technical efficiency and consumer welfare improved.
These empirical findings are affirmation of theoretical predictions of Boycko, Shleifer, and Vishny (1996), Yarrow (1995), and Vickers and Yarrow (1991) notably. The results, furthermore, support the widely accepted economic rationale that--aside from private ownership--market signals (competition or liberalization) are also important considerations towards garnering efficiency gains and performance improvement: see Yarrow (1995) and Vickers and Yarrow (1991). In sum, corporate performance--financial and Operating--has improved significantly after privatization and competition reforms in the three cases. Overall efficiency generally has also improved after privatization and the introduction of competition, compared with the period of monopoly.
The remaining issue to be resolved in the future is how much regulation be imposed on increased competition in Asian telecommunications in order to delineate the separate effects of regulation on performance vis-a-vis competition. This study has just started an operational research design for a study identifying a coherent approach to benchmark net efficiency gains after simultaneous adoption of both privatization and competition reforms.
TABLE 1
Results of Changes in Performance and Efficiency before and after
Privatization
Mean
Measures Country Before After
Profitability
Net Income Japan 365,023 190,645
(million) Malaysia 189 1,094
Philippines 3,435 4,927
Net Income Japan 8,801 3,697
per Line Malaysia 218 418
Philippines 3,216 3,353
Return on Japan 8.14% 4.56%
Equity Malaysia 9.21% 14.67%
Philippines 23.03% 10.56%
Operating Efficiency
Total Operating Japan 4,302,771 6,085,595
Revenues Malaysia 1,343 3,933
(million) Philippines 12,799 30,946
Total Operating Japan 103,290 115,020
Revenues Malaysia 1,434 1,585
per Line Philippines 12,023 20,241
Depreciation Japan 1,227,910 1,748,296
(million) Malaysia 394 924
Philippines 1,265 5,375
Capital Expenditure
Capital Japan 1,721,840 1,795,777
Investment Malaysia 2,346 2,180
(million) Philippines 6,617 19,271
Capital Japan 41,454 33,776
Investment Malaysia 2,289 782
per Line Philippines 6,153 12,758
Depreciation Japan 29,489 32,727
per Line Malaysia 422 379
Philippines 1,193 3,443
Outputs
Total Fixed Japan 42 53
Lines (million) Malaysia 1 2
Philippines 1 2
No. of Japan 322 270
Employees Malaysia 29.265 28.627
(thousand) Philippines 16.813 17.211
No. of Cellular Japan 32,400 2,311,200
Subscribers Malaysia 7,000 592,100
Philippines 18,200 1,093,571
Lines per Japan 129 199
Employee Malaysia 32 87
Philippines 62 92
International
Outgoing
Telephone Japan 31 894
Traffic Minutes Malaysia 36 287
(million) Philippines 101 195
Productivity and Technical Efficiency
Total Operating Japan 13,387,045 22,864,864
Revenues per Malaysia 46,145 137,907
Employee Philippines 749,256 1,925,350
Total Operating
Revenues Japan 73,801 82,293
-- Depreciation Malaysia 1,012 1,206
per Line Philippines 10,829 16,798
Capital Japan 5,351,506 6,778,611
Investment per Malaysia 81,826 76,354
Employee Philippines 383,048 1,170,725
Consumer Welfare
Telephone Lines Japan 35.874 44.134
per 100 Malaysia 5.962 12.635
Inhabitants Philippines 1.348 5.267
Waiting List for Japan 39 0
Telephone Lines Malaysia 157 128
(thousand) Philippines 559 829
Tariff Japan 0.031 0.024
Malaysia 0.209 0.149
Philippines 0.607 0.553
Standard Deviation
Test of
Measures Country Before After Significance
Profitability
Net Income Japan 24,473 65,623 -7.433
(million) Malaysia 118 586 +4.696 *
Philippines 1,364 2,238 +1.430
Net Income Japan 917 1,417 -8.403
per Line Malaysia 138 132 +2.682 *
Philippines 1,021 1,591 +0.181
Return on Japan 1.39% 1.87% -4.174
Equity Malaysia 5.89% 1.03% +2.057 *
Philippines 4.29% 5.16% -4.559
Operating Efficiency
