Tele-miscommunications

Does Kazakhtelecom have a future as a private firm?


Kazakhstan’s latest drive to privatize – “The People’s IPO” – is understandably half-hearted. The government would be pleased to be rid of notorious money-losers such as BTA Bank, which it took over in 2009 rather than watch it go down in flames. But the crown jewels are another matter. The oil and natural gas enterprise, KazMunaiGaz, is one of the government’s main sources of revenue. Also profitable is the telecommunications company Kazakhtelecom, of which the government owns 51%. Excluding its KCell sale, its 2012 profit may come to 22 billion tenge (about $147 million), reported Bloomberg News. The firm has said it would pay 210 billion tenge (about $1.4 billion) in dividends, according to Standard & Poor's.

The loss of a cash cow is not the only reason that the government may balk at selling Kazakhtelecom. Another is that the enterprise dominates its market and, left to its own devices, might take advantage of its position by selling too few services to the public at too high of a price. In the telecommunications industry, setup costs – such as building facilities to receive and process satellite signals – are high. A potential entrant would think twice about incurring them. Kazakhtelecom has already paid them (at least, until a new technology creates setup costs of its own) and has only the low costs of hooking up new subscribers to worry about. Free of competitors, Kazakhtelecom could charge whatever price the market would bear.

That price would pique consumers. In principle, a firm should set a price that barely covers the cost of serving one more customer. We want to serve her as long as she values the service by more than it would cost the seller. As a virtual monopoly, Kazakhtelecom would surely bolster its profits by setting the price well above the cost of adding a customer. This stiff price would discourage some households from subscribing even though they value the service at more than its cost.

Two solutions are evident. In one, Kazakhtelecom would charge these additional buyers a price below the one paid by customers of long standing. That would be a PR man’s nightmare.


The price ain’t right


In the other solution, the government would force Kazakhtelecom to charge a low price and to serve all customers willing to pay it. Kazakhtelecom would still be a private firm, albeit a regulated one. But the price may be too low to permit Kazakhtelecom to recover its setup costs. To keep the firm from going broke, the government could subsidize it. Ideally, the grant would enable the firm to earn an average rate of return and no higher. Determining this exact amount, however, may require the government to know more than it does.

This problem may be temporary, since Kazakhtelecom may gradually lose its lockhold on the market. Its market power stems from high setup costs that discourage potential. competitors. But historically, innovations have reduced setup costs (for given capacity) in telecommunications – fiber optics rather than copper wires, for example. Someday, Kazakhtelecom may find that it is no longer a monopoly. Regulating its price then may handicap it permanently. – Leon Taylor tayloralmaty@gmail.com




Good reading

W. Kip Viscusi, Joseph E. Harrington Jr., and John M. Vernon. Economics of regulation and antitrust. Fourth edition. Cambridge, Mass.: The MIT Press. Discusses the regulated monopoly.


References

Nariman Gizitdinov and Ksenia Galouchko. Kazakhtelecom retreats most ever as dividend date passes. Bloomberg News. Online. May 16, 2012

Reuters. Text – S&P summary: Kazakhtelecom (JSC). Online.