Special To Puerto Rico Herald
Privatization That Works
By Gene Roman
January 12, 2001
The guiding vision for American government during the mid-20th century was the New Deal. When President Roosevelt mobilized the economic and political power of the government in response to the Depression, he facilitated the restoration of our financial institutions, built housing, insured access to health care and provided much needed employment to millions. He can rightly be credited with demonstrating that the federal government has an important role to play in the lives of its citizens.
As a result of the New Deal, we have come to rely on government-sponsored initiatives to resolve many of our difficulties. If there is a problem today, government is expected to solve it. Whether it is a hurricane, poor schools, lack of income or homelessness, the government has become the first resort for relief. But is it always the best?
Up until the administration of Governor Pedro Rossello, this New Deal paradigm remained unchallenged in Puerto Rico. The government controlled many of the basic enterprises of daily life such as health care, telecommunications, housing and education. The government even owned Puerto Ricos largest shipping line and four major hotels. Government became the major, and in some cases, the only provider of basic services. In a July 24, 1998 interview with the NY Times, Representative Anibal Acevedo Vila, expressed one of the central tenets of this philosophy: "We still have the view that the government is the most important player guaranteeing social justice for the people."
A year earlier in a 1997 interview published in ITCs Telecom Market Report, Marcos Rodriguez Ema, the President of the Government Development Bank, correctly stated "that as a result of this philosophy, Puerto Rico has ended up with a huge, overblown, very ineffective government running everything from schools, health, telephones, water and electricity." In Privatization and Public-Private Partnerships, Professor Steve Savas of the City University of New York, identified this New Deal mentality as an obstacle to the spirit of innovation presently taking place within government and the non-profit sector.
Now the newly elected Governor, Sila Maria Calderon, a member of the opposition Popular Democratic Party, proposes to investigate many of the privatization initiatives completed during the Rossello administration through a Blue Ribbon Commission chaired by Representative David Noriega of the Puerto Rican Independence Party. Is this an attempt to inflict further damage in the public mind on the many successful privatization initiatives of the Rossello administration? Or will the panel use this as an opportunity to demonstrate that the sale of various government assets has led and will continue to lead to the provision of more effective, efficient and equitable services for the people of Puerto Rico?
The controversial sale of 51% of the Puerto Rico Telephone Company (PRTC) to the Texas-based GTE Corporation in 1999 will probably be the Commissions first target. The Puerto Rican government purchased the PRTC from International Telephone and Telegraph in 1974 for $165M because of the private sectors failure to respond to the demand for telecommunications services on the Island. Under government ownership, the PRTC increased market penetration from 25% in 1974 to 74% in 1996, and became a profitable government-owned corporation.
What remained hidden from public view until the divestment process began in 1999 was the fact that the profitability of the PRTC was build upon a monopoly of telecommunications services on the Island. This public monopoly ended when the U.S. Congress approved the Telecommunications Act of 1996. The goal of this new law was "to let anyone enter any communications business and compete in any market against anyone."
The introduction of competition exposed the PRTCs inability to function in a liberalized telecommunications market. The operational efficiency of the PRTC as reported by the Federal Communication Commission in 1996 measured in lines per employee was below the national average: National Average: 414 lines per employee (2.45 employees per 1,000 lines) PRTC Average: 171 lines per employee (5.85 employees per 1,000 lines). In June 1998, Puerto Rico Business Review, reported that net income dropped from $130 million in 1994 to $104 million in 1997. This was accompanied by a decrease in the PRTC market share for wireless services of 100% in 1994 to 34% in 1997. Competition also ended the PRTCs 60% market dominance of the local telephone market as well. This dramatic loss of market share and net income clearly demonstrated the PRTCs inability to compete as a public corporation in this new environment.
The PRTC as a government-owned corporation was severely limited in how effectively and efficiently it could respond to these new market realities. It operated under a fragmented authority structure of interest groups, political parties, legislators and government officials, making goal setting and a singular focus on customer needs much more difficult. The PRTC existed as the spoils of war for warring political parties under government ownership. It was not unusual for customers to have to wait 2-3 weeks for new phone installation and up to a month or longer for basic repairs. As Professor Savas discovered, "the inefficiency of municipal services is not due to bad commissioners, mayors or managers. It is the natural consequence of a monopoly system." Jon Slater, a GTE veteran, who was appointed President of the newly privatized PRTC in March 1999, identified the major weakness of a telecommunications monopoly in an April 16, 2000 interview with Doreen Hemlock of the Orlando Sun Sentinel: "We were the only game in town, take it or leave it."