Total Operating Japan 291,912 609,858 +7.655 *
Revenues Malaysia 243 1,683 +4.769 *
(million) Philippines 4,248 9,109 +4.615 *
Total Operating Japan 1,801 2,114 +11.207 *
Revenues Malaysia 66 46 +4.581 *
per Line Philippines 3,026 4,348 +3.860 *
Depreciation Japan 70,854 463,012 +3.474 *
(million) Malaysia 74 372 +4.338 *
Philippines 348 2,947 +3.654 *
Capital Expenditure
Capital Japan 27,968 309,149 +0.750
Investment Malaysia 2,793 1,527 -0.124
(million) Philippines 3,287 5,642 +4.886 *
Capital Japan 2,346 3,043 -5.393
Investment Malaysia 2,346 323 -1.429
per Line Philippines 2,767 3,613 +3.584 *
Depreciation Japan 234 6,012 +1.701
per Line Malaysia 43 30 -1.984
Philippines 221.804 1,596.618 +3.679 *
Outputs
Total Fixed Japan 2 5 +6.193 *
Lines (million) Malaysia 0.169 1.037 +4.566 *
Philippines 0.097 0.188 +5.616 *
No. of Japan 5.718 23.224 -6.661
Employees Malaysia 1.052 0.925 -1.151
(thousand) Philippines 1.370 2.866 +0.320
No. of Cellular Japan 19,321 3,542,925 +2.034 *
Subscribers Malaysia 8,446 693,181 +2.669 *
Philippines 26,004 980,477 +2.900 *
Lines per Japan 8.880 35.280 +5.911 *
Employee Malaysia 6.807 37.864 +4.452 *
Philippines 1.252 26.523 +2.988 *
International
Outgoing
Telephone Japan 15 612 +4.457 *
Traffic Minutes Malaysia 30 179 +4.313 *
(million) Philippines 26 60 +3.673 *
Productivity and Technical Efficiency
Total Operating Japan 1,145,883 4,224,727 +6.624 *
Revenues per Malaysia 9,761 61,566 +4.599 *
Employee Philippines 197,452 899,332 +3.349 *
Total Operating
Revenues Japan 1,616.883 6,193.427 +4.068 *
-- Depreciation Malaysia 89.553 70.275 +4.236 *
per Line Philippines 2,811.660 2,865.904 +3.597 *
Capital Japan 99,630 1,738,048 +2.588 *
Investment per Malaysia 99,299 54,936 -0.115
Employee Philippines 173,063 449,495 +4.219 *
Consumer Welfare
Telephone Lines Japan 1.293 3.553 +6.537 *
per 100 Malaysia 0.838 4.289 +4.742 *
Inhabitants Philippines 0.248 3.454 +2.991 *
Waiting List for Japan 54.129 0 N/A
Telephone Lines Malaysia 49.257 35.501 -1.173
(thousand) Philippines 201.398 82.051 +2.834 *
Tariff Japan 0.002 0.004 -4.518
Malaysia 0.018 0.039 -4.074
Philippines 0.061 0.068 -1.441
NOTES: This table presents the results of the three samples of Asian
telecommunication firms for forty-two years in aggregate between 1981
and 1999. Figures are expressed in local currency units, except
otherwise stated.
* denotes significance at 0.05 acceptance level, using one-tail test.
Tariff data are not available. Instead, data are calculated using the
following formula: (Operating Revenues - Depreciation/No. of Lines)/Per
Capita GDP. Per Capita GDP is calculated by dividing the annual GDP by
the annual population.
FIGURE 1
Growth Changes of Profitability Measures for Japan, Malaysia, and the
Philippines before and after Privatization Period
Net Income Annual Growth
Japan -9.60%
Malaysia 15.74%
Philippines 1.85%
Note: Table made from bar graph.
Annual Growth of Net Income per Line
Malaysia 2.68%
Japan -3.47%
Philippines -12.11%
Note: Table made from bar graph.
ROE Annual Growth
Japan -11.20%
Malaysia 1.59%
Philippines 13.41%
Note: Table made from bar graph.
FIGURE 2
Growth Changes of Operating Measures
Total Operating Revenues Growth Changes
Japan 3.93%
Malaysia 13.85%
Philippines 15.08%
Note: Table made from bar graph.
Total Operating Revenues per Line Growth
Changes
Japan 1.05%
Malaysia 1.00%
Philippines 9.07%
Note: Table made from bar graph.
Depreciation Growth Changes
Japan 5.74%
Malaysia 10.79%
Philippines 21.31%
Note: Table made from bar graph.
FIGURE 3
Growth Changes of Capital Expenditure Measures
Capital Investment Growth Changes
Japan 2.11%
Malaysia 11.24%
Philippines 19.08%
Note: Table made from bar graph.
Capital Investment per Line Growth Changes
Japan 0.72%
Malaysia 1.32%
Philippines 12.86%
Note: Table made from bar graph.
