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Price Controls and the Telecommunications Sector

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Presentation on theme: "Price Controls and the Telecommunications Sector"— Presentation transcript:

1 Price Controls and the Telecommunications Sector
By Mahendra Reddy, Chair, Fiji Commerce Commission And Dean, College of Business, Hospitality and Tourism Studies, Fiji National University

2 Introduction Price Control is a tool of Competition Law and Policy.
Competition law and policy is a relatively new initiative in the Pacific Island States. In Fiji, the regulatory body was established in 2000. The Fiji Commerce Commission, which is the competition authority and price regulatory body, was established with the general objective of protecting the consumers and promoting effective competition in Fiji’s market.

3 Key Objectives of Commerce Commission
Promote efficient competition in the interests of consumers and producers. Ensure non-discriminatory access to infrastructure facilities in monopoly or near-monopoly situations. Promote compliance with the Commerce decree 2010 to protect consumers through education, investigation, and where necessary, litigation.

4 Key Objectives of Commerce Commission
A major focus of competition law and policy is the avoidance of market dominating behavior of business through, inter alia, price fixing or market sharing cartels, abuses by leading firms and undue concentration. It is to promote competition as a means of assisting in the creation of markets responsive to consumer signals and ensuring the efficient allocation of resources in the economy and efficient production with incentives for innovation.

5 Price Control: Is it Necessary?
In some economies, as they attempt to move towards less regulation and liberalization, they note that certain sectors of the economy need regulatory intervention for several reasons, particularly due to market failure. Market’s fail because of: Natural monopolies; Small Market size; Government policies (such as licenses and quotas) Furthermore, in the absence of competition law, the persistence of entry barriers to many markets, can be an important deterrent to entrepreneurship and the mobility of capital.

6 Price Control: Is it Necessary?
Natural Monopolies: Small island countries like Fiji have a range of natural monopolies. A large number of them has arisen as a result of government corporatization and privatization. These continue to distort the market solution.

7 Price Control: Is it Necessary?
Market Size: The small market size also does not allow entry of too many players into industries which will require large capital investment. Incumbents also restrict the entry of new players in a number of ways: By engaging in predatory pricing By foreclosing the market before a new entrants enters the market. Governments Licenses, Quota’s and Tariff Protection: This also leads to a distorted market solution

8 Need for Intervention Hence Competition authorities have no choice but to: Ensure market foreclosure is prohibited; Ensure established firms do not engage in predatory pricing to drive out the new entrant from the market; and,

9 Need for Intervention Ensure those new entrants having de minimus market share are protected for certain period until they get a strong foot hold in the industry. Ensure monopolies and those firms which are dominant or have substantial market power do not abuse their power. => Price control

10 Price Control: A Temporary Solution
Price control are, generally, not an efficient solution. Price signals are the single most important beacon in the market that will ensure resources are allocated efficiently; Price signals will attract investors in a sector where they can make surplus and re-invest thus expanding the economy.

11 What does the Business Sector in Fiji want!!
Do they want a purely competitive market? Do they want no price control? Neither...they want a policy of convenience. They want no price control in the product market. But they want price control in the factor market.

12 What does the Business Sector in Fiji want!!
They don’t want control of prices in the product market but they want tariff protection They want high tariffs to be imposed on imported competing products so that they can raise their product price in the domestic market.

13 What does the Business Sector in Fiji want!!
They want the finished product to be imposed a tariff rate while their importation of unfinished product to have no tariff. They want tax free zones thus attracting inefficient factories to operate in these zones

14 What does the Business Sector in Fiji want!!
Electricity: They want the Commission deny FEA a tariff rate commensurate with a market rate of return… They made a long submission to the same Commission who said FEA cant bill the consumers for FEA’s Capital Cost and that Commission should regulate FEA.

15 What does the Business Sector in Fiji want!!
When Fiji Ports Authority increased the Port Charges, the importers and exporters ran to the Commission arguing that FPL is abusing their monopoly power and thus we must intervene and set their charges. The Commission intervened and have set their charges. Both parties are happy.

16 What does the Business Sector in Fiji want!!
AFL: When AFL started to increase rent of the floor space at Nadi, the tenants there ran to the Commission to intervene…that AFL is abusing their monopoly power and thus charging exorbitant rent. The Commission then researched and set the rates early this year and all parties are happy.

17 What does the Business Sector in Fiji want!!
Port Denarau: When Port Denarau increased its passenger levy, the cruise owners ran to the Commission arguing that they will be finished….the Commission intervened and have set the levy.

