1. Regulation & investment: Sri Lanka case study Rohan Samarajiva & Sabina Fernando Samarajiva@lirne.netSamarajiva@lirne.net; fernando@lirne.netfernando@lirne.net September 17, 2004, Mount Lavinia

2. 2 Agenda  Thumbnail of Sri Lanka telecom sector Duration of reforms & data availability make Sri Lanka a good case  Overall pattern of investments in network Relation to worldwide trends  Fixed sector: telecom regulatory environment and investment 1993-2002  Mobile sector: telecom regulatory environment and investment 1993-2002  Conclusions

3. 3 Mileposts in telecom reform  1980: bifurcation of posts & telecom  1989: first mobile license  1991: new law; Office of Director General of Telecom; corporatization of incumbent  1996-97: two fixed operators licensed; regulator strengthened  1997: Partial privatization & ceding of management of incumbent to NTT  2002-03: End of international “exclusivity” & licensing of 30+ int’l operators

4. 4 Market structure at end 2002  3 fixed operators (incumbent 86% market share)  4 mobile operators (largest =54% market share)  5 facilities based data operators  20+ non-facilities based data ops  30+ external gateway operators  1 trunk mobile operator  1 specialized infrastructure provider

5. 5 Incumbent fixed, entrant fixed & mobile growth, 1993-2002

6. 6 Sri Lanka telecom growth 96-03

7. 7 Growth, demand, etc.  Fixed lines 20.9% CAGR (1997-2002) 7 th highest  Mobile connections 52% CAGR (97-02)  380,000 waiters in 2004 (43% of total fixed subscribers--890,000)

8. 8 Population, GDP & fixed telephony shares by province

9. 9 Unwired Sri Lanka

10. 10

11. 11

12. 12 Risk affecting investment  Macro-level or country  Regulatory, and  Commercial  Focus here on subset of regulatory risk, described as “telecom regulatory environment” Areas affected by actions of telecom regulatory entities

13. 13 TRE assessment  Done as a pilot, with panel by Fernando et al. in September 2004 Expert assessment done for earlier version  Overall shape of the panel and expert assessments not very different, but panel is harsher in judgment; expert is a little more volatile but generous  1993-96 TRE not done Because decisions not affected by regulatory environment when government is sole supplier

14. 14 Fixed sector TRE over time

15. 15 Fixed sector TRE over time

16. 16 Sources of incumbent investment

17. 17 Incumbent & fixed entrant investments, 1996-2002

18. 18 Cumulative fixed investment & connections, 1993-2002

19. 19 Mobile sector TRE  Again, overall shapes are similar, but panel is harsh compared to expert  Agreement that interconnection is where TRE is worst, except for the expert who gives high marks for mobile interconnection in 1997-99

20. 20 Mobile sector TRE over time

21. 21 Mobile sector TRE over time

22. 22 Mobile investments 1993-2002 (3 operators only)

23. 23 Cumulative mobile investments & connections, 1993-2002

24. 24 Overall patterns, fixed  Highest investments around entry of 2 new operators  Incumbent investments decline sharply since 1999 peak Tapering off of govt on-lending Massive bypass; vindictiveness No investment brought in by NTT Interconnection determination appealed; legal uncertainty Questionable MOU increases revenues but does not induce investment

25. 25 Overall patterns, mobile  Fluctuations driven primarily by standards- related investments and new entry ETACS and AMPS  GSM  Private investment (primarily mobile) overtakes incumbent investments in 2001  Massive investment commitments (USD 300m) announced in past 12 months, primarily by mobiles Allowed to carry international traffic March 2003 1800 MHz auction in 2003 April

26. 26 Concluding comments  TRE methodology has significant potential  Contrast of fixed and mobile TREs and investment patterns suggest a causal relation  Of course affected by macro factors: airport attack in 2001 and ceasefire from 2002 Feb had major effects