Embedding competition principles in telecom regulation

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Embedding competition principles in telecom
regulation

• Rohan Samarajiva
• Samarajiva_at_lirne.net
• Malathy Knight-John
• malathy_at_ips.lk
• CUTS, August, 2005

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Outline

• Why reform for competition
• Key aspects of reform process
• Drawing from experience in telecom and gas
  reforms in Sri Lanka
• Can competition law keep up with the challenges
  facing telecom sectors?
• Towards a new framework for competition in
  telecom
• Drawing from Sri Lanka and selected country
  experience

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Economic reform the necessity for competition
regulation

• Infrastructure industries characterized by
• Essential facilities
• Economies of scale and scope
• First-comer advantages
• Therefore, reform has to include
• Introduction of competition
• Organizational reform of incumbent
• Introduction of explicit regulatory regime
• Many developing country reforms neglect one or
  two aspects, e.g.,
• Sri Lankas sector reforms were seen as
  by-products of privatization transactions paid
  inadequate attention to sector performance
• Telecom household gas sectors as exemplars

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Post-reform
Pre-reform
Telecom
LP Gas
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Connectivity aspect of post-reform sector
performance

• Telecom (sector reform privatization)
• 1991 corporatization creation of regulator had
  no significant effect
• 1996-98 reforms (competition/ interconnection)
  had dramatic effects
• Household gas (privatization no overall reform
  process)
• Privatization without competition does not result
  in significant growth
• Other benefits (e.g., mandated investment)
• Data does not capture effects of duopoly from
  2001 competition from 2003

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Lessons from telecom reforms, 1991-2003

• Competition is key
• Sri Lanka became a top 10 fixed-telephony growth
  market after competition introduced
• Allowing four mobile operators into a small
  market was radical in 1994, but has paid off,
  with 23.9 of households now having some form of
  telephone access
• 115,000 mobiles were in operation in North
  East within months of ceasefire
• Monopolies are harmful
• Uncertainty created by 5-year international
  exclusivity harmed the entire sector, including
  the beneficiary

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Lessons from telecom reforms, 1991-2003

• But regulation is necessary for competition and
  growth
• Rapid growth in mobile assisted by implementation
  of better fixed-mobile interconnection in 1999
  ending of international exclusivity in 2003
• Fixed sector growth stunted by refusal of
  incumbent to accept, the government to enforce,
  the 1999 fixed-fixed interconnection
• Failure was partly due to ambiguous exclusivity
  granted at privatization

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Mobile
Fixed Competition Introduced
End of International Exclusivity
Fixed-Mobile Interconnection Improved
Fixed
Partial Privatization
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Competition wherever possible regulation where
necessary

• Principle recognizes that markets (decentralized
  decision making) are
• Superior to planning in complex, dynamic systems
• Better than planning in fostering/responding to
  innovation
• Capable of yielding better performance
• Also recognizes imperfection of infrastructure
  markets by allowing for regulation

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Infrastructure reforms in 2002-04

• Regulation to ensure level playing field for
  investors and to protect consumers
• Safeguards to prevent extension of market power
  into competitive markets
• Structural vs behavioral
• Control market power in monopoly markets
• Asymmetric regulation
• Pragmatic approach 2nd 3rd best solutions
  better than none

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Challenges to competition in telecom sectors

• Incumbent advantages (control over essential
  facilities, vertical economies, control over
  network standards)
• Challenge for regulators
• Differentiate natural advantages of economies
  of scale and scope from anti-competitive
  practices
• Implement asymmetric regulation without unfairly
  handicapping incumbents
• Access to the Internet (broadband services)
• Slow progress in local loop unbundling
• Social legacies (cross-subsidization
  rural/urban USOs)

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Is competition law sufficient to meet telecom
challenges

• Drawing from New Zealand experience
• Complexity of telecom access issues and
  sophistication of solutions required (e.g.
  interconnection disputes) exceed boundaries of
  general purpose competition law
• Costly and lengthy litigation increased
  competitors market entry costs
• Replicability of model in developing countries?

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Is competition law sufficient to meet telecom
challenges?

• Drawing from Sri Lanka example
• Resources are serious problem
• Funding from Treasury
• Compromises independence does not allow for
  systematic development of capacity
• Sale of forfeited goods
• Fines
• Low yields, so in effect reliance on treasury
• Also, reliance on fines creates improper
  incentives

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Is competition law sufficient to meet telecom
challenges?

• Institutional capacity
• Low remuneration ? weak analytical capacity
  low levels of professionalism
• No independence
• All members appointed by single subject Minister
• Turnover similar to a government corporation
• Contrast with Public Utilities Commission, with
  Constitutional Council appointment and staggered
  terms

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Towards a new framework for competition in
telecom issues

• Sector-specific technical expertise vs.
  cross-sector flexibility
• Technical tunnel vision vs. broader allocative
  efficiency/social welfare
• Regulatory capture

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Towards a new framework for competition in
telecom Institutional mechanisms

• Concurrent jurisdiction (e.g., South Africa)
  clear demarcation of role of competition
  authority and sector regulator
• Is this affordable?
• Implications for regulatory risk and effects on
  investment
• Competition principles embedded in sector
  licences (e.g., Hong Kong)
• Multi-sector regulation exploiting scale and
  scope economies in institutional design (e.g.,
  Public Utility Commission of Sri Lanka)
• Choice may depend on country/market size

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Example Public Utilities Commission Act, 35 of
2002

• Contains the strongest competition law provisions
  in Sri Lanka
• Applies to any industry that is brought under the
  PUCSL by inclusion in schedule by Parliament
• Electricity Reform Act 34 of 2002
• Petroleum Sector Reform Bill?
• Also addresses independence and capacity problems
  of Competition Authority

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Independence

• Commission members appointed for staggered terms
  with concurrence of Constitutional Council
• Specified procedures for removal by Parliament
• Funded by industry levies, not consolidated fund
• Policy directions may be given only through
  Cabinet

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Capacity

• Funding through industry levies allows for
  outsourcing and adequate compensation packages
• Potential exists for an innovative organization
  that breaks from dysfunctional government models
• Will the potential be realized?

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Competition-friendly reforms in infrastructure
industries

• Clear vision with broad buy-in
• Duration of reforms does not overlap with term of
  government
• Capacity
• International best practice blended with
  knowledge of local circumstances
• Beyond the big bang
• Capacity commitment in ex-ante and ex-post
  regulatory agencies

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Contacts

• Rohan Samarajiva
• www.lirneasia.net
• samarajiva_at_lirne.net
• Malathy Knight-John
• www.ips.lk
• malathy_at_ips.lk