Introduction to Telecom Reform and Liberalization Policy and Regulatory Tools Stefaan G. Verhulst, Markle Foundation August 2003

OUTLINE Developments and Rationales behind Reform Promises and Expectations of Reform Tools and Trajectories of Reform Models and Comparisons

The historical approach to telecommunication service provision The PTT (Post, Telephone and Telegraph Administration) was granted a monopoly on the provision of telecommunication infrastructure and services since late 19th century. Basic model world-wide = monopoly on equipment and on basic network and service provision (public monopoly in Europe vs private in the US) The natural monopoly doctrine: the industry enjoys large fixed costs whose duplication was neither profitable for private investors nor socially desirable. Telecommunications was one of the societal benefits that economic development allowed. European PTTs became large and powerful employers, often capable to subsidise other social programmes.

(…cont’d) PTTs had multiple roles as policy-maker, regulators, and operators. During this time, experiences in telecommunication performance varied among countries (e.g. France vs Belgium, Greece)

Main pressures for change (since late 1970s) Radical developments in the electronics/computer industry and digital technology lowered the costs for certain types of infrastructure, exposed the inefficiencies of PTT monopolies, and offered opportunities for market entry. Increasing technological convergence between previously separated industries (consumer electronics industry, telecommunications, and media publishing) created new types of value-added services. Internationalisation of business urged national carriers to compete in attracting customers wishing to establish multinational private networks. In Europe, concerns were raised over creating a single European market for equipment and services able to compete against the US and Japanese rivals.

Major steps of reform Strategies for the restructuring of markets in the 1980s (as identified by Noam and Kramer, 1994) Market structure Strategies –Liberalisation –De and re-regulation –Divestiture (e.g. AT&T) –Consolidation (for capturing economies of scale and scope, e.g. through mergers and acquisitions) Ownership strategies –Corporatisation (loosens direct government control on the PTT) –Privatisation

… (cont’d) International Strategies –Expansion into new international markets –Alliances Competitiveness Strategies –Industrial policy considerations –Vertical integration (often with equipment manufacturers)

Promises and Expectations behind Telecom Reform and “Liberalization” Faster Growth and Increased Investment Better and Newer/Alternative Services New Service Providers Lower Costs (and lower prices) International Trade in Telecommunications Services Regulatory Intervention (behavioral and structural)

Major reform trajectories and tools Privatization and Licensing of competitive operators Interconnection and unbundling Price regulation in non- competitive market segments Introduction of transparent Competition regulation Universal Service and funding of social goals Removal of international trade barriers } Independent Regulator (NRA)

Time patterns of reform Countries that liberalize their markets often follow a certain timeline –Liberalization of equipment; –Liberalization of value-added services; –Liberalization of mobile and satellite services; –Liberalization of basic service (voice, data); –Liberalization of infrastructure networks; General trend to establish independent regulatory agencies

Institutions and Roles Policy: Government Regulation: NRA Operation: PTO Independence Accountability Funding Multi-sectoral

Licensing Telecom as an Essential Service/Finite Resource Privatization or Commercialization Provision of Regulatory Certainty and Flexibility (defines rights and obligations, e.g. access) Regulating Market Structure Balancing Competition and Consumer Protection Generating Government Revenues Types: individual operator licenses; general authorization; open entry Critical: Transparency of Process and Criteria (comparative selection vs auctioning)

Interconnection “inter-operator access” (gatekeeper issues) Procedural Issues (negotiation, dispute resolution and terms – non-discriminatory, fair and transparent - WTO) Commercial and Consumer Issues (charges, privacy, and resale) Technical and Operational Issues (Standards, Quality, Sharing and Access to Critical Operation Support Systems)

Price Regulation Rationale Revenue and Investment Objectives Efficiency: Productivity and Cost Objectives Social and Equity Objectives Methods Price Cap Regulation vs Rate of Return Regulation and Discretionary Pricing Concerns International Accounting vs VoIP

Competition Regulation Imperfect competition = market failure Sector Specific vs Competition Law Basics (determining the playing field): –Market Definition –Barriers to Entry –Market Power and Dominance –Essential Facilities Remedies (licensing, fines and damages, re- structuring)

Universal Service Universal Service vs Access Principles –Availability and Accessibility –Affordability –Quality Obligations and Funding –Licensing arrangements –Cross and other Subsidies - Universality Funds Key: Universality as a Moving Target

Emerging models of reform Model 1: privatization with full competition (New Zealand, Chile, Malaysia) –Benefits: initially increased efficiency –Challenges: continued dominance Model 2: privatization with phased-in competition and regulation (EU, Japan, Hong Kong, Australia, Korea, Argentina, Brazil) –Benefits: increased efficiency –Challenges: effective regulation, limited impact of privatization

Emerging models... Model 3: liberalization without privatization (Colombia, India) –Benefits: increased efficiency –Challenges: limited access to capital markets Model 4: private sector participation without privatization or liberalization (China, Saudi Arabia) –Benefits: access to capital & expertise –Challenges: continued strong state control

EU v. US approach EU US Competition Model Convergence Tends to emphasize dynamic competition (antitrust approach) Tends to emphasize static competition (regulatory approach) Tends to emphasize static competition (regulatory approach) More coordinated and horizontal regulation More coordinated and horizontal regulation Universal Service Narrow definition of services supported from industry funds Broader definition of services supported from industry funds Broader definition of services supported from industry funds Differentiated but “porous” legal and regulatory framework Differentiated but “porous” legal and regulatory framework