Depreciation per Line Growth Changes
Japan 2.80%
Malaysia -1.72%
Philippines 14.98%
Note: Table made from bar graph.
FIGURE 4
Growth Changes of Output Measures
No. of Employees Growth Changes
Japan -2.18%
Malaysia -0.65%
Philippines -0.99%
Note: Table made from bar graph.
Fixed Lines Growth Changes
Japan 2.86%
Malaysia 12.73%
Philippines 5.51%
Note: Table made from bar graph.
International Outgoing Telephone Traffic
Growth Changes
Japan 36.70%
Malaysia 32.15%
Philippines 3.67%
Note: Table made from bar graph.
FIGURE 5
Growth Changes of Productivity and Consumer Welfare Measures
Operating Revenues-Depreciation per Line
(Growth Changes)
Japan 0.19%
Malaysia 2.10%
Philippines 7.95%
Note: Table made from bar graph.
Capital Investment per Employee Growth Changes
Japan 4.39%
Malaysia 11.97%
Philippines 20.28%
Note: Table made from bar graph.
Operating Revenues per Employee Growth Changes
Japan 6.24%
Malaysia 14.60%
Philippines 16.23%
Note: Table made from bar graph.
Telephone Lines per 100 Inhabitants (Growth Changes)
Japan 2.37%
Malaysia 9.92%
Philippines 2.99%
Note: Table made from bar graph.
NOTES
The data for this study came from several sources collected during field visits. The authors express their sincere thanks to the several officers of NTT in Japan, Telekom Malaysia, and the PLDT in the Philippines for providing information and historical data series. The extensive database of International Telecommunications Union (ITU) in Geneva was made available, and Maria-Concetta Gasbarro of ITU assisted with more information. The Australian International Research Scheme of DEETYA provided the financial grant for this study over three years while the Postgraduate Publications Award of Monash University provided financial support for publication. The participants at the Young Scholars Panel in the Third EUROSEAS Conference, held at the University of London on 6-8 September 2001, contributed useful comments on an earlier version of this paper. Special thanks are expressed to John McKay and Lyle Brown for their helpful comments. Finally, we are grateful for the very useful comments of two anonymous referees of the journal. The authors are responsible for any remaining errors.
(1.) See, for example, Ramamurti (1991) and Wellenius and Peter (1994).
(2.) No available data on GDP in U.S. dollar during this period.
(3.) See complete list of licensees in <http://www.cmc.gov.my/licensing-new>.
(4.) In the early 1980s, the Philippines' teledensity was less than 2 per 100 people compared with Thailand (13), Singapore (38), South Korea (33), Malaysia (7), and Indonesia (3) (see Wolf and Sussmann 1995).
(5.) Section 2 of EO 59 defines interconnection as the "linkage, by wire, radio, satellite or other means, of two or more existing telecommunications carriers or operators with one another for the purpose of allowing or enabling the subscribers of one cartier or operator to access or reach the subscribers of the other carriers or operators".
(6.) The following persons are specially named for their enthusiastic assistance: Noorain Harun of Telekom Training College, Kuala Lumpur, Malaysia and the Head of Telekom Malaysia's Corporate Communications for furnishing copies of TM's annual reports; Motohiko Tokuriki, Investor Relations Group of NTT, Tokyo, Japan for NTT's annual reports; and Wilhelmina Yap-Chan, Vice-President, Investor Relations, of PLDT, Makati City, Philippines for PLDT's annual reports.
(7.) The authors are very much grateful to the assistance of Maria-Concetta Gasbarro of the Telecommunication Data and Statistics Unit of the ITU's Telecommunication Development Bureau in Geneva, Switzerland, for furnishing these statistical data.
(8.) The authors would like to appreciate the efforts of Policarpio Tolentino of the NTC-Philippines for securing the NTC's Annual Reports 1990-2000.
(9.) Since 1998, PLDT has been using a straight-line specific method over the estimated useful lives of its properties. Prior to 1998, straight-line composite rates were used. This changed the profit figures substantially.
(10.) The average estimated useful lives of its properties were reduced from eighteen to sixteen years.
(11.) As a percentage of operating revenues, international long distance revenues declined from 53.2 per cent in 1997 to 37.5 per cent in 1998 (PLDT Annual Report 1998, p. 7).
(12.) The NTT uses the declining-balance method of depreciation, except for buildings, where a straight-line method is used.
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Emilyn Cabanda is Research Associate at the Faculty of Business and Economics, Monash University, Australia.
Mohamed Ariff is Professor of Finance and Head of Finance at the Department of Accounting and Finance, Monash University, Australia.
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