The Singapore government has viewed the telecommunications infrastructure as a national asset, aiding its early development by providing financial support, protection from market forces and managerial talent, while urging the adoption of competitive rates. At a later stage, the state did not provide public funds to Singapore Telecom, in order to enforce market discipline on it.
5.4 Reasons for the Privatization of SingTel
In 1989, the Singapore Governement announced its intention to privatize Singapore Telecom and to list it on the Stock Exchange by 1993. Singapore Telecom was privatized as part of an effort to reduce the government’s involvement in business [Tan, 1992; Low, 1995].
Technological Advances
With the evolution of rapid technological improvements, many new products and services are innovated. An example of a new service would be Internet telephony, which is inexpensive and flexible in price and services to consumers, threatening to gain substantial market share in domestic and international voice traffic at the expense of established telecommunication companies. Thus, such technological improvements pose as a huge threat to traditional telecommunication services, but also create opportunities which can be exploited through entrepreneurship and innovations, hence shifting the industry from proprietary to open standards.
Facing the vast challenges to remain competitive and efficient, to continue being an international communication hub, in the midst of the technological advancement, Singapore Telecommunication industry has to acquire a cultural change, moving from operating in a slow-moving, monopolistic and protectionist system to a competitive market. With such rapid changes in the worldwide telecommunication industry, Singapore encounters increasing global challenges. The Singapore government deregulated the management of SingTel so as to prepare the telecommunication industry to be responsive, flexible to any competitions.
In addition, with the development on innovative products and services, consumers demand for higher product qualities and variety are inevitable. The privatization of SingTel, hence serves to cater to higher consumer expectations, so as to maximize its returns as its returns now depends greatly on the social returns of its services, instead of a return controlled by the government with its intervention in the business.
Preparation for Liberalization
The privatization of SingTel was also done to prepare for liberalization of the industry in later years. Liberalization of this industry was seen as necessary to meet the growing and changing demand of telecommunication services resulting from technology advances.
Stimulation of the Singapore Stock Market
By privatizing SingTel via the issuance of stocks, it encourages public involvement in the stock market as the general public has confidence in a large and strong company like SingTel. This stimulates the development of the Singapore stock market which at that time was overly dependent on the Malaysian Stock market and lacked both depth and scope [Kuo et al., 1989; Toh and Low, 1990a, 1990b; Low, 1995].
6 Practices of Privatization
Categories of Privatization
There are four main categories of ways in which governments can privatize state owned property. As the factors that affect the choice of privatization are plenty and highly political, and the goals of privatization are complex, empirical evidence on the determinants of the privatization is limited. Among the 4 categories, privatization through the sale of state property has been the most common method used by government in the past two decades [Megginson and Netter, 2001], and the most controversial method is mass privatization.
6.1 Privatization through Sale of State Property
There are two main ways in which this method of privatization can be carried out:
Direct sales
In the direct sales of state property, individuals, existing corporations or a group of investors pay the government for ownership rights on the property.
Share Issue Privatization (SIP)
In share issue privatization, the government sells its stake in the state property through a public share offering.
According to an empirical study by Megginson, Nash, Netter, and Annette Poulsen (2000), several factors influence the choice of privatization methods. These include capital market, political, and firm-specific factors. Specifically, they found that SIP is the preferred choice when 1) there is more even distribution of income, 2) the government hopes to simultaneously develop the capital market, and 3) the state business is profitable. On the other hand, those economies with an established property system would be more likely to use direct sales.
Another study by Bernardo Bortolotti, Marcella Fantini, and Domenico Siniscalco (1999a) has shown that SIP is more likely when the selling government’s deficit is great and the government is conservative.
6.2 Mass Privatization
This method involves the government issuing vouchers to citizens who can then use the vouchers to bid for stakes in the state property. Although this method resulted in an ownership change in the business, empirical results have shown that it may not change the effective control [Megginson and Netter, 2001].
