Seminar on “Efficiency of Utilities in the ERF Region” October 11, 2012

By Ramage Nada

“An Analysis of the Mobile Telephone Sector in MENA: Potential for Deregulation And Privatization”

The first session of the seminar kicked off with a presentation for a study on An Analysis of the Mobile Telephone Sector in MENA: Potential for Deregulation and Privatization by Sam Hakim (Pepperdine University) and Simon Neaime (American University of Beirut).

It is well recognized that the openness of the telecommunication sector contributes significantly to economic growth and social welfare. While a spectacular growth has taken place in the mobile telephone sector in the MENA region, there are scant academic studies on the telecom sector in MENA countries. The recent performance of the telecom sector and mobile services in particular, has not received the necessary attention it deserves, nor has the pace of market transition from monopoly to competition been investigated.

Hence, this paper is a significant step toward explaining the necessary requirements to develop the regulatory framework that should parallel the growth in mobile services. The study evaluates the growth and trend in the mobile telephone sector in several MENA countries between 1995 and 2007, where the penetration of mobile telecommunication has significantly increased. Competition was raised with an increased number of operators and an improvement in the legal framework.

As firm incentive to engage in collusion is driven by the market’s price elasticity, the study investigates the price elasticity using aggregate data on traffic and tariffs in a regional setting. The empirical results show that the price elasticities across countries are unitary suggesting that price reductions in the mobile service have an ‘equal’ effect on the volume of traffic, and therefore produce no effect on the total revenue from mobile telephony. The magnitude of demand elasticities does not entice collusive behavior between service providers because the effect of price reductions is neutral on total revenues. Additionally the cost of service and administrative corruption has a strong negative effect on mobile penetration, which, surprisingly, is higher in countries with more unequal income distribution. With respect to the degree and scope of liberalization of the mobile sector, the study reveals that the direction of deregulation is accelerated in countries with a high proportion of investment, where the sector generates high revenues, and where civil society is generally free from government interference. At the same time, the liberalization is slowed in countries characterized by a high-income inequality and average cost of service.

Market reforms in developed countries fail to translate to developing countries because several negative externalities are often overlooked. The paper suggests some factors to design a path for reforms in the mobile sector. Some of the solutions are to encourage the development of public interest groups that would observe costs, monitor performance, and provides back solutions to the government; developing a financial structure where the privatization of the mobile sector is not complete and the government retains a significant ownership in the regulated privatized monopoly. A higher ownership automatically creates an incentive for the government to support the firm. Also, successful reforms of the mobile telephone sector rest on the type of political governance and transparency in the country. Competition is often wrongly perceived as a method of reducing collusion. But lack of regulation may actually encourage corruption.

 

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