Embedding competition principles in telecom regulation Rohan Samarajiva lirne

Embedding competition principles in telecom regulation Rohan Samarajiva@lirne. net Malathy Knight-John malathy@ips. lk CUTS, August, 2005

Outline o o Why reform for competition Key aspects of reform process § q q Drawing from experience in telecom and gas reforms in Sri Lanka Can competition law keep up with the challenges facing telecom sectors? Towards a new framework for competition in telecom § Drawing from Sri Lanka and selected country experience 2

Economic reform: the necessity for competition & regulation o o o Infrastructure industries characterized by n Essential facilities n Economies of scale and scope n First-comer advantages Therefore, reform has to include n Introduction of competition n Organizational reform of incumbent n Introduction of explicit regulatory regime Many developing country reforms neglect one or two aspects, e. g. , n Sri Lanka’s sector reforms were seen as by-products of privatization transactions & paid inadequate attention to sector performance o Telecom & household gas sectors as exemplars 3

Post-reform Pre-reform LP Gas Telecom 4

“Connectivity” aspect of post-reform sector performance o Telecom (sector reform + privatization) n n o 1991 corporatization & creation of regulator had no significant effect 1996 -98 reforms (competition/ interconnection) had dramatic effects Household gas (privatization; no overall reform process) n Privatization without competition does not result in significant growth o n Other benefits (e. g. , mandated investment) Data does not capture effects of duopoly from 2001 & competition from 2003 5

Lessons from telecom reforms, 1991 -2003 o Competition is key n n Sri Lanka became a top 10 fixed-telephony growth market after competition introduced Allowing four mobile operators into a small market was radical in 1994, but has paid off, with 23. 9% of households now having some form of telephone access o o 115, 000+ mobiles were in operation in North & East within months of ceasefire Monopolies are harmful n Uncertainty created by 5 -year international exclusivity harmed the entire sector, including the beneficiary 6

Lessons from telecom reforms, 1991 -2003 o But regulation is necessary for competition and growth n n Rapid growth in mobile assisted by implementation of better fixed-mobile interconnection in 1999 & ending of international exclusivity in 2003 Fixed sector growth stunted by refusal of incumbent to accept, & the government to enforce, the 1999 fixed-fixed interconnection o Failure was partly due to ambiguous exclusivity granted at privatization 7

Mobile Fixed Competition Introduced Fixed-Mobile Interconnection Improved End of International Exclusivity Partial Privatization 8

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Competition wherever possible; regulation where necessary o Principle recognizes that markets (decentralized decision making) are n n Superior to planning in complex, dynamic systems Better than planning in fostering/responding to innovation Capable of yielding better performance Also recognizes imperfection of infrastructure markets by allowing for regulation 10

Infrastructure reforms in 2002 -04 o Regulation to ensure “level playing field” for investors and to protect consumers n Safeguards to prevent extension of market power into competitive markets o n n o Structural vs behavioral Control market power in monopoly markets Asymmetric regulation Pragmatic approach; 2 nd & 3 rd best solutions better than none 11

Challenges to competition in telecom sectors Incumbent advantages (control over essential facilities, vertical economies, control over network standards) q § Challenge for regulators: § § Access to the Internet (broadband services) q § q Differentiate “natural” advantages of economies of scale and scope from anti-competitive practices Implement asymmetric regulation without unfairly handicapping incumbents Slow progress in local loop unbundling Social “legacies” (cross-subsidization: rural/urban; USOs) 12

Is competition law sufficient to meet telecom challenges o Drawing from New Zealand experience § § § Complexity of telecom access issues and sophistication of solutions required (e. g. interconnection disputes) exceed boundaries of “general purpose” competition law Costly and lengthy litigation increased competitors’ market entry costs Replicability of “model” in developing countries? 13

Is competition law sufficient to meet telecom challenges? o Drawing from Sri Lanka example 1. Resources are serious problem 1. Funding from Treasury 1. 2. 3. Compromises independence & does not allow for systematic development of capacity Sale of forfeited goods Fines 1. 2. Low yields, so in effect reliance on treasury Also, reliance on fines creates improper incentives 14

Is competition law sufficient to meet telecom challenges? o Institutional capacity n o Low remuneration weak “analytical” capacity; low levels of professionalism No independence n n All members appointed by single subject Minister Turnover similar to a government corporation o Contrast with Public Utilities Commission, with Constitutional Council appointment and staggered terms 15

Towards a new framework for competition in telecom: issues o o o Sector-specific technical expertise vs. cross-sector flexibility Technical “tunnel” vision vs. broader allocative efficiency/social welfare Regulatory capture 16

Towards a new framework for competition in telecom: Institutional mechanisms o Concurrent jurisdiction (e. g. , South Africa): clear demarcation of role of competition authority and sector regulator n n o o Is this affordable? Implications for regulatory risk and effects on investment Competition principles embedded in sector licences (e. g. , Hong Kong) Multi-sector regulation exploiting scale and scope economies in institutional design (e. g. , Public Utility Commission of Sri Lanka) n Choice may depend on country/market size 17

Example: Public Utilities Commission Act, 35 of 2002 o o Contains the strongest competition law provisions in Sri Lanka Applies to any industry that is brought under the PUCSL by inclusion in schedule by Parliament n n o Electricity Reform Act 34 of 2002 Petroleum Sector Reform Bill? Also addresses independence and capacity problems of Competition Authority 18

Independence o o Commission members appointed for staggered terms with concurrence of Constitutional Council Specified procedures for removal by Parliament Funded by industry levies, not consolidated fund Policy directions may be given only through Cabinet 19

Capacity o o o Funding through industry levies allows for outsourcing and adequate compensation packages Potential exists for an innovative organization that breaks from dysfunctional government models Will the potential be realized? 20

Competition-friendly reforms in infrastructure industries o Clear vision with broad buy-in n o Capacity n o Duration of reforms does not overlap with term of government International best practice blended with knowledge of local circumstances Beyond the big bang n Capacity & commitment in ex-ante and ex-post regulatory agencies 21

Contacts o Rohan Samarajiva n n o www. lirneasia. net samarajiva@lirne. n et Malathy Knight. John n n www. ips. lk malathy@ips. lk 22