According to a study by Boycko, Shlefifer, and Vishny (1994), it was found that decisions to undertake mass privatization is largely shaped by politics. From the economic perspective, mass privatization is beneficial as it is in line with the free market practice and promotes effective corporate governance. However, this is only the case if the new owners have the required management skill to continue the business operation efficiently. As the proportion of ownership resulting from a given voucher bid is unknown, the benefits are not guaranteed.
6.3 Privatization from Below
This method is employed mainly in transition economies whereby the governments allow new private businesses to be set up in former centrally planned economies. In this case, shortage of entrepreneurs may hinder the privatization process. Also, the goal of efficiency may not be achieved in the short run if the new owners lack the skills to manage the business privately.
6.4 Privatization through Restitution
As the name suggests, this method of privatization simply involves the return of the property to its original owner. Simple as it seems, its implementation can be difficult when there is a lack of record to prove ownership. Hence, without a proper property rights system in place, the transition may turn out to be rather messy.
6.5 Implementation of Methods
Even after the government has decided on the method of privatization, decisions as to when and at what pace to privatize, how to go about implementing the method of privatizing etc, still has to be made. Several studies have been done on the mentioned issues. Some of the important factors that need to be considered when deciding on how to carry out privatization include the necessity of sequencing and staging the privatization process to build reputational capital with investors by the privatizing government, the building of domestic support for the program, and the identification of bidders who will maximize the efficiency of the firm [Megginson and Netter, 2001]. In particular, Jones et al. (1999) has shown that political factors affect the offer pricing, share allocation, and other terms in SIPs. For instance, even if governments have cease to be responsible for the operation of the state enterprise, they can still retain effective veto power through a variety of techniques, such as the retention of a “golden share”, which gives the government the power to forbid certain actions, for example, foreign takeovers. Also, it has been found that governments that are ideologically committed to privatization and economic reform will deliberately underprice SIPs and will privatize in stages to signal their commitment to protecting investor property rights [Megginson and Netter, 2001].
Generally, to affirm the success of privatization, firms should be privatized, in as transparent a method as possible, and through an auction or sale process that is open to the broadest possible cross section of potential buyer [Megginson and Netter, 2001].
7 SingTel’s Privatization Process
The multi-faceted privatization process
Singapore Telecom's functioning and privatization has been multi-faceted, involving several options. It can be seen as a continuum, as shown in Figure 1 (adopted from Durchslag et al., 1994. BOT is an acronym for build-operate-transfer, and BOO is an acronym for build-operate-own. PSU is an acronym for public sector unit).
Figure 1. A continuum of restructuring options
Over the years, several measures, as shown above, were taken to improve performance and create a more efficient organization (phase 1), while since 1989 there were liberalization measures intended to introduce competition in a phased and controlled manner (phase 3), before the sale of equity was finally initiated in 1993 (phase 5).
The practical policies that Singapore Telecom undertook, according to the phases as mentioned above, will be discussed further.
7.1 Phase 1 Improvement of Operational Performance
In line with phase 1’s aim of improving operational performance, Singapore Telecom undertook practical polices that comprised of expansion of infrastructure and new policies, introduction of new services and collaborations with other telecommunications corporations.
7.1.1 New Infrastructure and New Policies
Telephone Density
Over the past two decades, Singapore Telecom expanded its infrastructure. In 1992, telephone density in Singapore increased to 45 per 1,000 population, ranking second after Japan among Asian countries.
Low Tariff
Telecom progressively reduced its tariff, making it among the cheapest in the world. The low tariffs encouraged more international calls by residents and businesses. In 1988 international telephone calls averaged 12 per person which was among the highest in the world.
Modern and Efficient Telecommunication System
Singapore places much importance in ensuring that it has one of the world's most modern and efficient telecommunication systems. In 1983, Singapore became the first nation in the world to have a 100 per cent push-button digital telephone system. There are now 10,000 kilometres of fibre optic cable in the 650-square kilometre island nation.
