Presentacin para el BID

1
TELECOMMUNICATIONS REFORM IN PERU IMPACT OF
SECTOR REFORM ON COMPETITION
Competition Policy On Infrastructure
Services Geoffrey Cannock José Escaffi Presentati
on prepared for the Interamerican Development Bank
Washington D.C., April 23, 2001
www.apoyo.com
2
Outline

• Transition process in the Peruvian
  telecommunications sector
• From monopoly to competition.
• Main results of the opening process
• Market performance In which markets did the
  reforms work better? Which markets need more
  progress? What are the main concerns?
• Focus Fixed local telephony and long distance
  telephony
• Lessons learned
• Regulatory and competition policies
• Institutional framework
• Conclusions

3

• Transition process in the Peruvian
  Telecommunications sector
• Market performance
• Lessons learned
• Conclusions

2
4
Gradual opening process
?
?
?
PRIVATIZATION
OPEN MARKET
MONOPOLY PERIOD

• Digital trunking
• Internet access through cable TV

• ADSL
• PCS
• FWA

• LMDS

• Digital cellular

New technologies
ATT (FirstCom), Comsat, Gilat to Home, Nextel
Telecom Italia, Impsat, Diveo, GlobalStar,
Millicom
Main players
BellSouth
Telefonica
1991
1993
1994
1999
1997
1995
1996
1998
2000
Telecoms Law
Creation of regulator OSIPTEL
Privatization of CPT and Entel 1/
Merger of CPT and Entel
Early opening of the market
Long distance competition actually starts
Massive shareholder program
Law on OSIPTELs enforcement powers

• 5-year monopoly in local and long distance
  telephony
• Network expansion lines
• Better quality of service
• Tariff rebalancing program
• Descentralization
• Concessions supervision

1/ CPT Local telephony in the capital city
Entel Local telephony in the rest of the country
and of long distance services
5
Institutional Framework
Osiptel (Organismo Supervisor de la Inversión
Privada en Telecomunicaciones) Regulation Ex -
post competition in Telecommunications
Indecopi (Instituto Nacional de Defensa de la
Competencia y la Propiedad Intelectual) Competitio
n Agency
Ministerio de Transportes y Comunicaciones Concess
ions and spectrum allocation
6
Results (1)
Despite the opening of the market, there have
only been slight changes in the revenue structure
and in the total market share of the telecom
operators.
PERUVIAN TELECOMMUNICATIONS MARKET
Revenue structure
1998
2000
Operators market share
The business lines which have been competitive
markets are more important in terms of revenues.
7
Results (2)
More than two years after the opening of the
market, there are still services and regions
which need to achieve more progress to become a
competitive segment.
More competitive ()
Less competitive (-)
8
Results (3)
Most reductions in retail prices of fixed telecom
services have been a one - time price - cap
decrease instead of being incentivated by
competition. However, there are lower rates
mainly for the corporate sector.
9

• Transition process in the Peruvian
  Telecommunications sector
• Market performance
• Lessons learned
• Conclusions

8
10
Competition in telecom markets
More competitive ()
Less competitive (-)

• Outgoing ILD (Lima)
• Dial up Internet services

• Internet leased lines (Lima)
• Local leased circuits (Lima)
• Mobile telephony (Lima)
• Incoming ILD

• Fixed local telephony
• DLD leased circuits
• All services outside Lima (except O -ILD and
  mobile telephony)

• DLD
• Outgoing ILD (provinces)
• Mobile telephony (provinces)

11

• Transition process in the Peruvian
  Telecommunications sector
• Market performance
• Most competitive
• Least competitive
• Lessons learned
• Conclusions

10
12
Local leased circuits
The leased circuits market is one of the most
competitive, due to

• Important infrastructure service providers
  competing in Lima Telefónica, ATT Latin
  America, BellSouth, Comsat, IMPSAT, Diveo, GTH.
• Competitive service offers with different
  technologies optical fiber, wireless (through
  LMDS), CDPD wireless, etc.
• Quick concession process
• Not subject to exclusivity period (I.e. ATTs
  optical fiber ring)
• Network concentration on corporate areas of Lima.
• Expected high market growth.
• Osiptel enforced very closely leased circuits
  rules.

