lPage 34 THE ARCENTINE TELECOMMUNICATIONS SEC'I'OR program for judicial reforimi. Once this refornn has become effective, thc governimient ot' Argentina may wish to substitute judicial review for the existinig appFal imechanism.

For other counitries considering privatizing their telecommuinicationis sector, one of' the most important lessons from the Argentine expcrience is the importanice of establishing **a** well-defined regu!atory regime as early as possible in the privatization process and of adherinlg to a transparent and predictable process. This will reduIcc the risk premium demanded by investors. Argentinia had a very narrow window of opportunity in which to implement the privatization of ENTOe and so it chose not to wait until a regulatory regime was in place. I lad it tried to implemenit bothi a regulatory reginle **and** the privatization it may not have sutcceeded with cithier. However, this choice appears to have increased the risk premia required by investors and reduced the government's ability to capture the returns from the privatization.

Privatization in a series of staggered tranches of shares seems to provide governments with an opportunity to capture the returns from improved credibility. This strategy may be especially useful to countries where there are doubt as to governments' abilities to provide stable regulatioll. Thlese countries may have to tolerate high risk premia in the sale of the initial tranche, but if tiley improve their reputations these premia will be lower in the sale of subsequent tranches. However, it is important the first tranche offered for sale be large enough to give a credible signal of a change in regime. In most cases this would mean sciling a controlling interest in the firm. The widespread distribution of share ownership can also reduce the likely hood that the privatization would be reversed, as this reversal would affect too many parties.

Finally, in choosing strategies for price regulation, some caution should be exercised when selecti. g an RPI-X formula. Superficially, this seems to be a simple approach that requires little effort to monitor. A starting level of tariffs is set and then increases are held to inflation less some amount X which is intended to reflect technological innovation. However, the effect of this type of regulation is dependent on the starting price level. Setting this initial level is extremely problematic in cases whiere governments do not have the information required to determine what sort of return this generates. In such cases, as in Argentina, if the potential buyers are telecommunications operating companies, the buyers will have a significant iniformation and therefore bargaining advantage. In Argentina this led to the government's agreemenit, withlout full knowledge, to an initial tariff level that was very profitable to the buyers at the expense of consumers.

# **VIII. Conclusion**

While it is too early to be certain of the outcome of Argentina's economic reform program in general and the privatization of ENTei in specific, the impact appears to be positive. As discussed in section six, expectations regarding Argentina's econoric future seem to have improved dramatically since the beginning of the Menem administration. The net impact of the privatization of ENTel itself on welfare in Argentina is promising. If Argentina succeeds in implementing an effective regulatory regime along the lines outlined in the regulatory decree and if the telecommunications companies meet the performance targets outlined in the Pliego, the direct gains to the country from improvements in the telecommunications sector should be substantial. Based on a partial equilibrium analysis that is discussed in mor.: detail in Annex A, the net benefit to Argentina over the next ten years of the move