INTELSAT
Singapore also invests in INTELSAT, the 117-member International Telecommunication Satellite Organization and INMARSAT, the 55-member International Maritime Satellite Organization. Two satellite earth stations link Singapore directly to more than 50 countries and provide 1,900 circuits.
International System
In 1988, Singapore Telecom was the first organization in the world to install 's new 5ESS digital switch as an international gateway switching system. It also introduced the region's first international teleconference service which is now available to France, Hong Kong, USA and Germany. Singapore was among the few countries to launch the Integrated Services Digital Network (ISDN) service and this has helped to place Singapore in the forefront of international telecommunications. [Tan, C.H. (1992)]
Integrated Optical Fibre Submarine Cable System
In 1990, Telecom invested US$70 million in Phase I of the proposed US$310 million Aspac-Kyushu-Taiwan integrated optical fibre submarine cable system. The 7,600-kilometre network will link Japan, China, Taiwan, Malaysia and Singapore by 1993. The system is the longest undersea telecommunications system in the Asia Pacific region. It is an integration of two networks: the Asia-Pacific submarine cable system (ASPAC)--linking Singapore, Hong Kong and Japan--and the Kyushu-Taiwan system which connects Taiwan and Japan. It will be linked to the ASEAN Optical Fibre Submarine Cable Network to bridge cable systems in the Pacific and Indian Oceans and form a global telecommunications highway. [Tan, C.H. (1992)]
Aeronautical Satellite Communication Service
In 1991, in partnership with British Telecom and Norwegian Telecommunication Administration, Telecom introduced the world's first global Aeronautical Satellite Communication Service. Known as Skyphone, the service enables passengers to make air-to-ground phone calls to all parts of the world. In the private sector, Japanese MNC Hitachi Ltd has commissioned Singapore Telecom to set up a high speed Asia Pacific Digital leased circuit, making Singapore a key node of an international communications network serving its group of companies worldwide. The Hitachi Global Communication Network will link Japan, UK, USA and Singapore. [Tan, C.H. (1992)]
7.1.2 Introduction of New Services
Mobile Phone Services
In the 1990’s, the mobile phone increased in popularity due to the convenience it provided. The demand for telecommunications services thus surged. Telecom's two mobile phone systems were predicted to reach the limit of 140,000 subscribers by 1993. A third system based on the Pan-European Global System of Mobile Communications (GSM) standard that will enable subscribers to use their mobile phones (or handphones) in Europe was introduced. This system will cater for another 100,000 subscribers. At present, the facility is available to Hong Kong, Thailand and New Zealand but will be extended to the Philippines, Australia and Pakistan.
Paging Service
Telecom also intended to introduce an international paging service which will enable Singaporeans to receive pager messages while they are overseas. The Skypager Service, the first to be launched in the Asia-Pacific region, is available to the US, Canada, Hong Kong and Mexico. In order to enlarge its international paging network, Telecom had a joint venture to operate Hong Kong's first international paging system. Sky Telecom Services Ltd is jointly owned by HK-based Pacific Link Communications Ltd and US-based Mobile Telecommunications Technologies Corp (Mtel). Telecom's participation in the project follows an agreement it signed with Mtel in 1989, to develop joint marketing programmes and seek new joint partnerships for international paging. Mtel is listed on the US Nasdaq market and operates one of the largest international paging networks.
Video-Conferencing
First offered in 1988, video-conferencing services in Singapore are now linked with more than ten countries. The facility enables face-to-face meetings between people in different countries through video transmission. It features two-way full motion video, audio, graphics and data communications. [Tan, C.H. (1992)]
Global Software Defined Network (GSDN)
During the past few years, numerous new services have been introduced. In 1991 Telecom launched an international private network service, the Global Software Defined Network (GSDN) for business subscribers with offices overseas. GSDN operates like an inter-office communications link, it eliminates the need to dial strings of numbers with an access code, country code and an area code before the receiver's number. This facility provides companies with international calling volume of over two hours daily with the benefit of lower phone bills. Local companies can now subscribe to an international toll-free line.