-31
250
UK, EU Average
but there is still more room for price reduction
13
Incoming ILD
Another highly competitive sector is the incoming
ILD market.

• Main reasons why this is a competitive market
• The market price was completely out of line due
  to bilateral monopoly agreements.
• Quite open concession policy 50 new entrants
• The regulation allowed prices to go down near
  marginal cost.
• Very easy entrance investment requirements are
  relatively low.
• Hit - and - run inefficient entrance?

Source Osiptel, 2000
14
Mobile Telephony
MOBILE MARKET IN PERU

• Competition is becoming more aggressive mainly,
  on mobile originated calls, but not yet on fixed
  mobile.
• Main drivers
• CPP and prepaid cards
• Nextel (1999) and Telecom Italia Mobiles (2001)
  entrances to the market.
• New products, services (mobile Internet and
  data), and promotional packages for all mobile
  users.
• ARPU Mobile ? ARPU fixed ? Benefits
  residential customers.

US387 million 0,8 million users
US358 millions 1,3 million users
15

• Transition process in the Peruvian
  Telecommunications sector
• Market performance
• Most competitive
• Least competitive
• Lessons learned
• Conclusions

14
16
Fixed local telephony Infrastructure
The only firm having full Lima and rest of Peru
coverage is still Telefónica.
FACILITY - OWNED INFRASTRUCTURE (2000)
17
Fixed local telephony Teledensity (1)
Teledensity in Perú is still one of the lowest of
the region.
PPP GDP PER CAPITA VS TOTAL TELEDENSITY
Uruguay
Brazil
Chile
Venezuela
Panamá
Argentina
Total teledensity
Colombia
El Salvador
México
Ecuador
Bolivia
Dom. Rep.
Perú
Guatemala
Honduras
Nicaragua
PPP GDP per capita (US)
Source ITU, regulators, World Bank
18
Fixed local telephony Teledensity (2)
Fixed teledensity has shown poor performance in
the past four years
MOBILE
CAGR (1994-2000) 61
CAGR (1994 -1997) 82 CAGR (1998 -2000) 20
FIXED
CAGR (1994-2000) 12
CAGR (1994 -1997) 21 CAGR (1998 -2000) 4
19
Fixed local telephony Teledensity (3)
One of the reasons of the decrease in size of the
telecom market has been the reduction of the
Peruvian market.
20
Fixed local telephony Teledensity (4)

• Lima concentrates
• 51 of total GDP
• 30 of the population
• 80 of private investments
• 75 of factories

21
Fixed local telephony Teledensity (5)
There is a disparity between urban and rural
penetration.

• Lima concentrates
• 66 of fixed telephony lines.
• 79 of local fixed traffic

22
Fixed local telephony Competition Policies
COMPETITION POLICY INSTRUMENTS

• WLL spectrum auctions (however, slow process, not
  deployed yet)
• Definition of fixed interconnection charges from
  2,90in 1998 to 1,68 in 2000 (it will reach
  0,96 in 2002)
• Rate policy
• Rebalanced tariffs
• However, one price policy across Peru for all
  services
• Concession requirements 10 of the incumbents
  lines 5 of those outside Lima in each local
  area.
• Pending Estimation of the productivity factor.

Anyhow, these policy - based restrictions are
expected to be lifted in the near future
23
Fixed local telephony Benchmark
However, local loop appears to be mostly a market
dominated by incumbents.

• It seems that economies of scale are still
  relevant
• Is vertical integration regulation (merger
  controls and limits on crossover services) needed?

LOCAL TELEPHONY IN OTHER COUNTRIES (2000)
Mainly, cable operators
Opened 1998
1980s
1990s
1996
24
Payphones
However, payphones may be considered a substitute
for fixed telephony for lower income groups
Payphones penetration is above the average of the
region.
CAGR (1994-2000) 31
CAGR (1994 -1997) 30 CAGR (1998 -2000) 20
25
Outgoing International Long Distance

• Delayed start 15 months after early opening of
  the market
• Reasons why competition is starting slowly
• Build - out requirements
• Multicarrier design Call by call after two
  years.
• Billing is not yet an essential facility
• Agreement on who should bear costs of the
  multicarrier facilities and the concessions
  granting process
• Problems among parties to negotiate
  interconnection contracts
• The entrants own starting delays.
• However, decreasing prices (up to 40 less than
  Telefónica for corporate customers), increasing
  service offers (such as prepaid cards).

