THE ARGENTINE TELECOMMUNICATIONS SECTOR Page 38 rates of 4% a year and loan rates of 12% are used. The spread between the two is high, but reflects current conditions for dollar denominated finance in Argentina.

The projections for the combined Telecom and Telefonica case are based on: (i) the valuation report prepared by the National Development Bank; (ii) the investment targets and pricinig regimc laid out in the regulatory framework; (iii) the accounts of the two companlies through March 1992; and (iv) the business plans and quantitative information in the prospectuses for the firmis' public offerings. 'I'lTe actual pulse price until August 1992 is used and then it is assumed that the pulse price will follow the new pricing formula to vary with the US CPI on a semiannual basis, Inflation in Argenitina has been higher than that in the US, which means that the real pulse price has declined. It is assumed that this relative decline will continue. So far as their investment plans go, it is assumed that tihe firms will meet the quantitative targets necessary to extend the exclusive period to ten years. Intermediate input prices, mainly for equipment, are assumed to be exogenous and to grow at rate linked to wholesale prices and the exchange rate. Real average wage level for the private firms are projected to stay at the same level as in 1991. Based on actual data productivity gains are estimated at 14% in 1991 and at 8% and 1.5% for Telecom and Telefonica respectively in 1992. In accordance with current managerial expectations in the firms, an 8% productivity improvement is projcrted for 1993. After 1993, labor productivity improvements are assumed to be 4.2% per annum, 1% higher than ENTel's historical rate of increase of 3.2%.

The projections for ENTel are based on: (i) the firm's performance from 1980 to 1990 and (ii) on the information on the state of ENTel just prior to the privatization that was provided in the National Bank for Development's valuation of the firm. The assumptions in the counterfactual projection are different in a number of aspects. These involve the pricing regime, the treatment of labor, the level of investments, and the conditions of the sale. The basic assumption on the pulse price is that in the absence of thic privatization the price would not have increased as much as it did. Instead, it is assumed that the pulse price would have been adjusted to compensate for the high level of inflation in the first quarter of 1991 and then would have stayed at the same real level for the duration of the period. The growth in labor productivity is estimated to be lower than in the private firm case; it is project to continue to increase a the historical rate of 3.2%. New investment is projected to continue at an annual level comparable to the average level achieved betw'een 1980 and 1989. Without the debt restructuring that took place before the privatization, ENTel would hiave continued to operate with a higher level of debt and its associated expenses.

Based on these assumptions, it is estimated that as a result of the transfer in ownership, the value of the firm to society has increased by US$ 5,209 million in constant 1991 dollars. (Table 7 presents the base case reflecting the assumptions outlined above and the outcomes when the discount and loan rates are vary by plus and minus 5%. The general results are robust.) Of this amount, US$ 2,853 million accrued to the government. The most important effect is due to the change in tax revenue which brings in an additional US$ 2,185 million. With the privatization the government gives up the collection of the indirect tax it levied on telecommunications, but this is more than out-weighed by the increased revenues from the value-added and corporate taxes. The cash proceeds from the sale, less transaction costs, are the second most important contribution to the governments' benefits. totalling US$ 1,883 million. Quasi-rents of the order of US$ 695 million that the government would have earned as a shareholder in ENTel are given up. While external debt worth US$ 1,493 tnillion was canceled the government took on debt of US$ 2,0!3 from ENTel as part of its financial restructuring.