Venezuelan president Hugo Chavez has announced his intention to nationalize the incumbent telecommunications company, CANTV. Such action would almost certainly be bad for Venezuelans. The state-owned monopoly telecom firms of yesteryear delivered service that was horrible at best. Typically, one had to be on a waiting list for a phone for years, with bribes ultimately the only reliable way to have a phone installed. The lucky few who had phones could not rely on hearing a dial tone when they picked up the receiver, and if they heard a dial tone did not expect a call to go through on the first try.

Privatization, market liberalization, and the resulting competition have made telecommunications one of the few remarkable success stories in developing countries around the world. [See some of my work on telecoms in developing countries].

In addition to the issues many have raised so far about CANTV and its investors, the prospect of nationalization raises several other intriguing questions. In particular, how does the telecom regulator, Conatel, fit in, and what will become of the other privately-owned communications firms in the market?

Telecom reforms in most countries typically involved privatizing the state-owned incumbent and establishing a regulator that was supposed to be independent from short-term political pressures. [See a detailed database of telecom regulators in developing countries that I compiled with many others]. In keeping with that approach, Venezuela established the independent regulator Conatel in 1991 as part of larger telecom reforms that also included privatizing CANTV.

How would a nationalized CANTV interact with the regulator? Would the regulator retain the right to regulate CANTV or would Chavez insist that because it is owned by the state it should not be subject to the same rules as other firms?

In addition, CANTV is not the only telecom firm in the Venezuelan market. According to Conatel, in 2005 five companies offered mobile cellular service. CANTV’s mobile subsidiary, Movilnet, had about 40 percent of the country’s 12 million mobile subscribers. Four other private companies, therefore, have more than 7 million mobile subscribers.

The empirical economics research demonstrates that competition rather than privatization itself has generated dramatic improvements in telecom services. Thus, it is possible in principle that if a state-owned CANTV behaved as any other company then Venezuela's telecom market could remain reasonably competitive.

Unfortunately, once a firm is owned by the state it is unlikely to operate like any other company. It will tend to face pressures to do things other than invest in telephone service, such as maximizing employment. At the same time, because a state-owned firm may not face hard budget constraints and can thus operate inefficiently without financial consequences, other firms may not be able to compete with it at all. Often competitors that must contend with a state-owned incumbent find themselves unable to terminate calls on the incumbent's network or even on each others' networks (depending on the nature of interconnection) and pricing schemes that discourage consumers from using networks other than the incumbent's. Under such circumstances, firms would ultimately exit the market and consumers would suffer.

Perhaps the millions Venezuelans whose mobile services are not provided by CANTV will create enough pressure on the incumbent to behave, regardless of who owns it. Indeed, the large number of people who subscribe to competing networks makes today's situation different from the early days of telecom reforms. Today, CANTV needs to be able to terminate calls on its competitors' networks almost as much as competitors need to terminate calls on CANTV's network. Chavez's distrust of the private sector and desire to consolidate power, however, suggest that he is unlikely to allow the regulator to act independent of his authority or to allow private firms to compete fairly with the incumbent.

President Chavez may fashion himself a populist, but he is on course to undo one of the great successes on the last 20 years.