The Consumer Welfare Gains of Guatemalas Liberal Reforms

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The Consumer Welfare Gains of Guatemalas Liberal
Reforms
Thomas W. Hazlett, Giancarlo Ibarguen S. and
Wayne A. Leighton Presentation to Convergence
or Competition? Radio Spectrum Management in
Guatemala and Latin America June 9th and 10th,
2005 Francisco Marroquín University Guatemala
City, Guatemala
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• The opinions expressed here are those of the
  authors and do not represent the views of any of
  the institutions with which they are affiliated.

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Liberalization Is Not Always Popular, Two Latin
American Countries Lead the Way

• Comments on a report by Ronald Coase and other
  economists at the Rand Corporation, circa 1960
• This is a remarkable document Time somehow has
  left the authors behind. They ignore the social,
  cultural, and political values which have come to
  inhere in mass communications, in particular,
  broadcasting, as well as fifty years of
  administrative law developments I know of no
  country on the face of the globe except for a
  few corrupt Latin American dictatorships where
  the sale of spectrum could even be seriously
  proposed. (Coase, J. L. Econ. Oct. 1998)

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The Guatemalan Spectrum Privatization
ExperimentWhy Its Important

• Offers proof of concept for spectrum
  privatization (Coase 1959)
• Reform by legislation, not regulation
• Offers evidence in understanding optimal property
  rights regimes how to define the rights, how
  they work or dont work. - These lessons are
  applicable to both developed and developing
  countries.

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Guatemalas ReformsThe Short Story

• Private property rights defined sparingly
• Dispute resolution is mostly a minor factor
  incentives exist to overcome interference
• The mobile telephony market shows that Guatemala
  has been relatively successful in promoting
  consumer welfare

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The Guatemalan Experience

• Guatemala In 1996, the Ley General de
  Telecomunicaciones allocated spectrum in three
  categories
• 1. reserved for government use
• 2. reserved for amateurs
• 3. regulated (liberalized) bands

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The Reserved Bands

• For government use 1,335 MHz in total
• 1000 MHz reserved from 3 MHz to 3000 MHz
• For amateur use 4,761 MHz in total
• about 12 MHz reserved from 3 MHz to 3000 MHz
• These parties receive an AUF - autorización de
  uso
• de frequencia - which cannot be sold or
  transferred

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The Regulated or Liberalized Bands

• Parties receive a TUF título de usufructo de
  frecuencia which can be traded and has
  flexibility under technical constraints
• TUFs describe schedule of operation, area
• of operation, max transmission power, and
• max interference at border of coverage area

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TUFs v. Licenses

• In general, a spectrum license is a right to a
  particular use. With some spectrum, a licensee
  may choose among several uses.
• A TUF is essentially a property right, with the
  freedom to use the spectrum as one sees fit,
  subject to technical restrictions.

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Allocating TUFs

• Parties submit requests, government must publicly
  announce request in three days
• Only reasons for denial violation of intl
  treaties, or existing right is held by another
• Third parties may oppose, but must do so within 5
  days of end of public announcement
• Within 15 days, an auction is announced, which
  takes places within 20 days

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El Salvador

• Reform, functionally similar to Guatemala
• Also enacted via statute, not regulation
• Grants concessions, not TUFs, but they are very
  flexible
• Left ITU spectrum allocation template in effect
  but enacted rule change to permit full flexible
  use in licensees allocated frequency space

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El Salvador

• Concessions describe schedule of operation
  area of operation nominal power of transmitting
  stations maximum intensity of the electrical
  field surrounding the covered area modulation
  type the type, gain, and pattern of the
  radiation of the antennae of the transmitting
  stations the type, gain, and pattern of
  radiation of the antennae of the receiving
  stations in the event they must be protected the
  altitude and location of antennae above ground
  and above sea level

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Guatemala TUFs Auctioned and Traded

• TUFs traded 1,621 (or 41 percent of total)

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Results Mobile TelephonySource
Superintendencia de Telecomunicaciones (SIT)
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Guatemalas Subscriber GrowthBest in Latin
America

• Average Annual Growth Rate for Cellular
  Subscribers, 1997-2002 89.7 percent
• (Source International Telecommunications Union)

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Guatemala Has One of the Lowest Mobile Telephony
Rates in Latin America

• per-minute mobile rates, in-country,
  approximately US 0.12 (per ITU)

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• Spectrum Allocation to Mobile Telephony in Latin
  America

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Guatemalas Low Prices Are Statistically
Significant
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• Market Share, Mobile Telephony
• Source Superintendencia de Telecomunicaciones
  (SIT),
• as of December 31, 2004

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What Consumer Welfare Gains Really Mean
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Results Broadcast The Perennial Special Case

• Existing broadcasters until the end of 1996
  received free TUFs
• Additional parties could apply, subject to the
  non-interference rules
• For TV and radio, spacing extremely tight,
  allowing for more users. Exactly 50 TUFs in the
  FM bands 88.1, 88.5, 107.7

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Problems with the Guatemalan Experiement

• Not many, as predicted by critics
• No chaos in the market especially in the
  highly valued mobile telephony uses
• Still a need for enforcement, especially with
  TUFs used for broadcasting
• Thus, still a potential for political discretion
  (but this is lower than other countries)

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Outstanding IssuesProtecting Property Rights,
Avoiding Political Discretion

• Example Pirate Radio

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• Pirate Radio
• Unauthorized use of spectrum, especially pirate
  radio, has been a problem. At one time,
  estimates of up to 400 pirate users within
  Guatemala.
• Authorized users argue that Guatemalan
  regulator, the SIT, faces political pressure to
  not enforce against illegal users.

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• Political Discretion
• When there is political discretion, rights are
  not well-protected, and incentives for efficient
  use are lessened as a result.
• Guatemala has very little of this problem, as
  compared to most any other country. The lack of
  enforcement against pirate radio is the only
  significant exception.

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Lessons for Policymakers? increasing the
rights associated with the spectrum increases use
and efficiency ? which creates consumer
benefits ? but rights must be protected ?
against other users, and against rent
appropriation, and

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The Overlooked LessonFlexibility is Feasible
and Efficient, and Property Rights Do Not Mean
Chaos

• With the traditional approach, regulators
  determine what services are appropriate for given
  bands. A licensee can offer only those services
  that are allowed.
• Guatemala turned this approach on its head.
  Regulators determined the broad technical rules.
  A licensee can offer any service that is
  consistent with these rules.