The ability to make quick decisions is extremely limited by political considerations in a government owned corporation. President Richard Carrion of Banco Popular of Puerto Rico articulated this clearly in Puerto Rico Business Review: "In the hands of government, complex decisions must pass through a political crucible. The majority of decisions such as naming a President, board of directors, granting of contracts to suppliers, pricing of services and resolution of worker-employer conflicts are highly influenced by the political process. If a game is tied and you need a pinch hitter, I would prefer to put the bat in the hands of an Ivan Rodriguez or Juan Gonzalez without worrying if they are from the same political party." Stephen Shapiro, General Manager of Cellular One of Puerto Rico agreed: "A politician cannot run a company because the motivations are not the same and the first step is to recognize when something is wrong." In 1998, Dr. Heidi Souffront, Executive Director of the Caribbean Telecommunications Council, affirmed Governor Rossellos vision for a privatized telecommunications company in the Washington Times: "The Governor understands that now that competition is here, the PRTC needs to be much more flexible to prepare for what it will face." A monopoly like the PRTC had little incentive to use resources efficiently, or utilize labor saving practices. With no other service options available until recently, the Puerto Rican consumer was the slave of a well-intentioned government agency that did not suffer the financial and organizational consequences of poor performance. It could afford to be, as one analyst wrote, "fat, dumb and happy."
In the private sector, the profit motive provides the operational and fiscal discipline that focuses a company on customer driven services that are efficient, equitable and effective. Private sector companies operating in a competitive environment are also organized to develop quick and flexible responses to dramatic changes in their market. A 1994 study in the, Journal of Finance, comparing the pre and post-privatization financial and operating performance of 61 companies from 18 countries and 32 industries that experienced full or partial privatization from 1961-1990, concluded that operational efficiency improved by an average of 25%. The Orlando Sun Sentinel also reported that 6 months after the sale, service orders to be filled dropped by 22% and phone installations completed within 10 days rose by 1/3. A 1994 report by Glassman-Oliver concluded that thanks to the earlier deregulation of Puerto Ricos long distance markets, the Puerto Rican consumer had saved $578 million between 1989-1994. This represents a savings of $160 for each of the Islands 3.8 million residents. "The service that the PRTC offered before competition . . .was much more costly because there was no competition," wrote Dr. Souffront. "I cant say that the PRTC is no good because it would be a lie. It has had to keep up with the competition. The fact that the average cost of service to the consumer is 40% lower than in 1989 clearly shows the benefits of the new (competitive) markets."
The benefits for the public treasury are substantial as well. In remarks before a Special Commission of the Puerto Rican House of Representatives on July 10, 1997, Marcos Rodriguez Ema, the President of the Government Development Bank, testified that : "According to figures from the Association of Competitive Telecommunications Providers, private telecommunications companies have contributed more than $34 million a year in taxes since passage of the Telecommunications Act of 1996 . . . And if the general tendency that the income of telephone companies increases as a result of the improvements in operational efficiency after privatization, then collections would increase proportionately."
Even the unions who fought so passionately against privatization in 1977 and 1999 conceded that a privatized PRTC will perform better in a competitive market. Jose Juan Hernandez, President of the Independent Union of Phone Company Employees, admitted to Doreen Hemlock "that its better to have the phone company managed by GTE, although wed rather the government own it and keep the profits. But the truth is the government had measured everything in terms of votes [not good business practices]".
Ideological orthodoxy of the left or the right should not blind us from the reality that competition in the Puerto Rican telecommunications market has produced the following benefits for the consumer: lower prices, an upgrading of services and equipment, and a commitment to customer driven services.
Governor Rossellos New Economic Model for Puerto Rico, which allowed for this successful privatization, supports the conclusions of a World Bank Report, which called for a "profound change in the role of government, namely, to be a facilitator and regulator, and rely more on citizens, communities and markets." In Massachusetts, New York, Wisconsin, Indiana and many other states, public officials of both parties have been implementing this new public-private partnership model successfully for years.
Operating under strict accountability, all of the empirical evidence consistently demonstrates that community development corporations and other non-profit agencies can provide housing, health care, employment and educational services much more effectively and efficiently than government. The GI Bill, Pell Grants, HeadStart, Community Development Block Grants and other programs all have successful track records of doing great things with government money.
The Orlando Sun Sentinel identified 3 of the major ingredients that made the PRTC/GTE public-private partnerships a success: (1) a well structured deal with company employees and local investors getting shares in the company. (2) progressive management, sensitivity to employees and customer needs. (3) a recognition of the value of communication and lots of it.
This new paradigm taking place in Puerto Rico is building on the New Deal legacy of FDR to advance the democratic ideals of social and economic justice.
My hope is that Governor-elect Calderon will seek to build on this bold tradition of civic entrepreneurship instead of disingenuously attempting to discredit this important work.
Gene "Tito" Roman is a Democratic Party activist in NY and the former Massachusetts Regional Director of the Puerto Rico Federal Affairs Administration. He can be reached at email@example.com.