OUTGOING ILD MARKET
Source Apoyo Consultoría S.A.
26
Domestic Long Distance
DLD MARKET IN PERU

• Competition in this segment is just beginning
  only three operators besides Telefónica (ATT,
  BellSouth, and Perusat).
• Alternative offers are concentrated mainly in
  Lima. Outside the capital city, the only service
  provider is Telefónica.
• Provinces are not attractive to entrants due to
  low income level, small market size, and
  expensive DLD leased circuits and DLD
  interconnection.
• The provision of services of all entrants is
  focused on the same regions.

US130 million
US93 million
Source Osiptel
27

• Transition process in the Peruvian
  Telecommunications sector
• Market performance
• Lessons learned
• Conclusions

26
28
Assessment of the process
A qualitative assessment of the main policy
instruments and institutions presents mixed
results.
COMPETITION POLICY INSTRUMENTS RESULTS
Focus
()
Implementation
?
?
Incoming ILD rates
Concessions
?
?
?
Institutional framework
?
Competition law and institutions
Rebalanced price caps for local telephony
Universal Access
?
Interconnection (2000)
?
?
?
Build - out requirements
?
Spectrum auctions
Preselection
Resale
?
Interconnection (1998)
Productivity factor
?
(-)
()
?
Helped promote competition
Number portability
(-)
29
Interconnection (1)
The interconnection process had a well designed
legal and regulatory framework however, in
practice, there were additional problems which
delayed the agreements.

• Main design principle Negotiated agreements
  between parties under general and economic
  principles.
• It was felt that, applying the "Pareto principle"
  (i.e. just fixing the call termination rate on
  the fixed network and the interconnection points)
  will solve most of the interconnection problems
  among firms.
• However, parties did not reach agreements due to
  opportunistic games.
• Interconnection Rules given in 1998.
• Osiptel issued detailed interconnection orders in
  1999, which were quite demanding complementary
  interconnection rules, cost disaggregation of
  network elements, conflict resolution rules and
  regulations, etc.

30
Interconnection (2)
Should a more detailed interconnection framework
have been more convenient?

• It It might have helped, but probably not much
  since it is too hard to envision all possible
  disagreements due to parties opportunistic
  behavior.
• The most effective decision against opportunistic
  behavior was to allow high-capacity corporate
  lines to be used for interconnection purposes
  without having an interconnection agreement.
• Hence, it is important to have quick regulatory
  response to cover the loopholes enforcement
  powers to make things happen, specially regarding
  technical boycotts transparency in setting up
  the interconnection charges and an active
  license program.

31
Interconnection (3)

• Lessons learned
• The unexpected number of new entrants asking for
  interconnection at the same time and the
  incumbents expected delaying behavior stressed
  the regulators management resources. This could
  be avoided by
• Issuing resale rules beforehand
• Issuing a standard interconnection contract
• Allowing interim interconnection mechanisms
• Updating the interconnection rule
• Regulatory agenda
• Essential facilities redefinition. Additional
  unbundling local loop, rights of way, billing.
• Long distance carriers access through payphones
  and wireless handsets
• Simplify procedures
• Update interconnection charges
• Only regulate firms with a dominant market
  position

32
Institutional framework Market opening
No rules were envisaged other than just open the
market to competition.

• Multicarrier access to incumbents local loop
  facilities
• Licensing policies schedule, procedures,requireme
  nts
• Spectrum policy, availability, procedures, and
  schedule
• Who will pay for the incumbents CAPEX due to new
  entrants
• Productivity factor
• Size of the local area
• Detailed interconnection rules
• Asymmetric regulation regarding build - out
  requirements, price caps, and QoS

33
Institutional framework Competition (1)
Osiptel is empowered to solve competition cases
among telecommunications operators.

• An Administrative Court - type body looks at
  competition conflicts, and also regulatory
  conflicts (i.e. Interconnection), once there is a
  formal relationship between the parties through a
  contract or a particular administrative order.
  Its decisions may be appealed to a 5 - member
  Permanent Administrative Court.
• Regulatory conflicts between parties about
  reaching an interconnection agreement (i.e.,
  without a formal relationship) are looked by a
  Technical Committee from Osiptel staff lead by
  the General Manager. In case of disagreement, the
  parties may appeal to Osiptels Board of
  Directors.
• Other regulatory conflicts are treated through
  the typical regulatory decision making process,
  where parties interact with Osiptel through
  representations, both public and private.