Digitization of Network and Teleview
As the technological distinction between mass media, computers and telecommunication is blurring rapidly, the policy to achieve complete digitization of the telecommunication network reflected Singapore's commitment to develop information technology on a large scale. In 1988, Telecom launched a videotex information service called Teleview allows subscribers access to a wide range of information and computer services from their homes. Teleview is an integral part of a larger long-term national development in information technology.
Teleview technology had an impact on the public sector. The computer databases of more than 20 government ministries and agencies are accessible to subscribers. As Teleview provided a wide range of services, it reduced the need for subscribers to go to government offices for a new licence, obtain property valuation, or apply for government tender. Teleview enabled users to get a regular update of local and world news and also banking data that will enable them to compare bank rates, transfer accounts and check bank balances. Business reports, company analysis, information on stocks, flight and shipping information are available through Teleview. Education programs, interactive learning programs as well as magazines that provide fashion, shopping information, and teleordering facilities are also available. Microlink provides computer-related services and reviews of software while Funland provides games for kids and adults. There is also a travel section that provides travel tips to places of interest to the outbound tourists and mailbox facilities that provides services such as electronic messaging and the sending of greetings cards.
7.1.3 Collaborations with World-Renowned Telecommunication Corporations
In addition to its attempts to enhance domestic services, Telecom competed in the international market. The global telecommunication industry was characterized by rapid growth in demand for telecommunication products and services. Liberalization in many countries created keen competition resulting in higher customer awareness through intensive marketing and competitive pricing. Technology advancements brought down the cost of services. The fusion of computer and telecommunication technology resulted in new information technology products and services. Telecommunication conglomerates such as , , , and thus intensified their overseas expansion. The Asia Pacific market was expected to reach a value of US$50 billion by 1997.
The wholly-owned subsidiary, Singapore Telecom International Pte Ltd (STI) collaborates with many world-renowned telecommunication corporations on projects in the Asia-Pacific region. This includes joint ventures with Vietnamese partner, Ho Chi Mink Post and Telecommunications Administration to develop the infrastructure for cellular mobile phone services in 1992, US-based Mobile Telecommunication Corp which enables it to market the international paging system in Asia, and Sri Lankan partner, Capital Development and Investment Company Ltd to provide data communications services.
7.2 Phase 2 Corporatisation
Corporatisation of Singapore Telecom took place in 1992. Changes were made to the management structure by introducing more defined lines of responsibility. Private sector job titles were adopted. The job scopes of workers were changed to include broader and more challenging tasks. The development of a multi-skilled workforce reduced staff strength through non-replacement of resignation and retirement.
7.3 Phase 3 Deregulation and Introduction of Competition
Liberalization
In line with the global trend of deregulation, the Singapore Government liberalized the telecommunication equipment market in 1989. Suppliers were finally allowed to sell directly to users and compete with the former monopoly. The increase in competition led to lower prices of many products such as the fax machine and mobile handphone. In response to competition, Telecom focused its corporate strategy on customer orientation. Changes were made to the management structure by introducing more defined lines of responsibility. Private sector job titles were adopted. The job scopes of workers were changed to include broader and more challenging tasks. The development of a multi-skilled workforce reduced staff strength from 12,100 in 1988 to about 10,000 in 1991 through non-replacement of resignation and retirement.
One-Stop Shopping Concept
In order to enhance market competitiveness, a one-stop shopping concept was adopted by the newly formed special Ventures Strategic Business Unit. A subsidiary company, Telecom Equipment Pte Ltd, was in charge of a chain of conveniently located teleshops that provides a full range of telecom products, installation, repair and maintenance services. It also sells other business equipment from major vendors including , , and .
