Role of benchmarks in the regulation of partially competitive markets Rohan Samarajiva Benchmarking and regulation Workshop, Malé 6 December 2007

Agenda  Why regulate? Special case of micro states  Allocating limited regulatory resources  Possible solutions to problems of tariff, access and termination rate setting Competition for the market Banded forbearance  Foundation is benchmarking

What are the conditions for optimally functioning markets?  No barriers to entry and exit Multiple buyers & sellers No market power  Homogenous products  Perfect information  Rational participants (homo economicus)

Conditions for workable markets  Markets that do not satisfy information and rationality conditions  Are telecom markets workable? But telecom markets do not satisfy even the remaining conditions  Barriers to entry and exit Scarce resources  Increasing returns; essential facilities  Potential to extend market power from one market to another  Peculiarities of call termination: “market of one”

Special case of micro states (< 1 m population) 1 operator 2 operators 3 operators 4 operators 5 operators

Conundrum of regulation in micro states  Unlikely to achieve even the conditions of workable competition Though evidence does not support claim that micro states have to be monopoly duopoly markets  Therefore, less space to apply asymmetric regulation/forbearance  Applying conventional monopoly regulation requires lots of resources for regulatory agency Simple constraints of a micro state preclude a large regulatory agency

Allocating limited regulatory resources  To achieve good performance, every regulator must prioritize tasks Micro-state regulators must prioritize even more and be highly disciplined in allocating limited regulatory resources to the most important tasks  What are the priorities for the Maldives?

Ranking regulatory tasks... Market entry/licensing Spectrum management, including refarming Access and interconnection Tariff regulation Quality of service regulation Regulation of anti- competitive practices

Ranking regulatory tasks... Universal service Mobile number portability Rights of way Consumer protection Internet governance Type approval of equipment

Two that will be highly ranked in any list  Access and interconnection Fundamental to competition Enables sharing of essential facilities, which is even more important in micro states  E.g., inter-island links and international cables  End-user tariffs Integrally related to QOS

Key problems in tariff, access and termination rate setting  How to set access and termination prices?  How to determine if a tariff is reasonable?  Discussion of tariff determination in monopoly conditions Most elements overlap with determination of access and termination prices

Tariff regulation  In a fully competitive market, prices will be set by interaction of supply and demand India has highest levels of competition in the region  Forborne tariff regulation, except in limited cases  Highest TRE scores for tariff regulation  Widely perceived as having the lowest prices (actually not so)

Bangladesh, Pakistan, Sri Lanka & India mobile tariff baskets compared (USD), December 2007 Cheapest prepaidCheapest postpaid

“Per minute” USD BangladeshPakistanIndiaSri Lanka PostpaidPrepaidPostpaidPrepaidPostpaidPrepaidPostpaidPrepaid Xplore1Smile Freedo m Plan 1 Jazz Budget Standar d 99 Plus Regula rLite 103 KIT Standar d Connection Charges Subscription (rental) fee Incoming Outgoing (Fixed local) Outgoing (Fixed national) Outgoing (On net) Outgoing (Off net) On net SMS Off net SMS MMS Voic

Cheapest prepaidCheapest postpaid Bangladesh, Pakistan, Sri Lanka & India mobile tariff baskets compared (USD PPP), December 2007

"Per minute“ PPPBangladeshPakistanIndiaSri Lanka Postpai d Prepai dPostpaidPrepaidPostpaid Prepai d Postpai dPrepaid Xplore1Smile Freedom Plan 1 Jazz Budget Standard 99 Plus Regul ar Lite 103 KIT Standard Connection Charges Subscription (rental) fee Incoming Outgoing (Fixed local) Outgoing (Fixed national) Outgoing (On net) Outgoing (Off net) On net SMS Off net SMS MMS Voic

If not through competition, how?  “Find out the cost; add a reasonable return; determine revenue requirement; set prices” or “Rate of return rate base regulation”  First two steps are the most troublesome Uniform reporting system of accounts Used and useful test Cost of capital

What are the alternatives?  Competition for the market  Banded forbearance

Competition for the market  Auction the license, with a requirement that the prices are part of the bid Used in Morocco for 2 nd GSM license  Price cap or similar formula for periodic adjustments Ceilings and floors (to prevent predation and price squeeze)  Difficult to implement in dynamic environment  Periodic rebidding Creates conditions for rent seeking and depresses “patient” investment

Banded forbearance  Concept being developed by LIRNEasia  Identify peer group E.g., other micro states But natural is adjacent countries  Define benchmark and period (once a year; once every two years... ) Need not be the lowest  EU uses third from the bottom  Can be lowest plus x%  Define band: floor and ceiling

Banded forbearance  Anything goes within the band Tariffs must be filed Evaluated only for  Clarity to consumer  Whether within the band  Default approval within x days  When tariff dips below the floor, investigate for anti-competitive impact only  If tariff goes above ceiling, no alternative but to start a cost inquiry Need to identify interim solution, while inquiry is underway

Merits of banded forbearance  Asymmetric regulation, which also saves regulatory resources, deregulates non- dominant operators but requires dominant operator to file tariffs Cause of great unhappiness on part of dominant operator Regulator still has difficulty properly regulating dominant operator’s tariffs In oligopoly conditions, non-dominant operators may just shadow the incumbent’s prices  Banded forbearance applies to all operators  Deregulates incumbent, while providing safeguards against predation