34
Institutional framework Competition (2)
REGULATORY/COMPETITION CONFLICT SOLVING PROCESSES
Regulatory conflict (ie. ex - ante
interconnection)
Regulatory or competition conflict (ex - post)
Administrative Ad - Hoc External Court 3 - 5
members
General Manager
Appeal?
Appeal?
No
No
Yes
Yes
Osiptels Permanent Administrative Court
Board of Directors
Appeal?
Appeal?
No
No
Yes
Yes
Judiciary
35
Institutional framework Competition (3)
Relation between Competition and Regulatory
Agencies on a Transition Industry

• Demand for both regulation and anticompetitive
  cases increases quite dramatically after opening
  the market
• 1. Interconnection orders approved
  agreements ballooned from 3 up to 57.
• 2. Annual average competition cases on Osiptel
  increased from 2 to 5,3. Indecopi
  received an average of 7 during the same period.
• By far, most of the conflicts during the opening
  of the market are regulatory.
• Cases seen by the Administrative Court were
  evenly split between regulatory and competition
  ones.
• A good deal of regulatory and competition cases
  seen by Administrative Courts should be better
  dealt within the general regulatory decision
  making process. However, firms activate the AC
  route to press for timely decisions (Ultimately,
  that tends to activate a general regulatory
  response i.e. IP telephony, convergence issues,
  interconnection rates, unregulated network
  elements).

36
Institutional framework Competition (4)
Relation between Competition and Regulatory
Agencies on a Transition Industry (cont.)

• Hence, we feel that during the transition period,
  it is a good approach that the regulatory
  authority should keep competition policy due to
  its grater regulatory flexibility and to lower
  bureaucractic transaction costs.
• However, this mandate should be transfered to
  Indecopi within a clear deadline. For instance,
  in the short-run the appeals regarding
  competition cases should go to Indecopis Court
  instead of Osiptels.
• Starting this year, Osiptel should ask Indecopi
  for its non - binding opinion on competition
  issues.

37
Osiptels institutional assessment
OSIPTEL INSTITUTIONAL ASSESSMENT
()

• Staff
• Due process
• Resources

• Transparency (except modeling information)
• Flexibility
• Autonomy from Government
• Accountability

Implementation

• Autonomy from incumbent
• Modeling information available to public

• Supervision (2000)
• Asymmetric information (2000)

(-)
38
Other lessons learned

• The new role of the State as a regulator is not
  fully understood by high-level decision makers,
  media and users (independency issues, predictable
  rules)

Institutional setting

• The design of the privatization auction and the
  market structure do matter efficiency gains of
  Telefonicas horizontal and vertical integration
  vs delays of effective competition and
  supervision costs after the monopoly period
• The ex ante regulation should be scaled down with
  a clear schedule on those issues where the
  incumbent loses market power

Industry structure

• Gathering information empowerment is critical,
  specially regarding costs. If not, the
  regulators credibility decreases and information
  rents may become significant

Regulatory authority
Market entry

• A more aggressive plan for issuing available
  radio spectrum would foster competition,
  specially in the wireless and local markets

39

• Transition process in the Peruvian
  Telecommunications sector
• Market performance
• Lessons learned
• Conclusions

38
40
Conclusions (1)

• The Peruvian telecommunications market opening
  has been a gradual process.
• Two years after the early opening, the results
  have been mixed. There are still some services
  and regions which need to achieve more progress
  to become competitive markets.
• The most benefited segments have been Lima and
  the corporate sector.
• There are still some pending regulatory issues
  which might help to improve competition in the
  sector.
• Active ex -ante regulatory measures and an
  appropriate enforcement are critical to foster
  competition in former natural and legal
  monopolies.
• Competition institutions administrative court -
  type bodies have a role in pointing out ex - ante
  regulatory loopholes.

41
Conclusions (2)

• During the transition period, it is a good
  approach that the regulatory authority should
  keep competition policy.
• However, this mandate should be transferred to
  the general competition agency within a clear
  deadline.