7.4 Phase 5 Sale of Stake in Singapore Telecom
On 1 November 1993, 1.1 billion shares were offered for sale being 7.3 per cent of SingTel's share capital. Three classes of shares were offered, a maximum of 600 A shares at S$1.90 each to Central Provident Fund members (a form of social security in Singapore), a maximum of 1,000 B shares at S$2.00 to Singapore citizens, and C shares without a fixed number at S$3.60 per person.
8 Evaluation
8.1 Measurements and results- Qualitative
Service Quality
A good measurement of the quality of service SingTel provides would be to make a comparison among the three service providers in Singapore, namely SingTel, MobileOne Asia (M1) and StarHub in terms of the mobile service segment. An IDA survey of the quality of service the three service operators provides revealed the following result:
The call success rate refers to the number of successful calls established over the total number of mobile call attempts. A call is successful when a network connection is established. As shown from the figure, SingTel Mobile GSM 900 service has attained a hundred percent call success rate in relation to the other two service operators. In addition, SingTel has been recognized Best Asian Telecom Operator by industry publication, TelecomAsia, for six consecutive years since 1998. This goes to show that SingTel is able to maintain the standard of the service it provides to its end-users while facing fierce competition from the other service providers.
Infrastructure
The quality of Singapore's telecommunications infrastructure was judged as the world's best in the World Competitiveness Report issued by the Institute of Management Development and the World Economic Forum in Switzerland, every year between 1991-1994 (www.Singtel.com).
Product Line
The telecommunication industry has entered a phase driven by fast changing technology, which is stimulated by the demands of increasingly sophisticated end-users. To meet these demands, SingTel has consistently harnessed technology effectively to provide its consumers with the widest range of services possible. Prior to its privatization, the range of services SingTel has had for its consumers was largely limited. In the years following its conversion to a private sector, SingTel now provides a wide range of communication services both in Singapore and Australia, which includes:
- national telephone services;
- mobile communications services, including cellular, paging and satellite services;
- public data and private network services, including leased line, switched data, broadband, IP and Internet access services;
- international telephone services, including international direct dialling, calling cards, facsimile services and international corporate voice and wholesale voice services
8.2 Measurements and results- Quantitative
The various areas of quantitative measurements of the impact of privatization on SingTel will be as follows: profitability, productivity, efficiency and liquidity. The time frame of 1991-1996 is chosen to be examined as this range includes 2 years immediately before and after public listing in FY 1993/4.
Profitability
Profitability analysis measures the income of the firm relative to its revenues and invested capital. The Return on Total Assets (ROTA) ratio measures the efficiency of the utilization of the Group’s total assets in the generation of its profits is computed as follows:
The assumption made is that since assets play an important role in the generating of the company’s profits, a higher ratio symbolizes that the company is more efficient in employing its assets in the producing of the profits.
As shown in Figure 1, the return on total assets in financial year 1993/94 was ranked the highest among the years before and after SingTel’s IPO in October 1993. In addition, it can be observed that in the years following the privatization of SingTel, it was able to maintain a high level of ROTA despite the massive amounts of restructuring and shifting of ownership structure. In other words, as a result of its privatization, SingTel was able to reach its peak in terms of efficiency in the utilization of assets to generate profits.
Productivity
The first measure of the effectiveness of the productivity and operations of SingTel Group will be to analyze its value added information. Value added can be defined as the sales and other operating revenue of the business less the amount paid to acquire materials and services from outside vendors. It is the measure of wealth created by the enterprise therefore it is closely linked to the productivity of the business. Theoretically, an increase in the value added means that there is an increase in productivity of the business. The value added per employee is computed as follows:
In addition to the value added measure, we also look into the operating return per employee to determine the productivity of SingTel’s employees in generating revenue. Henceforth, it follows that a higher operating return per employee signifies that SingTel’s employees are more efficient in generating revenue for the company and vice versa. The formula is:
Figure 2A
With reference to Figure 2A, it is obvious that SingTel’s productivity is constantly on the rise despite the major restructuring in financial year 1993/94.