18 What does the Business Sector in Fiji want!!
FINTEL: When FINTEL was refusing to allow any other telecom operator to purchase bandwith directly from the SCCN, the operators ran to Commission to regulate the bandwidth charge as FINTEL was the sole provider of Bandwidth and was thus levying exorbitant charges. The Commission intervened and has not only set the bandwidth charge bringing it down on a sliding scale, the Commission has also opened up the gateway. Any operator can source bandwidth directly from the SCC network.

19 The reality in Fiji is…. We have monopolies that are abusing their power and distorting the competitive market solution. We have dominant firms who are setting prices and deciding on output thus distorting a competitive market solution.

20 The reality in Fiji is.. We have incumbents in the market who, in the advent of entry of a new player will foreclose the market by entering into long term contracts. We have well established players in the market, with a diverse range of products (to cross subsidize losses), who engage in predatory pricing to drive out a new entrant from the market.

21 The reality in Fiji is.. Some of those who have become well off in Fiji and PICs have largely acquired their wealth due to government-created monopoly positions through, for example, restricting trade and investment, or from privileged positions in parastatal organisations.

22 The reality in Fiji is.. Therefore, in Fiji and PICS there is a virtual absence of a full commitment to a fully competitive market. There will be continuous lobbying with governments…line Minister and Prime Minister to: Impose controls on the factor markets; Provide tax free zones; Provide tariff protection; Provide tax concessions on imported capital goods.

23 Commission is Clear on its Position
Competition is paramount. Competition must be allowed where market structure permits. Where markets fail, and if the goods within the market either could cause hardship and become an impediment to volume based surplus creation and economic growth, the Commission must intervene. Where market structure is distorted to lessen competition, the Commission must intervene.

24 Do we really have a regulated Economy
No not really; Most of the sector’s have no price control at all; Pharmacies: 20% of their products are under price control; Supermarkets: 15% of their products are under price control; Hardware: 30% of their products are under price control.

25 ICT and Growth

26 ICT Development in Fiji
Growth theory has expanded over the last two hundred years with addition of new contributions on key variables affecting growth and development of an economy; Over the last four decades, technology has been seen to be a critical factor defining countries going beyond their normal potential; Another factor that releases people's creative potential and knowledge is Information and Communication Technologies (ICT). They do not by themselves create transformations in society. ICT are best regarded as the facilitators of knowledge creation in innovative societies.

27 Introduction: ICT Development in Fiji (cont…)
The ICT sector has a powerful multiplier effect in the overall economy. Policy makers in Fiji have long back realised the potential of ICTs for development, and recognize that ICTs can be harnessed for great socio-economic benefits. An important sector within ICT is telecommunications sector; Fiji’s ICT sector showed first signs of making this contribution to the economy in the 1990 after several major developments.

28 Introduction: ICT Development in Fiji (cont…)
First was in July 1994 when Vodafone (Fiji) Limited (“Vodafone”) entered Fiji by introducing cellular mobile telecommunications systems and associated networks and to provide cellular mobile telecommunications services in Fiji. In 1999 when FINTEL invested to land the Southern Cross Cable Network into Fiji, it was the beginning of another era for Fiji with respect to telecommunications development.

29 Introduction: ICT Development in Fiji (cont…)
With the conclusion of the Deed of Settlement in 2008, Government was able to license Digicel (Fiji) Limited (“Digicel”) to operate cellular mobile telecommunications systems and associated networks and to provide public cellular mobile telecommunications services in Fiji. However, despite these developments, there is still room to further increase ICT penetration and reduce ICT prices. With this market situation, Fiji is missing the benefits that a more competitive telecom market would provide such as low costs of doing business, getting education and in communication.

30 Introduction: ICT Development in Fiji (cont…)
Compounding this is the high initial capital investment that this sector requires; High capital costs is an impediment to investment in this sector as well as recipe for high wholesale and retail rates. The question that arises then is can infrastructure sharing be the answer? Infrastructure sharing is an arrangement whereby one telecommunication carrier shares their telephone infrastructure with one (or more) other carrier(s).

31 Introduction: ICT Development in Fiji (cont..)
In case of industry’s which requires huge Capital investments, the challenge is to optimally utilize available resources while ensuring competition and availability of services at affordable prices. It is expected that advantage of such infrastructure sharing will be passed on to subscribers in terms of faster roll-out of services and greater affordability of services. It is useful in start up phase to build coverage quickly and in the longer term scenario to build more cost effective coverage in un-serviced area. What is the economic theory and legal basis for it?

