1. Telecom for improving investment climate & ICT use Rohan Samarajiva, Public Interest Program Unit, Ministry of Economic Reform, Science & Technology Samarajiva@lirne.netSamarajiva@lirne.net; +94 1 247 8733

2. Purpose of presentation  Reform of telecom is a necessary condition for investment overall  Creating conditions for private investment in telecom Market entry Independent & effective regulation  Examples from Sri Lanka throughout

3. Sri Lanka’s telecom sector after 12 years of reforms  Multiple operators (70+) 3 national fixed (no waiters in urban areas) 4 national mobile (overtook fixed; real price declined) 5+ facilities-based data 30 external gateway (~66% decrease in price) 20+ non-facilities based data  Fixed teledensity < 1 in 1991  almost 5 in 2003; Mobile ~0.01 in 1991  5 < in 2003  Telecom & banking are fastest growing sectors in economy in 2003 (~16%)  Telecom no longer a barrier to investment

4. Telecom as a necessary condition for increased investment  Two solutions Improve service only in enclave Improve sector performance everywhere  Sri Lanka tried the enclave solution in 1980s Supplementing exchange & outside plant in Katunayake EPZ Giving priority to GCEC factories (investors) Poor results including ridiculous outcome of banning automatic rediallers

5. Investment in telecom sector overall is key...  What we want is Adequate supply of services Lower prices Higher quality More choice  How do we get it? Not another reform of the failed government monopoly Not regulation, per se More investment

6. Private investment to improve telecom  Telecom is the infrastructure with the most dynamic industry structures and technologies Integrated government monopolies lack nimbleness to play  No multilateral/bilateral assistance for unreformed monopolies  Public investments better used elsewhere

7. Government action to attract private investment in telecom  Greater private investment depends on positive answers to 2 questions Are the returns adequate? (market risk) Are safeguards against administrative expropriation adequate? (regulatory risk)  What can government do? Let investors look after market risk: no market-position guarantees Reduce regulatory risk

8. Government actions: Market entry & privatization  Minimize barriers to entry; SL policy is License only where scarce resources are involved Otherwise authorizations  Examples External gateway operator licenses  30 given since March 2003  No discretion; no numerical limits

9. Entry conditions compared One-time fee (USD) Annual fees Bank guarantee India5,200,00015% of gross rev. Very high Pakistan500,000<0.5% gr. rev. + acc. contr. USD 10 million Sri Lanka50,0000.3% of gr. rev. None to govt.

10. Results...  From unstable monopoly to open entry...  From SLR 75 a minute to 20-25...  Telecom no longer seen as barrier to BPO investments

11. Incumbent Government Owned; No Competition Incumbent Partially Privatized; Foreign Management; Competition Fixed telephony investments in Sri Lanka, 1992-2002

12. Implications for the exchequer  Before the reforms, telecom was an easy but small source of government revenue Very low rates for domestic (<40% revenues); high rates on international outgoing and termination (60<% revenues) Periodic levies  After the reforms, it is an easy, reliable and LARGER source of government revenue ~20% tax (VAT; BTT earlier); reliable  On a user base that has increased seven fold Equity sales; licensing; spectrum fees; contributions to Vishva Grama Fund (for rural rollout) Dividends from shareholding

13. Key reform events  1989-1994 Licensing of 15+ facilities-based operators, including Incumbent which was changed to corporation  1996 Licensing of two fixed competitors (USD 120 m)  1997 35% sale of Incumbent to NTT of Japan for USD 225 million with 5-year management agreement

14. Key reform events  1998 Active regulation starts First step of 5 year rate rebalancing Satellite gateways liberalized  1999 Incumbent found to be in violation of license condition and pays consumers US$ 1 million First public hearing conducted

15. Key reform events  2002 Government sells 12.5% of Incumbent’s equity, bringing government ownership to <50%  2003 30+ External Gateway Licenses issued New Interconnection Rules gazetted Implementation ongoing Already a commitment of USD 90 million additional investment

16. Government actions: Regulation  Reduce regulatory risk Poor countries are poor because  Government does not work well  regulatory risk is high  investments are low/skewed  infrastructure is inadequate  economy is hobbled  Solution: independent and effective regulatory agency

17. Characteristics of effective regulation  No interference by government/incumbent  Constrained discretion  Professional and competent staff  Transparent participatory processes  Expeditious decision making  Efforts to reduce adversarial modes; increase buy-in  Doing a few things well

18. Independence of regulatory agency  Information & Communication Commission that will replace TRC Members appointed with concurrence of Constitutional Council Accountable to/removable by Parliament Not reporting to Minister for Telecom

19. Constrained discretion  Rate rebalancing in 1998-2003 governed by legal agreement that set revenue requirements Regulator decided specific tariffs that would yield promised revenues

20. Telecom regulation should focus on  Interconnection & anti-competitive issues In Sri Lanka  New interconnection rules in March 2003 Including access to undersea cable station Implementation in process  Dominant position rules being framed New legislation will remove tariff regulation from non-dominant operators  Anti-competitive practices proceedings soon

21. Regulation should focus on  Efficient management of scarce resources (spectrum, rights of way and numbers) In Sri Lanka  Allocation & assignments made public  1800 MHz, CDMA & WiFi consultations  First frequency auction in May 2003  New legislation on rights of way including “final offer” arbitration  New numbering plan being implemented

22. ... And get out of unnecessary areas  Most retail tariffs unregulated in new Act (except of dominant operators)  Equipment approvals power replaced by Mutual Recognition approach  Consumer issues to be covered by consumer contracts Regulator intervenes only when contract provisions exhausted

23. SAARC countries 1995-2001 telecom performance F/100CAGRM/100CAGR B’desh0.43120.4143.4 Bhutan2.5422.3-- India3.7521.50.63109.2 M’dives9.9411.96.89- Nepal1.3123.60.08- Pakistan2.3380.5664.5 SL4.4326.13.5653.4