Figure 2B
Figure 2B concludes that privatization of SingTel brought about positive impacts on the Group’s productivity level, as shown in the highest positive percentage change in the financial year 1993/94. Though the increase in productivity slowed down in the following year, the productivity level was still significantly higher than that achieved in years prior to the privatization.
Efficiency
Efficiency in this case refers to the number of times accounts receivables (AR) are collected during the year, known as receivables turnover. The higher the turnover, the higher the quality of receivables SingTel possesses, henceforth, the more efficient the company is. The turnover is given by:
Figure 3
Conclusion derived from Figure 3 is that the ratio dipped steadily since financial year 1994/95. A possible explanation for this would be that there was a gradual decrease in sales figure of SingTel due to increased competition. The drop in receivables turnover signifies that SingTel’s decreased efficiency with respect to the quality of receivables after converting to a private entity.
Liquidity
Liquidity analysis measures the adequacy of a firm’s resources to meet its near term cash obligations. Current ratio is utilized to perform this task. The ratio is computed as follows:
As observed from Figure 4, there was a significant dip in 1992/1993. This resulted from the massive restructuring of assets during that time period. The aim was to facilitate corporatisation in 1993/94, whereby focus of management shifted to maximizing profits for its shareholders. By 1993/94, there is a gradual upward movement following corporatisation and subsequent listing of SingTel. In general, SingTel was observed to be more efficient in the managing of its current assets while maintaining its desired level of current liabilities after being privatized.
8.3 Conclusion
It follows that after privatization, Singapore Telecom has continued to deliver high returns. For the two-year period from 1995 to 1997, its return on average shareholders' funds has been 29 per cent, its ROTA was 19 per cent, and operating return on turnover was 48 per cent. In addition, its operating return per employee rose from S$177m to S$195m, and the turnover per employee from S$359m to S$414m (www.Singtel.com). Profits increased by 12 per cent to S$1.89bn for the year ended 31 March 1998, despite the introduction of competition in the mobile market during April 1997 and falling international call rates. Singtel's share price has generally outperformed the market, which is in line with research showing that the share price of privatized government-linked companies in Singapore significantly outperforms non-government linked companies after privatization.
Henceforth, judging from the qualitative and quantitative aspects of SingTel after being converted to a private sector, it is evident that the privatization process had positive impacts on the company and the industry, as shown by the improved accounting figures as well as the non-financial areas.
9 References
-
Information on market economy
- Singapore Telecom Website
http://www.singtel.com
- Infocomm Development Authority of Singapore
http://www.ida.gov.sg
- Tan, C.H. (1992), "Singapore Telecom: from public to private sector", International Journal of Public Sector Management, Vol5 No. 4, pp. 4-14.
-
Megginson, William L., Jeffery M. Better, “From State to Market: A Survey of Empirical Studies on Privatization”, Journal of Economics Literature (June 2001), Vol. XXXIX, No 2, pp 321-389
- Paul Starr, “ The Meaning of Privatization” Yale Law and Policy Review 6 (1998):6-41
- Singh, K. (1998), ``Guided competition in Singapore's telecommunications industry'', presented at 4th Annual Conference of the Consortium for Research on Telecommunications Policy and Strategy, University of Michigan, Ann Arbor, MI, June.
- Knoop, C.I., Applegate, L.M., Neo, B.S. and King, J.L. (1996), ``Singapore unlimited: building the national information infrastructure'', Harvard Business School Case 9-196-012.
- Low, L. (1995), ``Privatization in Singapore: the big push'', Paper for Symposium on Privatization organized by the Asian Productivity Organization, Bangkok, 4-6 July.
- Toh, M.H. and Low, L. (1990a), ``Towards greater competition in Singapore's telecommunications'', Telecommunications Policy, August, pp. 303-14.
- Toh, M.H. and Low L. (1990b), ``Privatization of telecommunications services in Singapore'', in Pelkmans, J. and Wagner, N. (Eds), Privatization and Deregulation in ASEAN and EC: Making Markets More Effective, pp. 82-93.