32 Theoretical Basis: Service vs Facility Based Competition and the Ladder of Investment
Sectors requiring large scale industry specific investment can lead to monopolisation. As such, firms rolling out new infrastructure may be obliged to share them with others by subjecting them to access regulation. Normally it is difficult for a firm to roll-out its own infrastructure on a large scale to compete with incumbent operators. Thus the first stage of the competition development has been largely based on strict access regulation.

33 Theoretical Basis: Service vs Facility Based Competition and the Ladder of Investment (cont…)
The regulation forcing the incumbents to lease their facilities to the entrants, at a non-discriminatory and cost-oriented tariff-has facilitated the emergence of competition. Once established on the market, some of the new entrants can then roll out their own infrastructure thus leading to facilities based competition. This notion of service and facilities based competition is related to the concept of the ladder of investment”.

34 Theoretical Basis: Service vs Facility Based Competition and the Ladder of Investment (cont…)
The underlying notion is that this approach will motivate alternative operators to invest in infrastructure in order to take advantage of less complex, and therefore cheaper, access products of the incumbent. In the initial period of competition-creation, regulatory obligations enabling new providers to access wholesale services and to resale them are justified by the goal of attracting new service providers to the market, reducing retail prices, increasing immediate consumer benefit and the utilisation of existing infrastructure.

35 Theoretical Basis: Service vs Facility Based Competition and the Ladder of Investment (cont…)
It is assumed that regulation should motivate alternative operators to move up the ladder and deeper into the value chain, adding more and more of their own infrastructure elements, which normally requires new investments. It is assumed that this should result in the development of infrastructure competition. The savings that the ICT operators make in building new ICT system and networks can then be used for the development of new and efficient telecommunication services in order to improve their competition situation.

36 Infrastructure Sharing in the Telecommunications Sector: Essential Facilities Doctrine
The doctrine of essential facilities evolved in the United States in the beginning of the 20th century. Certain railroad companies owned both the railroad terminal as well as the only bridge link to the terminal. A new player, intending to provide competition to the existing players, was denied access to both the bridge as well as the railroad terminal. The existing players argued that the new player needed to build similar facilities and incur the relevant cost to be able to complete.

37 Infrastructure Sharing in the Telecommunications Sector: Essential Facilities Doctrine cont…
The US Supreme Court in the case of US vs. Terminal Railroad Association of St. Louis, [(1912) 224 U.S. 383], held this as a case of monopolization, and directed the existing players to provide access to essential facilities - namely, the bridge and the railroad terminal - to enable the new player to compete effectively. However, it is important to note that the essential facility doctrine is not construed as to mean that any investment made by an entrepreneur would be subjected to third party access, since such a legal regime would discourage any potential investor.

38 Telecommunications Examples: Selected Ones
USA: Telecommunications in the USA is regulated by the Telecommunications Act 1996, which contains requirements for both co-location and infrastructure sharing. France: ART (Autorité de Régulation des Télécommunications) also favoured sharing of 3G infrastructure between service providers, as long as they don’t share frequencies.

39 Telecommunications Examples: Selected Ones (cont…)
Germany: In Germany, the regulator RegTP (Regulierungsbehörde für Post und Telekommunikation) ruled that infrastructure sharing of wireless sites, masts, antennae, cables, combiners and cabinets was permissible – provided that full legal control of the networks and competitive independence remains intact. Brazil: National Telecommunications Agency (ANATEL) laid the rules on infrastructure sharing among telecommunications service providers. The rules set out the conditions and standards for sharing of ducts, conduits, poles, towers and utility easements in the telecommunications sector.

40 Telecommunications Examples: Selected Ones (cont…)
Norway: The different networks in Norway can share most of the infrastructure. Masts, antennae, power supplies, housing, transmission routes etc. can be shared. The core network cannot be shared. The frequencies cannot be shared. Trinidad and Tobago: TATT has attempted to prevent the proliferation of cellular towers throughout the country by mandating collocation (tower sharing) in the concession granted to cellular providers. The operators who availed concessions are required to share where the same is technically feasible

41 Summary and Conclusion…
Price controls are here as a temporary solution. Price controls are on goods and services are not provided via a competitive market and these goods and services are critical for the social well being as well as for economic growth.

42 Summary and Conclusion…
The Commission has too date undertaken numerous work to ensure: hardship on the general population is lessened as result of distorted market structure; Impediments to volume based surplus creation is removed and growth promoted; Price control remains in force until market can deliver the desired solution;

43 Summary and Conclusion…
Infrastructure sharing in the telecommunications sector in many countries has proven to be a critical lever contributing to the growth of the telecom sector. Operators should closely examine the economic benefits and develop their internal positions on the subject. The next major work in the telecommunications sector should be on this area and that’s in the domain of TAF.

44 The End Vinaka and Dhanyavad !!

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